IS 223
Introduction to Information Systems
Fall 2020
Custom Edition for Boston University
Taken from:
Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Management Information Systems: Managing the Digital Firm,
Sixteenth Edition
by Kenneth C. Laudon and Jane P. Laudon
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Cover Art: Courtesy of kentoh/Shutterstock
Taken from:
Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Copyright © 2020, 2017, 2016 by Pearson Education, Inc.
New York, New York 10013
Management Information Systems: Managing the Digital Firm, Sixteenth Edition
by Kenneth C. Laudon and Jane P. Laudon
Copyright © 2020, 2018, 2016, by Pearson Education, Inc.
New York, NY 10013
Copyright © 2020 by Pearson Education, Inc.
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IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
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Copyright Acknowledgments
“Improving Clinical care pathway of an Ayurvedic hospital: a teaching case for developing process
improvement capabilities,” by Wasana Bandara, Dharshani Thennakoon, and Rehan Syed, reprinted
from Journal of Information Technology Teaching Cases (January 1, 2016), by permission of
Palgrave Macmillan.
“BKASH: Financial Technology Innovation for Emerging Markets” (2017), by Ishtiaq P. Mahmood,
Marleen Dieleman, and Narmin T. Banu, by permission of Ivey Publishing.
“Netflix Inc.: The Disruptor Faces Disruption” (2017), by Chris F. Kemerer and Brian K. Dunn,
by permission of Ivey Publishing.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Brief Contents
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Information Systems in Global Business Today 2
E-commerce: Digital Markets, Digital Goods 40
Hardware, Software, and Mobile Systems 115
The Cloud 161
Database Processing 219
Processes, Organizations, and Information Systems 259
Managing Knowledge and Artificial Intelligence 300
Information Systems Development 341
Securing Information Systems 388
Glossary
432
Glossary
442
Index
447
v
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Detailed Contents
Chapter 1
Information Systems in Global Business Today 2
Opening Case: PCL Construction: The New Digital Firm 3
1-1
How are information systems transforming business, and why are they
so essential for running and managing a business today? 5
How Information Systems Are Transforming Business 6 • What’s New in
Management Information Systems? 7
Interactive Session | Management Can You Run the Company
with Your iPhone? 9
Globalization Challenges and Opportunities: A Flattened World 11 • The
Emerging Digital Firm 12 • Strategic Business Objectives of Information
Systems 13
1-2
What is an information system? How does it work? What are its
management, organization, and technology components? Why
are complementary assets essential for ensuring that information
systems provide genuine value for organizations? 16
What Is an Information System? 16 • Dimensions of Information
Systems 18
Interactive Session | Technology UPS Competes Globally with Information
Technology 23
It Isn’t Just Technology: A Business Perspective on Information
Systems 24 • Complementary Assets: Organizational Capital and
the Right Business Model 26
1-3
What academic disciplines are used to study information systems,
and how does each contribute to an understanding of information
systems? 28
Technical Approach 28 • Behavioral Approach 29 • Approach of This
Text: Sociotechnical Systems 29
1-4
How will MIS help my career? 30
The Company 30 • Position Description 31 • Job Requirements 31 •
Interview Questions 31 • Author Tips 31
Review Summary 32 • Key Terms 33 • Review Questions 33 •
Discussion Questions 34
Hands-On MIS Projects 34
Collaboration and Teamwork Project 35
Case Study: Did Information Systems Cause Deutsche Bank to Stumble? 36
References: 39
Chapter 2
E-commerce: Digital Markets, Digital Goods 40
Opening Case: Youtube Transforms the Media Landscape 41
2-1
What are the unique features of e-commerce, digital markets, and
digital goods? 43
vi
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Contents
vii
E-commerce Today 44 • The New E-commerce: Social, Mobile, Local 45 •
Why E-commerce Is Different 47 • Key Concepts in E-commerce: Digital Markets
and Digital Goods in a Global Marketplace 50
2-2
What are the principal e-commerce business and revenue
models? 53
Types of E-commerce 53 • E-commerce Business Models 54
Interactive Session | Organizations Uber: Digital Disruptor 57
E-commerce Revenue Models 58
2-3
How has e-commerce transformed marketing? 60
Behavioral Targeting 61 • Social E-commerce and Social Network
Marketing 64
Interactive Session | Management “Socializing” with Customers 67
2-4
How has e-commerce affected business-to-business transactions? 68
Electronic Data Interchange (EDI) 69 • New Ways of B2B Buying and Selling 70
2-5
What is the role of m-commerce in business, and what are the most
important m-commerce applications? 72
Location-Based Services and Applications 73 • Other Mobile Commerce
Services 74
2-6
What issues must be addressed when building an e-commerce
presence? 74
Develop an E-commerce Presence Map 74 • Develop a Timeline:
Milestones 75
2-7
How will MIS help my career? 76
The Company 76 • Job Description 76 • Job Requirements 77 •
Interview Questions 77 • Author Tips 77
Review Summary 78 • Key Terms 78 • Review Questions 79 •
Discussion Questions 80
Hands-On MIS Projects 80
Collaboration and Teamwork Project 81
Case Study: A Nasty Ending for Nasty Gal 82
References: 84
BKASH: FINANCIAL TECHNOLOGY INNOVATION FOR
EMERGING MARKETS 87
NETFLIX INC.: THE DISRUPTOR FACES DISRUPTION 103
Chapter 3
Hardware, Software, and Mobile Systems 115
Q3-1 What Do Business Professionals Need to Know About Computer
Hardware? 117
Hardware Components 118 • Types of Hardware 118 • Computer Data 119
Q3-2 How Can New Hardware Affect Competitive Strategies? 121
Internet of Things 121 • Digital Reality Devices 123 • Self-Driving
Cars 125 • 3D Printing 127 • Cryptocurrencies 127
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Contents
Q3-3 What Do Business Professionals Need to Know About Software? 128
What Are the Major Operating Systems? 129 • Virtualization 131 • Own Versus
License 133 • What Types of Applications Exist, and How Do Organizations
Obtain Them? 133 • What Is Firmware? 134
Q3-4 Is Open Source Software a Viable Alternative? 135
Why Do Programmers Volunteer Their Services? 135
So What? New from CES 2018 136
How Does Open Source Work? 137 • So, Is Open Source Viable? 138
Q3-5 What Are the Differences Between Native and Web Applications? 138
Developing Native Applications 138 • Developing Web Applications 139 •
Which Is Better? 140
Q3-6 Why Are Mobile Systems Increasingly Important? 140
Hardware 141 • Software 142 • Data 142
Ethics Guide: Free Apps for Data 143
Procedures 145 • People 146
Q3-7 What Are the Challenges of Personal Mobile Devices at Work? 146
Advantages and Disadvantages of Employee Use of Mobile Systems at
Work 146
Survey of Organizational BYOD Policy 147
Q3-8 2029? 149
Security Guide: Poisoned App-les 150
Career Guide: Senior Software Engineer 152
Case Study 3: The Apple of Your i 156
Chapter 4
The Cloud 161
Q4-1 Why Are Organizations Moving to the Cloud? 163
Cloud Computing 164 • Why Do Organizations Prefer the Cloud? 165 • When
Does the Cloud Not Make Sense? 167
Q4-2 How Do Organizations Use the Cloud? 167
Resource Elasticity 167 • Pooling Resources 168 • Over the Internet 169 •
Cloud Services from Cloud Vendors 169 • Content Delivery Networks 172 •
Using Web Services Internally 173
Q4-3 What Network Technology Supports the Cloud? 174
What Are the Components of a LAN? 175
Ethics Guide: Reverse Engineering Privacy 176
Connecting Your LAN to the Internet 178
Q4-4 How Does the Internet Work? 180
The Internet and the U.S. Postal System 181 • Step 1: Assemble Package
(Packets) 181 • Step 2: Put Name on Package (Domain Names) 181 • Step
3: Look Up Address (IP Address) 181 • Step 4: Put Address on Package
(IP Address on Packet) 182 • Step 5: Put Registered Mail Sticker on Package
(TCP) 182 • Step 6: Ship Package (Packets Transported by Carriers) 183
Q4-5 How Do Web Servers Support the Cloud? 184
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Contents
ix
Three-Tier Architecture 185 • Watch the Three Tiers in Action! 185 •
Service-Oriented Architecture (SOA) 186 • A SOA Analogy 186 • SOA for
Three-Tier Architecture 188 • Internet Protocols 189 • TCP/IP Protocol
Architecture 189
Q4-6 How Can eHermes Use the Cloud? 191
SaaS Services at eHermes 191 • PaaS Services at eHermes Security 192 • IaaS
Services at eHermes 192
Q4-7 How Can Organizations Use Cloud Services
Securely? 192
Virtual Private Networks (VPNs) 193 • Using a Private Cloud 193 • Using a
Virtual Private Cloud 195
So What? Quantum Learning 196
Q4-8 2029? 197
Security Guide: IRS Systems Overtaxed 198
Career Guide: Senior Network Manager 201
Case Study 4: Salesforce.com 205
Improving the Clinical-Care Pathway of an Ayurvedic Hospital:
a Teaching Case for Developing Process Improvement
Capabilities 209
Chapter 5
Database Processing 219
Q5-1 What Is the Purpose of a Database? 211
Q5-2 What Is a Database? 223
Relationships Among Rows 224 • Metadata 225
Ethics Guide: Mining at Work 226
Q5-3 What Is a Database Management System (DBMS)? 228
Creating the Database and Its Structures 228 • Processing the Database 229 •
Administering the Database 229
So What? Slick Analytics 230
Q5-4 How Do Database Applications Make Databases More Useful? 232
Traditional Forms, Queries, Reports, and Applications 232 • Browser Forms,
Reports, Queries, and Applications 234 • Multi-User Processing 235
Q5-5 How Are Data Models Used for Database Development? 236
What Is the Entity-Relationship Data Model? 237
Q5-6 How Is a Data Model Transformed into a Database Design? 240
Normalization 240 • Representing Relationships 242 • Users’ Role in the
Development of Databases 245
Q5-7 How Can eHermes Benefit from a Database System? 245
Q5-8 2029? 247
Security Guide: Big Data . . . Losses 248
Career Guide: Director of Data Engineering 250
Case Study 5: Searching for Pianos . . . 253
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
x
Contents
Chapter 6
Processes, Organizations, and Information Systems 259
Q6-1 What Are the Basic Types of Processes? 261
How Do Structured Processes Differ from Dynamic Processes? 262 • How Do
Processes Vary by Organizational Scope? 263
Q6-2 How Can Information Systems Improve Process Quality? 265
How Can Processes Be Improved? 266 • How Can Information Systems
Improve Process Quality? 266
Q6-3 How Do Information Systems Eliminate the Problems of Information
Silos? 267
What Are the Problems of Information Silos? 268 • How Do Organizations
Solve the Problems of Information Silos? 269 • An Enterprise System for
Patient Discharge 270
Q6-4 How Do CRM, ERP, and EAI Support Enterprise Processes? 270
The Need for Business Process Engineering 271 • Emergence of Enterprise
Application Solutions 271 • Customer Relationship Management (CRM) 272
• Enterprise Resource Planning (ERP) 273
So What? Digital Dining 274
Ethics Guide: Paid Deletion 276
Enterprise Application Integration (EAI) 278
Q6-5 What Are the Elements of an ERP System? 280
Hardware 280 • ERP Application Programs 280 • ERP Databases 281
• Business Process Procedures 281 • Training and Consulting 281
• Industry-Specific Solutions 283 • Which Companies Are the Major
ERP Vendors? 283
Q6-6 What Are the Challenges of Implementing and Upgrading Enterprise
Information Systems? 284
Collaborative Management 284 • Requirements Gaps 284 • Transition
Problems 285 • Employee Resistance 285 • New Technology 285
Q6-7 How Do Inter-Enterprise IS Solve the Problems of Enterprise
Silos? 286
Q6-8 2029? 287
Security Guide: It’s Not Me . . . It’s You 288
Career Guide: Software/Platform Engineer 290
Case Study 6: A Tale of Two Interorganizational IS 296
Chapter 7
Managing Knowledge and Artificial Intelligence 300
Opening Case: Machine Learning Helps Akershus University Hospital Make
Better Treatment Decisions 301
7-1
What is the role of knowledge management systems in
business? 303
Important Dimensions of Knowledge 304 • The Knowledge
Management Value Chain 305 • Types of Knowledge Management Systems 308
7-2
What are artificial intelligence (AI) and machine learning? How do
businesses use AI? 309
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Contents
xi
Evolution of AI 309 • Major Types of AI 310 • Expert Systems 310 •
Machine Learning 312 • Neural Networks 314 • Genetic Algorithms 317 •
Natural Language Processing, Computer Vision Systems, and Robotics 318 •
Intelligent Agents 319
7-3
What types of systems are used for enterprise-wide knowledge
management, and how do they provide value for businesses? 320
Enterprise Content Management Systems 321 • Locating and Sharing
Expertise 322 • Learning Management Systems 323
7-4
What are the major types of knowledge work systems, and how
do they provide value for firms? 323
Knowledge Workers and Knowledge Work 323
Interactive Session | Management Sargent & Lundy Learns to Manage
Employee Knowledge 324
Requirements of Knowledge Work Systems 325 • Examples of Knowledge Work
Systems 326
Interactive Session | Technology The Reality of Virtual Reality 328
7-5
How will MIS help my career? 329
The Company 329 • Position Description 330 • Job Requirements 330 •
Interview Questions 330 • Author Tips 330
Review Summary 331 • Key Terms 332 • Review Questions 332 •
Discussion Questions 333
Hands-On MIS Projects 333
Collaboration and Teamwork Project 334
Case Study: Can Cars Drive Themselves—And Should They? 335
References: 338
Chapter 8
Information Systems Development 341
Q8-1 How Are Business Processes, IS, and Applications Developed? 343
How Do Business Processes, Information Systems, and Applications
Differ and Relate? 344 • Which Development Processes Are Used for
Which? 345
Q8-2 How Do Organizations Use Business Process Management
(BPM)? 347
Why Do Processes Need Management? 347 • What Are BPM Activities? 348
Q8-3 How Is Business Process Modeling Notation (BPMN) Used to Model
Processes? 350
Need for Standard for Business Processing Notation 350 • Documenting the
As-Is Business Order Process 350
Q8-4 What Are the Phases in the Systems Development Life
Cycle (SDLC)? 353
Define the System 355
Ethics Guide: Engineered Slowdown 356
Determine Requirements 358 • Design System Components 360 • System
Implementation 361 • Maintain System 362
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
xii
Contents
Q8-5 What Are the Keys for Successful SDLC Projects? 363
Create a Work Breakdown Structure 363 • Estimate Time and Costs 364 •
Create a Project Plan 365 • Adjust Plan via Trade-Offs 366 • Manage
Development Challenges 368
Q8-6 How Can Scrum Overcome the Problems of the SDLC? 369
So What? Banking on IoT 370
What Are the Principles of Agile Development Methodologies? 371 •
What Is the Scrum Process? 373 • How Do Requirements Drive the Scrum
Process? 374
Q8-7 2029? 376
Fetch! 377 • User-Driven Systems 377 • Industry Will Push Change 377
Security Guide: IoT and Mirai 378
Career Guide: Developing Your Personal Brand 380
Case Study 12: When Will We Learn? 385
Chapter 9
Securing Information Systems 388
Opening Case: Hackers Target the U.S. Presidential Election:
What Happened? 389
9-1
Why are information systems vulnerable to destruction, error, and
abuse? 391
Why Systems are Vulnerable 392 • Malicious Software: Viruses, Worms, Trojan
Horses, and Spyware 393 • Hackers and Computer Crime 396 • Internal
Threats: Employees 400 • Software Vulnerability 401
9-2
What is the business value of security and control? 402
Legal and Regulatory Requirements for Electronic Records Management 402
Interactive Session | Technology Meltdown and Spectre Haunt the World’s
Computers 403
Electronic Evidence and Computer Forensics 405
9-3
What are the components of an organizational framework for security
and control? 406
Information Systems Controls 406 • Risk Assessment 407 • Security
Policy 408 • Disaster Recovery Planning and Business Continuity
Planning 409 • The Role of Auditing 409
9-4
What are the most important tools and technologies for safeguarding
information resources? 410
Identity Management and Authentication 410 • Firewalls, Intrusion Detection
Systems, and Anti-malware Software 412 • Securing Wireless Networks 414 •
Encryption and Public Key Infrastructure 414 • Securing Transactions with
Blockchain 416 • Ensuring System Availability 417 • Security Issues for Cloud
Computing and the Mobile Digital Platform 417
Interactive Session | Management How Secure Is the Cloud? 418
Ensuring Software Quality 420
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Contents
9-5
xiii
How will MIS help my career? 421
The Company 421 • Position Description 421 • Job Requirements 421 •
Interview Questions 421 • Author Tips 422
Review Summary 422 • Key Terms 423 • Review Questions 424 • Discussion
Questions 424
Hands-On MIS Projects 424
Collaboration and Teamwork Project 426
Case Study: Is the Equifax Hack the Worst Ever—and Why? 427
References: 430
Glossary
432
Glossary
442
Index
447
Chapter 1 is taken from Chapter 1 of Management Information Systems,
Managing the Digital Firm, 16th Edition by Kenneth C. Laudon and
Jane P. Laudon
Chapter 2 is taken from Chapter 10 of Management Information Systems,
Managing the Digital Firm, 16th Edition by Kenneth C. Laudon and
Jane P. Laudon
Chapter 3 is taken from Chapter 4 of Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Chapter 4 is taken from Chapter 6 of Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Chapter 5 is taken from Chapter 5 of Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Chapter 6 is taken from Chapter 8 of Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Chapter 7 is taken from Chapter 11 of Management Information Systems,
Managing the Digital Firm, 16th Edition by Kenneth C. Laudon and
Jane P. Laudon
Chapter 8 is taken from Chapter 12 of Using MIS, Eleventh Edition
by David M. Kroenke and Randall J. Boyle
Chapter 9 is taken from Chapter 8 of Management Information Systems,
Managing the Digital Firm, 16th Edition by Kenneth C. Laudon and
Jane P. Laudon
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAP TER
1
Information Systems in Global
Business Today
LEARNING OBJECTIVES
CHAPTER CASES
After reading this chapter, you will be able to
answer the following questions:
PCL Construction: The New Digital Firm
Can You Run the Company with Your iPhone?
UPS Competes Globally with Information
Technology
Did Information Systems Cause Deutsche
Bank to Stumble?
1-1 How are information systems
transforming business, and why are
they so essential for running and
managing a business today?
1-2 What is an information system?
How does it work? What are its
management, organization, and
technology components? Why are
complementary assets essential
for ensuring that information
systems provide genuine value for
organizations?
1-3 What academic disciplines are used
to study information systems, and
how does each contribute to an
understanding of information systems?
VIDEO CASES
Business in the Cloud: Facebook, Google,
and eBay Data Centers
UPS Global Operations with the DIAD and
Worldport
Instructional Video:
Tour IBM’s Raleigh Data Center
1-4 How will MIS help my career?
MyLab MIS
Discussion Questions: 1-4, 1-5, 1-6; Hands-on MIS Projects: 1-7, 1-8, 1-9, 1-10;
Writing Assignments: 1-16, 1-17; eText with Conceptual Animations
2
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
PCL Construction: The New Digital Firm
M
any people think the most widely used tool in a construction project
is a hammer, but it is more likely a filing cabinet or fax machine. The
construction industry has traditionally been very paper-intensive and
manual. A complex project such as a large building requires hundreds of architectural drawings and design documents, which can change daily. Costly delays
because of difficulty locating and accessing the documents and other project
information could make or break a project. Now that’s changing, and PCL Construction is at the forefront. Information technology has transformed the way
this business works, and it is a prime example of the new digital firm.
PCL is a group of independent general contracting construction companies,
with over 4,400 employees in the United States, Canada, and Australia. The
organization is active in the commercial, institutional, multifamily residential, renewable energy,
heavy industrial, historical restoration, and civil
construction sectors. PCL has corporate headquarters in Edmonton, Alberta, Canada and a United
States head office in Denver, Colorado.
At a PCL job site, you’ll now see employees using
mobile devices, including smartphones, tablets, and
laptops, to access important information from PCL
systems or input data. Electronic touch-screen kiosks
throughout the job site and electronic plan rooms
provide access to digitized, updated blueprints so
team members don’t have to waste time tracking
down paper versions.
In the past, on-site trailers used to house large
paper blueprints for a project. Each time a project
team member wanted to view plans, that person
had to visit a trailer. With up to 800 active construction projects running simultaneously, PCL had trouble keeping project documentation up to date. Information on paper forms to track small changes to project specifications or work
requirements might not reach project decision makers until 30–40 days from
the time it was recorded. By then, it was too late—decisions were made “from
the gut” rather than based on facts.
PCL Construction plans are now in digital form, or the paper versions are
scanned for digital storage. Digitized plans can be revised much more rapidly.
By performing much of the design and planning work on the computer, PCL
is able to identify and resolve conflicts and constructability issues early in
the construction process to help keep projects ahead of schedule and within
budget.
© Ndoeljindoel/123RF
3
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
4
Chapter 1 Information Systems in Global Business Today
PCL implemented Project Document Controls (PDC) to facilitate collaboration among project team members. A secure project-based website provides
real-time storage and management of information in a single shared accessible
location. Construction contractors, subcontractors, consultants, suppliers, and
clients can work from the same documents wherever they are. PCL uses its
own proprietary project management system for budgeting, costing, forecasting, subcontractor tracking, production, and reporting. The project management system is linked to other PCL systems, including the People and Projects
database, client management and accounting systems, and the BEST Estimating system. BEST Estimating is PCL’s in-house estimating program for creating
lump sum and unit price estimates and providing accurate resource and cost
information.
PCL started moving its computing work to Microsoft Azure Cloud, which hosts
the hardware and software for running some of PCL’s applications in remote
computing centers managed by Microsoft. Staff working on PCL projects can
access information from cloud-based systems at any time and location using
mobile devices as well as conventional desktop machines and an Internet connection. PCL saves 80 percent of the cost of backing up its corporate data by
using the Azure platform. Azure Cloud also hosts a real-time analytics dashboard
to monitor project performance in terms of quality, safety, schedule, and cost.
The data are displayed visually as bar graphs or pie charts to construction field
staff, project managers, and executives, and colors ranging from red to orange
to green display performance ratings.
Sources: “Technology and Innovation,” pcl.com, accessed February 9, 2018; “PCL: Capitalizing
on the Cloud,” itworldcanada.com, accessed February 9, 2018; Brian Jackson, “PCL Constructors Reach New Heights with Real-time Analytics Solution in the Cloud,” IT World Canada,
November 9, 2017.
P
CL Construction’s experience shows how essential information systems are
today. PCL operates construction projects in numerous distributed locations
in an industry that has been traditionally very paper-intensive. Processing and
accessing the large number of documents and other information required by
construction projects was excessively costly and time-consuming, driving up
costs. PCL used leading-edge information technology to digitize documents and
streamline business processes for documenting, tracking, and analyzing projects.
The information flows that drive PCL’s business have become largely digital,
making use of mobile tools and a cloud computing infrastructure. PCL Construction has become a leading example of a digital firm.
The chapter-opening diagram calls attention to important points raised by this
case and this chapter. To reduce time and costs and improve customer service
in a heavily paper-based industry, PCL management chose to use information
technology to increase the precision and efficiency of key business activities for
designing, costing, budgeting, and monitoring a construction project. These technologies include mobile devices (phones, tablets, laptops), touch screen kiosks,
cloud computing services, the Internet, and software for creating models, managing documents, monitoring project progress, budgeting, estimating costs, and
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 1 Information Systems in Global Business Today
Business
Challenges
• Widespread operations
• Paper-intensive processes
• Devise technology
•
strategy
Monitor projects
• Revise job functions
• Revise business
processes
•
•
•
•
•
Mobile devices
Touch screen kiosks
Microsoft Azure Cloud
Virtual design and
project management
software
Analytics dashboard
Management
Organization
Information
System
Project Management System
• Support budgeting, costing,
forecasting, subcontractor
tracking, and production
Technology
Business
Solutions
• Reduce costs
• Improve service
Virtual Design
• Create digital models of structures
Analytics Dashboard
• Monitor project performance
displaying key project performance indicators on a digital dashboard. The use of
leading-edge digital technologies to drive business operations and management
decisions is a key topic today in the MIS world and will be discussed throughout
this text.
It is also important to note that deploying information technology has changed
the way PCL Construction runs its business. To effectively use all of its new digital tools, PCL had to redesign jobs and procedures for gathering, inputting, and
accessing information, for designing, budgeting, and calculating costs, and for
monitoring project progress. These changes had to be carefully planned to make
sure they enhanced efficiency, service, and profitability.
Here are some questions to think about: How did information technology
change operations at PCL construction? What was the role of mobile technology
and cloud computing?
1-1 How are information systems transforming
business, and why are they so essential for
running and managing a business today?
It’s not business as usual in the United States or the rest of the global economy
anymore. In 2017, American businesses spent nearly $1 trillion on information systems hardware, software, and telecommunications equipment. In addition, they spent another $143 billion on business and management consulting
and services—much of which involves redesigning firms’ business operations
to take advantage of these new technologies. In fact, most of the business value
of IT investment derives from these organizational, management, and cultural
changes inside firms (Saunders and Brynjolfsson, 2016). Figure 1.1 shows that
between 1999 and 2017, private business investment in information technology
consisting of hardware, software, and communications equipment grew from 21
to 33 percent of all invested capital.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
5
Chapter 1 Information Systems in Global Business Today
INFORMATION TECHNOLOGY CAPITAL INVESTMENT
FIGURE 1. 1
Information technology capital investment, defined as hardware, software, and communications
equipment, grew from 21 to 33 percent of all invested capital between 1999 and 2017.
Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, Table 5.3.6. Real Private
Fixed Investment by Type, Chained Dollars (2018).
3000
Total Investment
2500
Investment (billions)
2000
1500
1000
IT Investment
33%
21%
500
16
17
20
15
20
14
20
12
13
20
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
03
04
20
20
02
20
20
01
20
00
20
99
0
19
6
As managers, most of you will work for firms that are intensively using
information systems and making large investments in information technology. You will certainly want to know how to invest this money wisely. If you
make wise choices, your firm can outperform competitors. If you make poor
choices, you will be wasting valuable capital. This book is dedicated to helping you make wise decisions about information technology and information
systems.
How Information Systems Are Transforming Business
You can see the results of this large-scale spending around you every day by
observing how people conduct business. Changes in technology and new innovative business models have transformed social life and business practices. More
than 269 million Americans have mobile phones (81 percent of the population),
and 230 million of these people access the Internet using smartphones and tablets. Fifty-five percent of the entire population now uses tablet computers, whose
sales have soared. Two hundred million Americans use online social networks;
175 million use Facebook, while 54 million use Twitter. Smartphones, social
networking, texting, e-mailing, and webinars have all become essential tools of
business because that’s where your customers, suppliers, and colleagues can be
found (eMarketer, 2018).
By June 2017, more than 140 million businesses worldwide had dot-com Internet sites registered. Today, 220 million Americans shop online, and 190 million
will purchase online. In 2017, FedEx moved about 16 million packages daily in
220 countries and territories around the world, mostly overnight, and the United
Parcel Service (UPS) moved more than 28 million packages daily. Businesses are
using information technology to sense and respond to rapidly changing customer
demand, reduce inventories to the lowest possible levels, and achieve higher
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Chapter 1 Information Systems in Global Business Today
levels of operational efficiency. Supply chains have become more fast-paced,
with companies of all sizes depending on just-in-time inventory to reduce their
overhead costs and get to market faster.
As newspaper print readership continues to decline, in 2017 more than 180
million people read a newspaper online, and millions more read other news
sites. Online digital newspaper readership is growing at 10 percent annually,
about twice as fast as the Internet itself. About 128 million people watch a
video online every day, 85 million read a blog, and 30 million post to blogs,
creating an explosion of new writers and new forms of customer feedback
that did not exist five years ago (eMarketer, 2018). Social networking site
Facebook attracted 214 million monthly visitors in 2018 in the United States
and more than 2 billion worldwide. Businesses are using social networking
tools to connect their employees, customers, and managers worldwide. Most
Fortune 500 companies now have Facebook pages, Twitter accounts, and Tumblr sites.
E-commerce and Internet advertising continue to expand. Google’s U.S. online
ad revenues surpassed $32 billion in 2017, and Internet advertising continues to
grow at more than 20 percent a year in the United States, reaching more than
$107 billion in revenues in 2018 (eMarketer, 2018).
New federal security and accounting laws requiring many businesses to
keep e-mail messages for five years, coupled with existing occupational and
health laws requiring firms to store employee chemical exposure data for
up to 60 years, are spurring the annual growth of digital information at the
estimated rate of 5 exabytes annually, equivalent to 37,000 new Libraries of
Congress.
What’s New in Management Information Systems?
Plenty. In fact, there’s a whole new world of doing business using new technologies for managing and organizing. What makes the MIS field the most
exciting area of study in schools of business is the continuous change in technology, management, and business processes. Five changes are of paramount
importance.
IT Innovations. A continuing stream of information technology innovations
is transforming the traditional business world. Examples include the
emergence of cloud computing, the growth of a mobile digital business
platform based on smartphones and tablet computers, big data and the
Internet of Things (IoT), business analytics, machine learning systems,
and the use of social networks by managers to achieve business objectives. Most of these changes have occurred in the past few years. These
innovations are enabling entrepreneurs and innovative traditional firms
to create new products and services, develop new business models, and
transform the day-to-day conduct of business. In the process, some old
businesses, even industries, are being destroyed while new businesses are
springing up.
New Business Models. For instance, the emergence of online video services for streaming or downloading, such as Netflix, Apple iTunes, and
Amazon, has forever changed how premium video is distributed and even
created. Netflix in 2018 attracted more than 125 million subscribers worldwide to what it calls the “Internet TV revolution.” Netflix has moved into
premium TV show production with nearly 1,000 original shows such as
American Vandal, Suburra, The Crown, Friends From College, No Country For
Old Men, House of Cards, and Orange Is the New Black, challenging cable
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and broadcast producers of TV shows, and potentially disrupting cable
network dominance of TV show production. Apple’s iTunes now accounts
for 67 percent of movie and TV show downloads and has struck deals
with major Hollywood studios for recent movies and TV shows. A growing
trickle of viewers are unplugging from cable and using only the Internet for
entertainment.
E-commerce Expansion. E-commerce generated about $700 billion in
revenues in 2017 and is estimated to grow to nearly $950 billion by 2020.
E-commerce is changing how firms design, produce, and deliver their products and services. E-commerce has reinvented itself again, disrupting the
traditional marketing and advertising industry and putting major media and
content firms in jeopardy. Facebook and other social networking sites such
as YouTube, Twitter, and Tumblr, along with Netflix, Apple Music, and many
other media firms, exemplify the new face of e-commerce in the twenty-first
century. They sell services. When we think of e-commerce, we tend to think
of selling physical products. While this iconic vision of e-commerce is still
very powerful and the fastest-growing form of retail in the United States,
growing up alongside is a whole new value stream based on selling services,
not goods. It’s a services model of e-commerce. Growth in social commerce
is spurred by powerful growth of the mobile platform: 85 percent of Facebook’s users access the service from mobile phones and tablets. Information systems and technologies are the foundation of this new services-based
e-commerce. Mobile e-commerce hit $229 billion in 2017 and is growing at 30
percent a year.
Management Changes. The management of business firms has changed:
With new mobile smartphones, high-speed wireless Wi-Fi networks, and
tablets, remote salespeople on the road are only seconds away from their
managers’ questions and oversight. Management is going mobile. Managers on the move are in direct, continuous contact with their employees.
The growth of enterprise-wide information systems with extraordinarily
rich data means that managers no longer operate in a fog of confusion but
instead have online, nearly instant access to the really important information they need for accurate and timely decisions. In addition to their public uses on the web, social networking tools, wikis, and blogs are becoming
important corporate tools for communication, collaboration, and information
sharing.
Changes in Firms and Organizations. Compared to industrial organizations of the previous century, new fast-growing twenty-first-century business
firms put less emphasis on hierarchy and structure and more emphasis on
employees taking on multiple roles and tasks and collaborating with others on
a team. They put greater emphasis on competency and skills rather than position in the hierarchy. They emphasize higher-speed and more-accurate decision making based on data and analysis. They are more aware of changes in
technology, consumer attitudes, and culture. They use social media to enter
into conversations with consumers and demonstrate a greater willingness to
listen to consumers, in part because they have no choice. They show better
understanding of the importance of information technology in creating and
managing business firms and other organizations. To the extent organizations
and business firms demonstrate these characteristics, they are twenty-firstcentury digital firms.
You can see some of these trends at work in the Interactive Session on Management. Millions of managers rely heavily on the mobile digital platform
to coordinate suppliers and shipments, satisfy customers, and manage their
employees. A business day without these mobile devices or Internet access
would be unthinkable.
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Part Two Information Technology Infrastructure
INTERACTIVE SESSION
Chapter 1 Information Systems in Global Business Today
MANAGEMENT
Can You Run the Company with Your iPhone?
Can you run the company just by using your iPhone?
Perhaps not entirely, but there are many business
functions today that can be performed using an
iPhone, iPad, or Android mobile device. Smartphones
and tablets have become all-in-one tools that help
managers and employees work more efficiently,
packing a powerful, networked computer into a
pocket-size device. With a tap or flick of a finger,
these mobile devices can access the Internet or serve
as a telephone, camera, music or video player, an
e-mail and messaging machine, and, increasingly, a
gateway into corporate systems. New software applications for document sharing, collaboration, sales,
order processing, inventory management, scheduling, and production monitoring make these devices
even more versatile business tools.
Network Rail runs, maintains, and develops the
rail tracks, signaling, bridges, tunnels, level crossings, and many key stations for most of the rail
network in England, Scotland, and Wales. Keeping
trains running on time is one of its top priorities. To
maintain 20,000 miles of track safely and efficiently,
skilled workers must be equipped with appropriate
tools and work across thousands of sites throughout
the rail network, 24 hours a day. Network Rail uses
a group of custom apps for its 22,000 iPhone and
iPad devices to streamline maintenance operations,
quickly capture incident data, and immediately share
critical information.
Several apps help Network Rail improve railway performance and safety. The Close Call app helps employees report hazards as they are found so problems can
be addressed quickly. The MyWork app gives maintenance teams all the information they need to start and
complete repair tasks. The Sentinel app allows field
managers to electronically scan ID cards to verify that
workers are qualified to perform specific tasks.
The iPhone and iPad apps provide maintenance
technicians with current technical data, GPS locations, and streamlined reports, replacing cumbersome reference books and rain-soaked paperwork
that slowed the repair process. Many service calls
start with hazardous conditions reported by Network
Rail employees themselves. Rather than waiting
hours to fill out a report at the depot, workers can
take pictures of dangerous situations right away,
using the Close Call app to describe situations and
upload photos to the call center. Once provided with
the hazard’s GPS coordinates, the call center will
usually schedule repairs within 24 hours.
MyWork gives maintenance workers a simple
overview of all of the jobs each team needs to complete during a specific shift. This mobile app clusters
jobs by location, skills required, and opening and
closing times. Using precise map coordinates, workers can find sites easily and finish jobs more quickly.
By electronically delivering daily job schedules to
over 14,000 maintenance staff members, MyWork
has enabled them to complete over a half a million
work orders to date while minimizing interruptions.
British Airways is the largest airline in the United
Kingdom, with operations in more than 200 airports
worldwide. The airline has found many ways to use
the iPad to improve customer service and operational
efficiency. The airline has created more than 40 custom apps for over 17,000 iPads for its workforce that
have transformed the way it does business.
Unforeseen disruptions can create long lines of
passengers seeking flight information and rebooking.
The FlightReact app used by British Airways mobilizes agents to scan a boarding pass, review the customer’s booking, look up alternate flight options, and
rebook and reticket passengers—all within four minutes. iBanner allows agents to identify passengers
transferring onto a specific flight, while iTranslate
enables staff to communicate easily with travelers
speaking any language.
Inside the airport, iPads and iPhones communicate with low-energy wireless Bluetooth signals from
iBeacon, notifying customers of Wi-Fi access, gate
locations, and flight updates. Beyond the terminal,
mobile apps are helping British Airways to improve
the aircraft turnaround process. British Airways has
more than 70 planes at London Heathrow Terminal,
five turning around at once, and each requiring a
team of around 30 people. To shorten and streamline
this process can generate huge business benefits.
Loading luggage and cargo onto an aircraft is one
of the most complex parts of the turnaround process, requiring detailed communications between
the turnaround manager (TRM), who coordinates
and manages the services around the aircraft during
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departure and arrival, the offsite Centralized Load
Control (CLC) team, and the pilot. With iPads running the iLoad Direct app, turnaround managers are
able to monitor the aircraft loading process and share
data with pilots and back-office staff in real time.
TRMs can receive and input real-time data about
the aircraft load’s contents, weight, and distribution.
These data are essential to help the pilot calculate
the right amount of fuel and position the plane for
take-off. By streamlining communications between
the ground crew, the CLC team, and the pilot, iLoad
Direct and iPad speed up the pace at which aircraft
become airborne. These mobile tools have helped
British Airways achieve an industry-leading benchmark for aircraft turnaround.
In addition to facilitating managerial work, mobile
devices are helping rank-and-file employees manage their work lives more effectively. Shyft is one of
several smartphone apps that allow workers to share
information, make schedule changes, and report
labor violations. Thousands of employees at chains
like Starbucks and Old Navy are using these apps to
view their schedules and swap shifts when they’ve
got a scheduling conflict or need extra work.
Sources: “British Airways: Transforming the Travel Experience from
Start to Finish,” Apple at Work, www.apple.com, accessed February 7,
2018; www.networkrail.co.uk,accessed September 2, 2018; “Network
Rail,” iPhone in Business, www.apple.com, accessed January 4, 2017;
and Lauren Weber, “Apps Empower Employees, Ease Scheduling,”
Wall Street Journal, January 3, 2017.
CASE STUDY QUESTIONS
1. What kinds of applications are described here?
What business functions do they support? How do
they improve operational efficiency and decision
making?
2. Identify the problems that the business in
this case study solved by using mobile digital
devices.
3. What kinds of businesses are most likely to benefit
from equipping their employees with mobile digital devices such as iPhones and iPads?
4. One company deploying iPhones has stated, “The
iPhone is not a game changer, it’s an industry
changer. It changes the way that you can interact
with your customers” and “with your suppliers.”
Discuss the implications of this statement.
iPhone and iPad
Applications for Business
1. Salesforce
2. Cisco WebEx Meetings
3. SAP Business One
4. iWork
5. Evernote
6. Adobe Acrobat Reader
7. Oracle Business
Intelligence Mobile
8. Dropbox
© Mama_mia/Shutterstock
Whether it’s attending an online meeting, checking orders, working with files and
documents, or obtaining business intelligence, Apple's iPhone and iPad offer unlimited
possibilities for business users. A stunning multitouch display, full Internet browsing, and
capabilities for messaging, video and audio transmission, and document management
make each an all-purpose platform for mobile computing.
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Chapter 1 Information Systems in Global Business Today
Globalization Challenges and Opportunities:
A Flattened World
In 1492, Columbus reaffirmed what astronomers were long saying: the world
was round and the seas could be safely sailed. As it turned out, the world was
populated by peoples and languages living in isolation from one another, with
great disparities in economic and scientific development. The world trade that
ensued after Columbus’s voyages has brought these peoples and cultures closer.
The “industrial revolution” was really a worldwide phenomenon energized
by expansion of trade among nations and the emergence of the first global
economy.
In 2005, journalist Thomas Friedman wrote an influential book declaring the
world was now “flat,” by which he meant that the Internet and global communications had greatly reduced the economic and cultural advantages of developed
countries. Friedman argued that the United States and European countries were
in a fight for their economic lives, competing for jobs, markets, resources, and
even ideas with highly educated, motivated populations in low-wage areas in
the less-developed world (Friedman, 2007). This “globalization” presents both
challenges and opportunities for business firms.
A significant percentage of the economy of the United States and other
advanced industrial countries in Europe and Asia depends on imports and
exports. In 2017, about 30 percent of the $20 trillion U.S. economy resulted
from foreign trade, both imports and exports. In Europe and Asia, the number
exceeded 50 percent. Many Fortune 500 U.S. firms derive more than half their
revenues from foreign operations. Tech companies are particularly dependent
on offshore revenue: 80 percent of Intel’s revenues in 2017 came from overseas
sales of its microprocessors, while Apple got 60 percent of its revenue outside
of the United States. Eighty percent of the toys sold in the United States are
manufactured in China, while about 90 percent of the PCs manufactured in
China use American-made Intel or Advanced Micro Design (AMD) chips. The
microprocessor chips are shipped from the United States to China for assembly
into devices.
It’s not just goods that move across borders. So too do jobs, some of them
high-level jobs that pay well and require a college degree. In the past decade,
the United States lost 7 million manufacturing jobs to offshore, low-wage producers. But manufacturing is now a very small part of U.S. employment (less
than 12 percent of the labor force and declining). In a normal year, about
300,000 service jobs move offshore to lower-wage countries. Many of the jobs
are in less-skilled information system occupations, but some are “tradable service” jobs in architecture, financial services, customer call centers, consulting,
engineering, and even radiology. Yet at the same time the United States has
lost so many jobs, it has added 33 million new service jobs.
The U.S. economy creates more than 3.5 million new jobs in a normal,
non-recessionary year. Although only 1.1 million private sector jobs were created
in 2011 due to slow economic recovery, by 2017, the U.S. economy was adding
more than 2 million new jobs annually for the third straight year. Employment
in information systems and the other service occupations is expanding rapidly,
and wages are stable. Outsourcing may have accelerated the development of new
systems worldwide, as these systems could be maintained and developed in lowwage countries. In part this explains why the job market for MIS and computer
science graduates is growing rapidly in the United States.
The challenge for you as a business student is to develop high-level skills
through education and on-the-job experience that cannot be outsourced.
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The challenge for your business is to avoid markets for goods and services that
can be produced offshore much less expensively. The opportunities are equally
immense. Throughout this book you will find examples of companies and individuals who either failed or succeeded in using information systems to adapt to
this new global environment.
What does globalization have to do with management information systems?
That’s simple: everything. The emergence of the Internet into a full-blown international communications system has drastically reduced the costs of operating
and transacting on a global scale. Communication between a factory floor in
Shanghai and a distribution center in Rapid City, South Dakota, is now instant
and virtually free. Customers can now shop in a worldwide marketplace, obtaining price and quality information reliably 24 hours a day. Firms producing goods
and services on a global scale achieve extraordinary cost reductions by finding low-cost suppliers and managing production facilities in other countries.
Internet service firms, such as Google and eBay, are able to replicate their business models and services in multiple countries without having to redesign their
expensive fixed-cost information systems infrastructure. Briefly, information
systems enable globalization.
The Emerging Digital Firm
All of the changes we have just described, coupled with equally significant organizational redesign, have created the conditions for a fully digital firm. A digital
firm can be defined along several dimensions. A digital firm is one in which
nearly all of the organization’s significant business relationships with customers,
suppliers, and employees are digitally enabled and mediated. Core business processes are accomplished through digital networks spanning the entire organization or linking multiple organizations.
Business processes refer to the set of logically related tasks and behaviors
that organizations develop over time to produce specific business results and the
unique manner in which these activities are organized and coordinated. Developing a new product, generating and fulfilling an order, creating a marketing
plan, and hiring an employee are examples of business processes, and the ways
organizations accomplish their business processes can be a source of competitive
strength.
Key corporate assets—intellectual property, core competencies, and financial
and human assets—are managed through digital means. In a digital firm, any
piece of information required to support key business decisions is available at
any time and anywhere in the firm.
Digital firms sense and respond to their environments far more rapidly than
traditional firms, giving them more flexibility to survive in turbulent times. Digital firms offer extraordinary opportunities for more-flexible global organization
and management. In digital firms, both time shifting and space shifting are
the norm. Time shifting refers to business being conducted continuously, 24/7,
rather than in narrow “work day” time bands of 9 a.m. to 5 p.m. Space shifting
means that work takes place in a global workshop as well as within national
boundaries. Work is accomplished physically wherever in the world it is best
accomplished.
Many firms, such as Cisco Systems, 3M, and GE, are close to becoming
digital firms, using the Internet to drive every aspect of their business. Most
other companies are not fully digital, but they are moving toward close digital
integration with suppliers, customers, and employees.
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Chapter 1 Information Systems in Global Business Today
Strategic Business Objectives of Information Systems
What makes information systems so essential today? Why are businesses investing so much in information systems and technologies? In the United States, more
than 25 million business and financial managers, and 36 million professional
workers in the labor force rely on information systems to conduct business.
Information systems are essential for conducting day-to-day business in the
United States and most other advanced countries as well as achieving strategic
business objectives.
Entire sectors of the economy are nearly inconceivable without substantial investments in information systems. E-commerce firms such as Amazon,
eBay, Google, and E*Trade simply would not exist. Today’s service industries—
finance, insurance, and real estate as well as personal services such as travel,
medicine, and education—could not operate without information systems.
Similarly, retail firms such as Walmart and Target and manufacturing firms
such as General Motors and GE require information systems to survive and
prosper. Just as offices, telephones, filing cabinets, and efficient tall buildings
with elevators were once the foundations of business in the twentieth century, information technology is a foundation for business in the twenty-first
century.
There is a growing interdependence between a firm’s ability to use information technology and its ability to implement corporate strategies and achieve
corporate goals (see Figure 1.2). What a business would like to do in five years
often depends on what its systems will be able to do. Increasing market share,
becoming the high-quality or low-cost producer, developing new products, and
increasing employee productivity depend more and more on the kinds and quality of information systems in the organization. The more you understand about
this relationship, the more valuable you will be as a manager.
Specifically, business firms invest heavily in information systems to achieve
six strategic business objectives: operational excellence; new products, services,
FIGURE 1. 2
THE INTERDEPENDENCE BETWEEN ORGANIZATIONS AND
INFORMATION SYSTEMS
In contemporary systems, there is a growing interdependence between a firm’s information
systems and its business capabilities. Changes in strategy, rules, and business processes
increasingly require changes in hardware, software, databases, and telecommunications.
Often, what the organization would like to do depends on what its systems will permit it to do.
Hardware
Business Strategic
Objectives
Business Processes
Software
Data Management
Business
Firm
Information
System
Telecommunications
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and business models; customer and supplier intimacy; improved decision making; competitive advantage; and survival.
Operational Excellence
Businesses continuously seek to improve the efficiency of their operations in
order to achieve higher profitability. Information systems and technologies are
some of the most important tools available to managers for achieving higher
levels of efficiency and productivity in business operations, especially when
coupled with changes in business practices and management behavior.
Walmart, the largest retailer on earth, exemplifies the power of information systems coupled with state-of-the-art business practices and supportive
management to achieve world-class operational efficiency. In fiscal year 2018,
Walmart achieved over $500 billion in sales—nearly one-tenth of retail sales in
the United States—in large part because of its Retail Link system, which digitally
links its suppliers to every one of Walmart’s stores. As soon as a customer purchases an item, the supplier monitoring the item knows to ship a replacement
to the shelf. Walmart is the most efficient retail store in the industry, achieving
sales of more than $600 per square foot, compared with its closest competitor,
Target, at $425 per square foot and other large general merchandise retail firms
producing less than $200 per square foot.
New Products, Services, and Business Models
Information systems and technologies are a major enabling tool for firms to
create new products and services as well as entirely new business models. A
business model describes how a company produces, delivers, and sells a product or service to create wealth.
Today’s music industry is vastly different from the industry a decade ago.
Apple Inc. transformed an old business model of music distribution based on
vinyl records, tapes, and CDs into an online, legal distribution model based on
its own iPod technology platform. Apple has prospered from a continuing stream
of innovations, including the iTunes music service, the iPad, and the iPhone.
Customer and Supplier Intimacy
When a business really knows its customers and serves them well, the customers generally respond by returning and purchasing more. This raises revenues
and profits. Likewise with suppliers, the more a business engages its suppliers, the better the suppliers can provide vital inputs. This lowers costs. How to
really know your customers or suppliers is a central problem for businesses with
millions of offline and online customers.
The Mandarin Oriental in Manhattan and other high-end hotels exemplify
the use of information systems and technologies to achieve customer intimacy. These hotels use computers to keep track of guests’ preferences, such as
their preferred room temperature, check-in time, frequently dialed telephone
numbers, and television programs, and store these data in a large data repository. Individual rooms in the hotels are networked to a central network server
computer so that they can be remotely monitored and controlled. When a
customer arrives at one of these hotels, the system automatically changes the
room conditions, such as dimming the lights, setting the room temperature, or
selecting appropriate music, based on the customer’s digital profile. The hotels
also analyze their customer data to identify their best customers and to develop
individualized marketing campaigns based on customers’ preferences.
JCPenney exemplifies the benefits of information systems–enabled supplier intimacy. Every time a dress shirt is bought at a JCPenney store in the
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Chapter 1 Information Systems in Global Business Today
United States, the record of the sale appears immediately on computers in
Hong Kong at the TAL Apparel Ltd. supplier, a contract manufacturer that produces one in eight dress shirts sold in the United States. TAL runs the numbers
through a computer model it developed and then decides how many replacement shirts to make and in what styles, colors, and sizes. TAL then sends the
shirts to each JCPenney store, bypassing completely the retailer’s warehouses. In
other words, JCPenney’s shirt inventory is near zero, as is the cost of storing it.
Improved Decision Making
Many business managers operate in an information fog bank, never really having
the right information at the right time to make an informed decision. Instead,
managers rely on forecasts, best guesses, and luck. The result is over- or underproduction of goods and services, misallocation of resources, and poor response
times. These poor outcomes raise costs and lose customers. In the past decade,
information systems and technologies have made it possible for managers to use
real-time data from the marketplace when making decisions.
For instance, Verizon Corporation, one of the largest telecommunications
companies in the United States, uses a web-based digital dashboard to provide
managers with precise real-time information on customer complaints, network
performance for each locality served, and line outages or storm-damaged lines.
Using this information, managers can immediately allocate repair resources to
affected areas, inform consumers of repair efforts, and restore service fast.
Competitive Advantage
When firms achieve one or more of these business objectives—operational
excellence; new products, services, and business models; customer/supplier
intimacy; and improved decision making—chances are they have already
achieved a competitive advantage. Doing things better than your competitors,
charging less for superior products, and responding to customers and suppliers
in real time all add up to higher sales and higher profits that your competitors
cannot match. Apple Inc., Walmart, and UPS, described later in this chapter,
are industry leaders because they know how to use information systems for
this purpose.
Survival
Business firms also invest in information systems and technologies because
they are necessities of doing business. Sometimes these “necessities” are driven
by industry-level changes. For instance, after Citibank introduced the first
automated teller machines (ATMs) in the New York region in 1977 to attract
customers through higher service levels, its competitors rushed to provide
ATMs to their customers to keep up with Citibank. Today, virtually all banks
in the United States have regional ATMs and link to national and international
ATM networks, such as CIRRUS. Providing ATM services to retail banking customers is simply a requirement of being in and surviving in the retail banking
business.
There are many federal and state statutes and regulations that create a legal
duty for companies and their employees to retain records, including digital
records. For instance, the Toxic Substances Control Act (1976), which regulates
the exposure of U.S. workers to more than 75,000 toxic chemicals, requires firms
to retain records on employee exposure for 30 years. The Sarbanes-Oxley Act
(2002), which was intended to improve the accountability of public firms and
their auditors, requires certified public accounting firms that audit public companies to retain audit working papers and records, including all e-mails, for five
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years. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010),
which was intended to strengthen regulation of the banking industry, requires
firms to retain all records for 10 years. Many other pieces of federal and state
legislation in health care, financial services, education, and privacy protection
impose significant information retention and reporting requirements on U.S.
businesses. Firms turn to information systems and technologies to provide the
capability to respond to these challenges.
1-2 What is an information system? How
does it work? What are its management,
organization, and technology components?
Why are complementary assets essential
for ensuring that information systems
provide genuine value for organizations?
So far we’ve used information systems and technologies informally without defining the terms. Information technology (IT) consists of all the hardware and
software that a firm needs to use in order to achieve its business objectives. This
includes not only computer machines, storage devices, and handheld mobile
devices but also software, such as the Windows or Linux operating systems, the
Microsoft Office desktop productivity suite, and the many thousands of computer programs that can be found in a typical large firm. “Information systems”
are more complex and can be best understood by looking at them from both a
technology and a business perspective.
What Is an Information System?
An information system can be defined technically as a set of interrelated
components that collect (or retrieve), process, store, and distribute information
to support decision making and control in an organization. In addition to supporting decision making, coordination, and control, information systems may
also help managers and workers analyze problems, visualize complex subjects,
and create new products.
Information systems contain information about significant people, places,
and things within the organization or in the environment surrounding it. By
information we mean data that have been shaped into a form that is meaningful and useful to human beings. Data, in contrast, are streams of raw facts representing events occurring in organizations or the physical environment before
they have been organized and arranged into a form that people can understand
and use.
A brief example contrasting information and data may prove useful. Supermarket checkout counters scan millions of pieces of data from bar codes, which
describe each product. Such pieces of data can be totaled and analyzed to provide
meaningful information, such as the total number of bottles of dish detergent
sold at a particular store, which brands of dish detergent were selling the most
rapidly at that store or sales territory, or the total amount spent on that brand of
dish detergent at that store or sales region (see Figure 1.3).
Three activities in an information system produce the information that organizations need to make decisions, control operations, analyze problems, and
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Chapter 1 Information Systems in Global Business Today
FIGURE 1. 3
DATA AND INFORMATION
Raw data from a supermarket checkout counter can be processed and organized to produce
meaningful information, such as the total unit sales of dish detergent or the total sales revenue
from dish detergent for a specific store or sales territory.
Da
ta
I
331 Brite Dish Soap 1.29
863 BL Hill Coffee 4.69
173 Meow Cat .79
331 Brite Dish Soap 1.29
663 Country Ham 3.29
524 Fiery Mustard 1.49
113 Ginger Root .85
331 Brite Dish Soap 1.29
.
.
.
rm
nfo
ati
on
Sales Region: Northwest
Store: Superstore #122
Information
System
ITEM NO. DESCRIPTION UNITS SOLD
331
7,156
Brite Dish Soap
YTD SALES
$9,231.24
create new products or services. These activities are input, processing, and output (see Figure 1.4). Input captures or collects raw data from within the organization or from its external environment. Processing converts this raw input into
a meaningful form. Output transfers the processed information to the people
who will use it or to the activities for which it will be used. Information systems
also require feedback, which is output that is returned to appropriate members
of the organization to help them evaluate or correct the input stage.
In PCL’s project management system, input includes the names and addresses
of contractors and subcontractors, project names and identification numbers,
project activities, labor costs, materials costs, and start and completion dates
for project activities. Computers store these data and process them to calculate
how much each project activity and the entire project will cost and estimated
completion time. The system provides meaningful information such as the
size, cost, and duration of all projects under PCL management, projects over
and under budget, and projects and project activities that are late or on time.
Although computer-based information systems use computer technology
to process raw data into meaningful information, there is a sharp distinction
between a computer and a computer program on the one hand and an information system on the other. Computers and related software programs are the
technical foundation, the tools and materials, of modern information systems.
Computers provide the equipment for storing and processing information. Computer programs, or software, are sets of operating instructions that direct and
control computer processing. Knowing how computers and computer programs
work is important in designing solutions to organizational problems, but computers are only part of an information system.
A house is an appropriate analogy. Houses are built with hammers, nails, and
wood, but these do not make a house. The architecture, design, setting, landscaping, and all of the decisions that lead to the creation of these features are
part of the house and are crucial for solving the problem of putting a roof over
one’s head. Computers and programs are the hammers, nails, and lumber of
computer-based information systems, but alone they cannot produce the information a particular organization needs. To understand information systems, you
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Chapter 1 Information Systems in Global Business Today
FIGURE 1. 4
FUNCTIONS OF AN INFORMATION SYSTEM
An information system contains information about an organization and its surrounding
environment. Three basic activities—input, processing, and output—produce the
information organizations need. Feedback is output returned to appropriate people or
activities in the organization to evaluate and refine the input. Environmental actors, such
as customers, suppliers, competitors, stockholders, and regulatory agencies, interact with
the organization and its information systems.
ENVIRONMENT
Customers
Suppliers
ORGANIZATION
INFORMATION SYSTEM
Input
Processing
Classify
Arrange
Calculate
Output
Feedback
Regulatory
Agencies
Stockholders
Competitors
must understand the problems they are designed to solve, their architectural
and design elements, and the organizational processes that lead to the solutions.
Dimensions of Information Systems
To fully understand information systems, you must understand the broader organization, management, and information technology dimensions of systems (see
Figure 1.5) and their power to provide solutions to challenges and problems in
the business environment. We refer to this broader understanding of information systems, which encompasses an understanding of the management and
organizational dimensions of systems as well as the technical dimensions of
systems, as information systems literacy. Computer literacy, in contrast,
focuses primarily on knowledge of information technology.
The field of management information systems (MIS) tries to achieve this
broader information systems literacy. MIS deals with behavioral issues as well as
technical issues surrounding the development, use, and impact of information
systems used by managers and employees in the firm.
Let’s examine each of the dimensions of information systems—organizations,
management, and information technology.
Organizations
Information systems are an integral part of organizations. Indeed, for some companies, such as credit reporting firms, there would be no business without an
information system. The key elements of an organization are its people, structure,
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Chapter 1 Information Systems in Global Business Today
FIGURE 1. 5
INFORMATION SYSTEMS ARE MORE THAN COMPUTERS
Using information systems effectively requires an understanding of the organization,
management, and information technology shaping the systems. An information system
creates value for the firm as an organizational and management solution to challenges
posed by the environment.
Organizations
Technology
Information
Systems
Management
business processes, politics, and culture. We introduce these components of
organizations here.
Organizations have a structure that is composed of different levels and specialties. Their structures reveal a clear-cut division of labor. Authority and
responsibility in a business firm are organized as a hierarchy, or a pyramid
structure. The upper levels of the hierarchy consist of managerial, professional, and technical employees, whereas the lower levels consist of operational personnel.
Senior management makes long-range strategic decisions about products
and services as well as ensures financial performance of the firm. Middle
management carries out the programs and plans of senior management, and
operational management is responsible for monitoring the daily activities of
the business. Knowledge workers, such as engineers, scientists, or architects,
design products or services and create new knowledge for the firm, whereas
data workers, such as secretaries or clerks, assist with scheduling and communications at all levels of the firm. Production or service workers actually
produce the product and deliver the service (see Figure 1.6).
Experts are employed and trained for different business functions. The major
business functions, or specialized tasks performed by business organizations,
consist of sales and marketing, manufacturing and production, finance and
accounting, and human resources (see Table 1.1).
An organization coordinates work through its hierarchy and through its
business processes. Most organizations’ business processes include formal rules
that have been developed over a long time for accomplishing tasks. These rules
guide employees in a variety of procedures, from writing an invoice to responding to customer complaints. Some of these business processes have been written
down, but others are informal work practices, such as a requirement to return
telephone calls from coworkers or customers, that are not formally documented.
Information systems automate many business processes. For instance, how a
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FIGURE 1. 6
LEVELS IN A FIRM
Business organizations are hierarchies consisting of three principal levels: senior
management, middle management, and operational management. Information systems
serve each of these levels. Scientists and knowledge workers often work with middle
management.
Senior
Management
Middle Management
Scientists and knowledge workers
Operational Management
Production and service workers
Data workers
customer receives credit or how a customer is billed is often determined by an
information system that incorporates a set of formal business processes.
Each organization has a unique culture, or fundamental set of assumptions,
values, and ways of doing things, that has been accepted by most of its members.
You can see organizational culture at work by looking around your university or
college. Some bedrock assumptions of university life are that professors know
more than students, that the reason students attend college is to learn, and that
classes follow a regular schedule.
Parts of an organization’s culture can always be found embedded in its information systems. For instance, UPS’s first priority is customer service, which is an
aspect of its organizational culture that can be found in the company’s package
tracking systems, which we describe in this section.
Different levels and specialties in an organization create different interests
and points of view. These views often conflict over how the company should
TABLE 1. 1
MAJOR BUSINESS FUNCTIONS
FUNCTION
PURPOSE
Sales and marketing
Selling the organization’s products and services
Manufacturing and production
Producing and delivering products and services
Finance and accounting
Managing the organization’s financial assets and
maintaining the organization’s financial records
Human resources
Attracting, developing, and maintaining the organization’s
labor force; maintaining employee records
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Chapter 1 Information Systems in Global Business Today
be run and how resources and rewards should be distributed. Conflict is the
basis for organizational politics. Information systems come out of this cauldron
of differing perspectives, conflicts, compromises, and agreements that are a
natural part of all organizations.
Management
Management’s job is to make sense out of the many situations faced by organizations, make decisions, and formulate action plans to solve organizational
problems. Managers perceive business challenges in the environment, they set
the organizational strategy for responding to those challenges, and they allocate
the human and financial resources to coordinate the work and achieve success.
Throughout, they must exercise responsible leadership. The business information systems described in this book reflect the hopes, dreams, and realities of
real-world managers.
But managers must do more than manage what already exists. They must also
create new products and services and even re-create the organization from time
to time. A substantial part of management responsibility is creative work driven
by new knowledge and information. Information technology can play a powerful role in helping managers design and deliver new products and services and
redirecting and redesigning their organizations.
Information Technology
Information technology is one of many tools managers use to cope with change.
Computer hardware is the physical equipment used for input, processing, and
output activities in an information system. It consists of the following: computers of various sizes and shapes (including mobile handheld devices); various
input, output, and storage devices; and telecommunications devices that link
computers together.
Computer software consists of the detailed, preprogrammed instructions
that control and coordinate the computer hardware components in an information system.
Data management technology consists of the software governing the organization of data on physical storage media.
Networking and telecommunications technology, consisting of both physical devices and software, links the various pieces of hardware and transfers data
from one physical location to another. Computers and communications equipment can be connected in networks for sharing voice, data, images, sound, and
video. A network links two or more computers to share data or resources, such
as a printer.
The world’s largest and most widely used network is the Internet. The Internet is a global “network of networks” that uses universal standards to connect
millions of networks in more than 230 countries around the world.
The Internet has created a new “universal” technology platform on which to
build new products, services, strategies, and business models. This same technology platform has internal uses, providing the connectivity to link different
systems and networks within the firm. Internal corporate networks based on
Internet technology are called intranets. Private intranets extended to authorized users outside the organization are called extranets, and firms use such
networks to coordinate their activities with other firms for making purchases,
collaborating on design, and other interorganizational work. For most business
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Chapter 1 Information Systems in Global Business Today
firms today, using Internet technology is both a business necessity and a competitive advantage.
The World Wide Web is a service provided by the Internet that uses universally accepted standards for storing, retrieving, formatting, and displaying information in a page format on the Internet. Web pages contain text,
graphics, animations, sound, and video and are linked to other web pages.
By clicking on highlighted words or buttons on a web page, you can link to
related pages to find additional information and links to other locations on
the web. The web can serve as the foundation for new kinds of information
systems such as UPS’s web-based package tracking system described in the
Interactive Session.
All of these technologies, along with the people required to run and manage
them, represent resources that can be shared throughout the organization and
constitute the firm’s information technology (IT) infrastructure. The IT
infrastructure provides the foundation, or platform, on which the firm can build
its specific information systems. Each organization must carefully design and
manage its IT infrastructure so that it has the set of technology services it needs
for the work it wants to accomplish with information systems. Chapters of this
book examine each major technology component of information technology
infrastructure and show how they all work together to create the technology
platform for the organization.
The Interactive Session on Technology describes some of the typical technologies used in computer-based information systems today. UPS invests heavily in information systems technology to make its business more efficient and
customer oriented. It uses an array of information technologies, including bar
code scanning systems, wireless networks, large mainframe computers, handheld computers, the Internet, and many different pieces of software for tracking packages, calculating fees, maintaining customer accounts, and managing
logistics.
Let’s identify the organization, management, and technology elements in
the UPS package tracking system we have just described. The organization
element anchors the package tracking system in UPS’s sales and production
functions (the main product of UPS is a service—package delivery). It specifies the required procedures for identifying packages with both sender and
recipient information, taking inventory, tracking the packages en route, and
providing package status reports for UPS customers and customer service
representatives.
The system must also provide information to satisfy the needs of managers
and workers. UPS drivers need to be trained in both package pickup and delivery
procedures and in how to use the package tracking system so that they can work
efficiently and effectively. UPS customers may need some training to use UPS
in-house package tracking software or the UPS website.
UPS’s management is responsible for monitoring service levels and costs and
for promoting the company’s strategy of combining low cost and superior service. Management decided to use computer systems to increase the ease of
sending a package using UPS and of checking its delivery status, thereby reducing delivery costs and increasing sales revenues.
The technology supporting this system consists of handheld computers,
bar code scanners, desktop computers, wired and wireless communications
networks, UPS’s data center, storage technology for the package delivery data,
UPS in-house package tracking software, and software to access the World Wide
Web. The result is an information system solution to the business challenge
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter
Chapter1 5Information
IT Infrastructure
Systems
andinEmerging
Global Business
Technologies
Today
INTERACTIVE SESSION
TECHNOLOGY
UPS Competes Globally with Information Technology
United Parcel Service (UPS) started out in 1907 in a
closet-sized basement office. Jim Casey and Claude
Ryan—two teenagers from Seattle with two bicycles
and one phone—promised the “best service and
lowest rates.” UPS has used this formula successfully
for more than a century to become the world’s largest
ground and air package-delivery company. It’s a global
enterprise with more than 454,000 employees, over
112,000 vehicles, and the world’s ninth-largest airline.
Today, UPS delivers 5.1 billion packages and documents in more than 220 countries and territories.
The firm has been able to maintain leadership in
small-package delivery services despite stiff competition from FedEx and the U.S. Postal Service by investing heavily in advanced information technology. UPS
spends more than $1 billion each year to maintain
a high level of customer service while keeping costs
low and streamlining its overall operations.
It all starts with the scannable bar-coded label
attached to a package, which contains detailed information about the sender, the destination, and when
the package should arrive. Customers can download
and print their own labels using special software provided by UPS or by accessing the UPS website. Before
the package is even picked up, information from the
“smart” label is transmitted to one of UPS’s computer
centers in Mahwah, New Jersey, or Alpharetta, Georgia, and sent to the distribution center nearest its
final destination.
Dispatchers at this center download the label
data and use special routing software called ORION
to create the most efficient delivery route for each
driver that considers traffic, weather conditions, and
the location of each stop. Each UPS driver makes
an average of 100 stops per day. In a network with
55,000 routes in the United States alone, shaving
even one mile off each driver’s daily route translates
into big savings: $50 million per year. These savings
are critical as UPS tries to boost earnings growth as
more of its business shifts to less-profitable
e-commerce deliveries. UPS drivers who used to drop
off several heavy packages a day at one retailer now
make many stops scattered across residential neighborhoods, delivering one lightweight package per
household. The shift requires more fuel and more
time, increasing the cost to deliver each package.
The first thing a UPS driver picks up each day is
a handheld computer called a Delivery Information
Acquisition Device (DIAD), which can access a wireless cell phone network. As soon as the driver logs
on, his or her day’s route is downloaded onto the
handheld. The DIAD also automatically captures
customers’ signatures along with pickup and delivery
information. Package tracking information is then
transmitted to UPS’s computer network for storage
and processing. From there, the information can be
accessed worldwide to provide proof of delivery to
customers or to respond to customer queries. It usually takes less than 60 seconds from the time a driver
presses “complete” on the DIAD for the new information to be available on the web.
Through its automated package tracking system,
UPS can monitor and even reroute packages throughout the delivery process. At various points along the
route from sender to receiver, bar code devices scan
shipping information on the package label and feed
data about the progress of the package into the central computer. Customer service representatives are
able to check the status of any package from desktop computers linked to the central computers and
respond immediately to inquiries from customers.
UPS customers can also access this information from
the company’s website using their own computers
or mobile phones. UPS now has mobile apps and a
mobile website for iPhone, BlackBerry, and Android
smartphone users.
Anyone with a package to ship can access the UPS
website to track packages, check delivery routes, calculate shipping rates, determine time in transit, print
labels, and schedule a pickup. The data collected at
the UPS website are transmitted to the UPS central
computer and then back to the customer after processing. UPS also provides tools that enable customers, such Cisco Systems, to embed UPS functions,
such as tracking and cost calculations, into their own
websites so that they can track shipments without
visiting the UPS site.
UPS is now leveraging its decades of expertise
managing its own global delivery network to manage
logistics and supply chain activities for other
companies. It created a UPS Supply Chain Solutions
division that provides a complete bundle of standardized services to subscribing companies at a fraction
of what it would cost to build their own systems and
infrastructure. These services include supply chain
design and management, freight forwarding, customs
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Chapter 1 Information Systems in Global Business Today
brokerage, mail services, multimodal transportation,
and financial services in addition to logistics services.
CandleScience, based in Durham, North Carolina,
is an industry leader in the candle and soap supply
industry, providing raw materials such as waxes,
wicks, and fragrances to candle makers around the
world. UPS worked with CandleScience to accurately
model shipping rates for the company and its customers and to add a freight shipping option capability to its website. UPS also helped CandleScience
identify the optimal location for a new warehouse
for its West Coast customers. The new West Coast
warehouse in Sparks, Nevada lets the company reach
some of its largest customers faster, more efficiently
and less expensively.
UPS provides both financial and shipping advice
and services to Flags of Valor, a small business based in
Ashton, Virginia, which sells hundreds of hand-crafted
wooden flags each day to online customers. Using UPS
Quantum View Manage® technology, the staff can
view and monitor outbound packages and immediately respond to customer questions about order status. UPS Capital®, the financial service division of UPS,
showed the company how to protect its cash flow and
assets by moving to a comprehensive insurance plan.
Sources: Paul Ziobro, “UPS’s $20 Billion Problem: Operations Stuck in
the 20th Century,” Wall Street Journal, June 15, 2018; www.ups.com,
accessed February 7, 2018; “Igniting Growth with CandleScience,” UPS
Compass, May 2017; and “Stars and Stripes Flying High,” UPS Compass, December 2017.
CASE STUDY QUESTIONS
1. What are the inputs, processing, and outputs of
UPS’s package tracking system?
2. What technologies are used by UPS? How are these
technologies related to UPS’s business strategy?
3. What strategic business objectives do UPS’s
information systems address?
4. What would happen if UPS’s information systems
were not available?
of providing a high level of service with low prices in the face of mounting
competition.
It Isn’t Just Technology: A Business Perspective
on Information Systems
Managers and business firms invest in information technology and systems
because they provide real economic value to the business. The decision to
build or maintain an information system assumes that the returns on this
investment will be superior to other investments in buildings, machines,
or other assets. These superior returns will be expressed as increases in
productivity, as increases in revenues (which will increase the firm’s
stock market value), or perhaps as superior long-term strategic positioning
of the firm in certain markets (which will produce superior revenues in the
future).
We can see that from a business perspective, an information system is an
important instrument for creating value for the firm. Information systems enable
the firm to increase its revenue or decrease its costs by providing information
that helps managers make better decisions or that improves the execution of
business processes. For example, the information system for analyzing supermarket checkout data illustrated in Figure 1.3 can increase firm profitability
by helping managers make better decisions as to which products to stock and
promote in retail supermarkets.
Every business has an information value chain, illustrated in Figure 1.7,
in which raw information is systematically acquired and then transformed
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Chapter 1 Information Systems in Global Business Today
FIGURE 1. 7
THE BUSINESS INFORMATION VALUE CHAIN
From a business perspective, information systems are part of a series of value-adding activities for
acquiring, transforming, and distributing information that managers can use to improve decision
making, enhance organizational performance, and, ultimately, increase firm profitability.
Business Processes
Supply
Chain
Management
Data
Collection
and
Storage
Enterprise
Customer
Management Management
Knowledge
Management
Firm
Profitability
and
Strategic
Position
TransforDissemination
mation
into Business
Systems
Planning
Information Processing Activities
Coordinating
Controlling
Modeling and
Decision
Making
Management Activities
Business Value
through various stages that add value to that information. The value of an
information system to a business, as well as the decision to invest in any
new information system, is, in large part, determined by the extent to
which the system will lead to better management decisions, more efficient
business processes, and higher firm profitability. Although there are other
reasons why systems are built, their primary purpose is to contribute to
corporate value.
The business perspective calls attention to the organizational and managerial
nature of information systems. An information system represents an organizational and management solution, based on information technology, to a challenge
or problem posed by the environment. Some chapters in this book begins with a
short case study that illustrates this concept. A diagram at the beginning of some
chapters illustrates the relationship between a business challenge and resulting
management and organizational decisions to use IT as a solution to challenges
generated by the business environment. You can use this diagram as a starting
point for analyzing any information system or information system problem you
encounter.
Review the diagram at the beginning of this chapter. The diagram shows
how PCL’s systems solved the business problem of inefficiencies created by a
far-flung, highly paper-intensive business. These systems provided a solution
that takes advantage of opportunities provided by new wireless digital technology and the Internet. PCL digitally enabled its key business processes for planning, designing, and monitoring its construction projects. These systems have
been essential in improving PCL’s overall business performance. The diagram
also illustrates how management, technology, and organizational elements work
together to create the systems.
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Chapter 1 Information Systems in Global Business Today
FIGURE 1. 8
VARIATION IN RETURNS ON INFORMATION TECHNOLOGY
INVESTMENT
Although, on average, investments in information technology produce returns far above
those returned by other investments, there is considerable variation across firms.
Source: Brynjolfsson, Erik and Lorin M. Hitt. “Beyond Computation: Information Technology, Organizational Transformation, and Business
Performance.” Journal of Economic Perspectives 14, No. 4 (2000).
4.0
1
2
3
4
2.0
Productivity
(relative to
industry
average)
1.0
.5
.25
.12
.25
1.0
4.0
8.0
IT Capital Stock (relative to industry average)
Complementary Assets: Organizational Capital
and the Right Business Model
Awareness of the organizational and managerial dimensions of information systems
can help us understand why some firms achieve better results from their information systems than others. Studies of returns from information technology investments show that there is considerable variation in the returns firms receive (see
Figure 1.8). Some firms invest a great deal and receive a great deal (quadrant 2);
others invest an equal amount and receive few returns (quadrant 4). Still other firms
invest little and receive much (quadrant 1), whereas others invest little and receive
little (quadrant 3). This suggests that investing in information technology does not
by itself guarantee good returns. What accounts for this variation among firms?
The answer lies in the concept of complementary assets. Information technology investments alone cannot make organizations and managers more effective
unless they are accompanied by supportive values, structures, and behavior patterns in the organization and other complementary assets. Business firms need
to change how they do business before they can really reap the advantages of
new information technologies.
Complementary assets are those assets required to derive value from a primary investment (Teece, 1998). For instance, to realize value from automobiles
requires substantial complementary investments in highways, roads, gasoline
stations, repair facilities, and a legal regulatory structure to set standards and
control drivers.
Research indicates that firms that support their technology investments
with investments in complementary assets, such as new business models, new
business processes, management behavior, organizational culture, or training,
receive superior returns, whereas those firms failing to make these complementary investments receive less or no returns on their information technology
investments (Brynjolfsson, 2005; Brynjolfsson and Hitt, 2000; Laudon, 1974).
These investments in organization and management are also known as
organizational and management capital.
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Chapter 1 Information Systems in Global Business Today
TABLE 1. 2 COMPLEMENTARY SOCIAL, MANAGERIAL, AND
ORGANIZATIONAL ASSETS REQUIRED TO OPTIMIZE RETURNS
FROM INFORMATION TECHNOLOGY INVESTMENTS
Organizational assets
Supportive organizational culture that values efficiency and effectiveness
Appropriate business model
Efficient business processes
Decentralized authority
Distributed decision-making rights
Strong IS development team
Managerial assets
Strong senior management support for technology investment and change
Incentives for management innovation
Teamwork and collaborative work environments
Training programs to enhance management decision skills
Management culture that values flexibility and knowledge-based
decision making.
Social assets
The Internet and telecommunications infrastructure
IT-enriched educational programs raising labor force computer literacy
Standards (both government and private sector)
Laws and regulations creating fair, stable market environments
Technology and service firms in adjacent markets to assist implementation
Table 1.2 lists the major complementary investments that firms need to
make to realize value from their information technology investments. Some
of this investment involves tangible assets, such as buildings, machinery,
and tools. However, the value of investments in information technology
depends to a large extent on complementary investments in management
and organization.
Key organizational complementary investments are a supportive business
culture that values efficiency and effectiveness, an appropriate business model,
efficient business processes, decentralization of authority, highly distributed
decision rights, and a strong information system (IS) development team.
Important managerial complementary assets are strong senior management
support for change, incentive systems that monitor and reward individual innovation, an emphasis on teamwork and collaboration, training programs, and a
management culture that values flexibility and knowledge.
Important social investments (not made by the firm but by the society at
large, other firms, governments, and other key market actors) are the Internet
and the supporting Internet culture, educational systems, network and computing standards, regulations and laws, and the presence of technology and
service firms.
Throughout the book, we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions.
Perhaps the single most important theme in the book, reflected in case studies and exercises, is that managers need to consider the broader organization
and management dimensions of information systems to understand current
problems as well as to derive substantial above-average returns from their information technology investments. As you will see throughout the text, firms that
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Chapter 1 Information Systems in Global Business Today
can address these related dimensions of the IT investment are, on average,
richly rewarded.
1-3 What academic disciplines are used to study
information systems, and how does
each contribute to an understanding
of information systems?
The study of information systems is a multidisciplinary field. No single theory
or perspective dominates. Figure 1.9 illustrates the major disciplines that contribute problems, issues, and solutions in the study of information systems.
In general, the field can be divided into technical and behavioral approaches.
Information systems are sociotechnical systems. Though they are composed
of machines, devices, and “hard” physical technology, they require substantial social, organizational, and intellectual investments to make them work
properly.
Technical Approach
The technical approach to information systems emphasizes mathematically based
models to study information systems as well as the physical technology and formal capabilities of these systems. The disciplines that contribute to the technical
approach are computer science, management science, and operations research.
Computer science is concerned with establishing theories of computability,
methods of computation, and methods of efficient data storage and access. Management science emphasizes the development of models for decision-making
and management practices. Operations research focuses on mathematical techniques for optimizing selected parameters of organizations, such as transportation, inventory control, and transaction costs.
FIGURE 1. 9
CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS
The study of information systems deals with issues and insights contributed from
technical and behavioral disciplines.
Technical
Approaches
Computer
Science
Management
Science
Operations
Research
MIS
Psychology
Sociology
Economics
Behavioral
Approaches
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Chapter 1 Information Systems in Global Business Today
Behavioral Approach
An important part of the information systems field is concerned with behavioral
issues that arise in the development and long-term maintenance of information
systems. Issues such as strategic business integration, design, implementation,
utilization, and management cannot be explored usefully with the models used
in the technical approach. Other behavioral disciplines contribute important
concepts and methods.
For instance, sociologists study information systems with an eye toward
how groups and organizations shape the development of systems and also how
systems affect individuals, groups, and organizations. Psychologists study information systems with an interest in how human decision makers perceive and
use formal information. Economists study information systems with an interest
in understanding the production of digital goods, the dynamics of digital markets,
and how new information systems change the control and cost structures within
the firm.
The behavioral approach does not ignore technology. Indeed, information
systems technology is often the stimulus for a behavioral problem or issue. But
the focus of this approach is generally not on technical solutions. Instead, it
concentrates on changes in attitudes, management and organizational policy,
and behavior.
Approach of This Text: Sociotechnical Systems
Throughout this book, you will find a rich story with four main actors: suppliers of hardware and software (the technologists); business firms making
investments and seeking to obtain value from the technology; managers
and employees seeking to achieve business value (and other goals); and
the contemporary legal, social, and cultural context (the firm’s environment). Together these actors produce what we call management information
systems.
The study of management information systems (MIS) arose to focus on the
use of computer-based information systems in business firms and government
agencies. MIS combines the work of computer science, management science, and
operations research with a practical orientation toward developing system solutions to real-world problems and managing information technology resources.
It is also concerned with behavioral issues surrounding the development, use,
and impact of information systems, which are typically discussed in the fields
of sociology, economics, and psychology.
Our experience as academics and practitioners leads us to believe that no
single approach effectively captures the reality of information systems. The
successes and failures of information systems are rarely all technical or all
behavioral. Our best advice to students is to understand the perspectives of
many disciplines. Indeed, the challenge and excitement of the information systems field are that it requires an appreciation and tolerance of many different
approaches.
The view we adopt in this book is best characterized as the sociotechnical view of systems. In this view, optimal organizational performance is
achieved by jointly optimizing both the social and technical systems used in
production.
Adopting a sociotechnical systems perspective helps to avoid a purely
technological approach to information systems. For instance, the fact that information technology is rapidly declining in cost and growing in power does not
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Chapter 1 Information Systems in Global Business Today
FIGURE 1. 10 A SOCIOTECHNICAL PERSPECTIVE ON INFORMATION
SYSTEMS
In a sociotechnical perspective, the performance of a system is optimized when both
the technology and the organization mutually adjust to one another until a satisfactory
fit is obtained.
TECHNOLOGY
ORGANIZATION
Alternative
1
Alternative
1
Alternative
2
Alternative
2
Alternative
3
Final
Design of
Technology
Alternative
3
Final
Design of
Organization
necessarily or easily translate into productivity enhancement or bottom-line
profits. The fact that a firm has recently installed an enterprise-wide financial reporting system does not necessarily mean that it will be used, or used
effectively. Likewise, the fact that a firm has recently introduced new business
procedures and processes does not necessarily mean employees will be more
productive in the absence of investments in new information systems to enable
those processes.
In this book, we stress the need to optimize the firm’s performance as a
whole. Both the technical and behavioral components need attention. This
means that technology must be changed and designed in such a way as to fit
organizational and individual needs. Sometimes, the technology may have
to be “de-optimized” to accomplish this fit. For instance, mobile phone users
adapt this technology to their personal needs, and as a result manufacturers
quickly seek to adjust the technology to conform to user expectations. Organizations and individuals must also be changed through training, learning, and
planned organizational change to allow the technology to operate and prosper.
Figure 1.10 illustrates this process of mutual adjustment in a sociotechnical
system.
1-4 How will MIS help my career?
Here is how Chapter 1 and this text can help you find an entry-level job as a
financial client support and sales assistant.
The Company
Power Financial Analytics Data Services, a data and software company serving
the financial industry with offices in New York City, Atlanta, Los Angeles, and
Chicago, is looking to fill an entry-level position for a financial client support
and sales assistant. The company has 1,600 employees, many of whom are
consultants showing clients how to work with its powerful financial analytics
software and data products.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 1 Information Systems in Global Business Today
Position Description
The financial client support and sales assistant will be part of a team in the
company’s consulting services. Consulting teams combine a thorough understanding of finance and technology with specific expertise in Power Financial Analytics Data Services software and assist clients in a variety of ways.
The company provides on-the-job training in its software and consulting methods. Job responsibilities include:
•
•
•
•
Supporting Financial Analytics Data Services applications.
Helping the team create custom models and screens.
Training clients in their offices and at seminars.
Providing expert consultation to clients by telephone and on-site.
Job Requirements
• Recent college graduate or investment professional with one to two years
of experience. Applicants with backgrounds in finance, MIS, economics,
accounting, business administration, and mathematics are preferred
• Knowledge of or interest in learning about financial markets
• Sound working knowledge of spreadsheets
• Very strong communication and interpersonal skills
• Strong desire to learn in rapidly changing environment
Interview Questions
1. What is your background in finance? What courses did you take? Have you
ever worked in the financial industry? What did you do there?
2. What is your proficiency level with spreadsheet software? What work
have you done with Excel spreadsheets? Can you show examples of your
work?
3. Are you able to discuss current trends in the financial industry and how they
impact Power Financial’s business model and client base?
4. Did you ever work with clients? Can you give examples of how you provided
client service or support?
5. Can you give us an example of a finance-related problem or other business
problem that you helped solve? Did you do any writing and analysis? Can
you provide examples?
Author Tips
1. Use the web to learn about financial markets and the financial industry.
2. Use the web to research the company, its financial products, and the tools
and services it offers customers. Learn what you can about its consulting
services. Additionally, examine the company’s social medial channels, such
as LinkedIn and Facebook, for trends and themes.
3. Inquire exactly how you would be using spreadsheets for this job.
Provide examples of how you used spreadsheets to solve problems in the classroom or for a job assignment. Show the spreadsheet work you did in finance.
4. Bring examples of your writing (including some from your Digital Portfolio
described in MyLab MIS) demonstrating your analytical skills and project
experience. Be prepared to discuss how you helped customers solve a
business problem or the business problem solving you did for your courses.
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Chapter 1 Information Systems in Global Business Today
REVIEW SUMMARY
1-1 How are information systems transforming business, and why are they so essential for running and
managing a business today?
E-mail, online conferencing, smartphones, and tablet computers have become essential tools for
conducting business. Information systems are the foundation of fast-paced supply chains. The Internet
allows many businesses to buy, sell, advertise, and solicit customer feedback online. Organizations are
trying to become more competitive and efficient by digitally enabling their core business processes
and evolving into digital firms. The Internet has stimulated globalization by dramatically reducing the
costs of producing, buying, and selling goods on a global scale. New information system trends include
the emerging mobile digital platform, big data, and cloud computing.
Information systems are a foundation for conducting business today. In many industries, survival
and the ability to achieve strategic business goals are difficult without extensive use of information
technology. Businesses today use information systems to achieve six major objectives: operational excellence; new products, services, and business models; customer/supplier intimacy; improved decision
making; competitive advantage; and day-to-day survival.
1-2 What is an information system? How does it work? What are its management, organization, and
technology components? Why are complementary assets essential for ensuring that information
systems provide genuine value for organizations?
From a technical perspective, an information system collects, stores, and disseminates information
from an organization’s environment and internal operations to support organizational functions and
decision making, communication, coordination, control, analysis, and visualization. Information systems transform raw data into useful information through three basic activities: input, processing, and
output.
From a business perspective, an information system provides a solution to a problem or challenge
facing a firm and represents a combination of management, organization, and technology elements.
The management dimension of information systems involves issues such as leadership, strategy, and
management behavior. The technology dimension consists of computer hardware, software, data management technology, and networking/telecommunications technology (including the Internet). The
organization dimension of information systems involves issues such as the organization’s hierarchy,
functional specialties, business processes, culture, and political interest groups.
In order to obtain meaningful value from information systems, organizations must support their
technology investments with appropriate complementary investments in organizations and management. These complementary assets include new business models and business processes, supportive
organizational culture and management behavior, and appropriate technology standards, regulations,
and laws. New information technology investments are unlikely to produce high returns unless businesses make the appropriate managerial and organizational changes to support the technology.
1-3 What academic disciplines are used to study information systems, and how does each contribute
to an understanding of information systems?
The study of information systems deals with issues and insights contributed from technical and
behavioral disciplines. The disciplines that contribute to the technical approach focusing on formal models and capabilities of systems are computer science, management science, and operations research.
The disciplines contributing to the behavioral approach focusing on the design, implementation, management, and business impact of systems are psychology, sociology, and economics. A sociotechnical
view of systems considers both technical and social features of systems and solutions that represent
the best fit between them.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 1 Information Systems in Global Business Today
33
Key Terms
Business functions, 19
Business model, 14
Business processes, 12
Complementary assets, 26
Computer hardware, 21
Computer literacy, 18
Computer software, 21
Culture, 20
Data, 16
Data management technology, 21
Data workers, 19
Digital firm, 12
Extranets, 21
Feedback, 17
Information, 16
Information system, 16
Information systems literacy, 18
Information technology (IT), 16
Information technology (IT) infrastructure, 22
Input, 17
Internet, 21
Intranets, 21
Knowledge workers, 19
Management information systems (MIS), 18
Middle management, 19
Network, 21
Networking and telecommunications
technology, 21
Operational management, 19
Organizational and management capital, 26
Output, 17
Processing, 17
Production or service workers, 19
Senior management, 19
Sociotechnical view, 29
World Wide Web, 22
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
1-1
•
•
•
•
•
1-2
•
Distinguish between data and information
and between information systems literacy
and computer literacy.
• Explain how the Internet and the World Wide
Web are related to the other technology components of information systems.
• Define complementary assets and describe
their relationship to information technology.
• Describe the complementary social, managerial, and organizational assets required to
optimize returns from information technology investments.
How are information systems transforming
business, and why are they so essential for
running and managing a business today?
Describe how information systems have
changed the way businesses operate and
their products and services.
Identify three major new information system
trends.
Describe the characteristics of a digital firm.
Describe the challenges and opportunities of
globalization in a “flattened” world.
List and describe six reasons why information systems are so important for business
today.
What is an information system? How does it work?
What are its management, organization, and technology components? Why are complementary
assets essential for ensuring that information systems provide genuine value for organizations?
•
•
Define an information system and describe
the activities it performs.
List and describe the organizational, management, and technology dimensions of information systems.
1-3
What academic disciplines are used to study
information systems, and how does each
contribute to an understanding of information
systems?
•
List and describe each discipline that
contributes to a technical approach to
information systems.
• List and describe each discipline that contributes to a behavioral approach to information
systems.
• Describe the sociotechnical perspective on
information systems.
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Chapter 1 Information Systems in Global Business Today
Discussion Questions
1-4 Information systems are too important to be
left to computer specialists. Do you agree?
Why or why not?
MyLab MIS
1-5 If you were setting up the website for a
Major League Baseball team, what management, organization, and technology issues
might you encounter?
1-6 What are some of the organizational,
managerial, and social complementary assets
that help make UPS’s information systems so
successful?
MyLab MIS
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience in analyzing financial reporting and inventory management problems, using data management software to improve management decision making about increasing sales,
and using Internet software for researching job requirements. Visit MyLab MIS to access this chapter’s Hands-On
MIS Projects.
Management Decision Problems
1-7
1-8
Snyders of Hanover, which sells about 80 million bags of pretzels, snack chips, and organic snack
items each year, had its financial department use spreadsheets and manual processes for much of its
data gathering and reporting. Snyder’s financial analyst would spend the entire final week of every
month collecting spreadsheets from the heads of more than 50 departments worldwide. She would
then consolidate and reenter all the data into another spreadsheet, which would serve as the company’s monthly profit-and-loss statement. If a department needed to update its data after submitting
the spreadsheet to the main office, the analyst had to return the original spreadsheet, then wait for the
department to resubmit its data before finally submitting the updated data in the consolidated document.
Assess the impact of this situation on business performance and management decision making.
Dollar General Corporation operates deep-discount stores offering housewares, cleaning supplies,
clothing, health and beauty aids, and packaged food, with most items selling for $1. Its business model
calls for keeping costs as low as possible. The company has no automated method for keeping track of
inventory at each store. Managers know approximately how many cases of a particular product the store
is supposed to receive when a delivery truck arrives, but the stores lack technology for scanning the
cases or verifying the item count inside the cases. Merchandise losses from theft or other mishaps have
been rising and now represent more than 3 percent of total sales. What decisions have to be made before
investing in an information system solution?
Improving Decision Making: Using Databases to Analyze Sales Trends
Software skills: Database querying and reporting
Business skills: Sales trend analysis
1-9
In this project, you will start out with raw transactional sales data and use Microsoft Access database
software to develop queries and reports that help managers make better decisions about product pricing,
sales promotions, and inventory replenishment. In MyLab MIS, you can find a Store and Regional Sales
Database developed in Microsoft Access. The database contains raw data on weekly store sales of computer equipment in various sales regions. The database includes fields for store identification number,
sales region, item number, item description, unit price, units sold, and the weekly sales period when the
sales were made. Use Access to develop some reports and queries to make this information more useful
for running the business. Sales and production managers want answers to the following questions:
• Which products should be restocked?
• Which stores and sales regions would benefit from a promotional campaign and additional marketing?
• When (what time of year) should products be offered at full price, and when should discounts be used?
You can easily modify the database table to find and report your answers. Print your reports and results of
queries.
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Chapter 1 Information Systems in Global Business Today
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Improving Decision Making: Using the Internet to Locate Jobs Requiring Information
Systems Knowledge
Software skills: Internet-based software
Business skills: Job searching
1-10 Visit a job-posting website such as Monster.com. Spend some time at the site examining jobs for
accounting, finance, sales, marketing, and human resources. Find two or three descriptions of jobs
that require some information systems knowledge. What information systems knowledge do these jobs
require? What do you need to do to prepare for these jobs? Write a one- to two-page report summarizing
your findings.
Collaboration and Teamwork Project
Selecting Team Collaboration Tools
1-11 Form a team with three or four classmates and review the capabilities of Google Drive and Google
Sites for your team collaboration work. Compare the capabilities of these two tools for storing team
documents, project announcements, source materials, work assignments, illustrations, electronic
presentations, and web pages of interest. Learn how each works with Google Docs. Explain why Google
Drive or Google Sites is more appropriate for your team. If possible, use Google Docs to brainstorm and
develop a presentation of your findings for the class. Organize and store your presentation using the
Google tool you have selected.
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Chapter 1 Information Systems in Global Business Today
Did Information Systems Cause Deutsche Bank to
Stumble?
CASE STUDY
D
eutsche Bank AG, founded in 1870, is one
of the world’s top financial companies,
with 2,425 branches worldwide. It offers a
range of financial products and services, including
retail and commercial banking, foreign exchange,
and services for mergers and acquisitions. The
bank provides products for mortgages, consumer
finance, credit cards, life insurance, and corporate
pension plans; financing for international trade;
and customized wealth management services for
wealthy private clients. Deutsche Bank is also the
largest bank in Germany, and plays a central role
in German economic life. In many ways, Deutsche
Bank is the embodiment of the global financial
system.
Deutsche Bank has the world’s largest portfolio
of derivatives, valued at about $46 trillion. A financial derivative is a contract between two or more
parties whose value is dependent upon or derived
from one or more underlying assets, such as stocks,
bonds, commodities, currencies, and interest rates.
Although Deutsche Bank had survived the 2008
banking crisis, which was partly triggered by flawed
derivatives, it is now struggling with seismic changes
in the banking industry, including recent regulatory
change. The bank was forced to pay $7.2 billion to
resolve U.S. regulator complaints about its sale of
toxic mortgage securities that contributed to the 2008
financial crisis.
In addition, the Commodity Futures Trading
Commission (CFTC) charged that Deutsche Bank
submitted incomplete and untimely credit default
swap data, failed to properly supervise employees
responsible for swap data reporting, and lacked an
adequate business continuity and disaster recovery plan. (A credit default swap is a type of credit
insurance contract in which an insurer promises to
compensate an insured party [such as a bank] for
losses incurred when a debtor [such as a corporation] defaults on a debt and that can be purchased
or sold by either party on the financial market.
Credit default swaps are very complex financial
instruments.)
The CFTC complained that on April 16, 2016,
Deutsche Bank’s swap data reporting system experienced a system outage that prevented Deutsche
Bank from reporting any swap data for multiple
asset classes for approximately five days. Deutsche
Bank’s subsequent efforts to end the system outage
repeatedly exacerbated existing reporting problems
and led to the discovery and creation of new reporting problems.
For example, Deutsche Bank’s swap data
reported before and after the system outage
revealed persistent problems with the integrity
of certain data fields, including numerous invalid
legal entity identifiers. (A legal entity identifier
[LEI] is an identification code to uniquely identify all legal entities that are parties to financial
transactions.) The CFTC complaint alleged that
a number of these reporting problems persist
today, affecting market data that is made available to the public as well as data that is used by
the CFTC to evaluate systemic risk throughout the
swaps markets. The CFTC complaint also alleged
that Deutsche Bank’s system outage and subsequent reporting problems occurred in part because
Deutsche Bank failed to have an adequate business
continuity and disaster recovery plan and other
appropriate supervisory systems in place.
In addition to incurring high costs associated with
coping with regulators and paying fines, Deutsche
Bank was a very unwieldy and expensive bank to
operate. U.S. regulators have identified Deutsche
Bank’s antiquated technology as one reason why
the bank was not always able to provide the correct
information for running its business properly and
responding to regulators. Poor information systems
may have even contributed to the 2008 financial crisis. Banks often had trouble untangling the complex
financial products they had bought and sold to determine their underlying value.
Banks, including Deutsche Bank, are intensive
users of information technology, and they rely on
technology to spot misconduct. If Deutsche Bank
was such an important player in the German and
world financial systems, why were its systems not up
to the job?
It turns out that Deutsche Bank, like other leading
global financial companies, had undergone decades
of mergers and expansion. When these banks merged
or acquired other financial companies, they often
did not make the requisite (and often far-reaching)
changes to integrate their information systems with
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 1 Information Systems in Global Business Today
those of their acquisitions. The effort and costs
required for this integration, including coordination
across many management teams, were too great. So
the banks left many old systems in place to handle
the workload for each of their businesses. This created what experts call “spaghetti balls” of overlapping
and often incompatible technology platforms and
software programs. These antiquated legacy systems
were designed to handle large numbers of transactions and sums of money, but they were not well
suited to managing large bank operations. They often
did not allow information to be shared easily among
departments or provide senior management with a
coherent overview of bank operations.
Deutsche Bank had more than 100 different booking systems for trades in London alone and no common set of codes for identifying clients in each of
these systems. Each of these systems might use a
different number or code for identifying the same
client, so it would be extremely difficult or impossible to show how the same client was treated in all
of these systems. Individual teams and traders each
had their own incompatible platforms. The bank
had employed a deliberate strategy of pitting teams
against each other to spur them on, but this further
encouraged the use of different systems because
competing traders and teams were reluctant to share
their data. Yet the bank ultimately had to reconcile
the data from these disparate systems, often by hand,
before trades could be processed and recorded.
This situation has made it very difficult for banks
to undertake ambitious technology projects for the
systems that they need today or to comply with
regulatory requirements. U.S. regulators criticized
Deutsche Bank for its inability to provide essential
information because of its antiquated technology.
Regulators are demanding that financial institutions
improve the way they manage risk. The banks are
under pressure to make their aging computer systems
comply, but the IT infrastructures at many traditional
financial institutions are failing to keep up with these
regulatory pressures or with changing consumer
expectations. Deutsche Bank and its peers must also
adapt to new innovative technology competitors such
as Apple that are muscling into banking services.
In July 2015, John Cryan became Deutsche
Bank’s CEO. He tried to reduce costs and improve
efficiency, laying off thousands of employees. He
focused on overhauling Deutsche Bank’s fragmented,
antiquated information systems, which are a major
impediment to controlling costs and finding new
sources of profit and growth. Cryan noted that the
bank’s cost base was swollen by poor and ineffective
business processes, inadequate technology, and too
many tasks being handled manually. He has called
for standardizing the bank’s systems and procedures,
eliminating legacy software, standardizing and
enhancing data, and improving reporting.
Cryan appointed technology specialist Kim
Hammonds as chief operating officer to oversee
reengineering the bank’s information systems and
operations. Hammonds had been Deutsche Bank’s
global chief information officer and, before that,
chief information officer at Boeing. Hammonds
observed that Deutsche Bank’s information systems
operated by trial and error, as if her former employer
Boeing launched aircraft into the sky, watched them
crash, and then tried to learn from the mistakes.
In February 2015, Deutsche Bank announced a
10-year, multibillion-dollar deal with Hewlett-Packard
(HP) to standardize and simplify its IT infrastructure,
reduce costs, and create a more modern and agile
technology platform for launching new products and
services. Deutsche Bank would migrate to a cloud
computing infrastructure where it would run its
information systems in HP’s remote computer centers. HP would provide computing services, hosting,
and storage. Deutsche Bank would still be in charge
of application development and information security
technologies, which it considers as proprietary and
crucial for competitive differentiation.
Deutsche Bank is withdrawing from high-risk client relationships, improving its control framework,
and automating manual reconciliations. To modernize its IT infrastructure, the bank is reducing the
number of its individual operating systems that
control the way a computer works from 45 to four,
replacing scores of outdated computers, and replacing
antiquated software applications. Thousands of applications and functions will be shifted from Deutsche
Bank’s mainframes to HP’s cloud computing services.
Automating manual processes will promote efficiency
and better control. These improvements are expected
to reduce “run the bank” costs by 800 million euros.
Eliminating 6,000 contractors will create total savings
of 1 billion euros. Deutsche Bank has also opened
four technology centers to work with financial technology startups to improve its technology.
Despite all of these efforts, Deutsche Bank
has struggled to regain profitability and stability.
In early April 2018 the bank’s supervisory board
replaced Cryan with Christian Sewing, a longtime
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Chapter 1 Information Systems in Global Business Today
insider who had been in charge of the bank’s wealth
management division and its branch network in
Germany. During his tenure, Cryan was unable
to restore profitability. In February 2018 the bank
reported a loss of €735 million, or about $900 million, for 2017, which represented its third consecutive annual loss.
Deutsche Bank has not been the only major bank
to be hampered by system problems. IT shortcomings were one reason Banco Santander’s U.S. unit in
2016 failed the U.S. Federal Reserve’s annual “stress
tests,” which gauge how big banks would fare in a
new financial crisis. A 2015 Accenture consultants’
report found that only 6 percent of board of director members and 3 percent of CEOs at the world’s
largest banks had professional technology experience. Financial technology innovations, security,
IT resilience, and technology implications of regulatory changes are now all critical issues for bank
boards of directors, but many lack the knowledge
to assess these issues and make informed decisions
about strategy, investment, and how best to allocate
technology resources.
Sources: Jack Ewing, “Deutsche Bank Replaces CEO Amid Losses
and Lack of Direction,” New York Times, April 8, 2018; Charles
Riley, “Deutsche Bank Hasn’t Made a Profit in Three Years,”
CNN Money, February 2, 2018; Anna Irrera, “Deutsche Bank
Launches Tech Startup Lab in New York City,” Reuters, March
21, 2017; Geoffrey Smith, “Things You Should Know About the
Deutsche Bank Train Wreck,” Fortune, September 28, 2016;
Hayley McDowell, “System Outage Sees Deutsche Bank Charged
over Reporting Failures,” The Trade News, August 19, 2016; Derek
du Preez, “US Regulator Charges Deutsche Bank over Multiple Systems Failures,” Diginomica, August 19, 2016; Kat Hall,
“Deutsche Bank’s Creaking IT Systems Nervously Eyeing Bins,”
The Register, October 27, 2015; Martin Arnold and Tom Braithwaite, “Banks’ Ageing IT Systems Buckle Under Strain,” Financial
Times, June 18, 2015; Martin Arnold, “Deutsche Bank to Rip Out
IT Systems Blamed for Problems,” Financial Times, October 26,
2015; Ben Moshinsky, “Deutsche Bank Has a Technology Problem,” Business Insider, October 20, 2015; Edward Robinson and
Nicholas Comfort, “Cryan’s Shakeup at Deutsche Bank Sees Tech
Restart,” Bloomberg, December 20, 2015; and Accenture, “Bank
Boardrooms Lack Technology Experience, Accenture Global
Research Finds,” October 28, 2015.
CASE STUDY QUESTIONS
1-12 Identify the problem described in this case
study. What management, organization, and
technology factors contributed to this problem?
1-13 What was the role of information technology
at Deutsche Bank? How was IT related to the
bank’s operational efficiency, decision-making
capability, and business strategy?
1-14 Was Deutsche Bank using technology
effectively to pursue its business strategy?
Explain your answer.
1-15 What solution for Deutsche Bank was
proposed? How effective do you think it will
be? Explain your answer.
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
1-16
What are the strategic objectives that firms try to achieve by investing in information systems and
technologies? For each strategic objective, give an example of how a firm could use information systems to
achieve that objective.
1-17
Describe the complementary assets that firms need in order to optimize returns from their information system
investments. For each type of complementary asset, give an example of a specific asset a firm should have.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 1 Information Systems in Global Business Today
39
Chapter 1 References
Baldwin, Richard. The Great Convergence: Information Technology
and the New Globalization. Cambridge, MA: Harvard
University Press (2016.)
Brynjolfsson, Erik. “VII Pillars of IT Productivity.” Optimize (May
2005).
Brynjolfsson, Erik, and Lorin M. Hitt. “Beyond Computation:
Information Technology, Organizational Transformation, and
Business Performance.” Journal of Economic Perspectives 14,
No. 4 (2000).
Bureau of Economic Analysis. National Income and Product
Accounts. www.bea.gov, accessed June 19, 2018.
Chae, Ho-Chang, Chang E. Koh, and Victor Prybutok. “Information
Technology Capability and Firm Performance: Contradictory
Findings and Their Possible Causes.” MIS Quarterly 38, No. 1
(March 2014).
Dedrick, Jason, Vijay Gurbaxani, and Kenneth L. Kraemer.
“Information Technology and Economic Performance: A
Critical Review of the Empirical Evidence.” Center for
Research on Information Technology and Organizations,
University of California, Irvine (December 2001).
eMarketer. “Number of Bloggers in the United States from 2014 to
2020 (in Millions).” eMarketer (2018).
___________. “Average Daily Time Spent with Media According to
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CHAP TER
2
E-commerce: Digital Markets,
Digital Goods
LEARNING OBJECTIVES
CHAPTER CASES
After reading this chapter, you will be able to
answer the following questions:
YouTube Transforms the Media Landscape
Uber: Digital Disruptor
“Socializing” with Customers
A Nasty Ending for Nasty Gal
2-1 What are the unique features of
e-commerce, digital markets, and
digital goods?
2-2 What are the principal e-commerce
business and revenue models?
2-3 How has e-commerce transformed
marketing?
2-4 How has e-commerce affected
business-to-business transactions?
2-5 What is the role of m-commerce
in business, and what are the most
important m-commerce applications?
2-6 What issues must be addressed when
building an e-commerce presence?
VIDEO CASES
Walmart Takes On Amazon: A Battle of IT
and Management Systems
Groupon: Deals Galore
Etsy: A Marketplace and Community
Instructional Videos:
Walmart’s E-commerce Fulfillment Center
Network
Behind the Scenes of an Amazon Warehouse
2-7 How will MIS help my career?
MyLab MIS
Discussion Questions: 2-7, 2-8, 2-9; Hands-on MIS Projects: 2-10, 2-11, 2-12, 2-13;
eText with Conceptual Animations
40
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Youtube Transforms the Media Landscape
T
he first video posted on YouTube was a 19-second clip from 2005 of one
of the company’s founders standing in front of the San Diego Zoo elephant cage. Who would have thought that the online video-sharing service would mushroom into the world’s second most popular website, with more
than 1.8 billion monthly users? YouTube viewers worldwide now watch more
than 5 billion YouTube videos per day. Three hundred hours of video are uploaded to YouTube every minute.
YouTube allows users to view, rate, share, add to favorites, report, and comment on videos and subscribe to other users’ video channels. Although hundreds
of millions of people love to post YouTube videos of their growing children,
dogs, and cats, YouTube offers much more: clips from major motion pictures
and TV shows, music videos, sports videos, videos from companies promoting their brands, and numerous “how-to”
videos about home repair, gardening, and
computer troubleshooting. Most YouTube
content has been uploaded by individuals,
but media corporations such as CBS, the
BBC, Vevo, and Hulu offer some of their
material via YouTube as part of a partnership program.
YouTube maintains very large databases
for video content and tracking the behavior of its users. It carefully mines data to
give each user personalized video recommendations that will entice that person
to watch longer. There are so many eyeballs affixed to YouTube—it’s a gold mine
for marketers, and YouTube content gets
richer by the minute. More than half of
YouTube views come from mobile devices.
YouTube was purchased by Google in
2006 and benefits from Google’s enormous reach, since Google handles about
80 percent of global Internet searches. YouTube revenue comes from ads accompanying videos that are targeted to site content and audiences. YouTube
also offers subscription-based premium channels, film rentals, and a subscription service called YouTube Red that provides ad-free access to the website and
some exclusive content. It is unclear if YouTube is actually profitable at this
point. Experts believe that annual costs for running and maintaining YouTube
exceed $6 billion.
Once known as a magnet for pirated video, YouTube has been embraced by
Hollywood and the entertainment world. Almost every movie trailer or music
© Bloomicon/Shutterstock
41
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Chapter 2 E-commerce: Digital Markets, Digital Goods
video is released onto YouTube; all major sports leagues upload highlights
there; and networks supplement traditional programming with videos that can
be shared, like the talk show host James Corden’s “Carpool Karaoke” series.
YouTube has become a major destination entertainment site, and it is about to
alter the media landscape even further.
YouTube has joined services targeting consumers who want to give up cable
or satellite TV without losing access to live television. In early 2017, YouTube
announced a subscription service called YouTube TV. For $40 per month, the
service offers more than 60 channels, including the major networks, FX, ESPN,
and the Disney Channel, as well as the ability to store an unlimited number of
programs on a cloud-based digital video recorder for up to six accounts. YouTube
TV subscribers will be able to watch content on any platform, including PCs,
tablets, smartphones, and big-screen TVs.
After the cost of acquiring all this television content is considered, Google
may not make much on YouTube TV subscription revenue. That’s fine right
now, because Google is using YouTube TV to break into the television advertising market, selling targeted advertising in ad slots that typically went to cable
operators. In the long term, that could be significant: Roughly $70 billion is
spent annually in the United States on TV ads.
Sources: David Pierce, “Why You Should Cut Cable—and What You’ll Miss,” Wall Street
Journal, February 14, 2018; Douglas MacMillan, “Investors Want More Transparency about
YouTube’s Sales, Profit,” Wall Street Journal, April 10, 2018; “37 Mind Blowing YouTube Facts,
Figures and Statistics—2018,” MerchDope, August 4, 2018; www.tv.youtube.com, accessed
July 30, 2018; Jack Nicas, “YouTube Tops 1 Billion Hours of Video a Day, on Pace to Eclipse
TV,” Wall Street Journal, February 27, 2017; Jack Nicas and Shalini Ramachandran, “Google’s
YouTube to Launch $35-a-Month Web-TV Service,” Wall Street Journal, February 28, 2017; and
Peter Kafka and Rani Molla, “2017 Was the Year Digital Ad Spending Finally Beat TV,” Recode,
December 4, 2017.
Y
ouTube exemplifies some of the major trends in e-commerce today. It
does not sell a product, it sells an innovative service, as e-commerce businesses are increasingly trying to do. YouTube’s service delivers streaming video
content either for free (supported by advertising) or by subscription, and also
enables users to upload and store their own videos. YouTube makes use of
advanced data mining and search technology to generate revenue from advertising. YouTube is “social,” linking people to each other through their shared
interests and fascination with video. And it is mobile: YouTube can be viewed
on smartphones and tablets as well as conventional computers and TV screens,
and more than half of YouTube views are on mobile devices.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. YouTube’s primary business challenge is how to take
advantage of opportunities presented by the Internet and new developments in
search and data mining technology to wring profits from the billions of videos it
streams to viewers. Obviously YouTube had to make major investments in technology to support video uploads and downloads, gigantic databases of videos
and users, tagging images, and social networking tools. YouTube generates revenue from ads targeted to video viewers and from subscriptions to its streaming
content services, including its new lineup of major TV channels. It is unclear
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 2 E-commerce: Digital Markets, Digital Goods
Business
Challenges
• Design business
and revenue model
• Opportunities presented
Management
• Maintain social
networks
• Partner with
Organization
content providers
• Databases
• Social networking
tools
• Data mining
• Video streaming
Technology
by new technology
Information
System
Business
Solutions
Video Content Serving
Platform
• Increase revenue
• Personalize streaming video
• Piggyback advertising
• Provide content subscription
service
whether YouTube has achieved long-term profitability, but it is very valuable to
Google as another outlet for its advertising.
Here are some questions to think about: How does YouTube provide value?
Why is YouTube an expensive business to operate? Is it a viable business model?
Why or why not?
2-1 What are the unique features of e-commerce,
digital markets, and digital goods?
In 2019, purchasing goods and services online by using smartphones, tablets, and
desktop computers is ubiquitous. In 2019, an estimated 224 million Americans
(about 92 percent of the Internet population) will shop online, and 195 million
will purchase something online, as did millions of others worldwide. Although
most purchases still take place through traditional channels, e-commerce continues to grow rapidly and to transform the way many companies do business
(eMarketer, 2018h). E-commerce is composed of three major segments: retail
goods, travel and services, and online content. In 2019, e-commerce consumer
sales of goods ($598 billion), travel and services ($213 billion), and online content ($23 billion) will total about $830 billion. Sales of retail goods alone will
be about 11 percent of total U.S. retail sales of $5.9 trillion, and are growing at
12 percent annually (compared with 3.3 percent for traditional retailers) (eMarketer, 2018e; 2018c). E-commerce is still a small part of the much larger retail
goods market that takes place in physical stores. E-commerce has expanded
from the desktop and home computer to mobile devices, from an isolated activity to a new social commerce, and from a Fortune 1000 commerce with a national audience to local merchants and consumers whose location is known to
mobile devices. At the top 100 e-commerce retail sites, more than half of online
shoppers arrive from their smartphones, and 48 percent of e-commerce sales
are now mobile, while 52 percent of purchases occur on the desktop. The key
words for understanding this new e-commerce in 2019 are “social, mobile, local”
(eMarketer, 2018d).
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Chapter 2 E-commerce: Digital Markets, Digital Goods
E-commerce Today
E-commerce refers to the use of the Internet and the web to transact business.
More formally, e-commerce is about digitally enabled commercial transactions
between and among organizations and individuals. For the most part, this refers to transactions that occur over the Internet and the web. Commercial transactions involve the exchange of value (e.g., money) across organizational or
individual boundaries in return for products and services.
E-commerce began in 1995 when one of the first Internet portals, Netscape.
com, accepted the first ads from major corporations and popularized the idea
that the web could be used as a new medium for advertising and sales. No
one envisioned at the time what would turn out to be an exponential growth
curve for e-commerce retail sales, which doubled and tripled in the early
years. E-commerce grew at double-digit rates until the recession of 2008–
2009, when growth slowed to a crawl and revenues flattened (see Figure 2.1),
which is not bad considering that traditional retail sales were shrinking by
5 percent annually. Since then, offline retail sales have increased only a
few percentage points a year, whereas online e-commerce has been a stellar
success.
The very rapid growth in e-commerce in the early years created a market
bubble in e-commerce stocks, which burst in March 2001. A large number of
e-commerce companies failed during this process. Yet for many others, such
as Amazon, eBay, Expedia, and Google, the results have been more positive:
soaring revenues, fine-tuned business models that produce profits, and rising
stock prices. By 2006, e-commerce revenues returned to solid growth and have
continued to be the fastest-growing form of retail trade in the United States,
Europe, and Asia.
• Online consumer sales (including travel and digital content) will grow to
an estimated $830 billion in 2019, an increase of more than 12 percent over
2018 with 195 million people purchasing online and an additional 224 million
shopping and gathering information but not purchasing (eMarketer, 2017b).
FIGURE 2.1
THE GROWTH OF E-COMMERCE
Retail e-commerce revenues grew 15–25 percent per year until the recession of 2008–2009,
when they slowed measurably. In 2018, e-commerce revenues grew at an estimated 12 percent
annually.
Sources: Based on data from eMarketer, “US Retail Ecommerce Sales, 2018–2022,” 2018c; eMarketer, “US Digital Travel Sales, 2018–2022,” 2018a; and
eMarketer chart, “US Mobile Downloads and In-App Revenues, 2013–2017,” 2017a.
Growth in E-Commerce B2C Revenue (billions)
1200.0
1000.0
800.0
600.0
400.0
200.0
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0.0
1995
B2C Revenues (Billions USD)
44
Year
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Chapter 2 E-commerce: Digital Markets, Digital Goods
•
•
•
•
The Internet influences more than $2 trillion in retail commerce that takes
place in physical stores, about 40 percent of all retail sales.
The number of individuals of all ages online in the United States is expected
to grow to 279 million in 2018, up from 147 million in 2004. In the world,
more than 3.7 billion people are now connected to the Internet. Growth in
the overall Internet population has spurred growth in e-commerce (Internet
World Stats, 2018).
Approximately 106 million U.S. households will have broadband access to the
Internet in 2018, representing about 82 percent of all households.
About 232 million Americans will access the Internet by using a smartphone in 2019. Mobile e-commerce has begun a rapid growth based on apps,
ringtones, downloaded entertainment, and location-based services. Mobile
e-commerce will account for about $267 billion in 2019, 44 percent of all
e-commerce. Mobile phones and tablets are becoming the most common
Internet access device. Currently, more than 80 percent of all mobile phone
users access the Internet using their phones, although they also use their
desktops (eMarketer, 2018b).
B2B e-commerce (use of the Internet for business-to-business commerce and
collaboration among business partners) expanded to more than $7.7 trillion.
Table 2.1 highlights these new e-commerce developments.
The New E-commerce: Social, Mobile, Local
One of the biggest changes is the extent to which e-commerce has become more
social, mobile, and local. Online marketing once consisted largely of creating
a corporate website, buying display ads on Yahoo, purchasing search-related
ads on Google, and sending email messages. The workhorse of online marketing was the display ad. It still is, but it’s increasingly being replaced by video
ads, which are far more effective. Display ads from the very beginning of the
Internet were based on television ads, where brand messages were flashed before millions of users who were not expected to respond immediately, ask questions, or make observations. If the ads did not work, the solution was often to
repeat the ad. The primary measure of success was how many eyeballs (unique
visitors) a website produced and how many impressions a marketing campaign
generated. (An impression was one ad shown to one person.) Both of these
measures were carryovers from the world of television, which measures marketing in terms of audience size and ad views.
From Eyeballs to Conversations: Conversational Commerce
After 2007, all this changed with the rapid growth of Facebook and other social
sites, the explosive growth of smartphones beginning with the Apple iPhone,
and the growing interest in local marketing. What’s different about the new
world of social-mobile-local e-commerce is the dual and related concepts of
conversations and engagement. In the popular literature, this is often referred
to as conversational commerce. Marketing in this new period is based on firms
engaging in multiple online conversations with their customers, potential customers, and even critics. Your brand is being talked about on the web and social
media (that’s the conversation part), and marketing your firm, building, and
restoring your brands require you to locate, identify, and participate in these
conversations. Social marketing means all things social: listening, discussing,
interacting, empathizing, and engaging. The emphasis in online marketing has
shifted from a focus on eyeballs to a focus on participating in customer-oriented
conversations. In this sense, social marketing is not simply a new ad channel
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Chapter 2 E-commerce: Digital Markets, Digital Goods
TABLE 2.1 THE GROWTH OF E-COMMERCE
BUSINESS TRANSFORMATION
E-commerce remains the fastest-growing form of commerce when compared to physical retail stores, services, and
entertainment. Social, mobile, and local commerce have become the fastest-growing forms of e-commerce.
The breadth of e-commerce offerings grows, especially in the services economy of social networking, travel, entertainment,
retail apparel, jewelry, appliances, and home furnishings.
The online demographics of shoppers broaden to match that of ordinary shoppers.
Pure e-commerce business models are refined further to achieve higher levels of profitability, and traditional retail firms, such as
Walmart, JCPenney, L.L.Bean, and Macy’s, are developing omnichannel business models to strengthen their dominant physical
retail assets. Walmart, the world’s largest retailer, has decided to take on Amazon with a more than $1 billion investment in its
e-commerce efforts.
Small businesses and entrepreneurs continue to flood the e-commerce marketplace, often riding on the infrastructures
created by industry giants, such as Amazon, Apple, and Google, and increasingly taking advantage of cloud-based computing
resources.
Mobile e-commerce has taken off in the United States with location-based services and entertainment downloads, including
e-books, movies, music, and television shows. Mobile e-commerce will generate more than $267 billion in 2019.
TECHNOLOGY FOUNDATIONS
Wireless Internet connections (Wi-Fi, WiMax, and 4G smartphones) continue to expand.
Powerful smartphones and tablet computers provide access to music, web surfing, and entertainment as well as voice
communication. Podcasting and streaming take off as platforms for distribution of video, radio, and user-generated content.
Mobile devices expand to include wearable computers such as Apple Watch and Fitbit trackers.
The Internet broadband foundation becomes stronger in households and businesses as communication prices fall.
Social networking apps and sites such as Facebook, Twitter, LinkedIn, Instagram, and others seek to become a major new
platform for e-commerce, marketing, and advertising. Facebook has 2.2 billion users worldwide and 214 million in the United
States (Facebook, 2018).
Internet-based models of computing, such as smartphone apps, cloud computing, software as a service (SaaS), and database
software greatly reduce the cost of e-commerce websites.
NEW BUSINESS MODELS EMERGE
More than 70 percent of the Internet population has joined an online social network, created blogs, and shared photos and
music. Together, these sites create an online audience as large as that of television that is attractive to marketers. In 2018,
social networking will account for an estimated 15 percent of online time. Social sites have become the primary gateway to the
Internet in news, music, and, increasingly, products and services. (eMarketer, 2018f)
The traditional advertising industry is disrupted as online advertising grows twice as fast as TV and print advertising; Google,
Yahoo, and Facebook display more than 1 trillion ads a year.
On-demand service e-commerce sites such as Uber, Lyft, and Airbnb extend the market creator business model (on-demand
model) to new areas of the economy.
Newspapers and other traditional media adopt online, interactive models but are losing advertising revenues to the online
players despite gaining online readers. The New York Times succeeds in capturing more than 2.8 million subscribers, growing at
25 percent annually and adding 400,000 new digital subscribers in 2018. Book publishing continues to grow slowly at 5 percent
because of the growth in e-books and the continuing appeal of traditional books.
Online entertainment business models offering television, movies, music, and games grow with cooperation among the major
copyright owners in Hollywood and New York and with Internet distributors such as Apple, Amazon, Google, YouTube, and
Facebook. Increasingly, the online distributors are moving into movie and TV production. Cable television is in modest decline,
as some viewers cut or reduce their cable subscriptions and rely on Internet-based alternatives such as Roku or YouTube TV.
but a collection of technology-based tools for communicating with shoppers.
The leading social commerce platforms are Facebook, Instagram, Twitter, and
Pinterest.
In the past, firms could tightly control their brand messaging and lead consumers down a funnel of cues that ended in a purchase. That is not true of
social marketing. Consumer purchase decisions are increasingly driven by the
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Chapter 2 E-commerce: Digital Markets, Digital Goods
47
conversations, choices, tastes, and opinions of their social network. Social marketing is all about firms participating in and shaping this social process.
From the Desktop to the Smartphone
Traditional online marketing (browser-based, search, display ads, video ads,
email, and games) still constitutes the majority (58 percent) of all online marketing ($107 billion), but it’s growing much more slowly than social-mobile-local
marketing. Mobile marketing now constitutes 70 percent of all online marketing. The marketing dollars are following customers and shoppers from the PC
to mobile devices (eMarketer, 2018g)
Social, mobile, and local e-commerce are connected. As mobile devices become more powerful, they are more useful for accessing Facebook and other
social sites. As mobile devices become more widely adopted, customers can use
them to find local merchants, and merchants can use them to alert customers
in their neighborhood of special offers.
Why E-commerce Is Different
Why has e-commerce grown so rapidly? The answer lies in the unique nature
of the Internet and the web. Simply put, the Internet and e-commerce technologies are much richer and more powerful than previous technology revolutions
such as radio, television, and the telephone. Table 2.2 describes the unique
features of the Internet and web as a commercial medium. Let’s explore each of
these unique features in more detail.
Ubiquity
In traditional commerce, a marketplace is a physical place, such as a retail
store, that you visit to transact business. E-commerce is ubiquitous, meaning
TABLE 2.2 EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
E-COMMERCE TECHNOLOGY DIMENSION
BUSINESS SIGNIFICANCE
Ubiquity. Internet/web technology is available
everywhere: at work, at home, and elsewhere by
desktop and mobile devices. Mobile devices extend
service to local areas and merchants.
The marketplace is extended beyond traditional boundaries and is
removed from a temporal and geographic location. Marketspace
is created; shopping can take place anytime, anywhere. Customer
convenience is enhanced, and shopping costs are reduced.
Global Reach. The technology reaches across national
boundaries, around the earth.
Commerce is enabled across cultural and national boundaries
seamlessly and without modification. The marketspace includes,
potentially, billions of consumers and millions of businesses worldwide.
Universal Standards. There is one set of technology
standards, namely Internet standards.
With one set of technical standards across the globe, disparate
computer systems can easily communicate with each other.
Richness. Video, audio, and text messages are
possible.
Video, audio, and text marketing messages are integrated into a single
marketing message and consumer experience.
Interactivity. The technology works through interaction
with the user.
Consumers are engaged in a dialogue that dynamically adjusts the
experience to the individual and makes the consumer a participant in
the process of delivering goods to the market.
Information Density. The technology reduces
information costs and raises quality.
Information processing, storage, and communication costs drop
dramatically, whereas currency, accuracy, and timeliness improve
greatly. Information becomes plentiful, cheap, and more accurate.
Personalization/Customization. The technology
allows personalized messages to be delivered to
individuals as well as to groups.
Personalization of marketing messages and customization of products
and services are based on individual characteristics.
Social Technology. The technology supports
content generation and social networking.
New Internet social and business models enable user content creation
and distribution and support social networks.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
that it is available just about everywhere all the time. It makes it possible to
shop from your desktop, at home, at work, or even from your car, using smartphones. The result is called a marketspace—a marketplace extended beyond
traditional boundaries and removed from a temporal and geographic location.
From a consumer point of view, ubiquity reduces transaction costs—the
costs of participating in a market. To transact business, it is no longer necessary
to spend time or money traveling to a market, and much less mental effort is
required to make a purchase.
Global Reach
E-commerce technology permits commercial transactions to cross cultural and
national boundaries far more conveniently and cost effectively than is true in
traditional commerce. As a result, the potential market size for e-commerce
merchants is roughly equal to the size of the world’s online population (estimated to be more than 3 billion).
In contrast, most traditional commerce is local or regional—it involves local
merchants or national merchants with local outlets. Television, radio stations,
and newspapers, for instance, are primarily local and regional institutions with
limited, but powerful, national networks that can attract a national audience
but not easily cross national boundaries to a global audience.
Universal Standards
One strikingly unusual feature of e-commerce technologies is that the technical
standards of the Internet and, therefore, the technical standards for conducting
e-commerce are universal standards. All nations around the world share them
and enable any computer to link with any other computer regardless of the
technology platform each is using. In contrast, most traditional commerce technologies differ from one nation to the next. For instance, television and radio
standards differ around the world, as does cellular telephone technology.
The universal technical standards of the Internet and e-commerce greatly
lower market entry costs—the cost merchants must pay simply to bring their
goods to market. At the same time, for consumers, universal standards reduce
search costs—the effort required to find suitable products.
Richness
Information richness refers to the complexity and content of a message.
Traditional markets, national sales forces, and small retail stores have great
richness; they can provide personal, face-to-face service, using aural and visual cues when making a sale. The richness of traditional markets makes them
powerful selling or commercial environments. Prior to the development of
the web, there was a trade-off between richness and reach; the larger the audience reached, the less rich the message. The web makes it possible to deliver
rich messages with text, audio, and video simultaneously to large numbers of
people.
Interactivity
Unlike any of the commercial technologies of the twentieth century, with the
possible exception of the telephone, e-commerce technologies are interactive,
meaning they allow for two-way communication between merchant and consumer and peer-to-peer communication among friends. Television, for instance,
cannot ask viewers any questions or enter conversations with them, and it cannot request customer information to be entered on a form. In contrast, all these
activities are possible on an e-commerce website or mobile app. Interactivity
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Chapter 2 E-commerce: Digital Markets, Digital Goods
allows an online merchant to engage a consumer in ways similar to a faceto-face experience but on a massive, global scale.
Information Density
The Internet and the web vastly increase information density—the total
amount and quality of information available to all market participants, consumers, and merchants alike. E-commerce technologies reduce information collection, storage, processing, and communication costs while greatly increasing the
currency, accuracy, and timeliness of information.
Information density in e-commerce markets make prices and costs more
transparent. Price transparency refers to the ease with which consumers can
find out the variety of prices in a market; cost transparency refers to the ability of consumers to discover the actual costs merchants pay for products.
There are advantages for merchants as well. Online merchants can discover
much more about consumers than in the past. This allows merchants to segment the market into groups that are willing to pay different prices and permits
the merchants to engage in price discrimination—selling the same goods,
or nearly the same goods, to different targeted groups at different prices. For
instance, an online merchant can discover a consumer’s avid interest in expensive, exotic vacations and then pitch high-end vacation plans to that consumer
at a premium price, knowing this person is willing to pay extra for such a vacation. At the same time, the online merchant can pitch the same vacation
plan at a lower price to a more price-sensitive consumer. Information density
also helps merchants differentiate their products in terms of cost, brand, and
quality.
Personalization/Customization
E-commerce technologies permit personalization. Merchants can target their
marketing messages to specific individuals by adjusting the message to a person’s clickstream behavior, name, interests, and past purchases. The technology also permits customization—changing the delivered product or service
based on a user’s preferences or prior behavior. Given the interactive nature of
e-commerce technology, much information about the consumer can be gathered in the marketplace at the moment of purchase. With the increase in information density, a great deal of information about the consumer’s past purchases and behavior can be stored and used by online merchants.
The result is a level of personalization and customization unthinkable with
traditional commerce technologies. For instance, you may be able to shape
what you see on television by selecting a channel, but you cannot change the
content of the channel you have chosen. In contrast, online news outlets such
as the Wall Street Journal Online allow you to select the type of news stories you
want to see first and give you the opportunity to be alerted when certain events
happen.
Social Technology: User Content Generation and
Social Networking
In contrast to previous technologies, the Internet and e-commerce technologies
have evolved to be much more social by allowing users to create and share with
their friends (and a larger worldwide community) content in the form of text,
videos, music, or photos. By using these forms of communication, users can
create new social networks and strengthen existing ones.
All previous mass media, including the printing press, use a broadcast model
(one-to-many) in which content is created in a central location by experts
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(professional writers, editors, directors, and producers), with audiences concentrated in huge numbers to consume a standardized product. The new Internet
and e-commerce empower users to create and distribute content on a large scale
and permit users to program their own content consumption. The Internet provides a unique many-to-many model of mass communications.
Key Concepts in E-commerce: Digital Markets
and Digital Goods in a Global Marketplace
The location, timing, and revenue models of business are based in some part
on the cost and distribution of information. The Internet has created a digital
marketplace where millions of people all over the world can exchange massive
amounts of information directly, instantly, and free. As a result, the Internet
has changed the way companies conduct business and increased their global
reach.
The Internet reduces information asymmetry. An information asymmetry
exists when one party in a transaction has more information that is important for the transaction than the other party. That information helps determine
their relative bargaining power. In digital markets, consumers and suppliers
can see the prices being charged for goods, and in that sense, digital markets
are said to be more transparent than traditional markets.
For example, before automobile retailing sites appeared on the web, there
was significant information asymmetry between auto dealers and customers.
Only the auto dealers knew the manufacturers’ prices, and it was difficult for
consumers to shop around for the best price. Auto dealers’ profit margins depended on this asymmetry of information. Today’s consumers have access to a
legion of websites providing competitive pricing information, and three-fourths
of U.S. auto buyers use the Internet to shop around for the best deal. Thus, the
web has reduced the information asymmetry surrounding an auto purchase.
The Internet has also helped businesses seeking to purchase from other businesses reduce information asymmetries and locate better prices and terms.
Digital markets are very flexible and efficient because they operate with
reduced search and transaction costs, lower menu costs (merchants’ costs
of changing prices), greater price discrimination, and the ability to change
prices dynamically based on market conditions. In dynamic pricing, the
price of a product varies depending on the demand characteristics of the customer or the supply situation of the seller. For instance, online retailers from
Amazon to Walmart change prices on thousands of products based on time
of day, demand for the product, and users’ prior visits to their sites. Using
big data analytics, some online firms can adjust prices at the individual level
based on behavioral targeting parameters such as whether the consumer is
a price haggler (who will receive a lower price offer) versus a person who
accepts offered prices and does not search for lower prices. Prices can also
vary by zip code. Uber, along with other ride services, uses surge pricing to
adjust prices of a ride based on demand (which always rises during storms
and major conventions).
These new digital markets can either reduce or increase switching costs, depending on the nature of the product or service being sold, and they might
cause some extra delay in gratification due to shipping times. Unlike a physical
market, you can’t immediately consume a product such as clothing purchased
over the web (although immediate consumption is possible with digital music
downloads and other digital products).
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FIGURE 2.2
THE BENEFITS OF DISINTERMEDIATION TO THE CONSUMER
The typical distribution channel has several intermediary layers, each of which adds to
the final cost of a product, such as a sweater. Removing layers lowers the final cost to the
customer.
Price per
Sweater
Manufacturer
Manufacturer
Manufacturer
Distributor
Retailer
Customer
$48.50
Retailer
Customer
$40.34
Customer
$20.45
Digital markets provide many opportunities to sell directly to the consumer,
bypassing intermediaries such as distributors or retail outlets. Eliminating intermediaries in the distribution channel can significantly lower purchase transaction costs. To pay for all the steps in a traditional distribution channel, a product
may have to be priced as high as 135 percent of its original cost to manufacture.
Figure 2.2 illustrates how much savings result from eliminating each of these
layers in the distribution process. By selling directly to consumers or reducing
the number of intermediaries, companies can raise profits while charging lower
prices. The removal of organizations or business process layers responsible for
intermediary steps in a value chain is called disintermediation. E-commerce
has also given rise to a completely new set of new intermediaries such as
Amazon, eBay, PayPal, and Blue Nile. Therefore, disintermediation differs from
one industry to another.
Disintermediation is affecting the market for services. Airlines and hotels
operating their own reservation sites online earn more per ticket because they
have eliminated travel agents as intermediaries. Table 2.3 summarizes the differences between digital markets and traditional markets.
Digital Goods
The Internet digital marketplace has greatly expanded sales of digital goods—
goods that can be delivered over a digital network. Music tracks, video, Hollywood
movies, software, newspapers, magazines, and books can all be expressed, stored,
delivered, and sold as purely digital products. For the most part, digital goods
are intellectual property, which is defined as “works of the mind.” Intellectual
property is protected from misappropriation by copyright, patent, trademark,
and trade secret laws. Today, all these products are delivered as digital streams or
downloads while their physical counterparts decline in sales.
In general, for digital goods, the marginal cost of producing another unit is
about zero (it costs nothing to make a copy of a music file). However, the cost of
producing the original first unit is relatively high—in fact, it is nearly the total
cost of the product because there are few other costs of inventory and distribution. Costs of delivery over the Internet are very low, marketing costs often
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TABLE 2.3 DIGITAL MARKETS COMPARED WITH TRADITIONAL MARKETS
DIGITAL MARKETS
TRADITIONAL MARKETS
Information asymmetry
Asymmetry reduced
Asymmetry high
Search costs
Low
High
Transaction costs
Low (sometimes virtually nothing)
High (time, travel)
Delayed gratification
High (or lower in the case
of a digital good)
Lower: purchase now
Menu costs
Low
High
Dynamic pricing
Low cost, instant
High cost, delayed
Price discrimination
Low cost, instant
High cost, delayed
Market segmentation
Low cost, moderate precision
High cost, less precision
Switching costs
Higher/lower (depending on
product characteristics)
High
Network effects
Strong
Weaker
Disintermediation
More possible/likely
Less possible/unlikely
remain the same, and pricing can be highly variable. On the Internet, the merchant can change prices as often as desired because of low menu costs.
The impact of the Internet on the market for these kinds of digital goods is
nothing short of revolutionary, and we see the results around us every day.
Businesses dependent on physical products for sales—such as bookstores,
music stores, book publishers, music labels, and film studios—face the possibility of declining sales and even destruction of their businesses. Newspaper and
magazine subscriptions to hard copies are declining, while online readership
and subscriptions are expanding.
Total record label industry revenues fell nearly 50 percent from $14 billion
in 1999 to about $7.7 billion in 2016, due almost entirely to the rapid decline in
CD album sales and the growth of digital music services (both legal and illegal
music piracy). But revenues increased in 2017 by 16 percent to $8.7 billion primarily through the growth of paid subscriptions (RIAA.com, 2018). The Apple
iTunes Store has sold more than 50 billion songs for 99 cents each since opening
in 2003, providing a digital distribution model that has restored some of the revenues lost to digital music channels. Yet the download business is rapidly fading
at Apple, down more than 25 percent in recent years, as streaming becomes the
dominant consumer path to music. Since iTunes, illegal downloading has been
cut in half, and legitimate online music sales (both downloads and streaming)
amounted to $5.7 billion in 2017. As cloud streaming services expand, illegal
downloading will decline further. Digital music sales, both digital download and
streaming, account for more than 80 percent of all music revenues. The music
labels make only about 32 cents from a single track download and only 0.5 cents
for a streamed track. Although the record labels make revenue from ownership
of the song (both words and music), the artists who perform the music make
virtually nothing from streamed music. Artists’ earnings on a streamed song on
an ad-supported platform like Spotify are pennies per million streams.
Hollywood has been less severely disrupted than the music industry by illegal digital distribution platforms, because it is more difficult to download
high-quality, pirated copies of full-length movies and because of the availability of low-cost, high-quality legal movies. Hollywood has struck lucrative
distribution deals with Netflix, Google, Hulu, Amazon, and Apple, making it
convenient to download and pay for high-quality movies and television series.
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TABLE 2.4 HOW THE INTERNET CHANGES THE MARKETS FOR DIGITAL
GOODS
DIGITAL GOODS
TRADITIONAL GOODS
Marginal cost/unit
Zero
Greater than zero, high
Cost of production
High (most of the cost)
Variable
Copying cost
Approximately zero
Greater than zero, high
Distributed delivery cost
Low
High
Inventory cost
Low
High
Marketing cost
Variable
Variable
Pricing
More variable (bundling,
random pricing games)
Fixed, based on unit costs
These arrangements are not enough to compensate entirely for the loss in DVD
sales, which fell 60 percent from 2006 to 2017. Digital format streaming and
downloads grew by 20 percent in 2017 and, for the first time, consumers viewed
more downloaded movies than DVDs or related physical products. As with television series, the demand for feature-length Hollywood movies appears to be
expanding, in part because of the growth of smartphones, tablets, and smart
TVs, making it easier to watch movies in more locations.
In 2019, about 258 million Internet users are expected to view movies,
about 82 percent of the adult Internet population. There is little doubt that the
Internet is becoming a major movie distribution and television channel that
rivals cable television, and someday may replace cable television entirely (see
the chapter-opening case).
Table 2.4 describes digital goods and how they differ from traditional physical goods (eMarketer, 2018i)
2-2 What are the principal e-commerce
business and revenue models?
E-commerce is a fascinating combination of business models and new information technologies. Let’s start with a basic understanding of the types of
e-commerce and then describe e-commerce business and revenue models.
Types of E-commerce
There are many ways to classify electronic commerce transactions—one is by
looking at the nature of the participants. The three major electronic commerce
categories are business-to-consumer (B2C) e-commerce, business-to-business
(B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce.
• Business-to-consumer (B2C) electronic commerce involves retailing products and services to individual shoppers. Amazon, Walmart, and iTunes are
examples of B2C commerce. BarnesandNoble.com, which sells books, software, and music to individual consumers, is an example of B2C e-commerce.
• Business-to-business (B2B) electronic commerce involves sales of goods
and services among businesses. Elemica’s website for buying and selling
chemicals and energy is an example of B2B e-commerce.
• Consumer-to-consumer (C2C) electronic commerce involves consumers
selling directly to consumers. For example, eBay, the giant web auction site,
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enables people to sell their goods to other consumers by auctioning their merchandise off to the highest bidder or for a fixed price. eBay acts as a middleman
by creating a digital platform for peer-to-peer commerce. Craigslist is the platform most consumers use to buy from and sell directly to others.
Another way of classifying electronic commerce transactions is in terms of
the platforms participants use in a transaction. Until recently, most e-commerce
transactions took place using a desktop PC connected to the Internet over a
wired network. Several wireless mobile alternatives have emerged, such as
smartphones and tablet computers. The use of handheld wireless devices for
purchasing goods and services from any location is termed mobile commerce
or m-commerce. All three types of e-commerce transactions can take place
using m-commerce technology, which we discuss in detail in Section 2.3.
E-commerce Business Models
Changes in the economics of information described earlier have created the
conditions for entirely new business models to appear while destroying older
business models. Table 2.5 describes some of the most important Internet business models that have emerged. All, in one way or another, use the Internet
(including apps on mobile devices) to add extra value to existing products and
services or to provide the foundation for new products and services.
Portal
Portals are gateways to the web and are often defined as those sites that users set
as their home page. Some definitions of a portal include search engines such as
TABLE 2.5 INTERNET BUSINESS MODELS
CATEGORY
DESCRIPTION
EXAMPLES
E-tailer
Sells physical products directly to consumers or to individual businesses.
Amazon
Blue Nile
Transaction broker
Market creator
Content provider
Saves users money and time by processing online sales transactions and
generating a fee each time a transaction occurs.
ETrade.com
Provides a digital environment where buyers and sellers can meet, search
for products, display products, and establish prices for those products;
can serve consumers or B2B e-commerce, generating revenue from
transaction fees.
eBay
Creates revenue by providing digital content, such as news, music, photos,
or video, over the web. The customer may pay to access the content, or
revenue may be generated by selling advertising space.
WSJ.com
Expedia
Priceline.com
Exostar
Elemica
GettyImages.com
iTunes.com
MSN Games
Community provider
Provides an online meeting place where people with similar interests can
communicate and find useful information.
Facebook
Portal
Provides initial point of entry to the web along with specialized content
and other services.
Yahoo
Twitter
MSN
AOL
Service provider
Provides applications such as photo sharing, video sharing, and
user-generated content as services; provides other services such as online
data storage and backup.
Google Docs
Photobucket.com
Dropbox
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Google and Bing even if few make these sites their home page. Portals such as
Yahoo, Facebook, MSN, and AOL offer web search tools as well as an integrated
package of content and services such as news, email, instant messaging, maps, calendars, shopping, music downloads, video streaming, and more all in one place.
The portal business model now provides a destination site where users start their
web searching and linger to read news, find entertainment, meet other people,
and, of course, be exposed to advertising. Facebook is a very different kind of portal based on social networking, and in 2018 Americans will spend more than half
their online time at Facebook, about two hours per day! Portals generate revenue
primarily by attracting very large audiences, charging advertisers for display ad
placement (similar to traditional newspapers), collecting referral fees for steering
customers to other sites, and charging for premium services. In 2019, portals (not
including Google, Facebook, or Bing) will generate an estimated $10 billion in display ad revenues. Although there are hundreds of portal/search engine sites, the
top portals (Yahoo, MSN, and AOL) gather more than 80 percent of the Internet
portal traffic because of their superior brand recognition.
E-tailer
Online retail stores, often called e-tailers, come in all sizes, from giant Amazon
with 2017 retail sales revenues of more than $178 billion to tiny local stores that
have websites. An e-tailer is similar to the typical brick-and-mortar storefront, except that customers only need to connect to the Internet to check their inventory
and place an order. Altogether, online retail (the sale of physical goods online) will
generate about $598 billion in revenues in 2019. The value proposition of e-tailers
is to provide convenient, low-cost shopping 24/7; large selections; and consumer choice. Some e-tailers, such as Walmart.com or Staples.com, referred to as
bricks-and-clicks, are subsidiaries or divisions of existing physical stores and carry
the same products. Others, however, operate only in the virtual world, without
any ties to physical locations. Ashford.com and eVitamins.com are examples of
this type of e-tailer. Several other variations of e-tailers—such as online versions of
direct-mail catalogs, online malls, and manufacturer-direct online sales—also exist.
Content Provider
E-commerce has increasingly become a global content channel. Content is defined broadly to include all forms of intellectual property. Intellectual property
refers to tangible and intangible products of the mind for which the creator
claims a property right. Content providers distribute information content—
such as digital video, music, photos, text, and artwork—over the web. The value
proposition of online content providers is that consumers can conveniently find
a wide range of content online and purchase this content inexpensively to be
played or viewed on multiple computer devices or smartphones.
Providers do not have to be the creators of the content (although sometimes
they are, like Disney.com) and are more likely to be Internet-based distributors of content produced and created by others. For example, Apple sells music
tracks at its iTunes Store, but it does not create or commission new music.
The phenomenal popularity of Internet-connected mobile devices such as
the iPhone, iPod, and iPad has enabled new forms of digital content delivery
from podcasting to mobile streaming. Podcasting is a method of publishing
audio or video broadcasts through the Internet, allowing subscribing users to
download audio or video files onto their personal computers, smartphones, tablets, or portable music players. Streaming is a publishing method for music
and video files that flows a continuous stream of content to a user’s device without being stored locally on the device.
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Estimates vary, but total online content will generate about $23 billion in
2019, one of the fastest-growing e-commerce segments, growing at an estimated
18 percent annual rate.
Transaction Broker
Sites that process transactions for consumers normally handled in person, by
phone, or by mail are transaction brokers. The largest industries using this
model are financial services and travel services. The online transaction broker’s primary value propositions are savings of money and time and providing
an extraordinary inventory of financial products or travel packages in a single
location. Online stockbrokers and travel booking services charge fees that are
considerably less than traditional versions of these services. Fidelity Financial
Services and Expedia are the largest online financial and travel service firms
based on a transaction broker model.
Market Creator
Market creators build a digital environment in which buyers and sellers can
meet, display products, search for products, and establish prices. The value
proposition of online market creators is that they provide a platform where
sellers can easily display their wares and purchasers can buy directly from sellers. Online auction markets such as eBay and Priceline are good examples of
the market creator business model. Another example is Amazon’s Merchants
platform (and similar programs at eBay), where merchants are allowed to
set up stores on Amazon’s website and sell goods at fixed prices to consumers. The so-called on-demand economy (mistakenly often referred to as the
sharing economy), exemplified by Uber (described in the Interactive Session
on Organizations) and Airbnb, is based on the idea of a market creator building a digital platform where supply meets demand; for instance, spare auto
or room rental capacity finds individuals who want transportation or lodging.
Crowdsource funding markets such as Kickstarter.com bring together private
equity investors and entrepreneurs in a funding marketplace.
Service Provider
Whereas e-tailers sell products online, service providers offer services online.
Photo sharing and online sites for data backup and storage all use a service
provider business model. Software is no longer a physical product with a CD
in a box but, increasingly, software as a service (SaaS) that you subscribe to
online rather than purchase from a retailer, such as Office 365. Google has led
the way in developing online software service applications such as G Suite,
Google Sites, Gmail, and online data storage services. Salesforce.com is a
major provider of cloud-based software for customer management.
Community Provider (Social Networks)
Community providers are sites that create a digital online environment
where people with similar interests can transact (buy and sell goods); share
interests, photos, and videos; communicate with like-minded people; receive
interest-related information; and even play out fantasies by adopting online personalities called avatars. Social networking sites Facebook, Tumblr, Instagram,
LinkedIn, and Twitter and hundreds of other smaller, niche sites all offer users
community-building tools and services. Social networking sites have been the
fastest-growing websites in recent years, often doubling their audience size in
a year.
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INTERACTIVE SESSION
ORGANIZATIONS
Uber: Digital Disruptor
You’re in New York, Paris, Chicago, or another major
city and need a ride. Instead of trying to hail a cab,
you pull out your smartphone and tap the Uber app.
A Google map pops up displaying your nearby surroundings. You select a spot on the screen designating an available driver, and the app secures the ride,
showing how long it will take for the ride to arrive
and how much it will cost. Once you reach your
destination, the fare is automatically charged to your
credit card. No fumbling for money.
Rates take into account the typical factors of time
and distance but also demand. Uber’s software predicts areas where rides are likely to be in high demand at different times of the day. This information
appears on a driver’s smartphone so that the driver
knows where to linger and, ideally, pick up customers within minutes of a request for a ride. Uber also
offers a higher-priced town car service for business
executives and a ride-sharing service. Under certain
conditions, if demand is high, Uber can be more
expensive than taxis, but it still appeals to riders by
offering a reliable, fast, convenient alternative to traditional taxi services.
Uber runs much leaner than a traditional taxi
company does. Uber does not own taxis and has no
maintenance and financing costs. It does not have
employees, so it claims, but instead calls the drivers
independent contractors, who receive a cut of each
fare. Uber is not encumbered with employee costs
such as workers’ compensation, minimum wage requirements, background checks on drivers, driver
training, health insurance, or commercial licensing
costs. Uber has shifted the costs of running a taxi
service entirely to the drivers and to the customers
using their cell phones. Drivers pay for their own
cars, fuel, and insurance. What Uber does is provide
a smartphone-based platform that enables people
who want a service—like a taxi—to find a provider
who can meet that need.
Uber relies on user reviews of drivers and the ride
experience to identify problematic drivers and driver
reviews of customers to identify problematic passengers. It also sets standards for cleanliness. It uses the
reviews to discipline drivers. Uber does not publicly
report how many poorly rated drivers or passengers
there are in its system. Uber also uses software that
monitors sensors in drivers’ smartphones to monitor
their driving behavior.
Uber is headquartered in San Francisco and was
founded in 2009 by Travis Kalanick and Garrett
Camp. In 2018, it had more than 3 million drivers
working in 600 cities worldwide, generating revenue
of 2.6 billion in the first quarter of 2018. After paying
for drivers, marketing, and other operating expenses,
Uber still operated at a loss. More than 75 million
people use Uber. However, Uber’s over-the-top success has created its own set of challenges.
By digitally disrupting a traditional and highly
regulated industry, Uber has ignited a firestorm of
opposition from existing taxi services in the United
States and around the world. Who can compete with
an upstart firm offering a 40 percent price reduction
when demand for taxis is low? (When demand is
high, Uber prices surge.) What city or state wants to
give up regulatory control over passenger safety, protection from criminals, driver training, and a healthy
revenue stream generated by charging taxi firms for
a taxi license?
If Uber is the poster child for the new
on-demand economy, it’s also an iconic example
of the social costs and conflict associated with
this new kind of business model. Uber has been
accused of denying its drivers the benefits of employee status by classifying them as contractors,
violating public transportation laws and regulations
throughout the United States and the world, abusing the personal information it has collected on
ordinary people, increasing traffic congestion,
undermining public transportation, and failing to
protect public safety by refusing to perform sufficient criminal, medical, and financial background
checks on its drivers. Uber’s brand image has been
further tarnished by negative publicity about its aggressive, unrestrained workplace culture and the
behavior of CEO Kalanick.
Uber has taken some remediating steps. It enhanced its app to make it easier for drivers to take
breaks while they are on the job. Drivers can now
also be paid instantly for each ride they complete
rather than weekly and see on the app’s dashboard
how much they have earned. Uber added an option
to its app for passengers to tip its U.S. drivers, and
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Kalanick resigned as head of Uber in June 2017. (He
was replaced by Dara Khosrowshahi.)
Critics fear that Uber and other on-demand firms
have the potential for creating a society of part-time,
low-paid, temp work, displacing traditionally fulltime, secure jobs—the so-called Uberization of work.
According to one study, half of Uber drivers earn
less than the minimum wage in their state. Uber responds by saying it is lowering the cost of transportation, expanding the demand for ride services, and
expanding opportunities for car drivers, whose pay
is about the same as other taxi drivers.
Does Uber have a sustainable business model?
The company is still not profitable, and continues
to subsidize the cost of many of its rides. Uber has
competitors, including Lyft in the United States and
local firms in Asia and Europe. New, smaller, competing firms offering app-based cab-hailing services
are cropping up, such as Sidecar and Via. Established
taxi firms in New York and other cities are launching their own hailing apps and trumpeting their
fixed-rate prices.
Uber is pressing on, with new services for
same-day deliveries, business travel accounts,
and heavy investments in self-driving cars, which
management believes will be key to lowering labor
costs and ensuring long-term profitability. After a
self-driving Uber car struck and killed a woman in
Tempe, Arizona in March 2018, Arizona suspended
autonomous vehicle testing in the state, and Uber
stopped testing autonomous cars in California,
Pittsburgh, and Toronto. Even before the accident,
Uber’s self-driving cars were having trouble driving
through construction zones and next to tall vehicles
like big truck rigs. Test drivers had to take over the
car almost every mile. It is still too early to tell
whether Uber and other on-demand businesses will
succeed.
Sources: Steven Hill, “New Leadership Has Not Changed Uber,” New
York Times, March 26, 2018; Bloomberg, “Uber Revenue Spiked
70% Last Quarter, But It Still Lost Tons of Money,” May 24,2018;
Daisuke Wakabashai, “Uber’s Self-Driving Cars Were Struggling Before Arizona Crash,” New York Times, March 23, 2018; Craig Smith,
“100 Amazing Uber Statistics, Demographics and Facts (July 2018),”
DMR, July 29, 2018; “Rob Berger, “Uber Settlement Takes Customers for a Ride,” Forbes, April 22, 2016; and Mike Isaac and Noam
Scheiber, “Uber Settles Cases with Concessions, But Drivers Stay
Freelancers,” New York Times, April 21, 2016.
CASE STUDY QUESTIONS
1. Analyze Uber using the competitive forces and
value chain models. What is its competitive
advantage?
2. What is the relationship between information
technology and Uber’s business model? Explain
your answer.
3. How disruptive is Uber?
4. Is Uber a viable business? Explain your answer.
E-commerce Revenue Models
A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on investment. Although many
e-commerce revenue models have been developed, most companies rely on
one, or some combination, of the following six revenue models: advertising,
sales, subscription, free/freemium, transaction fee, and affiliate.
Advertising Revenue Model
In the advertising revenue model, a website generates revenue by attracting a large audience of visitors who can then be exposed to advertisements.
The advertising model is the most widely used revenue model in e-commerce,
and arguably, without advertising revenues, the web would be a vastly different experience from what it is now because people would be asked to pay for
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Chapter 2 E-commerce: Digital Markets, Digital Goods
access to content. Content on the web—everything from news to videos and
opinions—is free to visitors because advertisers pay the production and distribution costs in return for the right to expose visitors to ads. Companies will
spend an estimated $125 billion on online advertising in 2019 (in the form of a
paid message on a website, paid search listing, video, app, game, or other online medium, such as instant messaging). About $90 billion of this will be for
mobile ads. Mobile ads will account for 72 percent of all digital advertising. In
the past five years, advertisers have increased online spending and cut outlays
on traditional channels such as radio and newspapers. In 2019, online advertising will grow at 18 percent and constitute about 53 percent of all advertising in
the United States (eMarketer, 2018g).
Websites with the largest viewership or that attract a highly specialized, differentiated viewership and are able to retain user attention (stickiness) can
charge higher advertising rates. Yahoo, for instance, derives nearly all its revenue from display ads (banner ads), video ads, and, to a lesser extent, search
engine text ads. Google and Facebook derive well over 90 percent of their revenue from advertising, including selling keywords (AdWords), selling ad spaces
(AdSense), and selling display ad spaces to advertisers. Facebook alone displays
one-third of the trillion display ads shown on all sites in 2019.
Sales Revenue Model
In the sales revenue model, companies derive revenue by selling goods, information, or services to customers. Companies such as Amazon (which sells
books, music, and other products), LLBean.com, and Gap.com all have sales
revenue models. Content providers make money by charging for downloads
of entire files such as music tracks (iTunes Store) or books or for downloading music and/or video streams (Hulu.com TV shows). Apple has pioneered
and strengthened the acceptance of micropayments. Micropayment systems
provide content providers with a cost-effective method for processing high volumes of very small monetary transactions (anywhere from 25 cents to $5.00 per
transaction). The largest micropayment system on the web is Apple’s iTunes
Store, which has more than 1 billion customers worldwide who purchase individual music tracks for 99 cents and feature-length movies for various prices.
Subscription Revenue Model
In the subscription revenue model, a website offering content or services
charges a subscription fee for access to some or all of its offerings on an ongoing basis. Content providers often use this revenue model. For instance, the
online version of Consumer Reports provides access to premium content, such
as detailed ratings, reviews, and recommendations, only to subscribers for a
$35.00 annual fee. Netflix is one of the most successful subscriber sites with
over 100 million customers worldwide in 2018. To be successful, the subscription
model requires the content to be perceived as differentiated, having high added
value, and not readily available elsewhere or easily replicated. Other companies
offering content or services online on a subscription basis include Match.com
(dating services), Ancestry.com (genealogy research), and Microsoft Xbox Live.
Free/Freemium Revenue Model
In the free/freemium revenue model, firms offer basic services or content
for free and charge a premium for advanced or special features. For example,
Google offers free applications but charges for premium services. Pandora, the
subscription radio service, offers a free service with limited play time and advertising and a premium service with unlimited play. The idea is to attract
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very large audiences with free services and then convert some of this audience
to pay a subscription for premium services. One problem with this model is
converting people from being freeloaders into paying customers. “Free” can be
a powerful model for losing money. None of the freemium music streaming
sites have earned a profit to date. Nevertheless, they are finding that free service with ad revenue is more profitable than the paid subscriber part of their
business.
Transaction Fee Revenue Model
In the transaction fee revenue model, a company receives a fee for enabling
or executing a transaction. For example, eBay provides an online auction marketplace and receives a small transaction fee from a seller if the seller is successful in selling an item. E*Trade, an online stockbroker, receives transaction
fees each time it executes a stock transaction on behalf of a customer. The
transaction revenue model enjoys wide acceptance in part because the true
cost of using the platform is not immediately apparent to the user.
Online financial services, from banking to payment systems, rely on a
transaction fee model. While online banking and services are dominated by
large banks with millions of customers, start-up financial technology firms,
also known as FinTech firms, have grown rapidly to compete with banks for
peer-to-peer (P2P), bill payment, money transfer, lending, crowdsourcing, financial advice, and account aggregation services. The largest growth in FinTech
has involved P2P payment services, such as Venmo and Square, two among
hundreds of FinTech firms competing in this space with banks and online payment giants such as PayPal (PayPal purchased Venmo in 2013). FinTech firms
are typically not profitable and are often bought out by larger financial service
firms for their technology and customer base.
Affiliate Revenue Model
In the affiliate revenue model, websites (called affiliate websites) send visitors to other websites in return for a referral fee or percentage of the revenue
from any resulting sales. Referral fees are also referred to as lead generation
fees. For example, MyPoints makes money by connecting companies to potential customers by offering special deals to its members. When members
take advantage of an offer and make a purchase, they earn points they can
redeem for free products and services, and MyPoints receives a referral fee.
Community feedback sites such as Epinions and Yelp receive much of their
revenue from steering potential customers to websites where they make a purchase. Amazon uses affiliates that steer business to the Amazon website by
placing the Amazon logo on their blogs. Personal blogs often contain display
ads as part of affiliate programs. Some bloggers are paid directly by manufacturers, or receive free products, for speaking highly of products and providing
links to sales channels.
2-3 How has e-commerce transformed marketing?
Although e-commerce and the Internet have changed entire industries and enabled new business models, no industry has been more affected than marketing and marketing communications.
The Internet provides marketers with new ways of identifying and communicating with millions of potential customers at costs far lower than traditional
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TABLE 2.6 ONLINE AD SPENDING BY FORMATS (BILLIONS)
MARKETING FORMAT
2018 REVENUE
DESCRIPTION
Search engine
$53.3
Text ads targeted at precisely what the customer is looking for at the moment of
shopping and purchasing. Sales oriented.
Display ads
$67.1
Banner ads (pop-ups and leave-behinds) with interactive features; increasingly
behaviorally targeted to individual web activity. Brand development and sales.
Includes social media and blog display ads.
Video
$21.2
Fastest-growing format, engaging and entertaining; behaviorally targeted,
interactive. Branding and sales.
Classified
$2.1
Job, real estate, and services ads; interactive, rich media, and personalized to
user searches. Sales and branding.
Rich media
$18.3
Animations, games, and puzzles. Interactive, targeted, and entertaining. Branding
orientation.
Lead generation
$2.3
Marketing firms that gather sales and marketing leads online and then sell them
to online marketers for a variety of campaign types. Sales or branding orientation.
Sponsorships
$2.1
Online games, puzzles, contests, and coupon sites sponsored by firms to
promote products. Sales orientation.
Email
$0.47
Effective, targeted marketing tool with interactive and rich media potential. Sales
oriented.
Source: Based on eMarketer, “Digital Ad Spending by Format,, 2018” eMarketer, March 2018.
media, including search engine marketing, data mining, recommender systems, and targeted email. The Internet enables long tail marketing. Before
the Internet, reaching a large audience was very expensive, and marketers
had to focus on attracting the largest number of consumers with popular hit
products, whether music, Hollywood movies, books, or cars. In contrast, the
Internet allows marketers to find potential customers inexpensively for products where demand is very low. For instance, the Internet makes it possible to
sell independent music profitably to very small audiences. There’s always some
demand for almost any product. Put a string of such long tail sales together and
you have a profitable business.
The Internet also provides new ways—often instantaneous and spontaneous—
to gather information from customers, adjust product offerings, and increase
customer value. Table 2.6 describes the leading marketing and advertising formats used in e-commerce.
Behavioral Targeting
Many e-commerce marketing firms use behavioral targeting techniques to
increase the effectiveness of banners, rich media, and video ads. Behavioral
targeting refers to tracking the clickstreams (history of clicking behavior) of individuals on thousands of websites to understand their interests and intentions
and expose them to advertisements that are uniquely suited to their online behavior. Marketers and most researchers believe this more precise understanding of the customer leads to more efficient marketing (the firm pays for ads
only to those shoppers who are most interested in their products) and larger
sales and revenues. Unfortunately, behavioral targeting of millions of web users
also leads to the invasion of personal privacy without user consent. When consumers lose trust in their web experience, they tend not to purchase anything.
Backlash is growing against the aggressive uses of personal information as consumers seek out safer havens for purchasing and messaging. Snapchat offers
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Chapter 2 E-commerce: Digital Markets, Digital Goods
FIGURE 2.3
WEBSITE VISITOR TRACKING
E-commerce websites and advertising platforms like Google’s DoubleClick have tools to
track a shopper’s every step through an online store and then across the web as shoppers
move from site to site. Close examination of customer behavior at a website selling women’s
clothing shows what the store might learn at each step and what actions it could take to
increase sales.
Courtesy of Google Inc.
Click 1
Click 2
Click 3
Click 4
The shopper clicks on the home page. The store can tell that the
shopper arrived from the Yahoo portal at 2:30 PM (which might
help determine staffing for customer service centers) and how
long she lingered on the home page (which might indicate trouble
navigating the site). Tracking beacons load cookies on the shopper’s
browser to follow her across the Web.
The shopper clicks on blouses, then clicks to view a woman’s pink
blouse. The shopper clicks to select this item in a size 10 in pink and
clicks to place it in her shopping cart. This information can help the
store determine which sizes and colors are most popular. If the visitor
moves to a different site, ads for pink blouses will appear from the
same or a different vendor.
Click 5
Click 6
From the shopping cart page, the shopper clicks to close the
browser to leave the website without purchasing the blouse.
This action could indicate the shopper changed her mind or that
she had a problem with the website’s checkout and payment
process. Such behavior might signal that the website was not
well designed.
disappearing messages, and even Facebook has retreated by making its default
for new posts “for friends only.”
Behavioral targeting takes place at two levels: at individual websites or from
within apps and on various advertising networks that track users across thousands of websites. All websites collect data on visitor browser activity and store
it in a database. They have tools to record the site that users visited prior to
coming to the website, where these users go when they leave that site, the type
of operating system they use, browser information, and even some location
data. They also record the specific pages visited on the particular site, the time
spent on each page of the site, the types of pages visited, and what the visitors
purchased (see Figure 2.3). Firms analyze this information about customer interests and behavior to develop precise profiles of existing and potential customers. In addition, most major websites have hundreds of tracking programs
on their home pages, which track your clickstream behavior across the web
by following you from site to site and re-target ads to you by showing you the
same ads on different sites. The leading online advertising network is Google’s
DoubleClick.
This information enables firms to understand how well their website is
working, create unique personalized web pages that display content or ads for
products or services of special interest to each user, improve the customer’s
experience, and create additional value through a better understanding of the
shopper (see Figure 2.4). By using personalization technology to modify the
web pages presented to each customer, marketers achieve some of the benefits of using individual salespeople at dramatically lower costs. For instance,
General Motors will show a Chevrolet banner ad to women emphasizing safety
and utility, whereas men will receive ads emphasizing power and ruggedness.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
FIGURE 2.4
WEBSITE PERSONALIZATION
Firms can create unique personalized web pages that display content or ads for
products or services of special interest to individual users, improving the customer
experience and creating additional value.
User
Website
Based on your portfolio
and recent market trends, here are
some recommendations.
Welcome back, Steve P. Munson.
Check out these recommended
titles: One Minute Manager
Leading Change
Results-Based Leadership
Sarah,
Here are the items you want
to bid on: Halogen reading lamp
Portable reading lamp
LED book reading lamp
It’s a short step from ad networks to programmatic ad buying. Ad networks create real-time bidding platforms (RTB) where marketers bid in an
automated environment for highly targeted slots available from web publishers. Here, ad platforms can predict how many targeted individuals will
view the ads, and ad buyers can estimate how much this exposure is worth
to them.
What if you are a large national advertising company or global manufacturer trying to reach millions of consumers? With millions of websites, working with each one would be impractical. Advertising networks solve this
problem by creating a network of several thousand of the most popular websites millions of people visit, tracking the behavior of these users across the
entire network, building profiles of each user, and then selling these profiles
to advertisers in a real-time bidding environment. Popular websites download
dozens of web-tracking cookies, bugs, and beacons, which report user online
behavior to remote servers without the users’ knowledge. Looking for young,
single consumers with college degrees, living in the Northeast, in the 18–34
age range who are interested in purchasing a European car? Advertising networks can identify and deliver thousands of people who fit this profile and
expose them to ads for European cars as they move from one website to another. Estimates vary, but behaviorally targeted ads are generally 10 times
more likely to produce a consumer response than a randomly chosen banner
or video ad (see Figure 2.5). So-called advertising exchanges use this same
technology to auction access to people with very specific profiles to advertisers in a few milliseconds. In 2016, about 50 percent of online display ads were
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FIGURE 2.5
HOW AN ADVERTISING NETWORK SUCH AS DOUBLECLICK
WORKS
Advertising networks and their use of tracking programs have become controversial among
privacy advocates because of their ability to track individual consumers across the Internet.
MERCHANT SITE
ADVERTISING NETWORK
DoubleClick.Net
Merchant server connects
to DoubleClick ad server
Ad server reads cookie;
checks database for profile
Ad server selects
and serves an
appropriate
banner ad
based on
profile
Consumer
requests Web
page from ad
network
member site
User
profile
Database
Network
Member
Firms
DoubleClick follows consumer from
site to site through use of tracking
programs
CONSUMER
targeted ads developed by programmatic ad buys, and the rest depended on
the context of the pages shoppers visited—the estimated demographics of visitors, or so-called blast-and-scatter advertising—which is placed randomly on
any available page with minimal targeting, such as time of day or season.
It’s another short step to native advertising. Native advertising involves
placing ads in social network newsfeeds or within traditional editorial content,
such as a newspaper article. This is also referred to as organic advertising, where
content and advertising are in very close proximity or integrated together.
Two-thirds (68 percent) of Internet users disapprove of search engines
and websites tracking their online behavior to aim targeted ads at them.
Twenty-eight percent of those surveyed approve of behavioral targeting because they believe it produces more relevant ads and information. A majority
of Americans want a Do Not Track option in browsers that will stop websites
from collecting information about their online behavior. More than 50 percent
are very concerned about the wealth of personal data online; 86 percent have
taken steps to mask their online behavior; 25 percent of web users use adblocking software (Rainie, 2016).
Social E-commerce and Social Network Marketing
In 2019, one of the fastest-growing media for branding and marketing is social
media. Companies will spend an estimated $30 billion in 2019 using social
networks such as Facebook, Instagram, Twitter, and LinkedIn to reach millions of consumers who spend hours a day on social sites. Expenditures for
social media marketing are much smaller than for television, magazines, and
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Chapter 2 E-commerce: Digital Markets, Digital Goods
even newspapers, but this will change in the future. Social networks in the
offline world are collections of people who voluntarily communicate with
one another over an extended period of time. Online social networks, such
as Facebook, Instagram, Pinterest, LinkedIn, Twitter, and Tumblr, along with
other sites with social components, are websites that enable users to communicate with one another, form group and individual relationships, and share
interests, values, and ideas.
Social e-commerce is commerce based on the idea of the digital social
graph, a mapping of all significant online social relationships. The social graph
is synonymous with the idea of a social network used to describe offline relationships. You can map your own social graph (network) by drawing lines from
yourself to the 10 closest people you know. If they know one another, draw
lines between these people. If you are ambitious, ask these 10 friends to list and
draw in the names of the 10 people closest to them. What emerges from this exercise is a preliminary map of your social network. Now imagine if everyone on
the Internet did the same and posted the results to a very large database with a
website. Ultimately, you would end up with Facebook or a site like it.
According to small world theory, you are only six links away from any other
person on earth. If you entered your personal address book, which has, say, 100
names in it, in a list and sent it to your friends, and they in turn entered 50 new
names of their friends, and so on, five times, the social network created would
encompass 31 billion people! The social graph is therefore a collection of millions of personal social graphs (and all the people in them).
If you understand the interconnectedness of people, you will see just how
important this concept is to e-commerce: The products and services you buy
will influence the decisions of your friends, and their decisions will in turn influence you. If you are a marketer trying to build and strengthen a brand, you
can take advantage of the fact that people are enmeshed in social networks,
share interests and values, and communicate and influence one another. As
a marketer, your target audience is not a million isolated people watching a
TV show but the social network of people who watch the show and the viewers’ personal networks. Moreover, online social networks are where the largest
Internet audiences are located. Table 2.7 describes the features of social commerce that are driving its growth.
Facebook, with 74 percent of all social marketing in the United States and
208 million U.S. monthly visitors in 2018, receives most of the public attention
given to social networking. The other top four social sites are also growing,
though at far slower rates than in the past. LinkedIn had 93 million visitors
a month in 2018. Twitter grew to reach 146 million active users in 2018, with
stronger offshore growth than in the United States. Pinterest hit the top 50
websites with 110 million users, a 25 percent increase from 2017. According
to analysts, 25 percent of the total time spent online in the United States was
spent on social network sites (about 56 minutes a day), and social networking
is the most common online activity. The fastest-growing smartphone applications are social network apps; nearly half of smartphone users visit social
sites daily. More than 70 percent of all visits to Facebook in 2018 came from
smartphones.
At social shopping sites such as Pinterest you can swap shopping ideas with
friends. Facebook offers the “like” button to let your friends know you admire
a product, service, or content and, in some cases, purchase something online.
Facebook processes around 5 billion likes a day worldwide. Online communities are also ideal venues to employ viral marketing techniques. Online viral
marketing is like traditional word-of-mouth marketing except that the word can
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TABLE 2.7 FEATURES OF SOCIAL COMMERCE
SOCIAL COMMERCE FEATURE DESCRIPTION
Newsfeed
A stream of notifications from friends and advertisers that social users find on their home pages.
Timelines
A stream of photos and events in the past that create a personal history for users, one that
can be shared with friends.
Social sign-on
Websites allow users to sign into their sites through their social network pages on
Facebook or another social site. This allows websites to receive valuable social profile
information from Facebook and use it in their own marketing efforts.
Collaborative shopping
An environment where consumers can share their shopping experiences with one another
by viewing products, chatting, or texting. Friends can chat online about brands, products,
and services.
Network notification
An environment where consumers can share their approval (or disapproval) of products,
services, or content or share their geolocation, perhaps a restaurant or club, with friends.
Facebook’s ubiquitous “like” button is an example, as are Twitter’s tweets and followers.
Social search (recommendations)
An environment where consumers can ask their friends for advice on purchases of
products, services, and content. Although Google can help you find things, social search
can help you evaluate the quality of things by listening to the evaluations of your friends or
their friends. For instance, Amazon’s social recommender system can use your Facebook
social profile to recommend products.
spread across an online community at the speed of light and go much further
geographically than a small network of friends.
The Wisdom of Crowds
Creating sites where thousands, even millions, of people can interact offers
business firms new ways to market and advertise and to discover who likes
(or hates) their products. In a phenomenon called the wisdom of crowds,
some argue that large numbers of people can make better decisions about a
wide range of topics or products than a single person or even a small committee of experts.
Obviously, this is not always the case, but it can happen in interesting ways.
In marketing, the wisdom of crowds concept suggests that firms should consult
with thousands of their customers first as a way of establishing a relationship
with them and, second, to understand better how their products and services
are used and appreciated (or rejected). Actively soliciting the comments of your
customers builds trust and sends the message to your customers that you care
what they are thinking and that you need their advice.
Beyond merely soliciting advice, firms can be actively helped in solving some
business problems by using crowdsourcing. For instance, BMW launched a
crowdsourcing project to enlist the aid of customers in designing an urban vehicle for 2025. Kickstarter.com is arguably one of the most famous e-commerce
crowdfunding sites where visitors invest in start-up companies. Other examples
include Caterpillar working with customers to design better machinery, IKEA
for designing furniture, and Pepsico using Super Bowl viewers to build an online video.
Marketing through social media is still in its early stages, and companies
are experimenting in hopes of finding a winning formula. Social interactions
and customer sentiment are not always easy to manage, presenting new challenges for companies eager to protect their brands. The Interactive Session on
Management provides specific examples of companies’ social marketing efforts
using Facebook and Twitter.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
INTERACTIVE SESSION
MANAGEMENT
“Socializing” with Customers
More than 3 billion people worldwide use social
media, making it an obvious platform for companies
seeking to engage consumers, amplify product messages, discover trends and influencers, build brand
awareness, and take action on customer requests
and recommendations. More than 80 million businesses have Facebook brand pages, enabling users
to interact with the brand through blogs, comment
pages, contests, and offerings on the brand page.
The “like” button gives users a chance to share with
their social network their feelings about content they
are viewing and websites they are visiting. With like
buttons on many millions of websites, Facebook can
track user behavior on other sites and then sell this
information to marketers. Facebook also sells display
ads to firms that appear on users’ home pages and
most other pages in the Facebook interface such as
photos and apps. Twitter features such as “promoted
tweets” and “promoted trends” enable advertisers to
have their tweets displayed more prominently when
Twitter users search for certain keywords.
Mack Trucks, a leading U.S. truck manufacturer,
used a social marketing campaign to attract customers, drivers, and dealers when it launched its new
Anthem model. Mack had traditionally used print
ads in trucking publications, brochures, and industry
trade shows as its primary marketing channels when
rolling out a new product. However, these channels
did not enable Mack to tailor and deliver different
messages for different customers. For example, a
manager of a large fleet might be most interested
in fuel efficiency, while an owner-operator might
be more attracted to design style. Mack’s marketing
team continued to use traditional channels for broad
awareness and relied on social marketing to focus on
segmentation and metrics.
Starting in July 2017 Mack launched a series of
biweekly YouTube videos to build excitement for
the Anthem model, followed by a live stream of
the Anthem unveiling on YouTube and Facebook in
September of that year. Mack netted 7,000 email addresses from the teaser campaign, with 3,700 people
viewing the live stream of the launch event. These
are considered significant numbers for a product
costing over U.S. $100,000. Mack’s marketing team
also launched a comprehensive social media campaign directing the company’s 174,000 Facebook
followers, 24,000 Twitter followers, 15,000 LinkedIn
followers, 15,000 YouTube subscribers, and other social communities to photos, videos, text summaries,
and other content describing every aspect of the new
Anthem line. These activities were credited with attracting more than 40,000 new social followers to the
Mack brand.
Mack uses Oracle Eloqua Marketing Cloud Service
and Oracle Social Cloud to link social activity to
175,000 profiles in its Oracle Eloqua database of customers and prospects. The digital marketing team
thus knows if a person in the database clicked on a
Facebook post to view an Anthem-related video or
looked for other information on the company’s website. Compelling personalized content helps engage
prospects and move them further along the sales process until they ask to talk to a Mack dealer. At that
point, the prospect is considered a qualified lead.
Oracle Social Cloud alerts team members when the
Mack Anthem is mentioned on various social sites,
and they can respond where appropriate.
Mack also enlisted celebrity influencers for the
Anthem campaign. Country music artist Steve
Moakler recorded a road song called Born Ready for
the Anthem launch and dedicated it to drivers. More
than 55,000 people viewed Moakler’s performance
on YouTube. The marketing team also produced
a YouTube video with the Oakland Raiders’ Khalil
Mack called What Makes a Mack, and it attracted over
75,000 viewers. Mack is developing a broad-based
influence program identifying customers and drivers who will be among the first to view new products
and serve as active advocates on social media.
More than 9,300 people opted into some aspect
of the Mack Anthem campaign, generating about
1,700 qualified leads. The Anthem landing page
has attracted over 146,000 visitors, who can watch
the Moakler video and obtain information on every
aspect of the new truck line. Mack’s senior management is very pleased with the results and the detail
and precision of digital marketing information. Vice
President of Marketing John Walsh can see what happens with every dollar Mack spends.
An estimated 90 percent of customers are influenced by online reviews, and nearly half of U.S.
social media users actively seek customer service
through social media. As a result, marketing is now
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placing much more emphasis on customer satisfaction and service. Social media monitoring helps marketers and business owners understand more about
buyers’ likes, dislikes, and complaints concerning
products, additional products or product modifications customers want, and how people are talking
about a brand (positive or negative sentiment).
Prompted by customer social media comments
about meats other than roast beef, fast-food sandwich
restaurant chain Arby’s launched a “Meat Mountain”
campaign poster showing various meats other than
roast beef. Arby’s customers mistakenly thought the
poster displayed a new sandwich and, through social
media, indicated they were anxious to try it. Arby’s
then responded with a new $10 Meat Mountain
sandwich.
Social media campaigns can be tricky to orchestrate, and the results are not always predictable.
When social followers of Donald Trump called for
boycotting Nordstrom for dropping Ivanka Trump’s
clothing line from its stores, Nordstrom’s stock price
rose, and the company outperformed many of its
retail industry rivals in the months that followed.
Nordstrom customers remained loyal to the brand.
Previous Trump tweets calling out other brands such
as Lockheed Martin had hurt stock share prices. In
September 2016, San Antonio–based Miracle Mattress
provoked angry social media backlash when it posted
a Facebook video advertising a “Twin Towers Sale.”
The video encouraged customers to “remember 9/11”
and “get any size mattress for a twin price.” Miracle
Mattress removed the video from its Facebook timeline, and owner Mike Bonanno posted an apology
letter.
Sources: Rob Preston, “Open Road,” Profit Magazine, Spring 2018;
Melody Hahm, “26-Year-Old Launches Instagram-Fueled Fast
Fashion Brand,” Yahoo Finance, July 25, 2018; Craig Smith, “844
Amazing Facebook Statistics (July 2018) by the Numbers,” Dmr,
July 30, 2018; www.Macktrucks.com, accessed July 29, 2018; Janet
Morrissey, “Brands Heed Social Media. They’re Advised Not to
Forget Word of Mouth,” New York Times, November 26, 2017; Farhad
Manjoo “How Battling Brands Online Has Gained Urgency, and
Impact,” New York Times, June 21, 2017; and Lindsay Friedman,
“The 12 Worst Social-Media Fails of 2016,” www.entrepreneur.com,
September 22, 2016.
CASE STUDY QUESTIONS
1. Assess the management, organization, and technology issues for using social media technology to
engage with customers.
2. What are the advantages and disadvantages
of using social media for advertising, brand
building, market research, and customer
service?
3. Give an example of a business decision in this
case study that was facilitated by using social
media to interact with customers.
4. Should all companies use social media technology
for customer service and marketing? Why or why
not? What kinds of companies are best suited to
use these platforms?
2-4 How has e-commerce affected
business-to-business transactions?
Trade between business firms (business-to-business commerce, or B2B) represents a huge marketplace. The total amount of B2B trade in the United States in
2019 is estimated to be about $13.5 trillion, with B2B e-commerce (online B2B)
contributing about $6.2 trillion of that amount (U.S. Bureau of the Census, 2018;
authors’ estimates). By 2020, B2B e-commerce is expected to grow to about
$6.9 trillion in the United States.
The process of conducting trade among business firms is complex and requires considerable human intervention; therefore, it consumes significant resources. Some firms estimate that each corporate purchase order for support
products costs them, on average, at least $100 in administrative overhead, including processing paper, approving purchase decisions, using the telephone
and fax machines to search for products and arrange for purchases, arranging
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for shipping, and receiving the goods. Across the economy, this adds up to
trillions of dollars annually spent for procurement processes that could be
automated. If even just a portion of inter-firm trade were automated and parts
of the entire procurement process were assisted by the Internet, literally trillions of dollars might be released for more productive uses, consumer prices
potentially would fall, productivity would increase, and the economic wealth
of the nation would expand. This is the promise of B2B e-commerce. The
challenge of B2B e-commerce is changing existing patterns and systems of
procurement and designing and implementing new Internet and cloud-based
B2B solutions.
Electronic Data Interchange (EDI)
B2B e-commerce refers to the commercial transactions that occur among business firms. Increasingly, these transactions are flowing through a variety of
Internet-enabled mechanisms. About 80 percent of online B2B e-commerce is
still based on proprietary systems for Electronic Data Interchange (EDI).
EDI enables the computer-to-computer exchange between two organizations
of standard transactions such as invoices, bills of lading, shipment schedules,
or purchase orders. Transactions are automatically transmitted from one information system to another through a network, eliminating the printing and
handling of paper at one end and the inputting of data at the other. Each major
industry in the United States and much of the rest of the world has EDI standards that define the structure and information fields of electronic transactions
for that industry.
EDI originally automated the exchange of documents such as purchase orders, invoices, and shipping notices. Although many companies still use EDI
for document automation, firms engaged in just-in-time inventory replenishment and continuous production use EDI as a system for continuous replenishment. Suppliers have online access to selected parts of the purchasing firm’s
production and delivery schedules and automatically ship materials and goods
to meet prespecified targets without intervention by firm purchasing agents
(see Figure 2.6).
Although many organizations still use private networks for EDI, they are
increasingly web-enabled because Internet technology provides a much more
flexible and low-cost platform for linking to other firms. Businesses can extend
digital technology to a wider range of activities and broaden their circle of trading partners.
FIGURE 2.6
ELECTRONIC DATA INTERCHANGE (EDI)
Companies use EDI to automate transactions for B2B e-commerce and continuous
inventory replenishment. Suppliers can automatically send data about shipments to
purchasing firms. The purchasing firms can use EDI to provide production and inventory
requirements and payment data to suppliers.
Shipping data
Supplier
Systems
Payment data
Production/inventory
requirements
Firm
Systems
Continuous replenishment
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Chapter 2 E-commerce: Digital Markets, Digital Goods
Procurement, for example, involves not only purchasing goods and materials but also sourcing, negotiating with suppliers, paying for goods, and making delivery arrangements. Businesses can now use the Internet to locate the
lowest-cost supplier, search online catalogs of supplier products, negotiate with
suppliers, place orders, make payments, and arrange transportation. They are
not limited to partners linked by traditional EDI networks.
New Ways of B2B Buying and Selling
The Internet and web technology enable businesses to create electronic storefronts for selling to other businesses using the same techniques as used for B2C
commerce. Alternatively, businesses can use Internet technology to create extranets or electronic marketplaces for linking to other businesses for purchase
and sale transactions.
Private industrial networks typically consist of a large firm using a secure
website to link to its suppliers and other key business partners (see Figure 2.7).
The buyer owns the network, and it permits the firm and designated suppliers,
distributors, and other business partners to share product design and development, marketing, production scheduling, inventory management, and unstructured communication, including graphics and email. Another term for a private
industrial network is a private exchange.
An example is VW Group Supply, which links the Volkswagen Group and
its suppliers. VW Group Supply handles 90 percent of all global purchasing for
Volkswagen, including all automotive and parts components.
Net marketplaces, which are sometimes called e-hubs, provide a single, digital marketplace based on Internet technology for many buyers and sellers (see
Figure 2.8). They are industry-owned or operate as independent intermediaries
between buyers and sellers. Net marketplaces generate revenue from purchase
FIGURE 2.7
A PRIVATE INDUSTRIAL NETWORK
A private industrial network, also known as a private exchange, links a firm to its suppliers,
distributors, and other key business partners for efficient supply chain management and
other collaborative commerce activities.
Firm
Suppliers
Distributors
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Chapter 2 E-commerce: Digital Markets, Digital Goods
FIGURE 2.8
A NET MARKETPLACE
Net marketplaces are online marketplaces where multiple buyers can purchase from
multiple sellers.
Net
Marketplace
• Catalogs
• Sourcing
• Automated
purchasing
• Processing
and fulfillment
Suppliers
Buyers
and sale transactions and other services provided to clients. Participants in Net
marketplaces can establish prices through online negotiations, auctions, or requests for quotations, or they can use fixed prices.
There are many types of Net marketplaces and ways of classifying them.
Some sell direct goods and some sell indirect goods. Direct goods are goods
used in a production process, such as sheet steel for auto body production.
Indirect goods are all other goods not directly involved in the production
process, such as office supplies or products for maintenance and repair. Some
Net marketplaces support contractual purchasing based on long-term relationships with designated suppliers, and others support short-term spot purchasing, where goods are purchased based on immediate needs, often from many
suppliers.
Some Net marketplaces serve vertical markets for specific industries, such
as automobiles, telecommunications, or machine tools, whereas others serve
horizontal markets for goods and services that can be found in many industries,
such as office equipment or transportation.
Exostar is an example of an industry-owned Net marketplace, focusing on
long-term contract purchasing relationships and on providing common networks and computing platforms for reducing supply chain inefficiencies.
This aerospace and defense industry-sponsored Net marketplace was founded
jointly by BAE Systems, Boeing, Lockheed Martin, Raytheon, and Rolls-Royce
plc to connect these companies to their suppliers and facilitate collaboration.
More than 125,000 trading partners in the commercial, military, and government sectors use Exostar’s sourcing, e-procurement, and collaboration tools for
both direct and indirect goods.
Exchanges are independently owned third-party Net marketplaces that connect thousands of suppliers and buyers for spot purchasing. Many exchanges
provide vertical markets for a single industry, such as food, electronics, or industrial equipment, and they primarily deal with direct inputs. For example,
Go2Paper enables a spot market for paper, board, and craft among buyers and
sellers in the paper industries from more than 75 countries.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
Exchanges proliferated during the early years of e-commerce, but many have
failed. Suppliers were reluctant to participate because the exchanges encouraged
competitive bidding that drove prices down and did not offer any long-term relationships with buyers or services to make lowering prices worthwhile. Many
essential direct purchases are not conducted on a spot basis because they require contracts and consideration of issues such as delivery timing, customization, and quality of products.
2-5 What is the role of m-commerce in
business, and what are the most
important m-commerce applications?
Walk down the street in any major metropolitan area and count how many
people are pecking away at their iPhones, Samsungs, or BlackBerrys. Ride the
trains or fly the planes, and you’ll see fellow travelers reading an online newspaper, watching a video on their phone, or reading a novel on their Kindle. As
the mobile audience has expanded in leaps and bounds, mobile advertising and
m-commerce have taken off.
In 2019, retail m-commerce will account for about 48 percent of all
e-commerce, with about $270 billion in annual revenues generated by retail
goods and services, apps, advertising, music, videos, ring tones, movies, television, and location-based services such as local restaurant locators and traffic
updates. M-commerce is the fastest-growing form of e-commerce, expanding at
a rate of 30 percent or more per year, and is estimated to grow to $500 billion by
2022 (see Figure 2.9) (eMarketer, 2018d).
FIGURE 2.9
MOBILE RETAIL COMMERCE REVENUES
Mobile e-commerce is the fastest-growing type of B2C e-commerce and represented
about 34 percent of all e-commerce in 2018.
Sources: Data from eMarketer chart “Retail Mcommerce Sales, US, (billions) 2018–2022,” eMarketer, 2018d
600
500
Revenue (billions $)
72
400
300
200
100
0
2016
2017
2018
2019
Year
2020
2021
2022
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Chapter 2 E-commerce: Digital Markets, Digital Goods
The main areas of growth in mobile e-commerce are mass market retailing
such as Amazon; sales of digital content such as music, TV shows, movies,
and e-books; and in-app sales to mobile devices. On-demand firms such as
Uber (described earlier in this chapter) and Airbnb are location-based services, and examples of mobile commerce as well. Larger mobile screens and
more-convenient payment procedures also play a role in the expansion of
m-commerce.
Location-Based Services and Applications
Location-based services include geosocial, geoadvertising, and geoinformation services. Seventy-four percent of smartphone owners use location-based
services. What ties these activities together and is the foundation for mobile
commerce is the global positioning system (GPS)–enabled map services available on smartphones. A geosocial service can tell you where your friends
are meeting. Geoadvertising services can tell you where to find the nearest
Italian restaurant, and geoinformation services can tell you the price of a
house you are looking at or about special exhibits at a museum you are passing. In 2019, the fastest-growing and most popular location-based services are
on-demand economy firms such as Uber, Lyft, Airbnb, and hundreds more that
provide services to users in local areas and are based on the user’s location (or,
in the case of Airbnb, the user’s intended travel location).
Waze is an example of a popular, social geoinformation service. Waze is a
GPS-based map and navigational app for smartphones, now owned by Google.
Waze locates the user’s car on a digital map using GPS and, like other navigation
programs, collects information on the user’s speed and direction continuously.
What makes Waze different is that it collects traffic information from users
who submit accident reports, speed traps, landmarks, street fairs, protests, and
even addresses. Waze uses this information to come up with suggested alternative routes, travel times, and warnings and can even make recommendations
for gas stations along the way. The Waze app is used extensively by Uber and
Lyft drivers and more than 50 million other drivers in the United States.
Foursquare and new offerings by Facebook and Google are examples of geosocial services. Geosocial services help you find friends, or your friends to find
you, by checking in to the service, announcing your presence in a restaurant or
other place. Your friends are instantly notified. About 20 percent of smartphone
owners use geosocial services.
Foursquare provides a location-based social networking service to over
60 million registered individual users, who can connect with friends, update
their location, and provide reviews and tips for enjoying a location. Points are
awarded for checking in at designated venues. Users choose to post their checkins on their accounts on Twitter, Facebook, or both. Users also earn badges by
checking in at locations with certain tags, for check-in frequency, or for the
time of check-in.
Connecting people to local merchants in the form of geoadvertising is the
economic foundation for mobile commerce. Geoadvertising sends ads to users
based on their GPS locations. Smartphones report their locations back to Google
and Apple. Merchants buy access to these consumers when they come within
range of a merchant. For instance, Kiehl Stores, a cosmetics retailer, sent special offers and announcements to customers who came within 100 yards of
their store.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
Other Mobile Commerce Services
Banks and credit card companies have developed services that let customers
manage their accounts from their mobile devices. JPMorgan Chase and Bank of
America customers can use their cell phones to check account balances, transfer funds, and pay bills. Apple Pay for the iPhone and Apple Watch, along with
other Android and Windows smartphone models, allow users to charge items to
their credit card accounts with a swipe of their phone. (See our Learning Track
on mobile payment systems.)
The mobile advertising market is the fastest-growing online ad platform,
racking up a forecast $90 billion in ad revenue in 2019 and growing at 20 percent
annually. Ads eventually move to where the eyeballs are, and increasingly that
means mobile phones and, to a lesser extent, tablets. Google is the largest mobile advertising market, posting about $23 billion in mobile ads or 60 percent of
its total ad revenue, with Facebook number two with $19.4 billion (90 percent
of its total digital ad business). Google is displaying ads linked to cell phone
searches by users of the mobile version of its search engine; ads are embedded
in games, videos, and other mobile applications.
Shopkick is a mobile application that enables retailers such as Best Buy,
Sports Authority, and Macy’s to offer coupons to people when they walk into
their stores. The Shopkick app automatically recognizes when the user has entered a partner retail store and offers a new virtual currency called kickbucks,
which can be redeemed for store gift cards.
Fifty-five percent of online retailers now have m-commerce websites—
simplified versions of their websites that enable shoppers to use cell phones to
shop and place orders. Virtually all large traditional and online retailers such as
Sephora, Home Depot, Amazon, and Walmart have apps for m-commerce sales.
In 2019, more than 66 percent of m-commerce sales will occur within apps
rather than mobile web browsers. Browser commerce has, at least for mobile
users, become app commerce.
2-6 What issues must be addressed when
building an e-commerce presence?
Building a successful e-commerce presence requires a keen understanding of
business, technology, and social issues as well as a systematic approach. Today,
an e-commerce presence is not just a corporate website but also includes a
social network site on Facebook, a Twitter feed, and smartphone apps where
customers can access your services. Developing and coordinating all these customer venues can be difficult. A complete treatment of the topic is beyond the
scope of this text, and students should consult books devoted to just this topic
(Laudon and Traver, 2019). The two most important management challenges in
building a successful e-commerce presence are (1) developing a clear understanding of your business objectives and (2) knowing how to choose the right
technology to achieve those objectives.
Develop an E-commerce Presence Map
E-commerce has moved from being a PC-centric activity on the web to a mobile and tablet-based activity. Currently, a majority of Internet users in the
United States use smartphones and tablets to shop for goods and services,
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Chapter 2 E-commerce: Digital Markets, Digital Goods
FIGURE 2.10
E-COMMERCE PRESENCE MAP
An e-commerce presence requires firms to consider the four types of presence, with
specific platforms and activities associated with each.
Type of Presence
Websites
Platform
Activity
Traditional
Search
Display Apps
Affiliates
Sponsorships
Mobile
Tablet
Email
Internal lists
Purchased lists
Facebook
Social media
Twitter
Blogs
Offline media
Print
TV & radio
Newsletters
Updates
Sales
Conversation
Engagement
Sharing
Advice
Education
Exposure
Branding
look up prices, enjoy entertainment, and access social sites, less so to make
purchases. Your potential customers use these various devices at different
times during the day and involve themselves in different conversations, depending what they are doing—touching base with friends, tweeting, or reading a blog. Each of these is a touch point where you can meet the customer,
and you have to think about how you develop a presence in these different
virtual places. Figure 2.10 provides a roadmap to the platforms and related
activities you will need to think about when developing your e-commerce
presence.
Figure 2.10 illustrates four kinds of e-commerce presence: websites,
email, social media, and offline media. You must address different platforms
for each of these types. For instance, in the case of website presence, there
are three platforms: traditional desktop, tablets, and smartphones, each
with different capabilities. Moreover, for each type of e-commerce presence, there are related activities you will need to consider. For instance,
in the case of websites, you will want to engage in search engine marketing, display ads, affiliate programs, and sponsorships. Offline media, the
fourth type of e-commerce presence, is included here because many firms
use multiplatform or integrated marketing by which print ads refer customers to websites.
Develop a Timeline: Milestones
Where would you like to be a year from now? It’s very helpful for you to have a
rough idea of the time frame for developing your e-commerce presence when
you begin. You should break your project down into a small number of phases
that could be completed within a specified time. Table 2.8 illustrates a one-year
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Chapter 2 E-commerce: Digital Markets, Digital Goods
TABLE 2.8 E-COMMERCE PRESENCE TIMELINE
PHASE
ACTIVITY
Phase 1: Planning
Envision web presence; determine personnel.
Web mission statement
Phase 2: Website development
Acquire content; develop a site design; arrange for
hosting the site.
Website plan
Phase 3: Web implementation
Develop keywords and metatags; focus on search
engine optimization; identify potential sponsors.
A functional website
Phase 4: Social media plan
Identify appropriate social platforms and content for
your products and services.
A social media plan
Phase 5: Social media
implementation
Develop Facebook, Twitter, and Pinterest presence.
Functioning social media
presence
Phase 6: Mobile plan
Develop a mobile plan; consider options for porting
your website to smartphones.
A mobile media plan
MILESTONE
timeline for the development of an e-commerce presence for a start-up company devoted to fashions for teenagers. You can also find more detail about
developing an e-commerce website in the Learning Tracks for this chapter.
2.7 How will MIS help my career?
Here is how Chapter 2 and this text can help you find a job as a junior
e-commerce data analyst.
The Company
SportsFantasy Empire, a technology company that creates digital sports competitions, is looking for a recent college graduate to fill a junior e-commerce data
analyst position. SportsFantasy Empire offers players the opportunity to compete through web and mobile devices in fantasy sports contests for cash prizes.
The company was founded in 2012 and is headquartered in Los Angeles, with
additional offices in San Francisco and New York.
Job Description
The junior e-commerce data analyst will work with SportsFantasy Empire’s analytics team to analyze large volumes of data to derive business insights about
the company’s games and customers that will increase revenue. Job responsibilities include:
• Setting up contest sizing that defines the user experience and business
efficiency.
• Optimizing acquisition spending and marketing strategies to drive growth.
• Identifying ways to improve customer gameplay through on-site changes.
• Measuring how new features or site changes are driving changes in customer
behavior.
• Developing standard reporting for key business results, including reports on
contest performance, player activity, segment performance, and key player
performance.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
Job Requirements
•
•
•
•
•
Bachelor’s degree in engineering, mathematics, business, or a related field
E-commerce data analytics experience desirable
Knowledge of statistics
Demonstrated history of independently developing new insights from data
Experience with model building, SQL, SAS, or other programming language
desirable
• Strong communication and organizational skills
• Avid fantasy sports player a plus
Interview Questions
1. Do you play fantasy sports? How often? Have you ever worked with
data about fantasy sports? Why do you think you would be a good fit for
this job?
2. What is your background in statistics? What courses did you take? Have you
any job experience where you had to use statistics?
3. Have you ever analyzed data about website performance or online customer
behavior?
4. What do you know about the cost of acquiring a customer through social media channels (i.e., measuring the average customer acquisition cost on social
networks; acquisition vs. retention costs)?
5. How would you propose working with our non-technical teams in telling a
story about customer data insights so that they are able to drive customer
engagement and loyalty and execute more effectively?
6. What is your proficiency level with SQL or SAS and site analytics
tools? Have you ever used these tools on the job? What did you do with
them?
7. Can you give an example of a problem you solved using data analytics? Did
you do any writing and analysis? Can you provide examples?
Author Tips
1. Review this chapter and also the discussion of search and search engine
marketing. To qualify for this job, you should also have taken course work in
statistics. Course work or on-the-job training in SQL and SAS would also be
helpful.
2. Use the web to do more research on the company. Try to find out more about
its strategy, competitors, and business challenges. Additionally, review the
company’s social media channels from the past 12 months. Are there any
trends you can identify or certain themes the social media channels seem to
focus on?
3. Be prepared to talk about SportsFantasy Empire’s games as well as the games
offered by competitors to show you are familiar with the industry. Inquire
about some of the ways the company fine-tunes its online presence. Be prepared to give an example of how you think a fantasy game could improve its
online presence.
4. Use the web to find examples of data analytics used by fantasy sports
companies.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
REVIEW SUMMARY
2-1 What are the unique features of e-commerce, digital markets, and digital goods?
E-commerce involves digitally enabled commercial transactions between and among organizations
and individuals. Unique features of e-commerce technology include ubiquity, global reach, universal
technology standards, richness, interactivity, information density, capabilities for personalization and
customization, and social technology. E-commerce is becoming increasingly social, mobile, and local.
Digital markets are said to be more transparent than traditional markets, with reduced information
asymmetry, search costs, transaction costs, and menu costs along with the ability to change prices
dynamically based on market conditions. Digital goods, such as music, video, software, and books, can
be delivered over a digital network. Once a digital product has been produced, the cost of delivering
that product digitally is extremely low.
2-2 What are the principal e-commerce business and revenue models?
E-commerce business models are e-tailers, transaction brokers, market creators, content providers,
community providers, service providers, and portals. The principal e-commerce revenue models are
advertising, sales, subscription, free/freemium, transaction fee, and affiliate.
2-3 How has e-commerce transformed marketing?
The Internet provides marketers with new ways of identifying and communicating with millions
of potential customers at costs far lower than traditional media. Crowdsourcing using the wisdom of
crowds helps companies learn from customers to improve product offerings and increase customer
value. Behavioral targeting techniques increase the effectiveness of banner, rich media, and video ads.
Social commerce uses social networks and social network sites to improve targeting of products and
services.
2-4 How has e-commerce affected business-to-business transactions?
B2B e-commerce generates efficiencies by enabling companies to locate suppliers, solicit bids, place
orders, and track shipments in transit electronically. Net marketplaces provide a single, digital marketplace for many buyers and sellers. Private industrial networks link a firm with its suppliers and other
strategic business partners to develop highly efficient and responsive supply chains.
2-5 What is the role of m-commerce in business, and what are the most important m-commerce
applications?
M-commerce is especially well suited for location-based applications such as finding local hotels and
restaurants, monitoring local traffic and weather, and providing personalized location-based marketing. Mobile phones and handhelds are being used for mobile bill payment, banking, securities trading,
transportation schedule updates, and downloads of digital content such as music, games, and video
clips. M-commerce requires wireless portals and special digital payment systems that can handle micropayments. The GPS capabilities of smartphones make geoadvertising, geosocial, and geoinformation services possible.
2-6 What issues must be addressed when building an e-commerce presence?
Building a successful e-commerce presence requires a clear understanding of the business objectives to be achieved and selection of the right platforms, activities, and timeline to achieve those objectives. An e-commerce presence includes not only a corporate website but also a presence on Facebook,
Twitter, and other social networking sites and smartphone apps.
Key Terms
Advertising revenue model, 58
Affiliate revenue model, 60
Behavioral targeting, 61
Business-to-business (B2B), 53
Business-to-consumer (B2C), 53
Community providers, 56
Consumer-to-consumer (C2C), 53
Cost transparency, 49
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Chapter 2 E-commerce: Digital Markets, Digital Goods
Crowdsourcing, 66
Customization, 49
Digital goods, 51
Direct goods, 71
Disintermediation, 51
Dynamic pricing, 50
Electronic Data Interchange (EDI), 69
E-tailer, 55
Exchanges, 71
FinTech, 60
Free/freemium revenue model, 59
Geoadvertising services, 73
Geoinformation services, 73
Geosocial services, 73
Indirect goods, 71
Information asymmetry, 50
Information density, 49
Intellectual property, 55
Location-based services, 73
Long tail marketing, 61
Market creator, 56
Market entry costs, 48
Marketspace, 48
79
Menu costs, 50
Micropayment systems, 59
Mobile commerce (m-commerce), 54
Native advertising, 64
Net marketplaces, 70
Personalization, 49
Podcasting, 55
Price discrimination, 49
Price transparency, 49
Private exchange, 70
Private industrial networks, 70
Revenue model, 58
Richness, 48
Sales revenue model, 59
Search costs, 48
Social graph, 65
Social shopping, 65
Streaming, 55
Subscription revenue model, 59
Transaction costs, 48
Transaction fee revenue model, 60
Wisdom of crowds, 66
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
2-1
What are the unique features of e-commerce,
digital markets, and digital goods?
•
•
•
2-2
2-4
•
Name and describe the principal
e-commerce business models.
Name and describe the e-commerce revenue models.
•
•
How has e-commerce transformed marketing?
•
•
Explain how social networking and the
wisdom of crowds help companies improve
their marketing.
Define behavioral targeting and explain
how it works at individual websites and on
advertising networks.
2-5
Explain how Internet technology supports business-to-business electronic
commerce.
Define and describe Net marketplaces
and explain how they differ from private industrial networks (private
exchanges).
What is the role of m-commerce in business,
and what are the most important m-commerce
applications?
•
2-6
Define the social graph and explain how it
is used in e-commerce marketing.
How has e-commerce affected business-tobusiness transactions?
What are the principal e-commerce business and
revenue models?
•
2-3
Name and describe four business trends
and three technology trends shaping
e-commerce today.
List and describe the eight unique features
of e-commerce.
Define a digital market and digital goods
and describe their distinguishing features.
•
List and describe important types of
m-commerce services and applications.
What issues must be addressed when building an
e-commerce presence?
•
List and describe the four types of
e-commerce presence.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
Discussion Questions
2-7 How does the Internet change consumer
and supplier relationships?
2-8 The Internet may not make corporations
MyLab MIS
obsolete, but the corporations will have
MyLab MIS
to change their business models. Do you
agree? Why or why not?
2-9 How have social technologies changed
MyLab MIS
e-commerce?
Hands-On MIS Projects
The projects in this section give you hands-on experience developing e-commerce strategies for businesses, using
spreadsheet software to research the profitability of an e-commerce company, and using web tools to research and
evaluate e-commerce hosting services. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
2-10 Columbiana is a small, independent island in the Caribbean that has many historical buildings, forts,
and other sites along with rain forests and striking mountains. A few first-class hotels and several
dozen less-expensive accommodations lie along its beautiful white-sand beaches. The major airlines
have regular flights to Columbiana, as do several small airlines. Columbiana’s government wants to
increase tourism and develop new markets for the country’s tropical agricultural products. How can an
e-commerce presence help? What Internet business model would be appropriate? What functions should
the e-commerce presence perform?
2-11 Explore the websites of the following companies: Swatch, Lowe’s, and Priceline. Determine which
of these websites would benefit most from adding a company-sponsored blog to the website. List the
business benefits of the blog. Specify the intended audience for the blog. Decide who in the company
should author the blog and select some topics for the blog.
Improving Decision Making: Using Spreadsheet Software to Analyze a Dot-com Business
Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis
2-12 Pick one e-commerce company on the Internet—for example, Ashford, Yahoo, or Priceline. Study
the web pages that describe the company and explain its purpose and structure. Use the web to find
articles that comment on the company. Then visit the Securities and Exchange Commission’s website
at www.sec.gov to access the company’s 10-K (annual report) form showing income statements and
balance sheets. Select only the sections of the 10-K form containing the desired portions of financial
statements that you need to examine and download them into your spreadsheet. (MyLab MIS provides
more detailed instructions on how to download this 10-K data into a spreadsheet.) Create simplified
spreadsheets of the company’s balance sheets and income statements for the past three years.
• Is the company a dot-com success, borderline business, or failure? What information provides
the basis of your decision? Why? When answering these questions, pay special attention to the
company’s three-year trends in revenues, costs of sales, gross margins, operating expenses, and net
margins.
• Prepare an overhead presentation (with a minimum of five slides), including appropriate spreadsheets
or charts, and present your work to your professor and classmates.
Achieving Operational Excellence: Evaluating E-commerce Hosting Services
Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services
2-13 This project will help develop your Internet skills in evaluating commercial services for hosting an
e-commerce site for a small start-up company.
You would like to set up a website to sell towels, linens, pottery, and tableware from Portugal and are
examining services for hosting small business Internet storefronts. Your website should be able to take secure
credit card payments and calculate shipping costs and taxes. Initially, you would like to display photos and
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Chapter 2 E-commerce: Digital Markets, Digital Goods
81
descriptions of 40 products. Visit Wix, GoDaddy, and iPage and compare the range of e-commerce hosting services they offer to small businesses, their capabilities, and their costs. Examine the tools they provide for creating an e-commerce site. Compare these services and decide which you would use if you were actually establishing a web store. Write a brief report indicating your choice and explaining the strengths and weaknesses of each
service.
Collaboration and Teamwork Project
Performing a Competitive Analysis of E-commerce Sites
2-14 Form a group with three or four of your classmates. Select two businesses that are competitors in the
same industry and that use their websites for electronic commerce. Visit these websites. You might
compare, for example, the websites for Pandora and Spotify, Amazon and BarnesandNoble.com, or
E*Trade and TD Ameritrade. Prepare an evaluation of each business’s website in terms of its functions,
user friendliness, and ability to support the company’s business strategy. Which website does a better
job? Why? Can you make some recommendations to improve these websites? If possible, use Google
Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your
findings for the class.
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Chapter 2 E-commerce: Digital Markets, Digital Goods
A Nasty Ending for Nasty Gal
CASE STUDY
I
n 2006, Sophia Amoruso was a 22-year-old hitchhiking, dumpster-diving community college dropout with a lot of time on her hands. After reading
a book called Starting an eBay Business for Dummies,
she launched an eBay store called Nasty Gal Vintage,
named after a song and 1975 album by the jazz
singer Betty Davis, second wife of the legendary
Miles Davis.
Nasty Gal’s styling was edgy and fresh—a little
bit rock and roll, a little bit disco, modern, but never
hyper-trendy. Eight years after its founding, Nasty Gal
had sold more than $100 million in new and vintage
clothing and accessories, employed more than 350
people, had more than a million fans on Facebook and
Instagram, and was a global brand. It looked like a
genuine e-commerce success story. Or was it?
When Amoruso began her business, she did
everything herself out of her tiny San Francisco
apartment—merchandising, photographing, copywriting, and shipping. She got up at the crack of dawn to
make 6 a.m. estate sales, haggled with thrift stores,
spent hours photoshopping the images she styled and
shot photos herself using models she recruited herself, and ensured that packaging was high quality.
She would inspect items to make sure they were
in good enough shape to sell. She zipped zippers,
buttoned buttons, connected hooks, folded each garment, and slid it into a clear plastic bag that was
sealed with a sticker. Then she boxed the item and
affixed a shipping label on it. She had to assume that
her customers were as particular and as concerned
with aesthetics as she was.
Amoruso had taken photography classes at a community college, where she learned to understand
the importance of silhouette and composition. She
bought vintage pieces with dramatic silhouettes—
a coat with a big funnel collar, a ’50s dress with a
flared skirt, or a Victorian jacket with puffy sleeves.
Exaggerating everything about the silhouette through
the angle from which it was photographed helped
Amoruso produce tiny thumbnails for eBay that
attracted serious bidders. She was able to take an
object, distill what was best about it, and then exaggerate those qualities so they were visible even in its
tiniest representation. When the thumbnail was enlarged, it looked amazing.
Amoruso has been a heavy user of social tools to
promote her business. When she first started out, she
used MySpace, where she attracted a cult following
of more than 60,000 fans. The company gained traction on social media with Nasty Gal’s aesthetic that
could be both high and low, edgy and glossy.
Amoruso took customer feedback very seriously
and believed customers were at the center of everything Nasty Gal did. When she sold on eBay, she
learned to respond to every customer comment to
help her understand precisely who was buying her
goods and what they wanted. Amoruso said that the
content Nasty Gal customers created has always
been a huge part of the Nasty Gal brand. It was very
important to see how customers wore Nasty Gal’s
pieces and the types of photographs they took. They
were inspiring.
Social media is built on sharing, and Nasty Gal
gave its followers compelling images, words, and content to share and talk about each day. They could be
a crazy vintage piece, a quote, or a behind-the-scenes
photo. At most companies the person manning the
Twitter and Facebook accounts is far removed from
senior management. Amoruso did not always author every Nasty Gal tweet, but she still read every
comment. If the customers were unhappy about
something, she wanted to hear about it right away.
At other businesses, it might take months for customer feedback to filter up to the CEO. When Nasty
Gal first joined Snapchat, Amoruso tested the water
with a few Snaps, and Nasty Gal followers responded
in force.
In June 2008, Amoruso moved Nasty Gal Vintage
off eBay and onto its own destination website,
www.nastygal.com. In 2012, Nasty Gal began selling
clothes under its own brand label and also invested
$18 million in a 527,000-square-foot national distribution center in Shepherdsville, Kentucky, to handle its
own shipping and logistics. Venture capitalists Index
Ventures provided at least $40 million in funding.
Nasty Gal opened a brick-and-mortar store in Los
Angeles in 2014 and another in Santa Monica in 2015.
With growing direct-to-consumer demand and
higher inventory replenishment requirements driven
by new store openings, Nasty Gal invested in a new
warehouse management system. The warehouse
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Chapter 2 E-commerce: Digital Markets, Digital Goods
management system investment was designed to
increase warehouse productivity and shorten order
cycle times so that Nasty Gal’s supply chain could
better service its mushrooming sales. (Order cycle
time refers to the time period between placing of
one order and the next order.) The company selected
HighJump’s Warehouse Management System (WMS)
with the goal of increasing visibility and overall productivity while keeping fill rates above 99 percent.
(The fill rate is the percentage of orders satisfied
from stock at hand.)
Key considerations were scalability and capabilities for handling retail replenishment in addition
to direct-to-consumer orders. HighJump’s implementation team customized the WMS software to
optimize the business processes that worked best for
an e-commerce retailer that ships most of its items
straight to the customer, with a small subset going to
retail stores. The WMS software was also configured
to support processes that would scale with future
growth. Picking efficiency and fill rates shot up, with
fill rates above 99 percent, even though order volume climbed.
Nasty Gal experienced tremendous growth
in its early years, being named INC Magazine’s
fastest-growing retailer in 2012 and earning a number one ranking in Internet Retailer’s Top 500 Guide in
2016. By 2011, annual sales hit $24 million and then
nearly $100 million in 2012. However, sales started
dropping to $85 million in 2014 and then $77 million
in 2015. Nasty Gal’s rapid expansion had been fueled
by heavy spending in advertising and marketing.
This is a strategy used by many start-ups, but it only
pays off in the long run if one-time buyers become
loyal shoppers. Otherwise, too much money is spent
on online marketing like banner ads and paying for
influencers. If a company pays $70 on marketing
to acquire a customer and that customer only buys
once from it, the company won’t make money. A
company that spends $200 million to make $100 million in revenue is not a sustainable business. Nasty
Gal had a “leaky bucket” situation: Once it burned
through its fundraising capital and cut down on marketing, sales continued to drop.
Nasty Gal couldn’t hold onto customers. Some
were dissatisfied with product quality, but many
were more attracted to fast-fashion retailers such as
Zara and H&M, which both deliver a wider array of
trendy clothes through online and bricks-and-mortar
stores at lower prices and are constantly changing
their merchandise. The actual market for the Nasty
Gal brand was quickly saturated. There was a limit to
the number of women Nasty Gal appealed to: Nasty
Gal had a California cool, young girl look, and it was
unclear how attractive it was in other parts of the
United States and around the world.
Nasty Gal also wasted money on things that didn’t
warrant large expenditures. The company quintupled the size of its headquarters by moving into a
50,300-square-foot location in downtown Los Angeles
in 2013—far more space than the company needed,
according to industry experts. The company had also
opened a 500,000-square-foot fulfillment center in
Kentucky to handle its own distribution and logistics as well as two bricks-and-mortar stores in Los
Angeles and Santa Monica. Even in the hyper-trendy
fashion business, companies have to closely monitor
production, distribution, and expenses for operations to move products at a scale big enough to make
a profit. Nasty Gal’s mostly young staff focused too
much on the creative side of the business.
While it was growing, Nasty Gal built its management team, hiring sizzling junior talent from retail
outlets such as Urban Outfitters. But their traditional
retail backgrounds clashed with the start-up mentality. As Nasty Gal expanded, Amoruso’s own fame
also grew, and she was sidetracked by other projects.
She wrote two books. The first, titled #Girlboss, described the founding of Nasty Gal and Amoruso’s
business philosophy and was adapted by Netflix into
a show with Amoruso as executive producer. (The
series was cancelled in June 2017 after just one season.) Employees complained about Amoruso’s management style and lack of focus.
Amoruso resigned as chief executive in 2015 but
remained on Nasty Gal’s board of directors until
the company filed for Chapter 7 bankruptcy on
November 9, 2016. Between 2015 and 2016, Nasty Gal
had raised an additional $24 million in equity and
debt financing from venture-focused Stamos Capital
Partners LP and Hercules Technology Growth Capital
Inc. Even though the funding helped Nasty Gal stay
afloat, the company still had trouble paying for new
inventory, rent, and other operating expenses.
Within weeks of filing for Chapter 7 protection,
Nasty Gal sold its brand name and other intellectual property on February 28, 2017, for $20 million
to a rival online fashion site, the United Kingdom’s
Boohoo.com. Boohoo is operating Nasty Gal as a
standalone website, but Nasty Gal’s stores are closing. Boohoo believes Nasty Gal’s arresting style and
loyal customer base will complement Boohoo and
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Chapter 2 E-commerce: Digital Markets, Digital Goods
expand global opportunities for growth. Many customers have complained about the quality of fabric
and customer service.
Amoruso subsequently turned to developing
Girlboss—a media company that hosts a website,
a podcast, and two annual conferences, called
the Girlboss Rally. She also launched the Girlboss
Foundation, which has given out $130,000 to
women-owned small businesses.
February 24, 2017; Shan Li, “Nasty Gal, Once a Fashion World
Darling, Went Bankrupt: What Went Wrong?,” Los Angeles Times,
February 24, 2017; “Case Study Nasty Gal,” HighJump, 2016; and
Yelena Shuster, “NastyGal Founder Sophia Amoruso on How to
Become a #GirlBoss,” Elle, May 15, 2014.
Sources: Cady Drell, “Sophia Amoruso on the Strange and
Difficult Upside of Making Big Mistakes.” Elle, July 24, 2018;
Aundrea Cline-Thomas, “How Girlboss’s Sophia Amoruso
Continues to Chart Her Career Course,” www.nbcnews.com,
July 26, 2018; Sarah Chaney, “How Nasty Gal Went from an
$85 Million Company to Bankruptcy,” Wall Street Journal,
2-16
CASE STUDY QUESTIONS
2-15
2-17
How was social media related to Nasty Gal’s
business model? To what extent was Nasty
Gal a “social” business?
What management, organization, and technology problems were responsible for Nasty
Gal’s failure as a business?
Could Nasty Gal have avoided bankruptcy?
Explain your answer.
Complete the following writing exercises.
2-18
Describe the six features of social commerce. Provide an example for each feature, describing how a
business could use that feature for selling to consumers online.
2-19
List and describe the main activities involved in building an e-commerce presence.
Chapter 2 References
Almquist, Eric, Jamie Cleghorn, and Lori Sherer. “The B2B Elements
of Value.” Harvard Business Review (March–April 2018).
Bapna, Ravi, Jui Ramaprasad, and Akmed Umyarov. “Monetizing
Freemium Comunities: Does Paying for Premium Increase
Social Engagement?”MIS Quarterly 42, No. 3 (September 2018).
Bell, David R., Santiago Gallino, and Antonio Moreno. “The Store
Is Dead - Long Live the Store.” MIT Sloan Management Review
(Spring 2018).
Brynjolfsson, Erik, Tomer Geva, and Shachar Reichman. “CrowdSquared: Amplifying the Predictive Power of Search Trend
Data.” MIS Quarterly 40, No. 4 (December 2016).
“Do Search Ads Really Work?” Harvard Business Review (March–
April 2017).
eMarketer. “US Mobile Downloads and In-App Revenue.”
(November, 2017a).
___________. “US Time Spent with Media.” eMarketer Chart
(April 2017b).
___________. “Digital Travel Sales 2018–2022.” eMarketer (June 2018a.)
___________. “Internet Users by Device, 2016–2022.” eMarketer
(February 2018b).
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(May 2018c.)
___________. “Retail Mcommerce Sales 2018–2022.” eMarketer
(July 2018d.)
___________. “Retail Sales North America 2018–2022.” eMarketer
(May 2018e).
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Day with Digital Media by Platform.” 2015–2020, eMarketer
(April 2018f.)
___________. “US Ad Spending.” eMarketer (April 2018g.)
___________. “US Digital Users Estimates for 2018.” eMarketer
(March 2018h).
___________. “US Digital Video Viewers and Penetration, 2016–
2022.” eMarketer (February 2018i).
Facebook. “Stats.” https://newsroom.fb.com, accessed July 20, 2018.
Fang, Xiao, and Paul Jen-Hwa Hu. “Top Persuader Prediction for
Social Networks.” MIS Quarterly 42 No. 1 (March 2018).
Gomber, Peter, Robert J. Kauffman, Chris Parker, and Bruce W. Weber.
“On the Fintech Revolution: Interpreting the Forces of Innovation, Disruption, and Transformation in Financial Services.”
Journal of Management Information Systems 35 No. 1 (2018).
Gosline, Renee Richardson, Jeffrey Lee, and Glen Urban. “The
Power of Customer Stories in Digital Marketing.” MIT Sloan
Management Review (Summer 2017).
Gunarathne, Priyanga, Huaxia Rui, and Abraham Seidmann.
“When Social Media Delivers Customer Service: Differential
Customer Treatment in the Airline Industry.” MIS Quarterly
42 No. 2 (June 2018).
Hoang, Ai-Phuong, and Robert J. Kauffman. “Content Sampling,
Household Informedness, and the Consumption of Digital Information Goods.” Journal of Management Information Systems
35 No. 2 (2018).
Hong, Yili, Paul A. Pavlou, Nan Shi, and Kanliang Wang. “On the
Role of Fairness and Social Distance in Designing Effective Social Referral Systems.” MIS Quarterly 41 No. 3 (September 2017).
Hu, Nan, Paul A. Pavlou, and Jie Zhang. “On Self-Selection Biases in
Online Product Reviews.” MIS Quarterly 41, No. 2 (June 2017).
Huang, Ni, Yili Hong, and Gordon Burtch. “Social Network Integration and User Content Generation: Evidence from Natural
Experiments.” MIS Quarterly 41 No. 4 (December 2017).
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Internet World Stats. “Internet Users in the World.”
Internetworldstats.com (2018).
John, Leslie K., Daniel Mochon, Oliver Emrich, and Janet
Schwartz. “What’s the Value of a ‘Like’?” Harvard Business
Review (March–April 2017).
Kwark, Young, Jianqing Chen, and Srinivasan Raghunathan.
“Platform or Wholesale? A Strategic Tool for Online Retailers
to Benefit from Third-Party Information.” MIS Quarterly 41
No. 3 (September 2017).
Laudon, Kenneth C., and Carol Guercio Traver. E-commerce: Business, Technology, Society, 15th ed. (Upper Saddle River, NJ:
Prentice-Hall, 2019).
Lin Zhije, Khim-Yong Goh, and Cheng-Suang Heng. “The Demand
Effects of Product Recommendation Networks: An Empirical
Analysis of Network Diversity and Stability.” MIS Quarterly
41, No. 2 (June 2017).
Liu, Qianqian Ben, and Elena Karahanna. “The Dark Side of Reviews:
The Swaying Effects of Online Product Reviews on Attribute
Preference Construction.” MIS Quarterly 41, No. 2 (June 2017).
Luo, Xueming, Bin Gu, Jie Zhang, and Chee Wei Phang. “Expert
Blogs and Consumer Perceptions of Competing Brands.” MIS
Quarterly 41, No. 2 (June 2017).
Mo, Jiahui, Sumit Sarkar, and Syam Menon. “Know When to Run:
Recommendations in Crowdsourcing Contests.” MIS Quarterly
42, No. 3 (September 2018).
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Oh, Hyelim, Animesh Animesh, and Alain Pinsonneault. “Free
Versus For-a-Fee: The Impact of a Paywall on the Pattern and
Effectiveness of Word-of-Mouth via Social Media.” MIS Quarterly 40, No. 1 (March 2016).
Orlikowski, Wanda, and Susan V. Scott. “The Algorithm and the
Crowd: Considering the Materiality of Service Innovation.”
MIS Quarterly 39, No. 1 (March 2015).
Rainie, Lee. “Americans’ Complicated Feelings about Social Media in
an Era of Privacy Concerns.” Pew Research Center (May 2018).
___________. “The State of Privacy in Post-Snowden America.” Pew
Research Center (September 21, 2016).
RIAA.com, accessed July 30, 2018.
Schlager, Tobias, Christian Hildebrand, Gerald Häubl, Nikolaus
Franke, and Andreas Herrmann. “Social ProductCustomization Systems: Peer Input, Conformity, and
Consumers’ Evaluation of Customized Products.” Journal of
Management Information Systems 35 No.1 (2018).
Shuk, Ying Ho, and Kai H. Lim. “Nudging Moods to Induce
Unplanned Purchases in Imperfect Mobile Personalization
Conexts.” MIS Quarterly 42, No. 3 (September 2018).
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July 8, 2018.
Ye, Shun, Siva Viswanathan, and Il-Horn Hann. “The Value
of Reciprocity in Online Barter Markets: An Empirical
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9B17M097
BKASH: FINANCIAL TECHNOLOGY INNOVATION FOR EMERGING
MARKETS
Ishtiaq P. Mahmood, Marleen Dieleman, and Narmin T. Banu wrote this case solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2017, Richard Ivey School of Business Foundation
Version: 2017-09-25
In May 2017, Kamal Quadir, the chief executive officer of bKash Limited (bKash), had mixed feelings.
Quadir had built one of the most innovative companies in Bangladesh from scratch: bKash was a mobile
financial services (MFS) firm uniquely targeted at the bottom, unbanked segment of society. The company
now had 26 million customers and was a lead player in the financial technology industry. Quadir had made
a positive impact on the lives of countless people, and bKash had gained worldwide recognition for an
innovative business model that offered real solutions to the poor. However, getting there had required
navigating through a range of challenges that required close collaboration with other players, including
telecommunications operators (telcos), banks, non-governmental organizations (NGOs), and regulators.
The journey was far from over. Now that the venture had finally scaled and reached break-even, Quadir
wondered what more he could do. The current business model was built on a set of guidelines issued by
Bangladesh Bank—the central bank of Bangladesh. However, the model could be undermined by future
regulations, as effective innovations frequently ushered in new challenges. How could he strengthen the
foundation of his disruptive business to make it more robust? How could the company continue to grow,
while maintaining its financial inclusion objective?
BANGLADESH: AN INCLUSIVE ECONOMIC GROWTH MODEL
With 156 million people1 crammed in an area slightly less than the size of the U.S. state of Illinois,
Bangladesh had long been one of the most densely populated countries in the world. Despite facing various
natural and infrastructural setbacks, according to the Asian Development Bank, the country enjoyed a gross
domestic product growth rate of above 6 per cent from 2012 to 2016.2 This number was achieved thanks to
strong domestic demand, private sector wages, public investment, an increasing number of women joining
the workforce, and higher worker remittances. Over the years, the country also showed significant
improvement in the Human Development Index. Between 1990 and 2010, life expectancy rose by about 12
years—from 58 to 70.3 However, the literacy rate remained rather low at 57.7 per cent.4
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The country’s garment industry was booming and drew in large numbers of workers, many of them women.
With the female workforce poised to grow from 34 per cent to 82 per cent over the next decade, Bangladesh
was witnessing enviable advances in female employment.5 With the fourth-largest Muslim population in
the world,6 Bangladesh also had an estimated 10 million overseas workers, most of them in the Middle East.
They sent back remittances representing over 10 per cent of Bangladesh’s annual income.7
Like most emerging markets, Bangladesh experienced rapid development in urbanization, including an
exodus of youth from rural areas to urban locations in search of better job opportunities. Dhaka, the capital
city of Bangladesh, bulged to a megacity of 17 million people in 2014.8 As a result of urbanization, most
emerging markets saw a reduction in rural living standards and an increase in extreme poverty. Bangladesh
did not, thanks in part to the efforts of BRAC and the Grameen Foundation, two of the largest NGOs in the
world. These organizations facilitated education and entrepreneurship, especially in the rural areas.
THE URBAN–RURAL GAP
Bangladesh had a fairly homogeneous population with close urban–rural bonds. The large population
residing in a collectivist society and packed within a geographical boundary of 147,570 square kilometres
ensured a steady demand for urban–rural interaction. Bangladesh’s tropical weather, population size, and
horizontal terrain gave it certain competitive advantages. The vast, flat lands ensured easy installation of
towers and an uninterrupted network, helping the telecommunication industry to thrive and allowing a
closely knit and well-connected societal structure. The total number of mobile phone subscriptions
reached 129 million at the end of July 2016.9 The share of mobile penetration was higher than richer
developing countries such as neighbouring India or Kenya (see Exhibit 1).
However, in a country with poor infrastructural facilities, widespread illiteracy, and an 84 per cent
unbanked population,10 transfer of money from cities and towns to villages was an issue. People would
often travel long distances to pay bills or hand over cash to relatives, which was inefficient and expensive.
While urbanization and rural microentrepreneurship generated a demand for easy financial transactions,
few players could meet the demand.
One of the options that people had in the early 2000s was using the services of banks. However, there were
few incentives for formal banks to venture out to unchartered territories. The reason was partly Bangladesh’s
weak infrastructure and partly a lack of the right type of technology that could reach the poor. While banks
were highly compliant as far as regulation was concerned, they did not cater to the basic needs of the lowincome population looking for an easy, efficient, and cost-effective financial service.
Highly process oriented, and barely accessible, banks did not attract much volume in terms of mass money
transfer. The power distance between formal banking employees and common uneducated people, as well
as regulatory compliances continued to be key barriers to using bank services. The processes and formalities
required for setting up bank accounts were complicated for common illiterate or semi-literate people.
Moreover, given the kind of overhead costs involved in setting up a bank structure—along with security,
employees, logistics, and utilities—banks did not find it financially feasible to extend services beyond urban
and suburban areas. This left a major chunk of the Bangladeshi population unbanked.
Another option people had was sending money through the Bangladesh Post Office. This required a trip to
the nearest post office. Although easier than using the services of a bank, the formalities were still rather
complicated for common people. The number of post offices was limited, and access points were
inadequate.
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Alternatively, people could use a passenger bus company that had expanded its services to transfer money.
The company adhered to none of the bank regulations, and the money transfer process worked in a way
similar to that of the post office.
The final option senders had was relying on family and friends. While this was an effective method, both
sending and receiving parties had to depend a lot on friends and family members’ schedules, not to mention
their reliability. This option proved to be not only inconvenient but also risky.
Overall, sending money to family members was either expensive, complex, or insecure. It prevented
opportunities from trickling down and empowering people at the lower levels of society where most people
relied on cash transactions. The lack of equal opportunity to access financial services left poor people at a
disadvantage. For instance, students pursuing education away from villages had to rely on inefficient means
to obtain college fees from parents, such as spending time travelling back and forth. Aside from time spent,
carrying cash around posed real dangers from robbery. Finally, less than ideal flows of cash to and from
the urban areas created opportunity costs for the poor.
The inequality in terms of access to financial services had attracted the attention of the Bangladesh central
bank, which put “financial inclusion” on the agenda. The central bank realized that macro-level monetary
policy was ineffective without micro-level channels to facilitate financial flows throughout society.
KAMAL QUADIR: THE INNOVATOR
The problem did not go unnoticed by Quadir, a Bangladeshi American entrepreneur. Quadir came from a
family of entrepreneurs; his brother Iqbal was a big inspiration who left his lucrative career as an investment
banker in New York in the mid-1990s and returned to Bangladesh to set up Grameenphone Limited
(Grameenphone), the largest telco in the country with revenue of US$1.4 billion in 2016.11 Quadir, who
studied studio art and economics at Oberlin College, Ohio, and later received a master of business
administration (MBA) from the Massachusetts Institute of Technology, was not only well aware of
macroeconomic dynamics but also well-equipped with business acumen to act on the urban–rural gap.
After finishing his MBA in 2005, Quadir founded CellBazaar, a platform similar to eBay, as he said that
there was “no efficient way for sellers to sell their item and buyers to look for it.” Instead of relying on
computers, he thought the platform should be based on mobile phones:
How do we use this tremendous resource we have in Bangladesh where 100 million people have
mobile phones? So that was the idea I had—that if I can utilize the ubiquitously available mobile
phones to create a marketplace, then poor people or anybody in the country can post his or her product
and another person can retrieve it from there. So it’s like creating eBay with mobile phones.
The venture worked, and within five years, almost 4.5 million people had used it. Quadir soon ran into a
problem that planted the seeds for his subsequent venture:
There was no efficient and universal payment mechanism in the country. The number of bank
accounts was low, and on top of that, the number of credit and debit cards was also very low. So I
was thinking how to solve the problem of common people not being able to make digital payment
efficiently.
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Having grown up in Jessore, a district town in the southwestern region of Bangladesh, Quadir was well
aware of the infrastructural problems that people from the less-developed districts of the country were
exposed to every day, limiting their opportunities. In later life, this exposure helped him have empathy and
understanding of the needs of individuals with relatives away from home.
He wanted to empower these low-income individuals who, despite their poverty, had access to cell phones
that cost as little as Tk1,20012 (approximately US$15). It was only a matter of time before he connected the
dots with bKash, offering mobile money accounts to millions. The earliest adoption was in transferring
electronic money among the accounts, which opened up opportunities for not only the unbanked population
but also students and microentrepreneurs.
BRAC: THE PARTNER
BRAC, the world’s largest NGO, started its journey in 1972, a year after Bangladesh gained independence.
With a focus on social development, BRAC provided a host of services geared to uplifting society. Founded
by Sir Fazle Hasan Abed, BRAC had 5.3 million microfinance borrowers and served 138 million of the
country’s population.13 Along with its development programs, in 2001, BRAC initiated a commercial bank—
BRAC Bank—to finance small and medium enterprises, which at that time was the “missing middle.”
In January 2008, Quadir and his brother Iqbal went to see Sir Abed of BRAC, who encouraged them to
consider how BRAC could serve as a platform for mobile payments. Two months later, Quadir went to
Kenya to learn about M-Pesa, the world’s first successful and scaled mobile money solution. In September
2008, Sir Abed introduced Quadir to the management of BRAC Bank Limited. Meanwhile, Quadir and his
brother formed Money in Motion, LLC, USA, together with Nick Hughes, who had led the launch of
M-Pesa in Kenya, and Arun Gore, the managing director of venture capital firm Grey Ghost Ventures.
BRAC Bank and Money in Motion then formed bKash in February 2010. The joint venture was designed
to provide an electronic payment platform to increase access to financial services for low-income users. In
a broader sense, the goal was to offer an efficient payment system for all Bangladeshis. Bikash is the Bengali
word for growth, prosperity, or bloom.
DIGITALIZATION FOR THE POOR: THE REGULATOR
In 2009, Dr. Atiur Rahman was appointed the tenth governor (May 1, 2009–March 15, 2016) of the central
bank. Educated in the Marxist tradition, Rahman was an economist who was passionate about reducing
poverty. Fortunately, in that respect he received clear support. He related, “When I started on my first day
as a Governor, I received a text message from the Prime Minister, and it read: ‘Please work for the poor.’”
Rahman wasted no time doing precisely that. Financial inclusion became one of the prime goals of the
central bank, as he believed it could contribute to economic growth without increasing inequality.
According to Juanita Woodward, a financial inclusion specialist, Bangladesh was able to innovate in the
area of financial inclusion partly because of the supportive role of the regulator:
Bangladesh Bank realized that countries cannot prosper unless poor people can access financial
services. Payments are (at the) centre of the plate; it is fundamental for economic development.
Even more so if you need to travel (far) to make payment. In Bangladesh, Grameen Bank innovated
by credit. Bangladesh Bank realized the “payments” piece was missing.
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According to Woodward, a key problem was that “banks are generally not interested in banking the poor.”
For instance, in India, where the government was using banks to provide MFS, progress was slow.
The central bank understood the inherent complexity of providing basic financial services to the masses. It
required a single-minded focus on digital financial services, rather than these services being just one of the
priorities for a bank. The central bank saw merit in allowing independent organizations designed for these
purposes. With its inherently conservative and cautious stance, the central bank gave a licence to bKash as
a specialized and independent entity but required it to operate as a bank subsidiary. That way, if anything
went wrong, the central bank could intervene.
Unlike other countries, such as Kenya and Philippines, where MFS took off through initiatives spearheaded
by telcos, in Bangladesh, MFS were bank-led. The central bank saw the need to supervise and regulate the
services. Two factors were of paramount importance: the safety of depositors’ funds and financial flows.
From the consumer protection angle, knowing that this was common people’s money going into a system,
the central bank needed to be confident that the money was safe. The second issue was related to monetary
policy. The central bank needed to have a handle on how much money was flowing in and out of banks in
order to have a clearer sense of the effectiveness of monetary instruments such as interest rates. A reckless
decision could have a fundamental impact on millions of people.
From the outset, the central bank was keen to allow experimentation and relied on market mechanisms to
turn financial inclusion for the poor into a reality. Allah Malik Kazemi, senior advisor to the central bank
governor, said,
We felt that our task is to provide an enabling environment where ideas can be experimented, where
successful ideas can flourish and other ideas will not do as well. We wanted to ensure that we do
not over-regulate anything. We did not provide anything overly structured. That’s because we
didn’t know what to regulate, the thing hadn’t taken off yet. So why should I make a 50-page
manual laying out dos and don’ts? That would be self-defeating. So we provided them loose
enabling guidelines.
Under the new guidelines for MFS, the central bank gave out 28 licences to different parties, including
bKash.14 Thus started a set of innovations in Bangladesh that would draw admiration from around the world,
not only from institutions such as the Bill & Melinda Gates Foundation and the International Finance
Corporation (both institutions subsequently made for-profit investments in the company and are substantial
equity holders in bKash), but also from the World Bank and other central bankers.
BKASH: THE BUSINESS MODEL
Making full use of the licence given by the central bank along with his expertise gained from the Kenyan
M-Pesa model, Quadir launched bKash, a purpose-built entity to provide MFS for the unbanked. The initial
challenge was which technology platform to rely on—that is, how to come up with a simple interface that
could be accessed by the cheapest (around US$15) handset. An easy way out would be to develop an
application for smartphones. However, then the service would be limited to affluent customers, which
would defeat the purpose of reaching the poor and unbanked.
bKash was keen to avoid transactions based on Short Message Service (SMS) because this would make the
process expensive and unsafe. With every SMS exchange, users would have amounts deducted from their
virtual account. Moreover, SMS kept a log of all transactions, which could lead to privacy breaches such
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as a personal identification number (PIN) getting stolen. Finally, every handset had a different set of criteria
for sending messages, making things more complex.
Quadir instead decided on a technology called Unstructured Supplementary Service Data (USSD). This
system offered a way for individuals to send and receive money using their cell phones, but without the
disadvantages of SMS-based systems. Also, it was supported by all handsets, no matter how basic. The fact
that USSD could be used irrespective of the mobile handset or operator15 gave Bangladesh a faster adoption
of mobile money than other countries.16
On top of that, with a USSD system, security was higher. The system offered an opportunity to implement
a two-factor authentication system. Since the mobile number for each person was unique, there was always
a way to assign accountability regarding which account was being used. Also, providing a PIN to each
account holder helped identify both the recipient and the sender. Thus, there was greater security in terms
of payment or money transfer, since the secret PIN would prevent, for example, a thief from making a
payment or transferring money in case of phone theft.
bKash found Fundamo, a South African financial software company that had deployed a highly scalable
financial platform in more than 20 countries. Fundamo was not only eager to work with bKash but also able
to provide bKash with a platform that combined global security standards with a high degree of versatility
to accommodate any operator or type of handset.
Another challenge was how to get customers to use bKash. In the beginning, people did not understand or
trust the service and did not perceive a need for it. bKash’s chief technology officer, Azmal Huda,
commented, “As Steve Jobs said, customers don’t know what they need. Breaking that ice is very
important.” He further noted that people originally would not believe that money could be transferred
through the air; they had to be convinced that it really worked.
To reach the millions of unbanked people across the country, bKash needed an outreach program. Initially,
with the financial support of the Bill & Melinda Gates Foundation, bKash piloted an agent recruitment
program with BRAC, which had microfinance borrowers all over the country. Shahid Ullah, a veteran staff
member of the BRAC Microfinance Programme, explained the recruiting strategy, which resulted in the
first 5,000 “brave individuals” as agents: “bKash recruited small and medium enterprise borrowers as they
were entrepreneurs and had good marketing skills.”17
Customers would first go to an agent and give cash in exchange for electronic money in their mobile phone
accounts. This was not unlike buying and selling airtime for mobile phones, something that was already
commonplace in Bangladesh. As such, the first bKash agents were those small retailers that already sold
airtime. Quadir shared how bKash followed a similar model of distribution as a consumer good company.
He explained: “Essentially, we thought about mobile money as a consumer good that needs to be distributed.
So after we concluded the pilot, we began to look for commercial distributors.”18
In subsequent years, bKash aggressively pursued distribution by linking up with seasoned distribution
companies that were each handling hundreds of agents. The distributors were hungry for new sources of
revenue. Quadir had a vision of achieving fast growth to ensure access points for cash and electronic money
everywhere. By 2016, bKash’s agent network grew to nearly 160,000 and bKash agents became a common
sight across the country.
bKash ensured that opening an account was as simple as possible and cost free. It employed an aggressive
pull strategy by flooding all media vehicles with awareness campaigns and “how to” promotions. To open
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an account, a customer needed to visit any bKash agent in the area along with a national identification
document, photographs, and mobile phone, and fill out a form. The process involved filling out the central
bank Know Your Customer (KYC) form, verifying the information at multiple levels, and eventually, the
authorized bKash employee approving the account. The process took around three days. As soon as the
account activation process was complete, customers could easily top up their virtual account, withdraw
money from it, and send or receive cash from another bKash account holder.
According to Juanita Woodward, this process made bKash stand out: “bKash had another advantage: the
sign up is very fast and easy, unlike banks. They also had a very transparent pricing. Banks, with their
legacy systems driving up cost, cannot compete with all-digital systems like bKash.”
This strategy, along with an engaged regulator and a robust distribution system available all the way to the
grass-roots level, caused the adoption of bKash to skyrocket and made the word “bKash” synonymous with
a verb, like “google.” The number of customers rose dramatically. By the end of 2013, bKash had 11 million
accounts.19 This number grew to 26 million by the end of 2016, according to Quadir.
The large footprint raised the issue of whether bKash was a bank-like institution. Quadir explained:
Banks are designed for serving the big fish. We are designed for anchovies. Our job is to design a
new kind of net, collect all the anchovies and give that money to the bank as a capital resource. A
bank is designed to maximize that big pot of money […]. They can finance a hospital, a factory,
universities. There is no conflict between us and the bank. We are making the idle money that has
been under people’s mattresses effective, and putting it in the bank. In a very fundamental way we
are complementing the banking service.
Relying on small transactions, bKash indeed operated on a very different model. Its income came mostly
from cash-out fees by customers (see Exhibit 2). Most of the service revenue—77 per cent—was shared
with agents and distributors. Importantly, the bank-led model also implied that bKash paid telcos a fee for
using the network; another 7 per cent of the service revenue was shared with the telco. bKash used the
remaining 16 per cent of the revenue for operational activities such as marketing, technology, and recruiting
agents. Overall, the margins seemed rather small, but volume generated viability (see Exhibit 3).
SCALING THE MODEL: THE CHALLENGE
The reliance on existing distribution channels, also used for such diverse activities as distributing
matchboxes, distributing aid after hurricanes, or selling mobile airtime, had given bKash the ability to reach
even the remotest parts of Bangladesh. However, moving physical cash around the country was becoming
a challenge due to the liquidity imbalance (see Exhibit 4). As people were primarily sending cash from
urban to rural areas, urban agents received cash from customers in the cities and rural agents were paying
out cash to customers in the rural areas. There was a need for agents in the capital to deposit their cash in
banks, and for agents in rural areas to obtain cash.
However, because of existing regulations, depositing cash was only possible through the BRAC Bank,
which had about 100 branches. This was not only inefficient but also posed security risks as agents had to
travel far with cash. The need for extra protection raised costs, defeating the logic of a low-cost service.
Moreover, counting excessive amounts of currency notes became a burden for BRAC Bank branches. The
central bank recognized the challenges and adopted a change in regulation that allowed agents to deposit
funds in any bank, not just a BRAC Bank. The new arrangement increased the protection of customer
deposits, as the customers’ money was now kept in multiple banks, including large state-owned banks,
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instead of the BRAC Bank alone. Moreover, depositing in multiple banks reduced the risks to a customer’s
deposit in case of a liquidity crisis in a single bank.
Then there was the question of technology. While large multinational companies often focused their
research and development expenses on technologies for improving customer convenience in rich countries,
different needs in emerging markets called for different technologies. As bKash grew, it needed a new
platform that could help it run smoothly on a much larger scale and cater to new, innovative products and
services it could offer. Fundamo had, in the meantime, been bought by Visa, which brought a very different
working relationship. Under the new setting, the partner had less incentive to serve customers like bKash.
In developed countries, new platforms had taken many years to mature, but bKash could not wait; it was
time for bKash to find a new technology partner. In 2016, bKash started working with technology giant
Huawei in place of Fundamo.
Separately, bKash thought about gearing up its application (app) development effort since cheap
smartphones were becoming increasingly common. Quadir was looking for a human-centric designing firm
that could help bKash come up with an app design allowing its customers to graduate out of USSD while
receiving alternative channels. In 2016, bKash started working with San Francisco-based IDEO, which
famously designed the first Apple mouse and many other innovative products.
The growth of the labour-intensive garment industry in Bangladesh was another opportunity on which
bKash wanted to capitalize. In a country where cheap labour was the main competitive advantage,
companies typically paid salaries in cash, with each worker receiving a relatively small amount. A typical
salary for an unskilled garment worker was US$68 per month in 2015.20 Most garment manufacturing
companies closed their factories for a day to organize the logistics of cash salary payments to their
thousands of workers. bKash’s technology platform could also be used to provide payroll payment solutions
to garment manufacturing companies. The first trials suggested that it could be a good solution for the
garment workers. Most were women who, until then, had been forced to cope with threats of extortion by
their husbands, theft, or mugging. This broadening of services required bKash to deal with large companies,
a hitherto unexplored territory for the company.
Bangladesh, being one of the largest exporters of labour in the world, provided bKash with the opportunity
to naturally extend its business by tapping into the growing pool of foreign remittances. Other players were
already active in the market. To enter this existing market, in April 2016, bKash partnered with Western
Union and MasterCard to help Bangladeshis transfer funds from anywhere in the world.
REMAINING RELEVANT: THE FUTURE
bKash had witnessed remarkable success in a short time span, becoming the lead player in a newly created
market (see Exhibit 5). Profit margins were small, but bKash recovered all its losses by 2016. The question
was, How big could bKash become?
As bKash scaled up, became more visible, and increased its scope to adjacent services, it also attracted
more attention. Some local banks thought that the disruptor was taking business away from them unfairly
under a lighter compliance regime. Stories started to circulate that bKash was operating without regulation,
overcharging customers, or even operating as a monopoly. Local newspapers occasionally reported on such
allegations,21 and they were a source of concern for bKash.
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bKash’s view was that it was far from a monopoly or acting as a monopolist. Quadir pointed out that it did
not enjoy any special concession from the state or the regulator. The company’s success was due to other
actions, such as making prudent strategies and decisions, aligning its business goals with the regulator’s
financial inclusion objectives, attracting good investors with global knowledge and governance, using
appropriate technologies, building grassroots reach, and recruiting qualified resources. Furthermore, bKash
had no capacity of blocking any of the other MFS providers to grow—a common feature of a monopolist.
Even if some of the MFS licence holders were inactive, a few were stepping up their efforts to capture
market share from bKash. In fact, the central bank hinted that it would be supportive of some consolidation
as it hoped bKash would not dominate the MFS market. Kazemi, the central bank advisor, said, “We are
keen to have a few major players in the market instead of bKash dominating the market.”22 Overall,
competition seemed set to increase.
Non-bank players were also looking to enter the market. For instance, Grameenphone, the largest telco, had
its own MFS. It offered services such as utility bill payment and train ticketing services. While telcos had
been lobbying the central bank for years for a licence to operate full-blown MFS, banks, keen on
maintaining MFS as bank-led, opposed any such move. Telcos, as network providers, could be in a position
to discriminate certain financial service providers if allowed to play in this market. Since most Bangladeshis
still had basic handsets (as opposed to smartphones), the financial service provider needed USSD
connectivity and MFS providers were directly dependent on the telco. By virtue of its ownership of the
network infrastructure, a telco could potentially provide an unfair advantage to its own MFS services.
However, Quadir thought the possibilities of regulatory shifts remained:
A critical part of the business is that its character and boundary are defined by the regulator. If the
regulator decides tomorrow that this is a business where it would allow telephone companies to be
shareholders, then they will become my competitors along with being my essential network
vendors. That would give birth to a serious conflict of interest and generate concerns on protecting
the public interest.
According to internal company documents, by late 2016, 92 per cent of bKash’s revenue still came from
cash-out fees, and there was limited diversification into other types of MFS revenue streams. Interestingly,
the central bank encouraged the company to offer a broader scope of MFS because of its goal of financial
inclusion for the unbanked. Rahman, the former bank governor, said, “Now, MFS is mostly concerned with
payments, but in the future there could be diversification of services. There should be more partnerships—
say with e-commerce companies, or outsourcing companies.”
It was inevitable that new technological innovations would emerge in Bangladesh, such as greater
penetration of smartphones, or other innovative e-commerce and financial technology solutions that would
transform the lives of the poor in the years to come. As such, bKash had to keep innovating and coming up
with new services and partnerships. Quadir, who believed in specialization, was mindful of the regulatory
demarcation. Instead of encroaching on others’ territory, he thought bKash was in a position to offer plenty
of specialized new services:
bKash should not be giving loans necessarily and have exposure to credit and related market risks.
However, the customer data we possess can allow a bank to get very effective credit rating results,
leading the bank to give loans to the right people; therefore, again we complement the bank’s
business. Furthermore, we can be a channel through which the borrowed funds will be disbursed
and loan repayment will be collected in a very efficient way at a reduced cost.
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Being a first mover with an innovative model meant navigating new regulatory territory. The faster bKash
developed, the more acute was the need to develop a regulatory ecosystem to match the risks. Quadir
thought bKash should be regulated by the central bank, but it shouldn’t be regulated like a bank because it
was not a bank. The current MFS guideline was created when the MFS industry was still in its infancy.
Since then, the industry had grown to become an important part of the financial ecosystem in Bangladesh.
Therefore, the question was how some regulatory areas needed to evolve to address the challenges identified
in practice, and how to govern dedicated MFS players in an appropriate manner.
The question of whether bKash was, or even should be, a bank, or a technology company that happened to
handle money, became pertinent in other areas too. The remote nature of money transactions could lead to
abuse of MFS by criminals. Quadir said,
Say the law enforcement agency comes to us for details about a person and demands a copy of a
customer’s KYC. Now, under the banking law, we cannot provide personal details; we will need a
court order. So, the law enforcement agency tries to obtain a court order, but the court may say that
this only happens under the banking law. But bKash is regulated under the company law, and thus
the court may not issue a summon. You see, bKash intends to cooperate with all relevant agencies,
and the agencies and bKash both require regulatory clarity.
As in other countries, it would take time for regulations and government institutions to catch up to new,
innovative practices and technologies that were fast changing lives for the better and offering opportunities
to address new challenges. In Bangladesh, banks needed to be held accountable for their MFS operations.
In the case of bKash, since it was a subsidiary of the BRAC Bank, a complex web of regulatory
responsibilities was placed on the BRAC Bank. Bank officers had their performance milestones
and incentives. These might not match with the accountability for an MFS with 26 million accounts and
160,000 agents.
The central bank published a new draft regulatory guideline in July 2015 for “providing an orderly, enabling
and competitive environment for utilizing this new window of opportunity of innovatively extending the
outreach of financial services.”23 One of the aims was to broaden the playing field.
The guideline discussed the granting of licences and the direct supervision of newly envisioned MFS
entities engaging in financial services such as limited deposits, payments, and remittance services—similar
to current MFS accounts. These new entities would not have exposure to credit risks; however, they must
maintain a minimum paid-up capital as a cushion against operational risks.
The guideline indicated that the central bank had in fact recognized the need for regulatory reform,
endorsing the need for specialized digital financial platforms, similar to bKash, instead of offering MFS
accounts through conventional banks. The latter would have increased the cost and defeated the whole
purpose of financial inclusion through minimizing costs.
While Quadir was excited about the new possibilities, regulatory uncertainty was a major concern. Was
bKash sufficiently robust in its foundation to be able to maintain its inclusive model of serving not only the
unbanked but also the under-banked, while remaining financially viable? Said Quadir,
I emphasize that our regulators have allowed this innovation to take place. Bangladesh has seen
some great innovations in the financial inclusion space due to its open-minded regulators. And, I
recognize the spirit of finding comfort in ambiguity, which is an essential component of a social
innovation that continues to evolve as does a society.
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EXHIBIT 1: MOBILE PHONE PENETRATION BY COUNTRY
Country
Penetration
rate (%)
Rwanda
India
Kenya
Bangladesh
Germany
Philippines
Brazil
Chile
70.24
78.76
80.84
82.45
116.86
118.07
126.80
129.25
Source: Compiled by the authors using data from the World Bank, United Nations Development Programme,
TheGlobalEconomy.com, Telecom Regulatory Authority of India, and Bangladesh Telecom Regulatory Commission.
EXHIBIT 2: BKASH PRICING STRUCTURE
Type of Transaction
Fee
Account opening
Free
Cash-in at agent
Free
Cash-out from agent
1.85% flat fee
Person-to-person money transfer
Tk5 (US$0.06, based on the exchange
rate of December 2016)
Bill and merchant payments (fee to customer)
Free
Merchant payments (cost to merchants)
1.30% to 1.80%
Business-to-person disbursement (fee to business)
0.50% (negotiable)
Source: International Finance Corporation, bKash: IFC Inclusive Business Case Study, 2016, accessed January 1, 2017,
https://www.ifc.org/wps/wcm/connect/5c993b23-8dd1-40c5-88cf-eb64618e871b/bKash_FINAL_low+res.pdf?MOD=AJPERES.
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EXHIBIT 3: BKASH FINANCIAL STATEMENTS
INCOME STATEMENT (in US$ Million)
2010
2011
2012
2013
2014
2015
Revenue
Cost of service
Gross profit
Other income
Salary and other allowances
Depreciation and amortization
Operating expenses
Other expenses
–
–
–
–
–
–
−0.33
–
0.01
−0.00
0.01
0.76
–
–
−0.73
−0.75
4.66
−4.24
0.42
4.11
–
–
−2.37
−3.57
40.61
−36.10
4.51
6.06
−3.30
−0.47
−2.73
−7.79
73.88
−61.53
12.35
8.54
−5.26
−1.03
−3.86
−6.60
110.26
−90.02
20.24
13.04
−7.62
−1.32
−6.73
−12.73
Profit before tax
Tax expenses
Deferred
−0.33
–
−0.72
–
−0.26
−1.41
–
0.40
−3.72
–
1.09
4.20
−1.77
–
4.88
−1.83
–
Total comprehensive profit
−0.33
−0.46
−1.02
−2.63
2.43
3.05
BALANCE SHEET (in US$ Million) (Not all items are listed)
2010
Assets
Non-current
assets
Current
assets
Equity
Current
liabilities
2012
2013
2014
2015
Property, plant, and
equipment
0.03
0.74
1.03
2.01
2.60
5.18
Intangible assets
Total non-current assets
0.01
0.04
0.48
1.45
0.51
2.28
0.48
4.54
1.89
5.00
4.28
9.46
–
0.02
0.12
0.87
1.28
2.63
Total current assets
Total assets
0.49
0.53
1.10
2.55
16.67
18.95
65.97
70.50
117.47
122.50
175.95
185.40
Share capital
0.05
0.04
0.36
0.49
0.49
0.49
–
–
4.60
16.62
1.71
27.28
Retained earnings
Total equity
−0.32
0.41
−0.69
8.33
−1.76
3.20
−4.47
12.65
2.02
25.91
1.03
28.86
Deferred liabilities
Accrued expenses
Accounts payable
0.10
0.01
0.00
0.87
0.04
0.68
0.09
0.53
0.97
0.09
3.13
2.40
0.09
3.92
1.62
0.09
7.75
0.35
Current liabilities
Total liabilities
Total equity and
liabilities
–
0.01
–
1.62
15.66
15.71
57.76
57.85
96.47
96.53
155.70
156.55
0.53
2.55
18.95
70.50
122.50
185.40
Accounts receivable
Share premium
Liabilities
Non-current
liabilities
2011
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EXHIBIT 3 (CONTINUED)
CASH FLOW STATEMENT (in US$ Million)
2010
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Cash and cash equivalents at beginning of
the year
Change in cash and cash equivalents
Cash and cash equivalents at end of the year
Restricted cash and cash equivalents
Cash and cash equivalents
2011
2012
−0.23 −0.72 −0.95
−0.04 −1.40 −0.64
0.75
2.78 16.11
–
0.45
0.47
0.47
–
0.47
0.66
1.11
–
1.11
1.00
2013
2014
2015
−1.06
−1.32
48.97
41.30
−8.21
44.04
57.70
−17.21
40.48
16.27 107.32
147.39
14.51 46.59 63.28
106.91
15.51 62.86
–
–
– −54.73 −93.10 −143.46
15.51
8.13 14.22
3.93
Source: Company documents.
EXHIBIT 4: LIQUIDITY IMBALANCE
Source: Created by the authors.
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EXHIBIT 5: COMPETITIVE LANDSCAPE
Market share (2015)
bKash
Rocket
mCash
UCash
MYCash
Others
58%
16.60%
8.50%
7.70%
3%
6.10%
Source: Created by the authors based on Jaheed Parvez, Ariful Islam, and Josh Woodard, Mobile Financial Services in
Bangladesh, April 2015, accessed July 15, 2016, www.cashlearning.org/downloads/mfsinbangladeshapril2015.pdf.
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ENDNOTES
“Bangladesh,” The World Factbook, Central Intelligence Agency, updated January 12, 2017, accessed January 15, 2017,
https://www.cia.gov/library/publications/the-world-factbook/geos/bg.html.
2
“Bangladesh:
Economy,”
Asian
Development
Bank,
accessed
September
15,
2016,
https://www.adb.org/countries/bangladesh/economy.
3
United Nations Development Progamme, Human Development Report 2016: Bangladesh, accessed September 15, 2016,
http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/BGD.pdf.
4
“Bangladesh:
Statistics,”
UNICEF,
updated
December
18,
2013,
September
16,
2016,
www.unicef.org/infobycountry/bangladesh_bangladesh_statistics.html.
5
R. K. Byron and F. Rahman, “Women Workforce Growing Fast,” Daily Star, October 11, 2015,
www.thedailystar.net/frontpage/women-workforce-growing-fast-155149.
6
“Top Ten Countries with Largest Muslim Population (2010),” Maps of World, accessed September 17, 2016,
www.mapsofworld.com/world-top-ten/world-top-ten-countries-with-largest-muslim-populations-map.html.
7
“The Path through the Fields,” Economist, November 3, 2012, accessed September 17, 2016,
www.economist.com/news/briefing/21565617-bangladesh-has-dysfunctional-politics-and-stunted-private-sector-yet-it-hasbeen-surprisingly.
8
“Rising Population Big Concern for Dhaka,” Daily Star, July 13, 2014, accessed September 18, 2016,
www.thedailystar.net/rising-population-big-concern-for-dhaka-33081.
9
“Mobile Phone Subscribers, Bangladesh, July 2016,” Bangladesh Telecommunication Regulatory Commission, July 2016,
accessed September 15, 2016, www.btrc.gov.bd/content/mobile-phone-subscribers-bangladesh-july-2016.
10
“The bKash Fundamo Partnership Story,” YouTube video, 3:37, posted by “Ashek Elahi,” July 21, 2012, accessed January
1, 2017, https://youtu.be/Z7Ln2LLhfCw.
11
Grameenphone, Welcome to a World Unbound: Annual Report 2016, 12, accessed June 4, 2017,
https://cdn01.grameenphone.com/sites/default/files/investor_relations/annual_report/GP_Annual_Report_2016_Optimized.pdf.
12
Tk = BDT = Bangladeshi Taka; US$1.00 = Tk78.96 on December 31, 2016.
13
“BRAC at a Glance,” BRAC, accessed April 6, 2017, www.brac.net/partnership.
14
Authors’ interview with Allah Malik Kazemi, senior advisor to the central bank governor.
15
Michel Hanouch, “What Is USSD & Why Does It Matter for Mobile Financial Services?” CGAP, February 17, 2015, accessed
April 5, 2017, www.cgap.org/blog/what-ussd-why-does-it-matter-mobile-financial-services.
16
“Innovation,” BRAC, accessed April 5, 2017, http://innovation.brac.net/fundchallenge/.
17
Shamsin Ahmed and Maria A. May, “Mobile Money in Bangladesh: Shifting from Scale to Innovation,” Impatient Optimists,
Bill
and
Melinda
Gates
Foundation,
June
18,
2014,
accessed
December
4,
2016,
www.impatientoptimists.org/Posts/2014/06/Mobile-Money-in-Bangladesh-Shifting-from-Scale-to-Innovation.
18
McKinsey & Company, McKinsey on Payments 20 (September 2014): 4, accessed June 20, 2017,
www.mckinsey.com/~/media/mckinsey/dotcom/client_service/financial%20services/latest%20thinking/payments/mop20_tran
sforming_national_payments_systems.ashx.
19
Greg Chen, “BKash Bangladesh: What Explains Its Fast Start?” CGAP, August 4, 2014, accessed January 15, 2017,
www.cgap.org/blog/bkash-bangladesh-what-explains-its-fast-start.
20
Matthew Cowgill, Malte Luebker, and Cuntao Xia, “Minimum Wages in the Global Garment Industry,” Research Note,
International Labour Organization, December 2015, accessed June 20, 2017, www.ilo.org/wcmsp5/groups/public/---asia/---robangkok/documents/publication/wcms_436867.pdf.
21
Faruk Ahmed, “bKash under Scrutiny for its Controversial Roles, Daily Observer, September 8, 2015, accessed June 20,
201, www.observerbd.com/2015/09/08/109500.php.
22
Authors’ interview with Allah Malik Kazemi, senior advisor to the central bank governor.
23
Bangladesh Bank, Regulatory Guidelines for Mobile Financial Services (MFS) in Bangladesh (Revised Version, July 2015),
2015, accessed September 4, 2016, https://www.bb.org.bd/aboutus/draftguinotification/guideline/mfs_final_v9.pdf.
1
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NETFLIX INC.: THE DISRUPTOR FACES DISRUPTION1
Chris F. Kemerer and Brian K. Dunn wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2017, Richard Ivey School of Business Foundation
Version: 2017-11-27
THE TABLES ARE TURNED ON NETFLIX
Reed Hastings, chief executive officer of Netflix Inc. (Netflix), was faced with another round of skeptical
business press as he attempted to grow his firm in 2017. His 1990s start-up business plan, which had
introduced the market to the convenience of home delivery of DVDs through the mail, had eviscerated the
prior market leader, Blockbuster LLC (Blockbuster), forcing it to divest itself of thousands of brick-andmortar video rental stores before finally falling into bankruptcy. Hastings was so successful that Fortune
magazine named him its 2010 “Businessperson of the Year.”2 This meteoric rise, however, seemed a distant
memory as Netflix focused on its transition to the digital delivery of video content. Digital delivery required
mastering new technologies and created the need to acquire or create popular content. Numerous
competitors, including both established mainstream content producers and digital upstarts, were making it
difficult for Netflix to recreate its earlier dominant success. The business press had become critical of
Netflix’s slowing acquisition of subscribers and its accelerating levels of debt, which had reached US$3.4
billion3 by March 2017.
Netflix was faced with the challenge of determining where and how quickly it would invest its capital in order
to continue its growth. Though the company had had early success in creating new, exclusive content (e.g.,
television series House of Cards and Orange Is the New Black), this apparent invincibility appeared to be
fading as more recent shows (e.g., The Get Down, Iron Fist) had been panned by the critics. As Netflix faced
increasing competition to acquire exclusive content, some of which came from companies with a long history
of success in content development, both the cost and the risk of failure seemed to be rising. In addition, former
content suppliers that had previously licensed content to Netflix now viewed Netflix more warily, given its
growth and apparent ambition to become more than just a delivery platform.4 Future deals would undoubtedly
be more expensive, if agreement could even be reached at all. Should Netflix continue to try to be a content
producer, competing with Hollywood’s industry leaders? Should it form a partnership with another media
company or companies to align everyone’s incentives? Should it consider moving into other media content
areas outside of traditional entertainment? Further, there remained the question of how to treat its legacy
DVD-by-mail business, a former cash cow that had been the subject of controversy both in the market and
internally at Netflix. Would the best choice be to sell the franchise and cash out? Netflix needed to decide
where, when, and how to invest so as to ensure its future, lest it suffer the same fate as Blockbuster.
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BACKGROUND: VIDEO RENTAL STORES AND THE RISE OF BLOCKBUSTER5
To better understand Netflix’s situation, it is useful to understand the industry that existed before it entered
the marketplace. Although Sony Corporation (Sony) developed its Betamax videocassette recorder (VCR) in
1976, for U.S. consumers the key development in the growth of home video entertainment was a 1984 U.S.
Supreme Court 5–4 decision that found that the Betamax did not violate copyright laws.6 This was followed
by Congress affirming the copyright law’s “first sale” doctrine and refusing to pass a law proposed by
Hollywood studios that would have forbidden the renting or re-selling of movie videotapes. In short order,
the focus of VCR users shifted from recording broadcast shows onto blank tapes to buying or renting prerecorded media.7
The video rental industry, in which VCR owners could rent tapes with video content (e.g., movies), was
initially dominated by a variety of independent stores that had sprung up quickly in neighbourhoods
everywhere. In 1985, David Cook opened the first Blockbuster store in Dallas, Texas. Blockbuster brought
to the industry an aggressive strategy based on multiple stores and a central database that connected them.
These data allowed Blockbuster to more accurately forecast demand for videos, and its emerging economies
of scale kept its costs lower than that of its competition. By opening stores larger than those run by momand-pop operators, Blockbuster could offer customers more choices and more copies of popular movies.
By 1993, Blockbuster had grown to over 3,400 stores, an accomplishment it achieved despite some
hesitancy by the movie studios, which preferred the higher margins on individual consumer sales via outlets
like Best Buy, rather than the smaller margins available from Blockbuster’s rentals.
NETFLIX’S DISRUPTIVE INNOVATION8
Netflix Knocks Off Blockbuster
Netflix lore noted that Hastings’s desire to found Netflix started with a $40 Blockbuster late fee that he
incurred in 1997.9 As motivating as that might have been, the shift from bulky VHS videotapes to slimmer,
more durable DVDs was also necessary to make a mail-order model feasible. One limitation for Netflix in
1997 was that DVD players were new and expensive, and therefore had limited U.S. household adoption.
Blockbuster continued its growth of brick-and-mortar stores, and also began integrating DVDs into its
inventory. In 1999, Netflix hired Ted Sarandos from Blockbuster competitor West Coast Video, and he
focused on the content side of the business. Rapid growth in U.S. DVD adoption helped both firms—half
of all U.S. households owned a DVD player by 2003 and over 80 per cent of households adopted this
technology within the first nine years of its introduction. This adoption rate was even faster than that for
VCRs, which had taken 13 years to reach the same level.10
Netflix’s pricing evolved from a traditional fee per rental, just as in video stores, to a monthly subscription
model, at first limited to a fixed number of DVDs, then later evolving into a $20/month price for unlimited
rentals. Significantly, Netflix had no late fees—customers could watch their rentals at their convenience,
whereas late fees were Blockbuster’s primary revenue source. Netflix also touted the convenience of shopping
by mail, eliminating both the trip to the store to rent a title and the trip to return it.
However, Netflix found it challenging to provide an adequate number of high-demand titles to its
customers.11 Its solution was to be an early developer and exploiter of database personalization, using a
customer’s past rental history to suggest other titles they might like. Though keyed from past rental history,
the recommendation system was also biased towards titles that Netflix actually had in stock, and therefore
allowed Netflix to fulfill a greater percentage of orders. In addition, its relatively centralized inventory
permitted it to stock a greater variety of titles, which Blockbuster, with its inventory scattered across
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thousands of individual retail locations, could not easily support. Netflix developed good relationships with
DVD suppliers, who saw it as another outlet for their product, and as a hedge against the growing nearmonopsonist Blockbuster. Netflix also worked closely on advanced integration with the U.S. Postal Service,
becoming one of its biggest customers.
In 2000, Netflix, with its 300,000 subscribers, was still not profitable. Meanwhile, DVD-player adoption
had helped fuel Blockbuster’s growth to some 7,700 stores. Hastings, who earlier in his career had started
but later sold the company Pure Software, had reported that in 2000 he engaged in negotiations with
Blockbuster to sell it interest in Netflix for $50 million: “We offered to sell a 49-per-cent stake and take the
name Blockbuster.com,” he said, but Blockbuster was not interested.12
Blockbuster would attempt to copy Netflix with an online service in 2004, hoping to leverage the
availability of its brick-and-mortar stores with the mail-order option and keep the operations integrated. It
was ultimately unsuccessful with its online offering, however, as were other contemporaneous imitators
such as Wal-Mart.
Netflix grew from 4.2 million subscribers in 2005 to 15 million in 2010 (see Exhibit 2). Although
Blockbuster still had 47 million registered customers, its eventual demise seemed apparent. Netflix had
more than doubled to 32 million subscribers by November of 2013—the month that Blockbuster announced
it was going out of business.
NETFLIX FACES DIGITAL DELIVERY
What Is Digital Delivery?
Information goods (i.e., any good that could be represented digitally) could be delivered over a communication
network such as the Internet. Initially, early Internet content was limited to lower-volume content, such as
text, and then later, images and music. Video content, with its relatively large file sizes, tended to be limited
to physical media, such as film, videotape, and discs. However, with advances in both network speeds and
compression algorithms to deliver content with greater fidelity using less data, other options emerged.
Traditionally, the first step in digital delivery was via downloaded content, such as Apple iPod users
downloading the complete file of any music they purchased from the iTunes online store. These files were
stored on the user’s device, and could be played repeatedly, thus mimicking physical media, such as vinyl
records, audio tapes, and music compact discs, which consumers were used to purchasing and owning.
Streaming content, on the other hand, was content that was played on the consumer’s device but stored on
a different device—typically a server operated by the content owner or licensee. Streaming required a
network connection between the two devices in order to play the content. In this way, it more closely
resembled listening to music on the radio, where the listener needed to have a connection to the content
(similar to radio frequency reception), as opposed to owning local copies.
Because video typically required much more data than music, streaming video required a faster network
connection in order to provide a reasonable viewing experience. As a consequence, some content owners
developed lower-resolution versions of their files in order to reduce their size, which then allowed them to
stream the content. This also avoided the problem of allowing consumers to possess a digital copy of their
content, which could potentially be shared or resold. Furthermore, the very large file sizes of full movies
acted as a partial deterrent to digital piracy (as did law enforcement efforts, such as the 2012 closure of the
popular website Megaupload).13
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Netflix initially thought the future of digital video delivery would be downloading, not streaming.14 It
created a dedicated device (that later was sold and became the Roku box) for this purpose, but eventually
developed a standalone streaming service, which was released as “Watch Instantly” in 2008.15 Early
attempts at streaming were low quality, and in any event, most potential customers did not have the required
Internet bandwidth.
However, seeing the potential of streaming, in 2011 Netflix made what would be seen as an ill-fated, tooearly commitment to the digital delivery model when it announced a decision to split itself between its
traditional DVD business (to be re-named “Qwikster”) and an uncoupled streaming business, which
required separate customer logins. As it was to be operated as two separate companies with no bundled
discounts for those seeking both DVD rentals and streaming availability, the new pricing model would
mean a 60 per cent effective price hike for existing subscribers who wanted to continue both service types.
Predictably, the announcement was met with a loss of 800,000 subscribers, and Netflix’s stock price fell 77
per cent.16 Although Netflix reversed the decision a month later, considerable damage had been done.
This public relations disaster fed into a variety of contemporaneous pessimistic predictions about Netflix’s
future. One noted that Netflix shares were in “free fall” after the third-quarter mishaps, and projected future
losses.17 Another said “customers wasted little time in jumping ship.”18
Despite these misgivings, Netflix recovered and continued to grow after 2011, increasing its subscriber count
from 23.5 million to over 93 million by the end of 2016, a compound annual growth rate of 32 per cent.
REED HASTINGS’S DECISION POINTS
Digital Delivery Challenges
Regardless of the mode or degree of digital delivery adoption, digital delivery presented Netflix with
significant challenges in terms of streaming content acquisition. This was not a problem in the DVD-bymail delivery model, as DVDs could be acquired from distributors and then rented. However, acquiring
streaming content was both riskier and more expensive.
First, licensing content was subject to the terms dictated by the content owner. Netflix learned this lesson
early on, when its original streaming contract with the Starz network expired. Starz would not renew the
contract on terms acceptable to Netflix, leaving Netflix with a hole in its available inventory.19
Second, the home entertainment market was a very crowded one, with 12 streaming competitors to Netflix
that had each surpassed 1 million subscribers.20 One significant competitor was Hulu, founded by The
National Broadcasting Company (NBC) and 21st Century Fox (Fox) in 2007, and later joined by the
Disney–ABC Television Group and Time Warner Inc. It operated on a subscription model, but also offered
advertisement-supported options. Fox streamed content 24 hours a day through Hulu, in some cases even
bypassing its local affiliates.21 As of July 2017, Hulu had the greatest viewer engagement of all streaming
services, measured at 2.9 hours per day (versus Netflix’s 2.2 hours per day),22 and its content included the
shows Casual and The Handmaid’s Tale. Another streaming competitor was Amazon Prime Video.
Amazon initially offered its Amazon Prime Video service as a bonus for subscribers to its fee-based Prime
membership service. Doing so provided the video streaming service a large number of subscribers at launch.
Further, the service benefited from Amazon’s financial power and multiple lines of business (e.g., Amazon
Web Services). Amazon spent more than $100 million on content in the third quarter of 2014 alone, and its
portfolio included the television series Transparent and The Man in the High Castle. In addition, its Fire
TV platform grew with each device it sold (see Exhibit 3 for additional details).
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Traditional web giants that competed with Netflix included both Google LLC/YouTube LLC (YouTube), and
Facebook Inc. (Facebook). While 75 per cent of U.S. Wi-Fi households had a Netflix subscription, YouTube
had quickly grown into second place in 2017 with 53 per cent penetration, and reached more of the coveted
18–34-year-old demographic than any cable network.23 Its content included the series Escape the Night.
Facebook, late to the sector, had also announced plans to offer new proprietary content, and tried to make up
for its late start by offering Hollywood studios better terms for their content, including sharing advertising
revenue and data on viewership, the latter of which was an important asset that had distinguished the success
of digital platforms such as Netflix.24
Of course, Netflix also competed with traditional home entertainment outlets, including Home Box Office
(HBO) and Sling TV, Dish’s live TV service. HBO had an extensive library of shows to watch on demand
via cable, and it had an app (HBO Go). It had a large number of subscribers and a strong, extended track
record of developing very popular original content, such as television series The Sopranos and Game of
Thrones. Sling TV, although it had fewer subscribers than Netflix in 2017, had viewers who were more
engaged, averaging 47 viewing hours per month, versus Netflix’s 28 hours per month.25
Many of these competitors fell into the category of “coopetition” to Netflix, a term that suggests cooperation between competing companies. Netflix licensed content from some of the same companies that
formed Hulu, but at the same time provided a competing service. Further, it relied on companies like Sony,
which had its own streaming service, to carry the Netflix app on Sony’s PlayStation videogame consoles.
Lastly, Netflix relied on the availability of bandwidth from cable companies to provide its services to
customers; many of these same cable companies (e.g., Comcast, Time Warner Inc.) were also content
producers with an interest in streaming services, and with which Netflix competed.
Major news outlets, such as The New York Times and The Wall Street Journal, reported that Netflix was seen
as a rival to firms from which it had previously licensed content, and that therefore deals were being cut
back.26 The Wall Street Journal wrote, “[Netflix] must keep things cordial with Hollywood’s traditional
studios . . . [and] prevent them from turning to its main competitors, Amazon and Hulu.” 27 It only had the
one source of revenue, but in its new market, it was competing with firms that had much more diverse
portfolios and revenue streams.
For example, if Netflix wanted to acquire some popular new show, it most likely would have to borrow
money from the bank; if Amazon wanted to acquire it, it could borrow money from the Amazon Web
Services division (of which, somewhat ironically, Netflix was a customer).28 Apple Inc., another financially
powerful competitor with $260 billion in cash in 2017,29 was also investing in content creation, most
recently poaching two senior executives from Sony TV.30
As an alternative to licensing third-party content, in 2013 Netflix ventured into developing its own original
content. It started out with a “home run” when it acquired House of Cards, starring Kevin Spacey, which went
on to win three Emmys.31 Given its lack of a track record at the time, Netflix needed to commit to buying the
entire season of the show without the option of declining after a pilot episode, as traditional media outlets usually
required. It also did well with Orange Is the New Black, a popular series based on a book, as well as the 1980sstyle adventure series Stranger Things. However, and to illustrate the risks, a more recent effort, Crouching
Tiger, Hidden Dragon: Sword of Destiny, was widely regarded as a flop, and Netflix found itself increasingly
cancelling original series that did not produce sufficient returns, such as Sense8 and The Get Down.32
In addition, there were significant sums at risk in these ventures. Netflix budgeted $6 billion in 2017 for
content—more than twice its total revenue. This level of spending resulted in $3.4 billion in long-term
debt.33 Critics said that its debt was such that it must continue to add more subscribers just to feed the
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business model, or everything could come crashing down.34 Whereas Netflix’s streaming content
obligations were approximately equal to its revenue in 2011, by 2017 a significant gap had emerged.35
In-House Competition; the Challenge of Incumbency
One consistent challenge confronted by all successful organizations facing significant technological change
was the allure of their existing incumbent line of business. This took several forms, including financial
investment in the existing capital infrastructure, organizational investment in skills and routines, and the
risk associated with moving away from a consistent, well-understood source of cash flow.
Author Joshua Gans36 termed this challenge “supply side disruption,” about which, drawing on the
academic research of Rebecca Henderson,37 he said,
Demand side disruption involves an established firm missing a certain kind of technological
opportunity, but supply side disruption arises when an established firm becomes incapable of taking
advantage of a technological opportunity. Specifically, when a new competing innovation involves a
distinct set of architectural knowledge, established firms that have focus on being “best in breed” in
terms of component innovation may find it difficult to integrate and build on the new architecture.38
At Netflix, those responsible for the legacy business had successfully argued for its re-investment. The
finely tuned industrial-engineered manual process of opening and stuffing the trademark red mailing
envelopes was replaced by special-purpose robots that could process 3,400 envelopes per hour versus the
680 per hour processed the prior, labour-intensive way.39 This enabled Netflix to reduce the number of
distribution centres from 50 to 33. These efficiencies resulted in cutting 75 per cent of its labour costs while
retaining a high degree of customer service—92 per cent of its customers received next-day delivery
service. Competitors also continued to see promise in the DVD format, as Redbox, with its trademark
automated kiosk vending machines, grew from about 100 locations in 2004 to 34,000 by 2012.40
One argument for continued investment in the legacy business was that, as recently as August 2015, fewer
than half of all U.S. homes had high-speed broadband service, and it could be expected that the currently
un-served lower-population-density areas might be without this service for the foreseeable future. This lack
of connectivity contributed to the continued success of brick-and-mortar video rental stores in these areas.41
This primarily rural phenomenon in the United States could presage markets in international locations with
limited broadband that might also continue to support the DVD format.42 And, when it temporarily split off
its DVD business in 2011, Netflix lost a number of its own senior managers.43
On the other hand, Netflix did not face the sort of business cannibalization challenges often faced by
traditional media businesses with the advent of a disruptive technology. Netflix, for example, did not face
the loss of advertising revenue as a result of a shift to streaming delivery, a potentially significant problem
for some of its competitors.44 Further, despite its increased internal efficiencies, its traditional DVD-based
business faced other costs, such as its dependence on the U.S. Postal Service, which had recently resulted
in a $100-million increase in mailing rates.45
Uncertain Future Public Policies—“Net Neutrality” and Its Variants
In 2003, Columbia University media law professor Tim Wu coined the term “net neutrality” to describe a
government regulatory principle that Internet service providers (ISPs) should enable access to all content and
applications regardless of the source, without favouring or blocking particular products or websites. It gained
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in visibility as Internet traffic became more and more concentrated over time, with Wired magazine reporting
in 2014 that half of all Internet traffic originated from just 30 organizations, including Google LLC, Facebook,
and Netflix.46 The policy required that ISPs not discriminate (e.g., “throttling back” throughput speeds) or
charge differentially by user, content, website, platform, application, type of attached equipment, or mode of
communication. This controversial policy tended to find favour with Internet firms, especially those that
generated a lot of traffic, like Netflix. It tended to be opposed by ISPs, such as Comcast and Verizon, which
argued that by limiting their decision rights, the effect of the regulation would be to reduce investment in
broadband network services and, therefore, to stifle innovation. In 2015, the Democratic Party administration
in the United States enacted the rules into law, effectively making broadband firms “common carriers,” like
the telephone network. In 2017, the Republican Party administration scaled back the regulation.47
Netflix, similar to other Internet firms, originally lobbied for net neutrality, as streaming video required
significant amounts of bandwidth, and limiting ISPs’ ability to differentially charge for this service
effectively subsidized the Internet firms’ activities. By 2017, at least publicly, Hastings argued that it was
no longer especially important.48 However, the uncertainty about the regulation and its future added risk to
any decision-making in the digital delivery market.
In addition, as the telecommunications sector of the economy grew and prospered, it became an attractive
area for lawmakers to target for new taxes. In 2017, Canadian legislators proposed, but did not pass, a 5 per
cent tax on broadband charges, dubbed by the press the “Netflix tax.”49 These monies would have been
redistributed to traditional communications firms, like newspapers, that were adversely affected by the rise
of the Internet. Traditional media firms lost revenue due to the Internet—particularly classified advertising,
but also subscription revenue—as some of their customers shifted use to their Internet equivalents. If
broadband revenue would be ultimately subject to additional taxes, this could decrease demand for it and
thereby hamper the growth of Netflix-like streaming services.
HASTINGS’S DECISIONS
Hastings faced a significant number of business decisions, and, despite Netflix’s successes, he was selfcritical, and was often quoted as admitting to having made a number of, at least in hindsight, poor decisions
in relation to the technology and home entertainment industries. These included online advertisements on the
website, starting an independent film production company, and buying DVDs out of the Sundance Film
Festival (which turned out to offer limited profitability), in addition to the 2011 Qwikster gaffe.50 In addition,
he had initially believed that the future would be digital downloading rather than digital streaming, and in
2009 Hastings said that there would still be DVDs in 2030, a prediction that looked increasingly unlikely.51
However, despite some of these missteps, Netflix was positioned to compete with some of the biggest firms
in both entertainment and consumer technology. Hastings himself noted that, historically, firms facing
disruption, such as AOL Inc. and the Eastman Kodak Company, failed because they were too cautious.52
But which non-cautious path should Netflix take? Should it continue to create its own content, or revert
back to being a neutral platform? Should it look to form exclusive contracts with content providers and/or
hardware manufacturers to “lock in” its customers? Did it need to acquire competitors and/or upstream or
downstream partners? What was the appropriate role for the legacy DVD division—should it continue to
be operated as a cash cow for as long as it was economically viable, or should it be sold off so as to reinvest
the funds in current operations? Or, was it finally time, as suggested by analysts who argued the firm was
over-valued, to sell the company and cash out while it had a high market capitalization?
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EXHIBIT 1: CHRISTENSEN’S DISRUPTIVE INNOVATION CONCEPT
Harvard Business School’s Clayton Christensen has authored a number of books and articles defining and
illustrating what he terms “disruptive innovations,” which are new products or services that re-make whole
industries, generally at the expense of the incumbent firm. This occurs because the incumbent firm does not
recognize the threat posed by the innovation due to two main reasons. First, the disruptive innovation
possesses a different package of performance attributes, not all of which are valued by existing customers;
therefore, the incumbent’s current customers do not initially find it attractive. Second, the performance
attributes of the innovation that existing customers do value, which are often weak in the innovation, improve
at such a rapid rate that the new entrant can later move up and capture the incumbent’s existing customers.
Disruptive innovators typically either enter at the low end of the market, or create entirely new markets.
Both of these scenarios are characterized as markets not well served by current solutions. Incumbents,
therefore, have a tendency not to take serious notice of the innovation, because either they are not losing
current customers to it, or, when they are, they are customers who buy low-margin products. Losing such
customers has the paradoxical effect of increasing the incumbent’s average margin, thus improving its
bottom line. As such, the financial signals that incumbents receive create Christensen’s “dilemma,” whereby
incumbent firms often do not recognize the threat.
In addition, incumbents often have difficulty adopting disruptive innovations themselves because, as these
innovations initially serve the existing customers poorly, to adopt them could mean the loss of existing
revenues through cannibalization. Conversely, new entrants have no current customers to lose, removing
any hesitation to invest in the innovation.
Source: Clayton Christensen, The Innovator’s Dilemma (New York, NY: Harper Business, 2001).
EXHIBIT 2: NETFLIX SUBSCRIBER GROWTH (MILLIONS) OVER TIME
100
90
80
70
60
50
40
30
20
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: “Netflix Subscribers from 2001 to 2011 (in 1,000),” Statista, accessed November 12, 2017,
https://www.statista.com/statistics/272551/subscribers-of-netflix-since-2001/; Jeff Dunn, “Here’s How Huge Netflix Has Gotten
in the Past Decade,” Business Insider, January 19, 2017, accessed July 2017, www.businessinsider.com/netflix-subscriberschart-2017-1.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Netflix Inc.: The Disruptor Faces Disruption
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111
9B17E016
EXHIBIT 3: NETFLIX AND ITS COMPETITORS, 2017
Founded
Netflix
Aug. 1997
Subscription
Price
Revenue
Sources
Content
Subscription
Content Amount1
Ownership
Subscribers
$8.00/month
Subscription
On-demand TV (past
seasons), on-demand
movies, exclusive
content
36,000 hours (April
2016);2 4,235
movies, 971 TV
shows (June 2017)
Netflix
On-demand TV, ondemand movies,
exclusive content,
video-on-demand
(VOD) content
(additional fee)
99 million worldwide
(April 2017),3 50.9
million in the United
States (March
2017)4
36,000 hours (April
2016);5 7,430
movies, 513 TV
shows (June 2017)
Amazon
80 million in the
United States (April
2017)6
Amazon
Prime
Video
Sep. 2006
$79.00/year
Subscription,
purchase, rental,
ad-supported
(limited content)
Apple TV
Apr. 2003
(iTunes)
n/a
Purchase, rental
VOD content
n/a
Apple
n/a
CBS All
Access
Oct. 2014
$5.99/month
Subscription
70 TV shows (June
2017)
CBS
1.5 million (February
2017)7
DirecTV
Now
Nov. 2016
$35.00/month
(100+
channels)
Live and on-demand
CBS programming,
some original content,
classic CBS content
Subscription
Live TV channels
n/a
AT&T
400,000 (March
2017)8
HBO Now
Apr. 2015
$14.99/month
Subscription
HBO content,
including current
season
681 movies, 90 TV
shows (June 2017)
Time Warner
2 million (February
2017)9
Subscription
(with or without
ads)
On-demand network
programming (except
current season of
CBS programming)
1,108 movies,
1,132 TV shows
(June 2017)
Joint venture
of Disney, Fox,
Comcast/NBC
Universal, and
Time Warner
12 million
(November 2016)10
n/a
Sony/Columbia
400,000 (March
2017)11
331 movies, 34 TV
shows (June 2017)
CBS
1.5 million (February
2017)12
n/a
Dish Network
1.3 million (April
2017)13
Hulu
Oct. 2007
$7.99/month
PlayStation
Vue
Mar. 2015
$30.00/month
(45+ channels)
Showtime
Jun. 2015
(streaming
service)
Sling TV
Jan. 2015
Subscription,
purchase, rental
$10.99/month
Subscription
$20.00/month
(20+ channels)
Subscription
Live TV channels,
VOD
Showtime content,
including current
season
Live TV channels
(limited major
networks)
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112 Netflix Inc.: The Disruptor Faces Disruption
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EXHIBIT 3 (CONTINUED)
Note: n/a = not available
1
“Movie/TV Show Counts,” JustWatch, accessed July 1, 2017, www.justwatch.com.
2
Mark Fahey, “Netflix vs Amazon: Estimating the Better Deal,” CNBC, April 22, 2016, accessed July 2017, www.cnbc.com/2016/04/22/netflix-vs-amazon-estimating-the-betterdeal.html.
3
Seth Fiegerman, “Netflix Nears 100 Million Subscribers,” CNN, April 17, 2017, accessed July 2017, http://money.cnn.com/2017/04/17/technology/netflixsubscribers/index.html.
4
“Number of Netflix Streaming Subscribers in the United States from 3rd Quarter 2011 to 2nd Quarter 2017 (in Millions),” Statista, accessed July 2017,
https://www.statista.com/statistics/250937/quarterly-number-of-netflix-streaming-subscribers-in-the-us.
5
Mark Fahey, “Netflix vs Amazon: Estimating the Better Deal,” CNBC, April 22, 2016, accessed July 2017, www.cnbc.com/2016/04/22/netflix-vs-amazon-estimating-the-betterdeal.html.
6
Stephanie Pandolph and Jonathan Camhi, “Amazon Prime Subscribers Hit 80 Million,” Business Insider, April 27, 2017, accessed July 2017,
www.businessinsider.com/amazon-prime-subscribers-hit-80-million-2017-4. The figure is for Amazon Prime subscribers, a service that includes Amazon Prime Video.
7
Todd Spangler, “Showtime Hits 1.5 Million Streaming Subscribers, CBS All Access Nears Same Mark,” Variety, February 13, 2017, accessed July 2017,
http://variety.com/2017/digital/news/showtime-cbs-all-access-streaming-1-5-million-subscribers-1201986844.
8
Artie Beaty, “Discovery CEO: DIRECTV Now & Vue Have 400,000 Subscribers,” Streaming Observer, March 29, 2017, accessed July 2017,
https://www.streamingobserver.com/discovery-ceo-directv-now-vue-400000-subscribers.
9
Cynthia Littleton, “HBO Now Grows to More Than 2 Million Domestic Subscribers,” Variety, February 8, 2017, accessed July 2017, http://variety.com/2017/tv/news/hbo-now2-million-subscribers-time-warner-1201981371.
10
Craig Smith, “18 Interesting Hulu Statistics (July 2017),” DMR, July 28, 2017, accessed July 2017, http://expandedramblings.com/index.php/hulu-statistics.
11
Artie Beaty, op. cit.
12
Todd Spangler, op. cit.
13
Daniel Frankel, “Sling TV Ended Q1 with 1.3M Subscribers, Dish Is Reportedly Telling Wall Street,” FierceCable, April 28, 2017, accessed July 2017,
www.fiercecable.com/online-video/sling-tv-ended-q1-1-3m-subs-dish-reportedly-telling-wall-street.
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Netflix Inc.: The Disruptor Faces Disruption
ENDNOTES
This case has been written on the basis of published sources only. Consequently, the interpretation and perspective
presented in this case are not necessarily those of Netflix Inc. or any of its employees.
2
Patricia Sellers, “The Man Who Became Fortune’s Businessperson of the Year,” Fortune, November 19, 2010, accessed
September 27, 2017, http://fortune.com/2010/11/19/the-man-who-became-fortunes-businessperson-of-the-year.
3
All currency amounts are in USD unless otherwise specified.
4
Joe Flint and Shalini Ramachandran, “Netflix: The Monster That’s Eating Hollywood,” The Wall Street Journal, March 24,
2017, accessed July 2017, https://www.wsj.com/articles/netflix-the-monster-thats-eating-hollywood-1490370059.
5
Ken Auletta, “Outside the Box,” The New Yorker, February 3, 2014, accessed July 2017,
https://www.newyorker.com/magazine/2014/02/03/outside-the-box-2.
6
Eduardo Porter, “Copyright Ruling Rings with Echo of Betamax,” The New York Times, March 26, 2013, accessed July 2017,
www.nytimes.com/2013/03/27/business/in-a-copyright-ruling-the-lingering-legacy-of-the-betamax.html.
7
Richard Roehl and Hal R. Varian, “Circulating Libraries and Video Rental Stores,” First Monday 6, no. 5 (2001); Stan
Liebowitz, Re-Thinking the Network Economy (New York: AMACOM, 2002), 194.
8
See Exhibit 1.
9
“Netflix: How a $40 Late Fee Revolutionized Television,” YouTube video, 12:52, posted by “Business Casual,” accessed July
2017, https://www.youtube.com/watch?v=BrpEHssa_gQ.
10
“VCR
&
DVD
Player
Household
Penetration
(1980-2007),”
accessed
July
2017,
https://www.flickr.com/photos/42182583@N00/2299078244.
11
Emily Steel, “Netflix Refines Its DVD Business, Even as Streaming Unit Booms,” The New York Times, July 27, 2015,
accessed July 2017, https://www.nytimes.com/2015/07/27/business/while-its-streaming-service-booms-netflix-streamlinesold-business.html.
12
Ken Auletta, op. cit.
13
Michael D. Smith and Rahul Telang, Streaming, Sharing, Stealing (Cambridge, MA: The MIT Press, 2016).
14
Joe Nocera, “Can Netflix Survive in the New World It Created?,” The New York Times Magazine, June 15, 2016, accessed
July 2017, https://www.nytimes.com/2016/06/19/magazine/can-netflix-survive-in-the-new-world-it-created.html.
15
“Netflix: One Eye on the Present and Another on the Future,” Knowledge@Wharton, October 28, 2009, accessed July 2017,
http://knowledge.wharton.upenn.edu/article/netflix-one-eye-on-the-present-and-another-on-the-future.
16
Greg Sandoval, “Netflix’s Lost Year: The Inside Story of the Price-Hike Train Wreck,” CNET, July 11, 2012, accessed July
2017, https://www.cnet.com/news/netflixs-lost-year-the-inside-story-of-the-price-hike-train-wreck.
17
Larry Dignan, “Netflix’s Big Collapse: Do You Believe in Streaming, International Expansion?,” ZDNet, October 25, 2011,
accessed July 2017, www.zdnet.com/article/netflixs-big-collapse-do-you-believe-in-streaming-international-expansion.
18
“Netflix’s Tough Transition to Online Movie Streaming,” digitalsurgeons, October 3, 2011, accessed July 2017,
https://www.digitalsurgeons.com/thoughts/strategy/netflixs-tough-transition-to-online-movie-streaming.
19
Ibid.
20
Joe Flint and Deepa Seetharaman, “Facebook Is Going Hollywood, Seeking Scripted TV Programming,” The Wall Street
Journal, June 25, 2017, accessed July 2017, https://www.wsj.com/articles/facebook-is-going-hollywood-seeking-scripted-tvprogramming-1498388401.
21
Shalini Ramachandran, “Fox Tries to Gain Leverage Over Affiliates on Live Streaming,” The Wall Street Journal, June 12,
2017, accessed July 2017, https://www.wsj.com/articles/fox-tries-to-gain-leverage-over-affiliates-on-live-streaming1497261600.
22
Sarah Perez, “U.S. Cord Cutters Watch More Netflix than Amazon Video, Hulu and YouTube Combined,” TechCrunch, July
5, 2017, accessed July 2017, https://techcrunch.com/2017/07/05/u-s-cord-cutters-watch-more-netflix-than-amazon-videohulu-and-youtube-combined.
23
Sarah Perez, “Netflix Reaches 75% of US Streaming Service Viewers, but YouTube Is Catching Up,” TechCrunch, April 10,
2017, accessed July 2017, https://techcrunch.com/2017/04/10/netflix-reaches-75-of-u-s-streaming-service-viewers-butyoutube-is-catching-up.
24
M. Smith and R. Telang, op. cit.
25
Sarah Perez, “Netflix Reaches 75% of US Streaming Service Viewers, but YouTube Is Catching Up,” op. cit.
26
Joe Nocera, op. cit.
27
Joe Flint and Shalini Ramachandran, op. cit.
28
Jay Greene and Laura Stevens, “Wal-Mart to Vendors: Get Off Amazon Cloud,” The Wall Street Journal, June 21, 2017,
accessed July 2017, https://www.wsj.com/articles/wal-mart-to-vendors-get-off-amazons-cloud-1498037402
29
Steve Vassallo, “It’s Time for Apple to Go Hollywood,” The Wall Street Journal, June 20, 2017, accessed July 2017,
https://www.wsj.com/articles/its-time-for-apple-to-go-hollywood-1497998797.
30
Tripp Mickle and Joe Flint, “Apple Poaches Sony TV Executives to Lead Push into Original Content,” The Wall Street
Journal, June 16, 2017, accessed July 2017, https://www.wsj.com/articles/apple-poaches-sony-tv-executives-to-lead-pushinto-original-content-1497616203.
31
Peter Cohan, “Netflix’s Reed Hastings Is the Master of Adaptation,” Forbes, October 22, 2013, accessed July 2017,
https://www.forbes.com/sites/petercohan/2013/10/22/netflixs-reed-hastings-is-the-master-of-adaptation.
32
David Trainer and Kyle Guske II, “Netflix’s Stock Is Worth Only About One-Third of Where It Trades Today,” MarketWatch,
June 18, 2017, accessed July 2017, www.marketwatch.com/story/netflixs-stock-is-worth-only-about-one-third-of-where-ittrades-today-2017-06-15.
1
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9B17E016
Trey Williams, “Netflix’s Global Blitz Should Lift Subscriptions 20% This Year,” The Wall Street Journal, March 6, 2017,
accessed July 2017, www.marketwatch.com/story/netflixs-global-blitz-should-lift-subscriptions-20-this-year-2017-03-06.
34
Joe Nocera, op. cit.
35
David Trainer and Kyle Guske II, op. cit.
36
Joshua Gans, The Disruption Dilemma (Cambridge, MA: MIT Press, 2016).
37
Rebecca M. Henderson and Kim B. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies
and the Failure of Established Firms,” Administrative Science Quarterly 35, no. 1 (1990): 9–30.
38
Joshua Gans, op. cit.
39
Emily Steel, op. cit.
40
Kirsten Acuna, “8 Ways Online Streaming Killed the Video Store”, Business Insider, February 5, 2013, accessed July 2017,
www.businessinsider.com/online-streaming-is-making-the-dvd-obsolete-2013-1.
41
Mark Perry, “‘The ‘Netflix Effect’: An Excellent Example of ‘Creative Destruction,’” AEI, August 6, 2015, accessed July 2017,
www.aei.org/publication/the-netflix-effect-is-an-excellent-example-of-creative-destruction; E. G. Smith, “Revenge of the Video
Store,” The Wall Street Journal, November 26, 2016, accessed July 2017.
42
Emily Steel, op. cit.
43
Greg Sandoval, op. cit.
44
Ken Doctor, “The Newsonomics of Netflix and the Digital Shift,” NiemanLab, July 28, 2011, accessed July 2017,
www.niemanlab.org/2011/07/the-newsonomics-of-netflix-and-the-digital-shift.
45
Peter Cohan, op. cit.
46
Robert McMillan, “What Everyone Gets Wrong in the Debate Over Net Neutrality,” Wired, June 23, 2014, accessed July
2017, https://www.wired.com/2014/06/net_neutrality_missing; the article argues that the Internet already was not “neutral,”
with ISPs already providing specific resources to handle high-traffic sites.
47
John McKinnon, “FCC Votes to Scale Down Net Neutrality Rules,” The Wall Street Journal, May 18, 2017, accessed July
2017, https://www.wsj.com/articles/fcc-votes-to-scale-down-net-neutrality-rules-1495124194.
48
Erin Carson, “Net Neutrality May Have Lost Netflix as an Ally,” CNET, May 31, 2017, accessed July 2017,
https://www.cnet.com/news/net-neutrality-netflix-reed-hastings.
49
Daniel Leblanc, “Trudeau Rejects New Internet Tax to Help Fund Media Sector,” The Globe and Mail, June 15, 2017,
accessed July 2017, https://beta.theglobeandmail.com/news/politics/liberal-ndp-mps-call-for-new-tax-on-internet-providersto-help-media-companies/article35315234.
50
James B. Stewart, “Netflix Looks Back on Its Near-Death Spiral,” The New York Times, April 26, 2013, accessed July 2017,
www.nytimes.com/2013/04/27/business/netflix-looks-back-on-its-near-death-spiral.html.
51
Knowledge@Wharton, op. cit.
52
Ken Auletta, op cit.
33
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CHAPTER
3
Hardware, Software,
and Mobile Systems
“How is the AI project going, Kam?” asks Jessica with a smile on
MyLab MIS
Using Your Knowledge
Questions 3-1, 3-2, 3-3
her face, hoping for good news. Kamala Patel, eHermes’ automation subject
matter expert (SME), has asked Jessica Ramma, CEO; Victor Vazquez, COO; and
Tess Visser, VP of Sales, to come down to the large warehouse to see how the
AI project is coming along. Jessica asked Kamala to see if she could feed the
company’s data into an AI and improve operational efficiency. If the project is
successful, it could save the company a lot of money.
“It’s going OK. Well, actually, it’s going much more slowly than we thought,”
Kamala says, shaking her head slightly and pointing to a map of the city on a
large monitor showing multicolored routes, destinations, and mobile storefronts.
“Putting it all together is turning out to be a lot more work than we initially
thought. My expertise is self-driving vehicles, not AI. I think I’ve gotten in over
my head. We really need an AI expert to make this work.”
115
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CHAPTER 3
Hardware, Software, and Mobile Systems
“We don’t have enough
data to train the AI.”
“When we talked about this a couple of months ago, you said it could work.
What’s changed?” Jessica asks with a disappointed tone in her voice.
“Nothing has changed. It will still work. It will save us a lot of money, too. It could
cut our costs by at least 20 percent and double our operational efficiency. But, to get
to that point, it will take a lot more time and money than we initially thought,” Kamala
says, nodding with a hint of encouragement.
Tess spins around and points to one of the screens. “You see, right now we load
up each mobile storefront with similar types of items that we think a person might
buy. Say a customer wants to buy baby clothes. Well, they might be interested in buying other baby-related items. So, we send a storefront full of baby items to that location, and the customer usually ends up buying more than just baby clothes.”
“And then we get the ice-cream-truck effect when people hear our eHermes
chimes being played in the neighborhood,” Kamala adds. “Multiple neighbors come
out and buy items from that same truck. They also bring out their own items for sale.
The time spent at each stop varies. There’s a lot of time spent selling items and logging new items that customers want to sell. It’s difficult to predict how long a storefront will stay at a given location.”
Jessica looks slightly confused. “But we’ve seen this for the past couple of years.
As people became more aware of eHermes, the duration of stops has increased. Why
would this affect the AI project?”
“For a couple of reasons. First, we don’t have
enough data to train the AI. It takes a lot of data
to train an AI to come up with optimal solutions.
The variability in the way our business operates
doesn’t help. We’re growing quickly, and the data
from a few years ago isn’t good training data.
Second, I’ve been leaning on a friend of mine
from graduate school to help me figure this all
out. It’s extraordinarily complex, and I’m not an
AI expert. We’re trying to optimize more than
just a supply chain. We’re really a company that
combines shipping, online retailing, and physical
retailing. We have to optimize routes, stops,
probable sales, customer buying habits, inventory
management—”
Source: Haiyin Wang/Alamy Stock Photo
Study
QUESTIONS
Q3- 1
What do business professionals need to know about computer
hardware?
Q3- 2
How can new hardware affect competitive strategies?
Q3- 3
What do business professionals need to know about software?
Q3- 4
Is open source software a viable alternative?
Q3 -5
What are the differences between native and Web applications?
Q3 -6
Why are mobile systems increasingly important?
Q3 -7
What are the challenges of personal mobile devices at work?
Q3 -8
2029?
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Hardware, Software, and Mobile Systems
117
Victor interrupts Kamala with a look of concern on his face. “What would it take to
make this work? How much would it cost?”
“At this point, probably more than we’ve got. We’d have to hire at least two AI
experts and a team of mid-level people. That won’t be cheap. We’d also need to spend
more on infrastructure for the additional processing power, data storage, and back-end
systems. Our cash burn rate will increase substantially.”
Jessica looks visibly disappointed. “What if we hired a few more people for you to
manage? Would that be enough?”
Kamala smiles. “No, not even close. I was swamped before we even started this
project. I’ve been neglecting software upgrades to our self-driving vehicles, and more
importantly, I need to finish the new systems development project to automate the data
collection from the storefronts. We’ll make a lot more money if we can log new inventory into our system as soon as we receive it from sellers and then sell it immediately.”
Jessica looks disappointed. “Well, maybe you’re right. I really wish there was
some way to make it work. We can’t grow quickly enough without an optimization system that doesn’t even exist yet. It’s really frustrating being on the cutting edge.”
“You mean the bleeding edge. . .right?” Victor asks with a smirk.
Chapter
PREVIEW
Q3-1
What would you do if you were Jessica? Or Victor? Would you go ahead and build your
own AI? It would save you money down the road. It might even give you a competitive
advantage over potential entrants into your market. You might be able to hire a team of
AI people without breaking the bank. Is Kamala being too conservative? If you’re wondering why, as a future business professional, you need to know about hardware and
software, think about those questions. Those questions and others of greater complexity—most likely ones involving technology that will be invented between now and
the time you start working—will come your way.
You don’t need to be an expert. You don’t need to be a hardware engineer or a
computer programmer. You do need to know enough, however, to be an effective
consumer. You need the knowledge and skills to ask important, relevant questions and
understand the answers.
We begin with basic hardware concepts and how innovations in hardware could
affect businesses. Next, we will discuss software concepts, open source software
development, and the differences between native and Web applications. Following
that, we’ll discuss the importance of mobile systems and the challenges created
when employees bring their computers to work. Finally, we’ll wrap up by forecasting
trends in hardware and software in 2029.
What Do Business Professionals Need
to Know About Computer Hardware?
Most people think of computer hardware as a laptop, a desktop, a server, or maybe even a tablet.
As time passes, the way we think of computer hardware is changing. Take phones as an example.
Twenty-five years ago, they were strictly used for voice communication. No one would have considered a phone a piece of computer hardware.
Fast-forward to today. Smartphones have substantial processing power, the ability to connect to
networks, internal memory, and virtual keyboards and can interconnect with other devices. Now a
“phone” is essentially a powerful piece of computing hardware. Computing hardware is also being
integrated into other devices such as watches, glasses, TVs, cars, and even toothbrushes.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
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Computer hardware consists of electronic components and related gadgetry that input, process, output, and store data according to instructions encoded in computer programs or software.
All hardware today has more or less the same components, at least to the level that is important
to us. We’ll begin with those components, and then we’ll quickly survey basic types of computers.
Hardware Components
Every computer has a central processing unit (CPU), which is sometimes called “the brain” of
the computer. Although the design of the CPU has nothing in common with the anatomy of animal
brains, this description is helpful because the CPU does have the “smarts” of the machine. The CPU
selects instructions, processes them, performs arithmetic and logical comparisons, and stores results
of operations in memory. Some computers have two or more CPUs. A computer with two CPUs is
called a dual-processor computer. Quad-processor computers have four CPUs. Some high-end
computers have 16 or more CPUs.
CPUs vary in speed, function, and cost. Hardware vendors such as Intel, Advanced Micro
Devices, and National Semiconductor continually improve CPU speed and capabilities while
reducing CPU costs. Whether you or your department needs the latest, greatest CPU depends on
the nature of your work.
The CPU works in conjunction with main memory. The CPU reads data and instructions from
memory and then stores the results of computations in main memory. Main memory is sometimes
called RAM, for random access memory.
All computers include storage hardware, which is used to save data and programs. Magnetic
disks (also called hard disks) are the most common storage device. Solid-state storage (SSD)
(or an SSD drive) is much faster than traditional magnetic storage because it stores information
using nonvolatile electronic circuits. SSD drives are gaining in popularity but are several times more
expensive than magnetic hard disks. USB flash drives are small, portable solid-state storage devices
that can be used to back up data and transfer it from one computer to another. Optical disks such
as CDs and DVDs are also popular portable storage media.
Types of Hardware
Figure 3-1 lists the basic types of hardware. Personal computers (PCs) are classic computing devices
that are used by individuals. In the past, PCs were the primary computer used in business. Today, they
are gradually being supplanted by tablets and other mobile devices. The Mac Pro is an example of a modern PC. Apple brought tablets to prominence with the iPad. In 2012, Microsoft announced Surface and
Google announced the Nexus series, all tablets. Moving down the list of hardware, a mobile device called
a phablet combines the functionality of a smartphone with the larger screen of a tablet. Devices like
Samsung’s Galaxy Note or Apple’s iPhone 8 Plus would fall into this crossover category. Smartphones
are cell phones with processing capability; the Samsung Galaxy S9 and iPhone 8 are good examples.
Today, because it’s hard to find a cell phone that isn’t “smart,” people often just call them phones.
Hardware Type
FIGURE 3-1
Basic Types of Hardware
Example(s)
Personal computer (PC)
Including desktops and laptops
Apple Mac Pro
Tablet
Including e-book readers
iPad, Microsoft Surface, Google Nexus, Kindle Fire
Phablet
Samsung Galaxy Note, iPhone 8 Plus
Smartphone
Samsung Galaxy, iPhone
Server
Dell PowerEdge Server
Server farm
Racks of servers (Figure 3-2)
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119
FIGURE 3-2
Server Farm
Source: Andrew Twort/Alamy Stock Photo
A server is a computer that is designed to support processing requests from many remote
computers and users. A server is essentially a PC on steroids. A server differs from a PC principally
because of what it does. The relationship between PCs and servers is similar to the relationship
between clients and servers at a typical restaurant. Servers take requests from clients and then
bring them things. In restaurants this is food and silverware. In computing environments servers
can send Web pages, email, files, or data to PCs. PCs, tablets, and smartphones that access servers
are called clients. As of 2018, a good example of a server is the Dell PowerEdge server.
Finally, a server farm is a collection of, typically, thousands of servers. (See Figure 3-2.) Server
farms are often placed in large truck trailers that hold 5,000 servers or more. Typically a trailer has
two large cables coming out of it; one is for power, and the other is for data communications. The
operator of the farm backs a trailer into a pre-prepared slab (in a warehouse or sometimes out in
the open air), plugs in the power and communications cables, and, voilà, thousands of servers are
up and running!
Increasingly, server infrastructure is delivered as a service via the Internet that is often referred
to as the cloud. We will discuss cloud computing in Chapter 4, after you have some knowledge of
data communications.
The capacities of computer hardware are specified according to data units, which we discuss
next.
Computer Data
Computers represent data using binary digits, called bits. A bit is either a zero or a one. Bits are
used for computer data because they are easy to represent physically, as illustrated in Figure 3-3. A
switch can be either closed or open. A computer can be designed so that an open switch represents
zero and a closed switch represents one. Or the orientation of a magnetic field can represent a bit:
magnetism in one direction represents a zero; magnetism in the opposite direction represents a one.
Or, for optical media, small pits are burned onto the surface of the disk so that they will reflect light.
In a given spot, a reflection means a one; no reflection means a zero.
Computer Data Sizes
All forms of computer data are represented by bits. The data can be numbers, characters, currency
amounts, photos, recordings, or whatever. All are simply a string of bits. For reasons that interest
many but are irrelevant for future managers, bits are grouped into 8-bit chunks called bytes. For
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1
1
0
1
A. Light switches representing 1101
FIGURE 3-3
Bits Are Easy to Represent
Physically
1
1
0
1
B. Direction of magnetism representing 1101
1
1
0
1
C. Reflection/no reflection representing 1101
character data, such as the letters in a person’s name, one character will fit into one byte. Thus,
when you read a specification that a computing device has 100 million bytes of memory, you know
that the device can hold up to 100 million characters.
Bytes are used to measure sizes of noncharacter data as well. Someone might say, for example,
that a given picture is 100,000 bytes in size. This statement means the length of the bit string that
represents the picture is 100,000 bytes or 800,000 bits (because there are 8 bits per byte).
The specifications for the size of main memory, disk, and other computer devices are expressed
in bytes. Figure 3-4 shows the set of abbreviations that are used to represent data storage capacity.
A kilobyte, abbreviated KB, is a collection of 1,024 bytes. A megabyte, or MB, is 1,024 kilobytes.
A gigabyte, or GB, is 1,024 megabytes; a terabyte, or TB, is 1,024 gigabytes; a petabyte, or
PB, is 1,024 terabytes; an exabyte, or EB, is 1,024 petabytes; and a zettabyte, or ZB, is 1,024
exabytes. Sometimes you will see these definitions simplified as 1KB equals 1,000 bytes and 1MB
equals 1,000KB, and so on. Such simplifications are incorrect, but they do ease the math.
To put these sizes in perspective consider that Walmart processes about 40 PB worth of customer data per day.1 Facebook processes about 600 TB each day, in a 300PB data warehouse.2 The
super-secret NSA data center in Utah is estimated to hold about 12 EB of data.3 And Cisco estimates
that annual global Internet traffic volume will exceed 3.3 ZB by the end of 2021.4
Specifying Hardware with Computer Data Sizes
Computer disk capacities are specified according to the amount of data they can contain. Thus, a
5TB disk can contain up to 5TB of data and programs. There is some overhead, so it is not quite
5TB, but it’s close enough.
Term
FIGURE 3-4
Important Storage-Capacity
Terminology
Definition
Abbreviation
Byte
Number of bits to represent one character
Kilobyte
1,024 bytes
KB
Megabyte
1,024 KB 5 1,048,576 bytes
MB
Gigabyte
1,024 MB 5 1,073,741,824 bytes
GB
Terabyte
1,024 GB 5 1,099,511,627,776 bytes
TB
Petabyte
1,024 TB 5 1,125,899,906,842,624 bytes
PB
Exabyte
1,024 PB 5 1,152,921,504,606,846,976 bytes
EB
Zettabyte
1,024 EB = 1,180,591,620,717,411,303,424 bytes
ZB
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You can purchase computers with CPUs of different speeds. CPU speed is expressed in cycles
called hertz. In 2018, a slow personal computer had a speed of 3.0 Gigahertz with multiple processors. A fast personal computer had a speed of 3.5+ Gigahertz, with multiple processors. An
employee who does only simple tasks such as word processing does not need a fast CPU; a multi-core
3.0 Gigahertz CPU will be fine. However, an employee who processes large, complicated spreadsheets or who manipulates large database files or edits large picture, sound, or video files needs a
fast computer like a multi-processor workstation with 3.5 Gigahertz or more. Employees whose
work requires them to use many large applications at the same time need 32 GB or more of RAM.
Others can do with less.
One last comment: The cache and main memory are volatile, meaning their contents are lost
when power is off. Magnetic and optical disks are nonvolatile, meaning their contents survive
when power is off. If you suddenly lose power, the contents of unsaved memory—say, documents
that have been altered—will be lost. Therefore, get into the habit of frequently (every few minutes
or so) saving documents or files that you are changing. Save your documents before your roommate
trips over the power cord.
Q3-2
How Can New Hardware Affect Competitive
Strategies?
Organizations are interested in new hardware because they represent potential opportunities,
or threats, to their ability to generate revenue. It’s important to keep an eye on new tech hardware for the same reason you watch the weather forecast. You care about how the future will
affect you.
Next, we will look at five new hardware developments that have the potential to disrupt existing organizations.
Internet of Things
The first disruptive force that has the power to change business is the Internet of Things (IoT).
This is the idea that objects are becoming connected to the Internet so they can interact with other
devices, applications, or services. Everyday objects are being embedded with hardware capable of
sensing, processing, and transmitting data. Objects can then connect to a network and share data
with any other application, service, or device.
Take your mobile phone, for example; it’s probably a smartphone. But it wasn’t always
“smart.” It started out as a simple device that just handled voice calls. Over time it became a smart
device by adding more processing power, more memory, Internet access, Wi-Fi connectivity, and
the ability to interconnect with other devices and applications (Figure 3-5). People began to use
their mobile phones much differently than before. It also changed the way businesses operate.
In 2017, Amazon reported that more than 70 percent of its customers shopped using a mobile
device.5
What happens when other devices become smart? How would your life change if you had access
to a smart car, smart home appliances, or an entire smart building? Within a few short decades
it’s possible that you could interact with nearly every object around you from your smartphone. In
fact, your devices will be able to talk to other devices, anticipate your actions, make changes, and
configure themselves.
This shift away from “dumb” devices to interconnected smart devices is not lost on businesses.
Consumers like smart devices and are willing to pay more for them. Businesses want to improve
the existing devices they manufacture into a smart devices and then sell them for twice as much.
If they don’t, someone else will.
The iPhone, for example, was introduced by Apple Inc., a computing hardware and software
company. The mobile phone market was already mature. Industry leaders could have created a
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FIGURE 3-5
Smartphone Development
Source: Grgroup/Fotolia
smartphone, but they didn’t. Apple’s success with portable audio players (iPod) and mobile phones
(iPhone) was a shot across the bow of other hardware manufacturers. A wave of smart devices is
coming.
Impact of the Internet of Things
The impact of IoT will be felt by many different high-tech industries. Smart devices need microprocessors, memory, wireless network connections, a power source, and new software. These devices
will also need new protocols, more bandwidth, and tighter security, and they will consume more
energy.
A good example of this push toward smart devices is General Electric’s (GE) Industrial Internet.6 GE’s Industrial Internet is a broad program focused on creating smart devices, analyzing the
data from these devices, and then making changes that increase efficiencies, reduce waste, and
improve decision making. GE sees the greatest potential for smart devices in hospitals, power grids,
railroads, and manufacturing plants.
GE estimates that an average airline using smart devices in its jet aircraft could save an average of 2 percent in fuel consumption. The resulting fuel and carbon dioxide savings would be the
equivalent of removing 10,000 cars from the road.7
Microsoft has also made tremendous gains using smart devices. Microsoft has created a network of 125 smart buildings spread over 500 acres in Redmond, Washington (Figure 3-6).8 Its
operations center processes 500 million data transactions every day from 30,000 devices, including
heaters, air conditioners, lights, fans, and doors.
Microsoft engineers were able to reduce energy costs by 6 percent to 10 percent a year by identifying problems like wasteful lighting, competing heating and cooling systems, and rogue fans. For
Microsoft, that’s millions of dollars. What if every corporate building were a smart building? When
you consider that 40 percent of the world’s energy is consumed in corporate buildings, you can
start to get an idea of the immense financial cost savings. Indirectly, this would also have a huge
environmental and economic impact worldwide.
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FIGURE 3-6
Microsoft’s Redmond, WA,
Campus
Source: Ian Dagnall/Alamy Stock Photo
Digital Reality Devices
The second disruptive force that has the power to change business is digital reality devices. Digital
reality devices are an emerging technology with tremendous potential to revolutionize our daily
lives. Much like the emergence of the Internet in the mid-1990s, these devices will create entirely
new types of companies and change the way people live, work, shop, and entertain themselves. It’s
estimated that the digital reality market will be $160 billion by 2021.9
There are different levels of digital reality on a continuum from completely real environments
to completely virtual environments, or simulated nonphysical environments. Before you start to
think about how digital reality devices will affect business, you need to understand how the levels
of digital reality differ. First, reality is the state of things as they actually exist. If you’re reading
the paper version of this textbook with your eyes, contact lenses, or glasses, you’re seeing the real
world without any digital alteration. You are (hopefully) experiencing reality.
Next comes augmented reality. Augmented reality (AR) is the altering of reality by overlaying
digital information on real-world objects. Examples of AR devices include Google Glass ($1,250),
Epson’s Moverio Smart Glasses ($700), and Daqri Smart Helmet (est. $5,000 to $15,000). Essentially, these devices work like heads-up displays, giving users information about the real world
they’re experiencing. For example, an AR device could provide users directions in the form of virtual
arrows being displayed on the roadway. Users could also read virtual emails displayed in the air or
see virtual health data projected in front of them as they exercise.
The next step on the digital reality continuum, as shown in Figure 3-7, is mixed reality. Mixed
reality (MR) is the combination of the real physical world with interactive virtual images or objects.
Reality
Augmented
Reality
Mixed Reality
Virtual Reality
Glasses
Google Glass
Microsoft
HoloLens
Facebook’s
Oculus Rift
Virtual Information
No
Yes
Yes
Yes
Virtual Objects
No
No
Yes
Yes
Virtual World
No
No
No
Yes
Example
FIGURE 3-7
Levels of Digital Reality
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Microsoft (HoloLens, $3,000) and Meta (Meta 2, $1,495) released their MR devices in early 2016.
Both companies are marketing these devices to developers interested in creating digital reality applications. MR devices are generally perceived as having greater potential than AR devices due to their
ability to interact with virtual objects in real time.
For example, using AR you could view a 2D virtual weather forecast projected on your wall.
But with MR you would see a real-time 3D virtual model of your city created on your coffee table
(Figure 3-8). It would show a virtual tornado moving toward the city, and you could interact with
the 3D weather application to see its projected path. And this is just one example. Imagine watching
sporting events live in high-definition 3D in the middle of your room.
There’s one problem when discussing AR and MR devices. Currently, the term augmented reality
isn’t applied consistently. It’s common to hear AR used to describe both AR and MR devices.10 But
this is normal for emerging technologies. Terms are created, refined, and stored in common speech as
the technology develops. So don’t be surprised to hear AR used to describe both types of digital reality.
The last step on the digital reality continuum is virtual reality (VR), or a completely computer-generated virtual world with interactive digital objects. Here you’ll find devices like Facebook’s
Oculus Rift ($465), Sony’s PlayStation VR ($349), and Samsung Gear VR ($129). These are completely immersive experiences that try to create a strong sense of presence, or the illusion that a
virtual experience is real. In other words, if a device were able to create a strong sense of presence,
you’d lean back and hold on tight if you were on a virtual roller coaster about to go off the track.
Impact of Digital Reality Devices
Digital reality devices are developing in much the same way cellular phones developed over the past
20 years. In fact, it’s entirely possible that the AR market could disrupt the smartphone market.
Imagine taking calls, browsing the Web, messaging friends, and watching a movie without ever
taking your smartphone out of your pocket.
The application of digital reality devices extends beyond personal use as well. Organizations are
currently building digital reality applications for education, training, collaboration, new product
design, “holoportation,” gaming, sports, advertising, tourism, and shopping. For example, Lowe’s
new Holoroom allows customers to design and visualize their ideal room before they commit to
major changes. Case Western Reserve University has partnered with Microsoft to develop 3D mixedreality applications to teach anatomy in an interactive environment.11
The full impact of digital reality devices won’t be understood for years—we just don’t know
how they’ll be used. Even experts in the field are just starting to understand the implications of how
digital reality devices will change organizations. The shift from 2D flat screens to a 3D virtual world
FIGURE 3-8
Digital Reality Applications
Source: Peshkov/Fotolia
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is like changing vocations from being a painter to being a sculptor. It requires new skills, processes,
tools, and ways of thinking. Digital reality devices are truly one of the most transformative innovations in hardware to come along in the past 20 years.
Self-Driving Cars
The third disruptive force that could change the way businesses operate is self-driving cars. A selfdriving car (also known as a driverless car) uses a variety of sensors to navigate like a traditional
car but without human intervention. It will be full of advanced hardware and integrated software
and is the epitome of a mobile system. In fact, it will be so mobile that it will be able to move without
anyone being in the car (Figure 3-9). Yes, self-driving cars are in your very near future.
A recent report by KPMG indicates that self-driving cars could reach nearly full adoption by
2050.12 Most auto manufacturers (GM, Toyota, BMW, Ford, etc.) say they will have self-driving
cars by 2021.13 Uber, Waymo (Google), and Tesla have been testing self-driving cars for a few years
now with more than 1 billion miles driven. Toyota announced its ePalette self-driving mobile store
at the 2018 CES show. And Apple announced it is partnering with Volkswagen to make its first
self-driving shuttles for its employees.14 It looks like the race to develop self-driving cars is heating
up. The competition will be fierce.
Self-driving cars will make things easier, cheaper, and safer. They’ll also disrupt well-established
industries.
Self-Driving Cars Make Things Easier
Imagine how a self-driving car will change the lives of a typical family. A self-driving car could
allow Dad to review sales reports while “driving” to work. He’s much less stressed out—and more
FIGURE 3-9
Future Cars Will Drive
Themselves
Source: Dan Race/Fotolia
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productive—during his commute than he was with his old car. The self-driving car could then drop
off the kids at school—without Dad in the car—and return home to take Mom to work.
After work the family goes shopping and is dropped off curbside at the store. No need to park
anymore. It’s safer, too. While shopping, Dad gets a message from his college-aged daughter that
she needs the car sent to pick her up from the airport. Dad’s glad he won’t have to drive all the way
out there. Self-driving cars can also plan routes, fill themselves up with gas, take themselves to get
repaired, and reroute themselves if there’s an accident or traffic. There’s no more stress or aggressive driving either.
Self-Driving Cars Make Things Cheaper
You’ve seen how a self-driving car can make your life easier. But what about cost? Will it be more
expensive or less expensive than the car you have now? Self-driving cars will probably be much less
expensive over time than your current car. Early adopters will pay a premium when self-driving
cars first hit the market, but that’s true of most new products. Cost savings will show up in several
ways. In the preceding scenario, you may have noticed that the family had only one car. Self-driving
cars will be used more effectively than cars are used now. Most cars sit dormant for 22 hours a day.
Sharing a self-driving car could eliminate the need to have multiple cars. That’s a big cost savings.
You’ll see more cost savings because a self-driving car will drive more efficiently (less braking,
revving the engine, and street racing!). You will avoid costly traffic tickets, parking tickets, accidents,
and DUI citations. Your car insurance will drop dramatically. It may be so low that you won’t even
need it anymore. In a report about the effect of self-driving cars on the insurance industry, KPMG
estimated that accident frequency will drop by 90 percent by the year 2050. Subsequently, the
personal automobile industry will shrink to 22 percent of its current size.15 The analysis is probably right. Self-driving cars will probably take a big chunk out of the $150B paid each year in car
insurance premiums.
Self-Driving Cars Will Make Things Safer
Yes, you read that right—safer. Currently, 90 percent of motor vehicle crashes are caused by human
error.16 Motor vehicle crashes are the leading cause of death for people ages 3 to 33. Spending
time driving may be the most dangerous thing you do all day. Your self-driving car will be able to
see better than you, react more quickly than you, and have better information about your driving
environment. It will be able to communicate with other cars around it, dynamically analyze traffic
patterns, avoid construction sites, and contact emergency services if needed.
Self-driving cars will mean safer driving, fewer accidents, fewer drunk drivers, fewer road-rage
incidents, and fewer auto–pedestrian accidents. Cars will be able to go faster with fewer accidents.
In the future, manual driving may be a risky and expensive hobby.
Self-Driving Cars Will Disrupt Businesses
Self-driving cars have the potential to disrupt well-established industries. Self-driving cars may
mean fewer cars on the road. Fewer cars on the road may mean fewer cars sold (transportation),
fewer auto loans written (finance), fewer automobile insurance policies underwritten (insurance), fewer auto parts sold due to fewer accidents (manufacturing), and fewer parking lots (real
estate). If they didn’t have to drive, consumers might take more trips by car than by plane or train
(transportation).
The production of self-driving cars will mean more jobs for engineers, programmers, and systems designers. There will be more computer hardware, sensors, and cameras in the vehicle. Corporations may not completely see the far-reaching effects of self-driving cars on existing industries.
They may even fundamentally change our society. What if driving a “manual” car becomes too
costly? Teenagers in the future may never learn how to drive a car. Ask yourself: Do you know how
to ride a horse? Your ancestors did.
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3D Printing
The fourth disruptive force that has the power to change businesses is 3D printing. 3D printing will
not only change the competitive landscape, but it may change the nature of businesses themselves.
Consider how Nike has used 3D printing to improve the way it designs and creates shoes. It
recently used a 3D printer to create the world’s first 3D-printed cleat plate for a shoe called the Nike
Vapor Laser Talon.17 Nike chose to use a 3D printer to produce the cleat because it could create
the optimal geometric shapes for optimal traction. Using a 3D printer, it could design and produce
a lighter and stronger cleat much more quickly than before. In fact, Nike did just that when it produced a pair of custom-designed sprinting shoes (the Nike Zoom Superfly Flyknit) for gold-medal
Olympian Allyson Felix to be worn at the 2016 Olympic games in Rio.18
3D printers have the potential to affect a broad array of industries beyond sporting equipment.
You can get an idea of the scope of change when you realize that 3D printers can print in more
than just plastics (Figure 3-10). They can print in metal, wood, ceramics, foods, and biological
material too.
Take the ability to 3D-print in a variety of materials and look for opportunities across the
aerospace, defense, automotive, entertainment, and healthcare industries. What happens when
it becomes feasible to 3D-print extra-large objects like cars,19 planes, boats, houses, and drones?
Cryptocurrencies
The fifth disruptive force that has the power to change businesses is cryptocurrencies. Cryptocurrencies are digital-only currencies that use cryptographic protections to manage and record
secure transactions. Bitcoin, introduced in 2009, is currently the most well-known cryptocurrency among the thousands available today. Cryptocurrencies are an important disruptive force
because of their potential to transform world economies.
Benefits of Cryptocurrencies
There are lots of reasons to love cryptocurrencies. Compared to traditional payment methods, cryptocurrency transactions are faster and easier and have few to no fees. Governments can’t easily monitor,
tax, or seize cryptocurrencies. Consumers holding cryptocurrencies are protected from inflation, too.
FIGURE 3-10
3D Printer
Source: Seraficus/iStock/Getty Images
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For example, there are only 21 million possible bitcoins. Each bitcoin can be broken down
into smaller fractions of a bitcoin, with the smallest unit, a satoshi, being 1/100,000,000 of one
bitcoin. But there won’t be any more bitcoins created beyond the original 21 million. The same is
not true of traditional fiat currencies, or government-approved legal tender. Historically, when
governments run up huge debts, they just print more money to pay for those debts. This causes
inflation, which increases prices and decreases the purchasing power of your money. Consumers
around the world like cryptocurrencies because they protect their users from inflation.
Risks of Cryptocurrencies
There are risks to cryptocurrencies, too. The value of a cryptocurrency can drop to zero if enough
big holders of the currency sell their coins. Bitcoin, for example, derives its value because enough
people perceive it as valuable. There is nothing like gold backing its value, and it is not governmentapproved legal tender. It’s all perception. That can lead to extreme price volatility. Bitcoin also suffers
from the fact that relatively few businesses accept it as payment, and it initially got a bad reputation
for being used by organized crime.
The Future of Cryptocurrencies
Cryptocurrencies are slowly gaining acceptance. Banks and even some governments are launching
their own cryptocurrencies. Business are using blockchain, or the decentralized public ledgering
system used to record cryptocurrency transactions, to manage transactions in traditional sectors
like shipping, real estate, voting, and stock trading. Even if they don’t replace traditional fiat currencies, the underlying technology behind cryptocurrencies is making all types of transactions
more secure and easier to manage.
Q3-3
Innocuous-looking applications can
be custom-made for malicious purposes. Read the Security Guide on
pages 150–151 to learn more.
What Do Business Professionals Need to Know
About Software?
As a future manager or business professional, you need to know the essential terminology and
software concepts that will enable you to be an intelligent software consumer. To begin, consider
the basic categories of software shown in Figure 3-11.
Every computer has an operating system (OS), which is a program that controls that computer’s resources. Some of the functions of an operating system are to read and write data, allocate
main memory, perform memory swapping, start and stop programs, respond to error conditions,
and facilitate backup and recovery. In addition, the operating system creates and manages the user
interface, including the display, keyboard, mouse, and other devices.
Although the operating system makes the computer usable, it does little application-specific
work. If you want to check the weather or access a database, you need application programs such
as an iPad weather application or Oracle’s customer relationship management (CRM) software.
Both client and server computers need an operating system, though they need not be the same.
Further, both clients and servers can process application programs. The application’s design determines whether the client, the server, or both process it.
Operating System
FIGURE 3-11
Categories of Computer
Software
Application Programs
Client
Programs that control the
client computer’s resources
Applications that are processed
on client computers
Server
Programs that control the
server computer’s resources
Applications that are processed
on server computers
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You need to understand two important software constraints. First, a particular version of an
operating system is written for a particular type of hardware. For example, Microsoft Windows
works only on processors from Intel and companies that make processors that conform to the Intel
instruction set (the commands that a CPU can process). With other operating systems, such as
Linux, many versions exist for many different instruction sets.
Second, two types of application programs exist. Native applications are programs that
are written to use a particular operating system. Microsoft Access, for example, will run only on
the Windows operating system. Some applications come in multiple versions. For example, there
are Windows and Macintosh versions of Microsoft Word. But unless you are informed otherwise,
assume that a native application runs on just one operating system. Native applications are sometimes called thick-client applications.
A Web application (also known as a thin-client application) is designed to run within a
computer browser such as Firefox, Chrome, Opera, or Edge (formerly Internet Explorer). Web applications run within the browser and can run on any type of computer. Ideally, a Web application can
also run within any browser, though this is not always true as you will learn.
Consider next the operating system and application program categories of software.
What Are the Major Operating Systems?
The major operating systems are listed in Figure 3-12. Consider each.
FIGURE 3-12
Major Operating Systems
Category
Nonmobile
Clients
Mobile Clients
Servers
Operating System
Used for
Remarks
Windows
Personal computer
clients
Most widely used operating system in business. Current
version is Windows 10. Includes a touch interface.
macOS
Macintosh clients
First used by graphic artists and others in arts
community; now used more widely. First desktop OS
to provide a touch interface. Current version is the
macOS High Sierra.
Unix
Workstation clients
Popular on powerful client computers used in
engineering, computer-assisted design, architecture.
&KHƂEWNVHQTVJGPQPVGEJPKECNWUGT#NOQUVPGXGTWUGF
by business clients.
Linux
Just about anything
Open source variant of Unix. Adapted to almost every
type of computing device. On a PC, used with Libre
1HƂEGCRRNKECVKQPUQHVYCTG4CTGN[WUGFD[DWUKPGUU
clients.
Symbian
Nokia, Samsung, and other
phones
Popular worldwide, but less so in North America.
BlackBerry OS
Research in Motion
BlackBerries
iOS
iPhone, iPod Touch, iPad
Device and OS developed for use by business. Very
popular in beginning, but losing market share to
iOS and Android.
Rapidly increasing installed base with success of the
iPhone and iPad. Based on macOS.
Android
Samsung, Google,
HTC, and Sony
smartphones; tablets
Linux-based phone/tablet operating system from
Google. Rapidly increasing market share.
Windows 10 (mobile)
Nokia and Microsoft Surface
9KPFQYUVCKNQTGFURGEKƂECNN[HQTOQDKNGFGXKEGU
Full Windows 10 on Surface Pro.
Windows Server
Servers
Businesses with a strong commitment to Microsoft.
Unix
Servers
Fading from use. Replaced by Linux.
Linux
Servers
Very popular. Aggressively pushed by IBM.
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Nonmobile Client Operating Systems
Nonmobile client operating systems are used on personal computers. The most popular is Microsoft Windows. Some version of Windows resides on more than 88 percent of the world’s desktops,
and, if we consider just business users, the figure is more than 95 percent. The most recent version
of Windows is Windows 10. Net Applications estimates that overall market share of Windows as of
2018 is Windows 7 at 44 percent, Windows 10 at 31 percent, Windows XP at 6 percent, Windows
8.1 at 6 percent, and Windows 8 at 1 percent.20 It’s interesting to note that Windows 7 remains
the most popular version of Windows despite the fact that Microsoft ended mainstream support
for it in January 2015.
Windows 8 was a major rewrite of prior versions. Windows 8 was distinguished by what Microsoft calls modern-style applications.21 These applications, now carried over into Windows 10,
are touch-screen oriented and provide context-sensitive, pop-up menus. They can also be used with
a mouse and keyboard. Microsoft claims that modern-style applications work just as well on portable, mobile devices, such as tablet computers, as they do on desktop computers. One key feature
of modern-style applications is the minimization of menu bars, status lines, and other visual overhead. Figure 3-13 shows an example of a modern-style version of searching for images in Windows
Explorer.
Apple Computer, Inc., developed its own operating system for the Macintosh, macOS. The current version is macOS High Sierra. Apple touts it as the world’s most advanced desktop operating
system. Windows 10 now gives it a run for the money in terms of that title.
Until recently, macOS was used primarily by graphic artists and workers in the arts community.
But for many reasons, macOS has made headway into the traditional Windows market. According to Net Applications, as of 2018, desktop operating system market share was divided between
versions of Windows (88.8 percent), macOS (Mac OS X) (8.6 percent), and Linux (2.3 percent).22
macOS was designed originally to run the line of CPU processors from Motorola, but today a
Macintosh with an Intel processor is able to run both Windows and the macOS.
Unix is an operating system that was developed at Bell Labs in the 1970s. It has been the workhorse of the scientific and engineering communities since then. Unix is seldom used in business.
Linux is a version of Unix that was developed by the open source community. This community
is a loosely coupled group of programmers who mostly volunteer their time to contribute code to
FIGURE 3-13
Example of the Modern-Style
Interface
Source: Microsoft Edge, Windows 10,
Microsoft Corporation.
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develop and maintain Linux. The open source community owns Linux, and there is no fee to use
it. Linux can run on client computers, but usually only when budget is of paramount concern. By
far, Linux is most popular as a server OS. According to DistroWatch.com, the top five most popular
versions of Linux as of 2018 were Linux Mint, Manjaro, Debian GNU/Linux, Ubuntu, and Solus.23
Mobile Client Operating Systems
Figure 3-12 also lists the five principal mobile operating systems. Symbian is popular on phones
in Europe and the Far East, but less so in North America. BlackBerry OS was one of the most
successful early mobile operating systems and was used primarily by business users on BlackBerry
devices. It has lost market share to iOS, Android, and Windows 10.
iOS is the operating system used on the iPhone, iPod Touch, and iPad. When first released, it
broke new ground with its ease of use and compelling display, features that are now being copied
by the BlackBerry OS and Android. With the popularity of the iPhone and iPad, Apple has been
increasing its market share of iOS, and, according to Net Applications, it is used on 28 percent of
mobile devices.24 The current version of iOS is iOS 11.
Android is a mobile operating system licensed by Google. Android devices have a very loyal
following, especially among technical users. Net Applications estimates Android’s market share to
be nearly 69 percent.
Most industry observers would agree that Apple has led the way, both with the macOS and
the iOS, in creating easy-to-use interfaces. Certainly, many innovative ideas have first appeared
in a Macintosh or iSomething and then later were added, in one form or another, to Android and
Windows.
Users who want Windows 10 on mobile devices will get either Windows 10 (mobile) on
smartphones or a full version of Windows 10 on Surface Pro devices. Windows garners less than
1 percent of the mobile OS market share.
The smartphone market has always been huge, but recently, e-book readers and tablets
have substantially increased the market for mobile client operating systems. As of 2018, 77
percent of Americans owned a smartphone, and 53 percent owned a tablet in addition to their
smartphone.25
Server Operating Systems
The last three rows of Figure 3-12 show the three most popular server operating systems. Windows
Server is a version of Windows that has been specially designed and configured for server use. It
has much more stringent and restrictive security features than other versions of Windows and is
popular on servers in organizations that have made a strong commitment to Microsoft.
Unix can also be used on servers, but it is gradually being replaced by Linux.
Linux is frequently used on servers by organizations that want, for whatever reason, to avoid
a server commitment to Microsoft. IBM is the primary proponent of Linux and in the past has used
it as a means to better compete against Microsoft. Although IBM does not own Linux, IBM has
developed many business systems solutions that use Linux. By using Linux, neither IBM nor its
customers have to pay a license fee to Microsoft.
Virtualization
Virtualization is the process by which one physical computer hosts many different virtual (not
literal) computers within it. One operating system, called the host operating system, runs one
or more operating systems as applications. Those hosted operating systems are called virtual
machines (vm). Each virtual machine has disk space and other resources allocated to it. The host
operating system controls the activities of the virtual machines it hosts to prevent them from interfering with one another. With virtualization, each vm is able to operate exactly the same as it would
if it were operating in a stand-alone, nonvirtual environment.
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FIGURE 3-14
Linux Mint Virtual Machine
Running in Microsoft
Windows
Source: Windows 10, Microsoft
Corporation.
Three types of virtualization exist:
• PC virtualization
• Server virtualization
• Desktop virtualization
With PC virtualization, a personal computer, such as a desktop or laptop, hosts several different operating systems. Say a user needs to have both Linux and Windows running on a computer for
a training or development project. In that circumstance, the user can load software like Oracle VirtualBox or VMWare Workstation on the host operating system in order to create Linux and Windows
virtual machines. The user can run both systems on the same hardware at the same time if the host
operating system has sufficient resources (i.e., memory and CPU power) as shown in Figure 3-14.
With server virtualization, a server computer hosts one or more other server computers. In
Figure 3-15, a Windows Server computer is hosting multiple virtual machines. Users can log on
to any of those virtual machines, and they will appear as normal desktop computers. Figure 3-16
shows how one of those virtual machines would appear to a user of that virtual desktop. Notice
FIGURE 3-15
Windows Server Computer
Hosting Virtual Machines
Source: Windows 10, Microsoft
Corporation.
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The virtual
machine
Browser on
the virtual
machine
running
Google
Taskbar for
the virtual
machine
FIGURE 3-16
Virtual Machine Example
Source: Windows 10, Microsoft
Corporation.
Taskbar for
the host
that the user of that virtual machine is running a Web browser as if it is a local desktop. Server
virtualization plays a key role for cloud vendors, as you’ll learn in Chapter 4.
PC virtualization is interesting as well as quite useful, as you will learn in Chapter 4. Desktop virtualization, on the other hand, has the potential to be revolutionary. With desktop virtualization,
a server hosts many versions of desktop operating systems. Each of those desktops has a complete
user environment and appears to the user to be just another PC. However, the desktop can be accessed
from any computer to which the user has access. Thus, you could be at an airport and go to a terminal
computer and access your virtualized desktop. To you, it appears as if that airport computer is your
own personal computer. Using a virtual desktop also means that you wouldn’t have to worry about
losing a corporate laptop or confidential internal data. Meanwhile, many other users could have
accessed the computer in the airport, and each thought he or she had his or her personal computer.
Desktop virtualization is in its infancy, but it might have major impact during the early years
of your career.
Own Versus License
When you buy a computer program, you are not actually buying that program. Instead, you are
buying a license to use that program. For example, when you buy a macOS license, Apple is selling
you the right to use macOS. Apple continues to own the macOS program. Large organizations do
not buy a license for each computer user. Instead, they negotiate a site license, which is a flat fee
that authorizes the company to install the product (operating system or application) on all of that
company’s computers or on all of the computers at a specific site.
In the case of Linux, no company can sell you a license to use it. It is owned by the open source
community, which states that Linux has no license fee (with certain reasonable restrictions). Large
companies such as IBM and smaller companies such as RedHat can make money by supporting
Linux, but no company makes money selling Linux licenses.
What Types of Applications Exist, and How Do Organizations
Obtain Them?
Some applications are designed to
be free but gather data about the
people who use them. Read the Ethics Guide on pages 143–145 about
how this is done.
Application software performs a service or function. Some application programs are general purpose,
such as Microsoft Excel or Word. Other application programs provide specific functions. QuickBooks,
for example, is an application program that provides general ledger and other accounting functions.
We begin by describing categories of application programs and then describe sources for them.
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Read more about how software
is developed and managed in the
Career Guide on page 152.
Horizontal-market application software provides capabilities common across all organizations and industries. Word processors, graphics programs, spreadsheets, and presentation programs
are all horizontal-market application software.
Examples of such software are Microsoft Word, Excel, and PowerPoint. Examples from other
vendors are Adobe’s Acrobat, Photoshop, and PageMaker and Jasc Corporation’s Paint Shop Pro.
These applications are used in a wide variety of businesses across all industries. They are purchased
off the shelf, and little customization of features is necessary (or possible). They are the automobile
equivalent of a sedan. Everybody buys them and then uses them for different purposes.
Vertical-market application software serves the needs of a specific industry. Examples of
such programs are those used by dental offices to schedule appointments and bill patients, those
used by auto mechanics to keep track of customer data and customers’ automobile repairs, and
those used by parts warehouses to track inventory, purchases, and sales. If horizontal-market applications are sedans, then vertical-market applications would be construction vehicles, like an excavator. They meet the needs of a specific industry.
Vertical applications usually can be altered or customized. Typically, the company that sold
the application software will provide such services or offer referrals to qualified consultants who
can provide this service.
One-of-a-kind application software is developed for a specific, unique need. The U.S. Department of Defense develops such software, for example, because it has needs that no other organization has.
You can think of one-of-a-kind application software as the automotive equivalent of a military
tank. Tanks are developed for a very specific and unique need. Tanks cost more to manufacture than
sedans, and cost overruns are common. They take longer to make and require unique hardware
components. However, tanks are highly customizable and fit the requirements of a heavy-duty
battle vehicle very well.
If you’re headed into battle, you wouldn’t want to be driving a four-door sedan. Sometimes
paying for a custom vehicle, while expensive, is warranted. It all depends on what you’re doing.
Militaries, for example, purchase sedans, construction vehicles, and tanks. Each vehicle fills its own
need. You can buy computer software in exactly the same ways: off-the-shelf software, off-theshelf with alterations software, or custom-developed software.
Organizations develop custom application software themselves or hire a development vendor.
Like buying a tank, such development is done in situations where the needs of the organization are
so unique that no horizontal or vertical applications are available. By developing custom software,
the organization can tailor its application to fit its requirements.
Custom development is difficult and risky. Staffing and managing teams of software developers
is challenging. Managing software projects can be daunting. Many organizations have embarked
on application development projects only to find that the projects take twice as long—or longer—to
finish than planned. Cost overruns of 200 percent and 300 percent are not uncommon.
In addition, every application program needs to be adapted to changing needs and changing
technologies. The adaptation costs of horizontal and vertical software are amortized over all the
users of that software, perhaps thousands or millions of customers. For custom-developed software,
however, the using organization must pay all of the adaptation costs itself. Over time, this cost
burden is heavy.
Because of the risk and expense, custom development is the last-choice alternative, used only
when there is no other option. Figure 3-17 summarizes software sources and types.
What Is Firmware?
Firmware is computer software that is installed into devices such as printers, print servers, and
various types of communication devices. The software is coded just like other software, but it is
installed into special, read-only memory of the printer or other device. In this way, the program
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Software Source
Off-the-shelf
Software
Type
Off-the-shelf
and then
customized
Custom-developed
Horizontal
applications
Vertical
applications
One-of-a-kind
applications
FIGURE 3-17
Software Sources and Types
becomes part of the device’s memory; it is as if the program’s logic is designed into the device’s
circuitry. Therefore, users do not need to load firmware into the device’s memory. Firmware can be
changed or upgraded, but this is normally a task for IS professionals.
Q3-4
Is Open Source Software a Viable Alternative?
To answer this question, you first need to know something about the open source movement and
process. Most computer historians would agree that Richard Matthew Stallman is the father of the
movement. In 1983, he developed a set of tools called GNU (a self-referential acronym meaning
GNU Not Unix) for creating a free Unix-like operating system. Stallman made many other contributions to open source, including the GNU general public license (GPL) agreement, one of
the standard license agreements for open source software. Stallman was unable to attract enough
developers to finish the free Unix system but continued making other contributions to the open
source movement.
In 1991 Linus Torvalds, working in Helsinki, began work on another version of Unix, using
some of Stallman’s tools. That version eventually became Linux, the high-quality and very popular
operating system discussed previously.
The Internet proved to be a great asset for open source, and many open source projects became
successful, including:
•
•
•
•
•
•
•
•
LibreOffice (default office suite in Linux distributions)
Firefox (a browser)
MySQL (a DBMS, see Chapter 5)
Apache (a Web server, see Chapter 4)
Ubuntu (a Windows-like desktop operating system)
Android (a mobile device operating system)
Cassandra (a NoSQL DBMS, see Chapter 5)
Hadoop (a Big Data processing system)
Why Do Programmers Volunteer Their Services?
To a person who has never enjoyed writing computer programs, it is difficult to understand why
anyone would donate his or her time and skills to contribute to open source projects. Programming
is, however, an intense combination of art and logic, and designing and writing a complicated computer program can be exceedingly pleasurable (and addictive). Many programmers joyfully write
computer programs—day after day. If you have an artistic and logical mind, you ought to try it.
The first reason that people contribute to open source is that it is great fun! Additionally, some
people contribute to open source because it gives them the freedom to choose the projects they work
on. They may have a programming day job that is not terribly interesting—say, writing a program
to manage a computer printer. Their job pays the bills, but it’s not fulfilling.
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SO WHAT?
NEW FROM CES 2018
What’s new in hardware? It’s the Consumer Electronics Show
(CES) held in Las Vegas every January: 4,000 exhibitors and
180,000 hardware-gawking attendees whipped to a frenzy by
loud music, screaming video, and hyperventilating media. It’s a
show that only Las Vegas can do!
What’s hot this year? How about:
• Toyota e-Palette: At CES 2018, Toyota announced an
autonomous concept vehicle named the e-Palette that the
company believes will fill a role in an emerging mobility as a
service (MaaS) market. The vehicle’s bizarre design looks like
a rectangular cube on wheels with transparent panels that
can be customized to display digital signage based on whatever the vehicle is tasked with doing at the time. The e-Palette
vehicle can be configured for a variety of uses, including ridesharing, package delivery, mobile stores, temporary lodging,
food trucks, or temporary entertainment at large events.
The implications of Toyota’s e-Palette are even more
profound if you consider that the vehicle is completely
autonomous. Mobile clothing stores can bring products
right to your front door to try on. You can order dinner
from hundreds of different food trucks that will bring it
wherever you are. Traditional and highly inefficient city
buses will be replaced with smaller transport modules that
can pick you up anywhere at any time for a fraction of the
cost. Because drivers aren’t needed, the entire shipping sector will be revolutionized by dramatically lower costs.
Toyota’s e-Palette may cause a fundamental transformation in commerce similar to the change that occurred
with the emergence of the Internet. The Internet allowed
certain companies to transform from traditional brick-andmortar businesses to online businesses. Similarly, e-Palette
may cause a transformation from brick-and-mortar and
online businesses to mobile businesses.
• Peloton Tread: The Peloton Tread is a treadmill with a
32-inch HD touchscreen that allows users to participate in
at least 10 live exercise classes per day. Users get live instruction by expert trainers streamed right to their homes. Users
can see their real-time ranking on a live leaderboard as
they’re running and get detailed workout metrics.
Users don’t have to go to the gym anymore. They can
get guided workouts that fit their schedule and have access
to more than 1,000 prerecorded workouts. Users don’t
have to worry about the weather, uneven terrain, or dodging cars. It’s a safe, convenient workout. The Peloton Tread
will retail for about $4,000. These same features also come
on Peloton’s stationary bike ($2,000).
Source: Haiyin Wang/Alamy Stock Photo
• Sony Aibo: One of the most talked about innovations at
CES 2018 was Sony’s robotic dog named Aibo. The newest
version of Aibo is Wi-Fi enabled and integrated with an AI.
It has sensors all over its plastic body that recognize when
people pet it. It has a camera built into its nose that can
be used to recognize individual family members. Another
camera on its back is pointed upward and used for navigation. In fact, Aibo learns the layout of the rooms and can
even walk back to its charging station when it’s low on
power. Aibo will retail for about $1,800 and will require a
$27-per-month subscription. Unfortunately, it’s currently
only for sale in Japan.
Questions
1. What impact do you think Toyota’s e-Palette will have on
traditional brick-and-mortar businesses?
2. How could Toyota’s e-Palette affect e-commerce?
3. Why would consumers prefer Peloton Tread over a traditional treadmill or running outside?
4. Peloton has transformed traditional treadmills and stationary bikes into IoT devices. Which other workout devices
would benefit from being smart IoT devices?
5. What are the benefits of a robot dog over a biological dog?
What might be some of the drawbacks of a robot dog?
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In the 1950s, Hollywood studio musicians suffered as they recorded the same style of music
over and over for a long string of uninteresting movies. To keep their sanity, those musicians would
gather on Sundays to play jazz, and a number of high-quality jazz clubs resulted. That’s what open
source is to programmers: a place where they can exercise their creativity while working on projects
they find interesting and fulfilling.
Another reason for contributing to open source is to exhibit one’s skill, both for pride and to
find a job or consulting employment. A final reason is to start a business selling services to support
an open source product.
How Does Open Source Work?
The term open source means that the source code of the program is available to the public. Source
code is computer code as written by humans and understandable by humans. Figure 3-18 shows
a portion of the computer code written for the ARES project.
Source code is compiled into machine code that is processed by a computer. Machine code
is, in general, not understandable by humans and cannot be modified. When a user accesses a
Web site, the machine code version of the program runs on the user’s computer. We do not show
machine code in a figure because it would look like this:
1101001010010111111001110111100100011100000111111011101111100111. . .
FIGURE 3-18
Source Code Sample
In a closed source project, say, Microsoft Office, the source code is highly protected and only
available to trusted employees and carefully vetted contractors. The source code is protected like gold
in a vault. Only those trusted programmers can make changes to a closed source project.
With open source, anyone can obtain the source code from the open source project’s Web
site. Programmers alter or add to this code depending on their interests and goals. In most cases,
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programmers can incorporate code they find into their own projects. They may be able to resell
those projects depending on the type of license agreement the project uses.
Open source succeeds because of collaboration. A programmer examines the source code and
identifies a need or project that seems interesting. He or she then creates a new feature, redesigns
or reprograms an existing feature, or fixes a known problem. That code is then sent to others in the
open source project who evaluate the quality and merits of the work and add it to the product, if
appropriate.
Typically, there are many cycles of iteration and feedback. Because of this iteration, a wellmanaged project with strong peer reviews can result in very high quality code, like that in Linux.
So, Is Open Source Viable?
The answer depends on to whom and for what. Open source has certainly become legitimate.
According to The Economist, “It is now generally accepted that the future will involve a blend of
both proprietary and open-source software.”26 During your career, open source will likely take a
greater and greater role in software. However, whether open source works for a particular situation
depends on the requirements and constraints of that situation. You will learn more about matching
requirements and programs in Chapter 8.
In some cases, companies choose open source software because it is “free.” It turns out that this
advantage may be less important than you’d think because in many cases support and operational
costs swamp the initial licensing fee.
Q3-5
What Are the Differences Between Native
and Web Applications?
Applications can be categorized as native applications that run on just one operating system or Web
applications that run in browsers. In the latter case, the browser provides a more or less consistent
environment for the application; the peculiarities of operating systems and hardware are handled
by the browser’s code and hidden from the Web application.
Figure 3-19 contrasts native and Web applications on their important characteristics. Consider
the Native Applications column first.
Developing Native Applications
Native applications are developed using serious, heavy-duty, professional programming languages.
macOS and iOS applications are constructed using Objective-C or the Swift programming language. Linux (Android) applications are constructed using Java, and Windows applications are constructed using C#, VB.NET, C++, and others. All of these languages are object-oriented, which
means they can be used to create difficult, complex applications and, if used properly, will result in
high-performance code that is easy to alter when requirements change. The particular characteristics of object-oriented languages are beyond the scope of this text.
Object-oriented languages can be used only by professional programmers who have devoted
years to learning object-oriented design and coding skills. Typically, such developers were computer
science majors in college.
The benefit of such languages is that they give programmers close control over the assets of
the computing device and enable the creation of sophisticated and complex user interfaces. If the
programs are well written, they perform fast and use memory efficiently. The limits on native applications are usually budgetary, not technological. As a businessperson, you can get just about any
application you can afford.
The downside of native applications is that they are, well, native. They only run on the operating system for which they are programmed. An iOS application must be completely recoded in order
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FIGURE 3-19
Characteristics of
Native and Web
Applications
Hardware, Software, and Mobile Systems
Native Applications
Web Applications
Development
Languages
Objective-C
Java
C#, C++, VB.NET, Swift
(object-oriented languages)
html5
css3
JavaScript
(scripting language)
Developed by
Professional programmers only
Professional programmers and technically
oriented Web developers and business
professionals
5MKNNNGXGNTGSWKTGF
High
Low to high
&KHƂEWNV[
High
Easy to hard, depending on application
requirements
Developer’s
Degree
Computer science
Computer science
Information systems
Graphics design
User Experience
Can be superb, depending
on programming quality
Simple to sophisticated, depending on
program quality
Possible applications
Whatever you can pay for…
Some limits prohibit very sophisticated
applications
Dependency
iOS, Android, Windows
Browser differences, only
Cost
*KIJ&KHƂEWNVYQTMD[JKIJN[
paid employees, multiple versions
required.
Low to high . .GCUKGTYQTMD[NGUUGTRCKF
GORNQ[GGUQPN[OWNVKRNGDTQYUGTƂNGU
necessary. Sophisticated applications
OC[TGSWKTGJKIJUMKNNCPFRC[
Application
distribution
Via application stores (e.g., Apple
Store)
Via Web sites
Example
Vanguard iPad application (free
in Apple's iTunes store)
Seafood Web site: www.wildrhodyseafood.com
Picozu editor: www.picozu.com/editor
139
to run on Android and recoded again to run on Windows.27 Thus, to reach all users, an organization will need to support and maintain three separate versions of the same application. It will also
have to staff and manage three different development teams, with three different skill sets.
As a general rule, the cost of native applications is high. Many organizations reduce that cost
by outsourcing development to India and other countries, but native applications are still expensive
relative to Web applications. The standard way to distribute native applications is via a company
store, such as iTunes, owned by Apple. An excellent example of a native application is Vanguard’s
iPad application. It is easy to use, has complex functionality, and is highly secure, as you would
expect. Companies such as Vanguard must and can afford to pay for exceedingly high-quality
applications.
Developing Web Applications
The third column in Figure 3-19 summarizes Web application characteristics. Such applications
run inside a browser such as Firefox, Chrome, Opera, or Edge. The browser handles the idiosyncrasies of the operating system and underlying hardware. In theory, an organization should be able to
develop a single application and have it run flawlessly on all browsers on all devices. Unfortunately,
there are some differences in the way that browsers implement the Web code. This means that some
applications won’t run correctly in some browsers.
As shown in the first row of Figure 3-19, Web development languages are html5, css3, and
Javascript. html5 is the latest version of html, which you will learn about in Chapter 4. The advantages of this version are support for graphics, animation, 2D animations, and other sophisticated
user experiences. css3 is used with html5 to specify the appearance of content coded in html.
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JavaScript is a scripting programming language that is much easier to learn than native-client
languages. It is used to provide the underlying logic of the application.
Web applications can be written by professional programmers, and, indeed, most are. However,
it is possible for technically oriented Web developers and business professionals to develop them
as well. The entry-level technical skill required is low, and simple applications are relatively easy
to develop. But sophisticated user experiences are difficult. Web application developers may have
degrees in computer science, information systems, or graphics design.
The user experience provided by a Web application varies considerably. Some are simply fancy
Web-based brochures (www.wildrhodyseafood.com); others are quite sophisticated, such as SpiroCanvas (www.gethugames.in/) or, even more impressive, www.biodigital.com.
Web applications are limited by the capabilities of the browser. While browsers are becoming
increasingly sophisticated, they cannot offer the full capabilities of the underlying operating system
and hardware. Thus, Web applications are unable to support very specialized and complex applications, though this becomes less true each year.
As stated, the major advantage of Web over native applications is that they will run on any
operating system and device. There are some browser differences, but these differences are very
minor when compared with the differences among iOS, Android, and Windows. In general, unlike
native applications, you can assume that a Web application has one code base and one development team.
Because Web applications can be developed by less skilled, lesser-paid employees and because
only one code base and one development team are necessary, they are considerably cheaper to
develop than native applications. However, this statement assumes applications of equivalent complexity. A simple native application can be cheaper to develop than a complex Web application.
Users obtain Web applications via the Internet. For example, when you go to www.picozu.com/
editor. the required html5, css3, and JavaScript files are downloaded automatically over the Web.
Updates to the application are automatic and seamless. You need not install (or reinstall) anything.
This difference is an advantage to the user; it makes it more difficult, however, to earn money from
your application. Amazon, for example, will sell your native application and pay you a royalty.
However, unless you require users to buy your Web application (which is possible but rare), you’ll
have to give it away.
Which Is Better?
You know the answer to that question. If it were clear-cut, we’d only be discussing one alternative. It’s not. The choice depends on your strategy, your particular goals, the requirements for your
application, your budget, your schedule, your tolerance for managing technical projects, your need
for application revenue, and other factors. In general, Web applications are cheaper to develop
and maintain, but they may lack the wow factor. You and your organization have to decide for
yourselves!
Q3-6
Why Are Mobile Systems Increasingly Important?
Mobile systems are information systems that support users in motion. Mobile systems users access
the system from any place—at home, at work, in the car, on the bus, or at the beach—using any
smart device, such as a smartphone, tablet, or PC. The possibilities are endless.
Mobile systems users move not only geographically but also from device to device. The user
who starts reading a book on an iPad on a bus, continues reading that book on a PC at work, and
finishes it on a Kindle Fire at home is mobile both geographically and across devices.
As shown in Figure 3-20, the major elements in a mobile system are users in motion, mobile
devices, wireless connectivity, and a cloud-based resource. A mobile device is a small, lightweight,
power-conserving, computing device that is capable of wireless connectivity. Almost all mobile
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 3
Mobile
Device
Users in
Motion
FIGURE 3-20
Elements of a Mobile
Information System
Wireless Connectivity
Hardware, Software, and Mobile Systems
141
r Web sites
r Services (IM, email, etc.)
r Application code
r Data sources
Resources in the Cloud
devices have a display and some means for data entry. Mobile devices include smartphones, tablets, smartwatches, and small, light laptops. Desktop computers, Xboxes, and large, heavy, powerhungry laptops are not mobile devices.
You will learn about wireless connectivity and the cloud in Chapter 4. For now, just assume
that the cloud is a group of servers on the other end of a connection with a mobile device. When
downloading a book for a Kindle, for example, the cloud is one or more servers on the other end
that store that book and download a copy of it to your device.
The major reason for the importance of mobile systems is the size of their market. According to
Cisco, at the end of 2016 there were 8 billion mobile devices generating 7.2 exabytes of traffic per
month.28 By 2021, this will jump to 11.6 billion mobile devices generating more than 49 exabytes
per month. That’s 1.5 devices for every person on the planet. Smartphones will account for nearly
86 percent of global mobile traffic.29
It took seven years after the launch of the first iPhone (2007–2014) for smartphones to
achieve mainstream use by 70 percent of the U.S. market.30 That’s faster than any other technology except television in the early 1950s, which tied the smartphone adoption rate. The February
2018 Pew Research Center Mobile Fact Sheet shows that 95 percent of people in the United States
owned a mobile phone and 77 percent owned a smartphone.31 The size of the mobile e-commerce,
or m-commerce, market is expected to exceed $420B by 2021.32
Additionally, mobile use is favored by the young. According to Pew Research Center’s measures
of mobile device use, the younger the age group, the greater the percentage of people with mobile
devices. Further, younger people have more devices per capita than older groups.33 These young
cohorts will further increase mobile systems use in the years to come.
Because of this vast and growing market, mobile systems are having a major impact on business
and society today—impact that is forcing industry change while creating new career opportunities
for mobile-IS-savvy professionals, as well as large numbers of new, interesting mobile-IS-related
jobs.
Figure 3-21 summarizes the mobile-system impact for each of the five components of an information system. We will discuss each of the components in this figure, starting with hardware.
Hardware
Clearly, increasing demand for mobile systems means the sales of many more mobile devices, often
at the expense of PC sales. Hewlett-Packard, a large PC manufacturer, learned this fact when it
didn’t respond quickly enough to the onslaught of mobile devices and was forced to eliminate
27,000 jobs in 2012. In the future, there will be high demand for innovative mobile devices as well
as cheap copycats.
If you’re reading this book, you’re unlikely to be a hardware engineer, and if you’re not living
in Asia, you’re also unlikely to be involved in hardware manufacturing. However, any market having 3.9 billion prospects is ripe with opportunities in marketing, sales, logistics, customer support,
and related activities.
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Hardware
Software
Data
Procedures
People
Impact of mobile
systems growth
Many, many more
mobile devices
will be sold.
Compact interfaces;
new technology for
active users;
application scaling.
More data, but
more information?
Less device real
estate means fewer
ads possible.
Always on, always
at work. Employee
lifestyle becomes
hybrid of personal
and professional.
Ability to thrive
in a dynamic
environment
more important.
Industry changes
PCs less important;
high demand
(and requirement)
for innovative
devices as well
as cheap copycats.
html5, css3, and
JavaScript increase
capability of
thin-clients.
Loss of control.
Ad model in
danger?
Personal mobile
devices at work.
More part-time
employees and
independent
contractors.
Career
opportunities
Jobs for mobile
device sales,
marketing,
support.
New technology
levels the playing
ƂGNFHQTJVON
Business expertise
needed for mobile
requirements. New
companies!
Reporting and data
mining even
more important.
Design of effective
mobile reports.
Innovative use of
just-in-time data.
Need for adjusting
business processes
gives another
premium to nonroutine problem
solvers.
Independent
contractors
(and some
employees) work
where and when
they want. What
is this new social
organism?
FIGURE 3-21
Five Components of Mobile
Change and Opportunity
Software
The reduced size of mobile devices requires the invention of new, innovative interfaces. The mobile
user is an active user and expects an active screen experience. The premium will be for moving
graphics, changing Web pages, and animation. Applications will need to scale from the very smallest to the very largest, while providing a user experience appropriate to the device’s size.
Rapid technology change in mobile software continually levels the playing field. Today, for
example, expert programmers in Objective-C better not relax. html5 and css3 are gaining popularity, and they will reduce the need for Objective-C expertise. Further, as you learned in Q3-5, while
languages like Objective-C are difficult and time-consuming to learn, html5, css3, and JavaScript are
less so. With the reduced barrier to entry, hordes of less experienced and less educated new entrants
will appear as competitors. You might be one of them.
Additionally, continually evolving software means new and exciting entrepreneurial
opportunities. Are you sorry that you missed the early days working at Facebook? Right now,
somewhere, there is another Mark Zuckerberg starting. . . well, what? Because of the continually changing software environment, new opportunities abound and will continue to do so for
decades.
Data
Many more mobile systems mean an incredible amount of new data, data that professionals can use
to create much more information. But, more data doesn’t necessarily mean more information. In
fact, many business professionals believe they’re drowning in data while starving for information.
What can be done with all of this mobile-systems data to enable humans to conceive information
of greater value to them? Data mining and better reporting are good options.
On the other hand, not all the news is good, at least not for many organizations. For one,
smaller screens means less room for advertising, a factor that limited the success of the Facebook
public offering in May 2012. Also, mobile systems increase the risk of organizations losing control
over their data. In the past, employees used only computer equipment provided by the employer and
connected only via employer-managed networks. In that situation, it is possible for the organization
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
ETHICS GUIDE
FREE APPS FOR DATA
You’re sitting in your Introduction to MIS class, and
the professor starts talking about how profitable software
development can be. He points out that billionaires like Bill
Gates (Microsoft), Larry Ellison (Oracle), Larry Page (Google),
and Mark Zuckerberg (Facebook) all made their fortunes by
developing useful software. But a vocal classmate jumps in and
points out that he’s never paid any of those people a penny. He
uses Google Search, Gmail, and Facebook all for free. Yes, he
uses Microsoft Office, but it’s the free online version through
OneDrive. Even the apps on his smartphone are free.
Then comes the perennial question, which also happens
to be a major point of frustration for the tech industry: How
do you make money from free apps? The professor says something about capturing market share, potential income, and
future innovation. You’re not buying it. You’re interested in
real income, not potential income.
Nick the Data Broker
The person sitting next to you, Nick, starts smiling broadly
and nods his head. He’s in your group for your big class project. He leans over and whispers, “If you’re not paying for it,
you are the product. Data is where you make money, not software. Give them the software, take the data, and make the
money. It’s simple.”
You’re a little confused at first. But then you think back
to last Wednesday when you first met Nick. He said he was
coming back to school to get a degree in MIS because he
needed the technical knowledge for his new job with his
brother’s company. He explained that his brother was a data
broker (sometimes called an information broker). He buys data
about individuals from companies and then sells it to other
companies for a profit. It sounded like they were doing really
well. Before you could even ask if it was legal or ethical, Nick
quipped, “Yes, of course it’s legal. Everyone does it.” He had
obviously gotten this question before.
But was Nick right? He isn’t a billionaire like Bill Gates.
Nick was only concerned with buying and selling data. He
wasn’t interested in application development. But he did make
a good point, and it got you thinking. What if you started a
business that made applications that were designed to collect
individual data? You could make dozens of useful apps, collect
individual data, and then sell it to Nick.
But what data would Nick pay for? How much of it could
you get? He wouldn’t care about gaming data. But he would pay
for data about user behavior like which Web sites they visit, where
they’re located, who their friends are, and what they purchase.
Flashlight Apps
At lunch, you do a few searches about how mobile applications can access data on smartphones. It turns out that users
just have to grant the application permission(s), and it can
access any data on the phone. Could that be right? Any data?
This could be a gold mine. You get excited at the prospect of
harvesting thousands of terabytes of data and selling them to
Nick. You could retire in a month.
But then a sinking feeling comes over you. What if you’re
not the first person to think of this idea? What if someone else
is already giving away apps and harvesting users’ data. You
decide to check the permissions for one of the most useful free
applications you have on your phone—your flashlight app.
You search for “flashlight app permissions” and you see dozens
of news articles referencing a threat report by SnoopWall.34
The SnoopWall report looked at the permissions required
by the top 10 flashlight apps for Android smartphones. The
results were shocking. All of these apps did more than just
turn a light on and off. They required permission to access
data about your location, network connectivity, and USB
storage. They also required permissions to install shortcuts,
receive data to/from the Internet, modify your system settings,
and disable your screen lock.
The app you use was third on the list. Not good. You
decide to check to see whether the report was accurate. Were
these apps harvesting all this data? You look at the first six
flashlight apps that show up in Google Play. The results are
shown in the following table. The bottom three rows show
the changes in the number of permissions from 2013, 2014,
2016, and 2018.
Seeing all of the permissions required by these simple flashlight apps is distressing. Why would your flashlight need your
GPS coordinates? Who was getting this data? What were they
using it for? It looks like someone had already thought of your
data-harvesting idea. It may be too late to make any money off
the free-app-for-individual-data scheme. All of a sudden, these
free apps don’t look as attractive to you—as a consumer.
143
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SuperBright LED
Flashlight
Brightest
Flashlight
Free
Brightest
LED
Flashlight
Take pictures and videos
X
X
X
Receive data from Internet
X
X**
X
Control flashlight
X
X
X
Permissions
Flashlight
HighPowered
Flashlight
Tiny
Flashlight
+ LED
X
X
X
X
X**
X
X
X*
Change system display settings
X**
X**
X**
Modify system settings
X**
X**
X**
Prevent device from sleeping
X
X
X
X*
X
X
View network connections
X
X
X
X
X
X
Full network access
X
X
X
X
X
X
Run at startup
X**
Control vibration
X
X**
X
Retrieve running apps
Modify or delete the contents of your storage
X
Read the contents of your storage
X
View Wi-Fi connections
X
Read phone status and identity
X
Read Home settings and shortcuts
X
X**
X*
Write Home settings and shortcuts
Disable your screen lock
Install shortcuts
X
Uninstall shortcuts
X
Approximate location
X
X**
Precise location
X
X**
Disable or modify status bar
X**
Draw over other apps
X
X**
Other
3
Count 2013
20
15
13
9
15
6
Count 2014
8
15
13
9
15
7
Count 2016
6
14
8
5
6
7
Count 2018
8
16
10
7
12
8
* Dropped for 2018
** Added for 2018
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CHAPTER 3
Hardware, Software, and Mobile Systems
145
DISCUSSION QUESTIONS
1. Consider the decision to create a free application designed
to harvest individual data.
a. Is this decision ethical according to the categorical
imperative?
b. Is this decision ethical according to the utilitarian
perspective?
c. How would users react if they knew their data was
being harvested in exchange for a free app?
2. Suppose Google becomes aware that apps in the Google
Play store are harvesting user data unrelated to the function of the application.
a. Does it have a legal obligation to find out which apps are
harvesting data inappropriately?
b. Does it have an ethical obligation to find out which apps
are harvesting data inappropriately?
c. Does Google provide free apps in exchange for individual data? Why?
3. How hard should Google work at curating apps in Google
Play to ensure that appropriate permissions are set?
4. In 2014, Symantec found that 17 percent of all Android
apps were malware in disguise.35 But a report by Google
found that less than 1 percent of all Android devices had a
potentially harmful application installed.36
a. Is it ethical for Google to remove applications it considers inappropriate? Consider both the categorical
imperative and utilitarian perspectives.
b. Is it ethical for Google to limit permissions for certain
applications? Consider both the categorical imperative
and utilitarian perspectives.
to control who does what with which data and where. No longer. Employees come to work with their
own mobile devices. Data leakage is inevitable.
With more people switching to mobile devices and with less room for ads, online advertising
revenue may be sharply reduced, possibly endangering the revenue model that supports most of
the Web’s free content. If this happens, dramatic change is just around the corner!
Procedures
Mobile systems are always on. They have no business hours. And people who use mobile systems
are equally always on. In the mobile world, we’re always open for business. It is impossible to be out
of the office. One consequence of always-on is the blending of our personal and professional lives.
Such blending means, in part, that business will intrude on your personal life, and your personal
life will intrude on your business. This intrusion can be distracting and stressful; on the other hand,
it can lead to richer, more complex relationships.
Employees will expect to use their mobile devices at work, but should they? In truth, who
can keep them from it? If the organization blocks them from connecting to the work-related
networks, they can connect over the wireless networks that they pay for themselves. In this
case, the organization is entirely out of the loop. Could employees send confidential corporate
information through their personal mobile devices? We will discuss these issues in more detail
in Q3-7.
Mobile systems offer the potential of just-in-time data, which is data delivered to the user at
the precise time it is needed. A pharmaceutical salesperson uses just-in-time data when she accesses
a mobile system to obtain the latest literature on a new drug while waiting for the doctor to whom
she will pitch it. She needn’t remember the drug’s characteristics any longer than it takes her to
walk down the hallway and make the sale.
Furthermore, some organizations will passively wait for change to happen, while others will
proactively reengineer their processes to incorporate mobile systems for higher process quality.
Either way, the need for business process change creates opportunity for creative, nonroutine business problem solvers.
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People
Mobile systems change the value of our thinking. For example, just-in-time data removes the premium on the ability to memorize vast quantities of product data, but creates a premium for the ability to access, query, and present that data. Mobile systems increase the speed of business, giving an
advantage to those who can nimbly respond to changing conditions and succeed with the
unexpected.
With the ability to be connected and always on, organizations may find they can be just as effective with part-time employees and independent contractors. The increasing regulatory complexity
and cost of full-time employees will create an incentive for organizations to do just that.
As that occurs, professionals who can thrive in a dynamic environment with little need for
direct supervision will find that they can work both where and when they want, at least a good
part of the time. Once you’re always on and remote, it doesn’t matter if you’re always on in New
Jersey or at a ski area in Vermont. New lifestyle choices become possible for such workers.
These mobile workers can work where they want and for whom they want. There won’t be a
boss looking over their shoulder. They can work multiple jobs with different companies at the same
time! Companies may have to change the way they pay workers. Instead of paying employees by
the hour, they would need to focus more on paying for productivity. This shift toward focusing
on performance will empower great employees and make it harder for slackers to hide out in an
organization. Companies will benefit from mobile workers too. They won’t need as much expensive
commercial office space. What an incredible time to be starting a business career!
Q3-7
What Are the Challenges of Personal Mobile
Devices at Work?
So far, we’ve focused on mobile applications that organizations create for their customers and others
to use. In this question we will address the use of mobile systems within organizations.
In truth, organizations today have a love/hate relationship with their employees’ use of their
own mobile devices at work. They love the cost-saving possibility of having employees buy their own
hardware, but they hate the increased vulnerability and loss of control. The result, at least today, is
a wide array of organizational attitudes.
Consider a recent report by Tech Pro Research that estimates 74 percent of companies have
adopted BYOD or are planning to do so.37 If you aren’t already bringing your own device to work,
you’ll soon have to. Yet only 43 percent of all organizations have created an official mobile-use
policy.38
Advantages and Disadvantages of Employee Use of Mobile
Systems at Work
Figure 3-22 summarizes the advantages and disadvantages of employee use of mobile systems at
work. Advantages include the cost savings just mentioned as well as greater employee satisfaction of using devices that they chose according to their own preferences rather than organizationsupplied PCs. Because employees are already using these devices for their own purposes, they need
less training and can be more productive. All of this means reduced support costs.
On the other hand, employee use of mobile devices has significant disadvantages. First, there
is the real danger of lost or damaged data. When data is brought into employee-owned computing
devices, the organization loses control over where it goes or what happens to it. IBM, for example,
disallowed the use of Apple’s voice searching application, Siri, on employees’ mobile devices for just
that reason.39 Also, if an employee loses his or her device, the data goes with it, and when employees
leave the organization, the data on their personal devices needs to be deleted somehow.
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CHAPTER 3
FIGURE 3-22
Advantages and Disadvantages
of Employee Use of Mobile
Systems at Work
147
Hardware, Software, and Mobile Systems
Advantages
Disadvantages
Cost savings
Data loss or damage
Greater employee satisfaction
Loss of control
Reduced need for training
Compatibility problems
Higher productivity
Risk of infection
Reduced support costs
Greater support costs
Organizations also lose control over the updating of software and the applications that users
employ. This control loss leads to compatibility problems; users can process data, for example edit
documents, with software that is incompatible with the organization’s standard software. The result
to the organization is a mess of inconsistent documents.
Possibly the greatest disadvantage of employee use of their own devices is the risk of infection.
The organization cannot know where the users have been with their devices or what they’ve done
when they’ve been there. The possibility of severe viruses infecting the organization’s networks is
real. Finally, all of these disadvantages can also lead, ironically, to greater support costs.
Given all that, organizations cannot avoid the issue. Whatever the costs and risks, employees
are bringing their own devices to work. Ignoring the issue will simply make matters worse.
Survey of Organizational BYOD Policy
A bring your own device (BYOD) policy is a statement concerning employees’ permissions and
responsibilities when they use their own device for organizational business. Figure 3-23 arranges
BYOD policies according to functionality and control. Starting in the lower left-hand corner, the
most primitive policy is to ignore mobile use. That posture, which provides neither functionality to
the employee nor control to the organization, has no advantages and, as just stated, cannot last.
The next step up in functionality is for the organization to offer its wireless network to mobile
devices, as if it were a coffee shop. The advantage to the organization of this policy is that the organization can sniff employees’ mobile traffic, thus learning how employees are using their devices
(and time) during work.
Control
High
Low
Functionality
High
FIGURE 3-23
Six Common
BYOD Policies
Low
Full VPN Access
to Organizational
Systems
You’re
responsible
for damage
Organizational
Services on
Public Internet
We’ll check it
out, reload
software and
data, and
manage it
remotely
If you connect
it, we own it
We’ll offer limited
systems you can
access from any
device
Access to Internet
We’ll be a
coffee shop
None
They don’t
exist
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The next policy provides more functionality and somewhat more control. Here the organization
creates secure application services using https that require employee sign-on and can be accessed from
any device, mobile or not. Such applications can be used when employees are at work or elsewhere.
These services provide controlled access to some organizations’ assets.
A fourth policy is more of a strategic maneuver than a policy. The organization tells employees
that they can sign on to the organization’s network with their mobile devices, but the employee is
financially responsible for any damage he or she does. The hope is that few employees know what
their exposure is and hence decide not to do so.
A more enlightened policy is to manage the users’ devices as if they were owned by the organization. With this policy, employees turn over their mobile devices to the IS department, which
cleanses and reloads software and installs programs that enable the IS department to manage the
device remotely. Numerous vendors license products called mobile device management (MDM)
software that assist this process. These products install and update software, back up and restore
mobile devices, wipe employer software and data from devices in the event the device is lost or the
employee leaves the company, report usage, and provide other mobile device management data.
This policy benefits the organization, but some employees resist turning over the management
of their own hardware to the organization. This resistance can be softened if the organization pays
at least a portion of the hardware expense.
The most controlling policy is for the organization to declare that it owns any mobile
device that employees connect to its network. To be enforceable, this policy must be part of
the employee’s contract. It is taken by organizations that manage very secure operations and
environments. In some military/intelligence organizations, the policy is that any smart device
that ever enters the workplace may never leave it. The advantages of these six policies are summarized in Figure 3-24.
BYOD policies are rapidly evolving, and many organizations have not yet determined what is
best for them. If your employer has a committee to develop such policies, join it if you can. Doing so
will provide a great way to gain exposure to the leading technology thinkers at your organization.
FIGURE 3-24
Advantages of Example
BYOD Policies
BYOD Policy
Description
Advantage to Organization
They don’t exist
Organization looks the other
way when employees bring
mobile devices to work.
None
We’ll be a coffee shop
You’ll be able to sign
in to our wireless network
using your mobile device.
Packet sniffing of employee
mobile device use at work.
We’ll offer limited
systems you can
access from any device
Organization creates https
applications with sign-in
and offers access to noncritical
business systems.
Employees gain public access from
any device, not just mobile
devices, without having to
use VPN accounts.
You’re responsible
for damage
Threatening posture to discourage
employee use of mobile devices
at work.
Appear to be permissive
without actually being so.
We’ll check it out, reload
software, and then manage
remotely
Employees can use their mobile
devices just as if they were
computers provided by the
corporate IS department.
Employee buys the hardware
(perhaps with an employer's
contribution).
If you connect it, we
own it
Employees are not to use mobile
devices at work. If they do, they
lose them. Part of employment
agreement.
Ultimate in control for highly
secure work situations
(intelligence, military).
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Q3-8
Hardware, Software, and Mobile Systems
149
2029?
There’s a really old movie called You’ve Got Mail (1998) starring Tom Hanks and Meg Ryan. In it,
the characters get really excited when they get “mail.” The term email was so new at the time that
it hadn’t even caught on yet. You can see people in the movie reading newspapers and paper books.
Oh, how times have changed.
Fast-forward to today. Email now comes in seconds after it’s sent. You check your email during
commercial breaks while you’re watching TV, while you’re driving in traffic, and while you’re sitting
on the toilet. Instead of checking your email with bated breath, you’re dreading seeing more work
pile up in your inbox. Or worse—bills, spam, and viruses.
New hardware and software have changed everyday life. People are always on, always
connected, always communicating, always working and playing. This trend will continue. The
Internet of Things will allow us to be continually connected to more and more devices. You’ll
be able to control your home, and everything in it, from your smartphone. Your home will be so
smart that it will analyze you. It will see what, how, and when you do things and then anticipate
your needs.
Imagine your TV turning on every morning at just the right time so you can watch the markets
open (see Figure 3-25). You smell fresh-baked bread, your shower turns on by itself, and your car
FIGURE 3-25
Smart Home
Source: Si-Gal/iStock Vectors/Getty
Images
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SECURITY GUIDE
POISONED APP-LES
Have you ever stopped to look up at the stars on a
clear night and seen a faint white light tracking slowly across
the sky? If so, you’ve seen a satellite orbiting the earth at
speeds exceeding thousands of miles per hour. What may surprise you is that early spacecraft launched by NASA had less
computing power than your smartphone. That’s right—the
small handheld device you use for checking social media and
email and for playing games is more powerful than the first
spacecraft. But why do you need all of that computing power?
Phone calls and text messages don’t seem to require massive
processing power. Welcome to the era of the “app”!
Apps are the drivers of faster and more powerful smartphones. Apple and other smartphone manufacturers release
new versions of their phones on an annual basis. Keeping up
with the flashiest and most powerful apps drives the demand
for faster processing chips and more memory. Advancements
in both of these areas often happen without increasing the
form factor of the phone or reducing battery life.
Smartphone users have a seemingly insatiable appetite
for apps. In 2017, the Apple App Store contained more than
2.2 million apps, reported 197 billion app downloads, and
listed 12 million registered app developers.40 These apps allow
you to do everything from making stock trades on the go to
checking the latest weather conditions anywhere in the world.
While most apps cost only a few dollars, many of them are
free. You may be wondering, “How is this possible?” and “Are
there any hidden costs?” You may be surprised to learn that
free apps may not be such a great deal after all.
accessed user credentials, hijacked URLs, were able to read
and write data on devices, and compromised other iOS apps.
WeChat, an app used extensively in China, was affected by
XcodeGhost and contributed heavily to the tally of more than
500 million iOS users who could have been exposed to this
dangerous malware.41
The malware was embedded in apps available on the
App Store because developers chose to install a compromised
version of the Xcode developers kit despite warnings that the
software had been altered. Developers were downloading the
compromised software because it had been posted on a server
offering faster-than-standard download speeds.
Once this vulnerability had been identified, Apple notified users that the dangerous apps had been removed from the
XcodeGhost Haunts iOS
The App Store is generally a well-regulated marketplace. Apps
are screened for security vulnerabilities and vulgar content in
order to create a safe experience for users. However, with more
than 2 million applications available to consumers, it is inevitable that some malicious apps clear the screening process.
Apple recently reported that dozens of apps available
on the App Store contained a malware application named
XcodeGhost. Apps containing this malware reportedly
Source: © CarmenMurillo/iStock/Getty Images Plus
150
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CHAPTER 3
App Store and that they were collaborating with developers to
ensure that this type of incident does not happen again. However, even with these apps identified and removed, this security
breach begs the question “What other vulnerabilities are lurking in the App Store, and have you already downloaded any of
these potential threats?”
Installation App-rehension
Have you ever been using your phone and seen an alert message indicating that one of the apps on your phone was accessing your location information in the background? If so, were
you worried? Did you allow the app to continue monitoring
your location, or did you shut it off? A key point to consider
is that an app does not have to be considered malware to be
dangerous or invasive. In fact, many of the apps on your
phone are likely accessing data that are unrelated to the app’s
specific purpose. For example, a survey of apps with built-in
Hardware, Software, and Mobile Systems
151
networking tools revealed that 13 out of 15 of these apps
uploaded all user contacts on the phone to remote servers
managed by the app developers.42 Contact information can
then be sold to advertisers and other third parties for a profit.
This type of indirect information gathering is why many
of the apps downloaded from the App Store are free. End users
end up paying for them with their privacy. But why do users
tolerate an invasion of their privacy? Users often fail to review
the usage agreement for each app.43 Even more striking is that
developers can change the terms of privacy agreements after
a user has agreed to a prior version of the terms.
Despite the tremendous convenience, productivity, and
entertainment afforded by our phones and apps, there are hidden costs. These hidden costs may include the risk of downloading dangerous software or inadvertently allowing apps
access to private data. A little app-rehension may help users
prevent a serious privacy invasion or data theft.
DISCUSSION QUESTIONS
1. Think about your use of various phone and computer
apps and your interactions on social media. Have you
ever experienced a breach of your privacy or personal
data? What was the impact of this breach? Were you
able to resolve it, or were you forced to live with the
consequences?
2. Try to identify three different strategies that any smartphone user could follow in an attempt to minimize the risk
of installing and using dangerous/risky apps.
3. Reflect on the trade-off between free apps and the potential privacy risks that these apps may introduce. Has this
article changed your perception of free apps? If so, how?
4. Conduct an Internet search to identify if there have been
any recent security vulnerabilities introduced through an
app store (e.g., the App Store, Google Play, or Windows
Phone Store). If so, conduct a brief investigation to see
which apps are involved, how many people have been
affected, and whether the vulnerability has been resolved.
knows exactly when to self-start so it’s warm when you get in. Your self-driving car will let you work
on your way to work. You’ll see these anticipatory systems at your job too.
How will advances in hardware and software affect the types of jobs you’ll go to? Ten years
from now, the best-paying jobs will be ones that don’t currently exist. The following are hot jobs
today: IoT architect, marketing technologist, Big Data architect, and DevOps manager. These job
titles didn’t exist 10 years ago. Ten years from now, there will be an entirely new set of jobs that
you haven’t heard of before.
How do you prepare for future jobs? What types of jobs will pay well? Regardless of your current college major, your future job will probably require a high level of tech skill. The best way to
prepare for these types of jobs is to cultivate creativity, novel problem solving, and good judgment
and have a sincere desire to learn new things.
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CAREER GUIDE
Name: Marshall Pettit
Company: Preparis, Inc.
Job Title: Senior Software Engineer
Education: University of Utah
Source: Marshall Pettit, Preparis, Inc.
Sr. Software Engineer
1
How did you get this type of job?
Networking. Never underestimate the value of
professional lunches and close friends. Although
my education and earlier experience differed substantially from my current job, a brilliant friend
encouraged me to pursue my dreams as a software developer and gave me a strong referral to
a company that had recently offered him a job.
We started together, and he became an important
mentor for me.
2
5
Learning quickly! Programming languages, platforms, and paradigms consistently change. Staying abreast of these changes is important for
making positive contributions on a continuing
basis.
6
What does a typical workday look like for
you (duties, decisions, problems)?
Each workday requires self-motivation and a
strong commitment to our team. I meet briefly
each morning with my team to review our progress and make sure it is in line with the goals and
objectives we select at the beginning of each iteration, spanning 2 or 3 weeks. I also make myself
available throughout the day to review their code
and individual work, as they do for me.
4
What do you like most about your job?
My home is my office, and my schedule is flexible. This allows me opportunities to coach my children’s sports teams, help with their homework,
and support their daily needs.
Are education or certifications important in
your field? Why?
Formal education is important in every field.
Although my education differs from my current
responsibilities, it provides me greater depth
when interacting with business leaders as we
develop solutions for the customers we serve.
Certificates are not as important in my field.
Instead, consistent informal study and practice at coding challenge websites pay greater
dividends.
What attracted you to this field?
Web software development has always fascinated me since taking an elective during my
undergraduate business management studies.
Building complex yet elegant business systems
using commands in a text editor is as fulfilling as
building a home from raw materials and seeing it
take shape.
3
What skills would someone need to do well
at your job?
7
What advice would you give to someone
who is considering working in your field?
Just do it. Take a leap of faith and run with the challenges ahead. Courageously tackling your dream
job in spite of the imaginary barriers around it will
be both fun and rewarding.
8
What do you think will be hot tech jobs in 10
years?
Artificial intelligence will provide the most intriguing opportunities in the coming years. Opportunities in machine learning, data science, and
business intelligence will grow substantially.
152
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CHAPTER 3
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153
ACTIVE REVIEW
Use this Active Review to verify that you understand the ideas and
concepts that answer the chapter’s study questions.
languages. Explain each cell of Figure 3-19. State which is better:
native or Web applications. Justify your answer.
Q3-1
What do business professionals
need to know about computer hardware?
Why are mobile systems increasingly important?
List types of hardware and give an example of each. Define bit
and byte. Explain why bits are used to represent computer data.
Define the units of bytes used to size memory.
Define mobile systems. Name and describe the four elements
of a mobile system. Describe the size of the mobile market and
explain why there are 3.9 billion mobile prospects. Explain why
the mobile market will become stronger in the future. Explain
why a problem for one organization is an opportunity for another.
Using the five-component model, describe particular opportunities for each component. Define just-in-time data and explain how
it changes the value of human thinking.
How can new hardware affect competitive strategies?
Q3-2
Define IoT and describe a smart device. Explain why smart devices
are desirable. Give two examples of how businesses could benefit from smart devices. Describe the difference between AR, MR,
and VR. Explain why sense of presence is important in virtual
environments. Describe how self-driving cars could be safer and
cheaper and make life easier. Explain how 3D printing works and
how it could affect new product design, manufacturing, distribution, and consumer purchasing. Describe some of the benefits
and risks of using a cryptocurrency like Bitcoin.
Q3-3 What do business professionals
need to know about software?
Review Figure 3-12 and explain the meaning of each cell in this
table. Describe three kinds of virtualization and explain the use
of each. Explain the difference between software ownership and
software licenses. Explain the differences among horizontal-market, vertical-market, and one-of-a-kind applications. Describe the
three ways that organizations can acquire software.
Is open source software a viable
alternative?
Q3-4
Define GNU and GPL. Name three successful open source projects. Describe four reasons programmers contribute to open
source projects. Define open source, closed source, source code, and
machine code. In your own words, explain why open source is a
legitimate alternative but might or might not be appropriate for
a given application.
Q3-6
Q3-7 What are the challenges of personal
mobile devices at work?
Summarize the advantages and disadvantages of employees’
using mobile systems at work. Define BYOD and BYOD policy.
Name six possible policies and compare them in terms of functionality and organizational control. Summarize the advantage
of each to employers.
Q3-8
2029?
Explain how email usage has changed over the past 20 years.
Describe how an anticipatory system might work. Explain how
advances in hardware and software might change the types of
jobs you take in the future.
Using Your Knowledge with eHermes
Suppose you are part of this eHermes team. Briefly summarize
how the knowledge in this chapter would help you contribute.
Explain why eHermes decided not to develop its own AI. Summarize the challenges it would face if it did decide to develop its
own AI.
What are the differences between
native and Web applications?
Q3-5
In your own words, summarize the differences between native
applications and Web applications. In high-level terms, explain
the difference between object-oriented languages and scripting
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KEY TERMS AND CONCEPTS
Android 131
Application software 133
Augmented reality (AR) 123
Binary digits 119
Bitcoin 127
Bits 119
BlackBerry OS 131
Blockchain 128
Bring your own device (BYOD)
policy 147
Bytes 119
Central processing unit (CPU) 118
Client 119
Closed source 137
Computer hardware 118
Cryptocurrencies 127
Custom-developed software 134
Desktop virtualization 133
Dual processor 118
Exabyte (EB) 120
Fiat currencies 128
Firmware 134
Gigabyte (GB) 120
GNU 135
GNU general public license (GPL)
agreement 135
HoloLens 155
Horizontal-market application 134
Host operating system 131
Internet of Things (IoT) 121
iOS 131
Just-in-time data 145
Kilobyte (KB) 120
License 133
Linux 130
Machine code 137
macOS 130
Main memory 118
M-commerce 141
Megabyte (MB) 120
Microsoft Windows 130
Mixed reality (MR) 123
Mobile device 140
Mobile device management (MDM)
software 148
Mobile systems 140
Modern-style application 130
Native application 129
Nonvolatile 121
Object-oriented 138
Off-the-shelf software 134
Off-the-shelf with alterations
software 134
One-of-a-kind application 134
Open source 137
Operating system (OS) 128
PC virtualization 132
Personal computers 118
Petabyte (PB) 120
Phablet 118
Quad processor 118
RAM 118
Reality 123
Satoshi 128
Self-driving car 125
Sense of presence 124
Server 131
Server farm 119
Server virtualization 132
Site license 133
Smart device 121
Smartphone 118
Solid-state storage (SSD) 118
Source code 137
Storage hardware 118
Swift 138
Symbian 131
Tablets 118
Terabyte (TB) 120
Thick-client application 129
Thin-client application 129
Unix 130
Vertical-market application 134
Virtual 123
Virtualization 131
Virtual machines (vm) 131
Virtual reality (VR) 124
Volatile 121
Web application 129
Windows 10 (mobile) 131
Windows Server 131
Zettabyte (ZB) 120
MyLab MIS
To complete the problems with MyLab MIS, go to EOC Discussion Questions in the MyLab.
USING YOUR KNOWLEDGE
3-1. Microsoft offers free licenses of certain software prodMyLab MIS
ucts to students at colleges and universities that participate in its Microsoft Imagine program (formerly known
as the Microsoft DreamSpark program). If your college
or university participates in this program, you have the
opportunity to obtain hundreds of dollars of software
for free. Here is a partial list of the software you can
obtain:
• Microsoft Access 2016
• Microsoft OneNote 2016
• Microsoft Windows Server 2016
•
•
•
•
a.
Microsoft Project 2016
Microsoft Visual Studio 2017
Microsoft SQL Server 2017
Microsoft Visio 2016
Search www.microsoft.com, www.google.com, or www.
bing.com and determine the function of each of these
software products.
b. Which of these software products are operating systems, and which are application programs?
c. Which of these programs are DBMS products?
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CHAPTER 3
d. Which of these programs should you download and
install tonight?
e. Either (1) download and install the programs in your
answer to part d or (2) explain why you would choose
not to do so.
f. Does Microsoft Imagine provide an unfair advantage to
Microsoft? Why or why not?
3-2. Visit the Open Source Initiative’s Web site at www.openMyLab MIS
source.org. Summarize the mission of this foundation. Find
the definition of open source on this site, and summarize
that definition in your own words. Explain this foundation’s role with regard to open source licenses. Summarize
the process for having a license approved by the foundation.
Describe the advantage of having the foundation’s approval.
3-3. Suppose that you are Kamala at eHermes. List five criteria
MyLab MIS
you would use in helping eHermes decide whether it should
make its own AI. Justify your criteria.
Hardware, Software, and Mobile Systems
155
3-4. Describe how the class enrollment application at your university could benefit from a mobile application that uses
the cloud.
3-5. Judging from your personal experience, describe the BYOD
policy that appears to be in place at your university. Explain
the advantages and disadvantages of the policy to you as
a student and to the organization as a whole. How do you
think that BYOD policy will change in the next five years?
Explain your answer.
3-6. Read Q3-2 if you have not already done so. Critically evaluate the opinions of the author. Do you agree that advances
in the IoT and self-driving cars will make life easier? Better?
If so, say why. If not, explain what you think will happen
when more smart devices and self-driving cars are adopted.
Explain how you could prepare for a future high-tech job
market.
COLLABORATION EXERCISE 3
Using the collaboration IS you built, collaborate with a group of students to answer the following questions.
In March 2016, Microsoft released the development edition
of its new mixed-reality head-mounted device named Microsoft
HoloLens. HoloLens differs from digital reality devices like Meta
2 or Oculus Rift because it is a stand-alone, untethered computing device. In other words, it doesn’t have to be plugged into a
computer. It’s a complete Windows 10 computer.44
HoloLens has a custom-built holographic CPU, an Intel
32-bit processor, 2 GB of RAM, and 64 GB of storage. It can be
used for 2 to 3 hours without being recharged, and it comes with
Bluetooth/Wi-Fi connectivity. It also comes with a 2-megapixel
HD video camera, four microphones, motion sensors, light sensors, environmental cameras, and a depth-sensing camera.
As a result, HoloLens can do some pretty amazing things.
It accepts voice commands and gesture commands (e.g., air tapping), it maps spaces in a room, and, most importantly, it creates
holograms (virtual objects) in thin air. You can watch videos of
how HoloLens works on its YouTube channel.
In a recent demonstration, Microsoft showed how HoloLens
could be used collaboratively by having two people in different
locations fix a plumbing problem together. A person with a broken pipe was wearing HoloLens, and a person who knew how to
fix the pipe was in a separate location. The person wearing the
HoloLens could see 3D holographic arrows appear on the pipes
indicating what needed to be done to fix the problem. The arrows
were being hand-drawn on a tablet showing a live video feed from
the HoloLens.
In another example, designers and engineers at Autodesk use
HoloLens to collaboratively create new products.45 Mechanical
engineers, industrial designers, and marketing managers can all
see the product as it’s being designed. They don’t have to iterate
through numerous physical prototypes. They can make immediate changes to a virtual prototype before it’s even built.
Volvo is using HoloLens in a similar way. The company has
been able to reduce design times and potentially improve its manufacturing processes with the device. HoloLens also helps with
sales. Using the device, customers can change the color of the
car they’re looking at with one click. Salespeople can also show
customers interactive demonstrations of a car’s built-in safety
features (like automatic breaking sensors) in 3D holographic
environments.
The potential uses for HoloLens are staggering. Gamers
won’t be stuck on the couch playing video games anymore; they
will be able to play multiplayer holographic games anywhere
with anyone—for 2 hours. HoloLens will also change the way
people communicate. Microsoft engineers recently gave a demonstration of “holoportation” in which a real-time interactive 3D
hologram of a person was holoported into another room. Users
wearing HoloLens could interact with the person as if they were
in the same room.
Many other applications in education, entertainment,
tourism, design, engineering, and movies are being developed.
And, because HoloLens is one of the first mixed-reality devices
to become commercially available, it’s likely that the best applications for this technology are still unknown. We simply don’t
know what people will use it for. What is clear, however, is that
big names like Google, Microsoft, and Apple are making large
investments into mixed-reality devices like HoloLens. They see
the potential and are voting with their wallets.
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Recall the RAND study that stated there will be increased
worldwide demand for workers who can apply new technology
and products to solve business problems in innovative ways.
Microsoft HoloLens is an excellent example of a new technology
that will be applied innovatively.
3-10. Some people buy gaming consoles like Sony PlayStation
3-7. Consider uses for HoloLens at your university. How might
3-11. You will sometimes hear the expression “Emerging tech-
HoloLens be used in architecture, chemistry, law, medicine,
business, geography, political science, art, music, or any other
discipline in which your team has interest? Describe one
potential application for HoloLens for five different disciplines.
nology is constantly leveling the playing field.” In other
words, technology eliminates competitive advantages of
existing companies and enables opportunities for new
companies. How does this statement pertain to HoloLens,
iPad, Windows 10, Apple, and Google?
and Microsoft Xbox because of exclusive games. Not all
video games are available on all consoles. How important might applications be in the success of digital reality
devices like HoloLens, Meta 2, and Oculus Rift?
3-8. List specific features and benefits for each of the five applications you selected in question 3-7.
3-9. Describe, in general terms, the work that needs to be accomplished to create the applications you identified in question 3-7.
CASE STUDY 3
The Apple of Your i
A quick glance at Apple’s stock history in Figure 3-26 will tell
you that Apple is an incredibly successful and dramatic company,
having peaks around the turn of the century, in 2007–2008,
2012, 2015, and again in 2018. It currently has the highest market value of any public company worldwide. Apple has
been so successful that the NASDAQ stock exchange concluded
Apple’s price was skewing the price of the NASDAQ 100 Index
and reduced Apple’s weight in that index from 20 percent to 12
percent. As of this writing, Apple stock is trading at $190 after
hitting a recent low of $56 in 2013.
But since Steve Jobs’s death (October 5, 2011), there haven’t
been any groundbreaking products like the iPod, iPhone, and
iPad. iWatch was released in 2015, but many initial reviews were
tepid at best.46 There were already several smartwatches on the
market that had similar functionality, and it had performance
issues. Most importantly, it wasn’t clear if the iWatch provided
enough value over the iPhone that was already in users’ pockets.
In short, it wasn’t an immediate hit. So, what does the future look
Apple Closing Stock Price
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
Jul-18
Jul-17
Jul-16
Jul-15
Jul-14
Jul-13
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
Jul-05
Jul-04
Jul-03
Jul-02
Jul-01
Jul-00
Jul-99
Source: Financial data from finance.
yahoo.com
$0
Jul-98
FIGURE 3-26
Growth in Apple Stock Price
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CHAPTER 3
like for Apple and its shareholders? Uncertain, especially if you
consider its past history without Jobs.
Early Success and Downfall
At the dawn of the personal computer age, in the early 1980s,
Apple pioneered well-engineered home computers and innovative
interfaces with its Apple II PC for the home and its Macintosh
computer for students and knowledge workers. At one point,
Apple owned more than 20 percent of the PC market, competing against many other PC vendors, most of which are no longer
relevant (or in business).
However, Apple lost its way. In 1985, Steve Jobs, Apple’s
chief innovator, lost a fight with the Apple board and was forced
out. He founded another PC company, NeXT, which developed
and sold a groundbreaking PC product that was too innovative
to sell well in that era. Meanwhile, Apple employed a succession
of CEOs, starting with John Sculley, who was hired away from
Pepsi-Cola where he’d enjoyed considerable success. Sculley’s
knowledge and experience did not transfer well to the PC business, however, and the company went downhill so fast that CNBC
named him the 14th worst American CEO of all time.47 Two
other CEOs followed in Sculley’s footsteps.
During this period, Apple made numerous mistakes, among
them not rewarding innovative engineering, creating too many
products for too many market segments, and losing the respect of
the retail computer stores. Apple’s PC market share plummeted.
Steve Jobs, Second Verse
In 1996, Apple bought Jobs’s NeXT computing and gained technology that became the foundation of macOS High Sierra, today’s
Macintosh operating system. The true asset it acquired, however,
was Steve Jobs. Even he, however, couldn’t create an overnight
miracle. It is exceedingly difficult to regain lost market share and
even more difficult to regain the respect of the retail channel that
had come to view Apple’s products with disdain. Even by 2011,
Apple’s PC market share was in the range of 10 percent to 12
percent, down from a high of 20 percent in the 1980s.
In response to these problems, Apple broke away from the
PC and created new markets with its iPod, iPhone, and iPad. It
also countered retailer problems by opening its own stores. In
the process, it pioneered the sale of music and applications over
the Internet.
iPod, iPhone, and iPad devices are a marvel of creativity and
engineering. They exude not only ease of use, but also now/wow/
fun coolness. By selling hot music for the iPod, Apple established
a connection with a dynamic segment of the market that was
willing to spend lots of money on bright, shiny objects. The ability to turn the iPhone on its side to rotate images probably sold
more iPhones than anything else. With the iPad, portable devices
became readable, and the market responded by awarding Apple
Hardware, Software, and Mobile Systems
157
a 54 percent share of the mobile market.48 And Apple’s success
continues with the iPhone 8, which, as of this writing, is selling
well.
All of this success propelled Apple’s stores not only beyond
vanilla retailers like Murphy USA but also beyond the lofty heights
of Tiffany & Co. In 2017, Apple stores were grossing more than
$5,546 per square foot, compared with $2,951 for Tiffany and
$3,721 for Murphy USA. Apple currently operates more than
500 such retail outlets and welcomes more than 1 million customers per day.49
Apple encourages customer visits and loyalty with its open
and inviting sales floor, its Genius Bar help desk, and its incredibly
well-trained and disciplined sales force. Salespeople, who are not
commissioned, are taught to be consultants who help customers
solve problems. Even some vocabulary is standardized. When an
employee cannot solve a customer’s problem, the word unfortunately is to be avoided; employees are taught to use the phrase as
it turns out instead.50 Try that on your next exam!
Apple has sold more than 25 billion songs through its iTunes
online store, 130 million books through its iBookstore, and a
mere 75 billion applications downloaded through its App Store.
Apple is now the number-one PC software channel.51
To encourage the development of iPhone and iPad apps,
Apple shares its revenue with application developers. That would
be more than $70B paid to developers over the years!52 Developers responded by creating 1,000,000 iOS applications, and an
army of developers are at work building thousands more while
you read this.
By the way, if you want to build an iOS application, what’s
the first thing you need to do? Buy a Macintosh. Apple closed its
development to any other development method. Adobe Flash? No
way. Apple claims that Flash has too many bugs, and perhaps so.
Thus, Flash developers are excluded. Microsoft Silverlight? Nope.
Microsoft developers are out in the cold too. The non-Apple development community was furious, and Apple’s response was, in
essence, “Fine, we’ll pay our $70B to someone else.”
The bottom line? Until Jobs’s death, every sales success fed
every other sales success. Hot music fed the iPod. The iPod fed
iTunes and created a growing customer base that was ripe for
the iPhone. Sales of the iPhone fed the stores, whose success fed
the developer community, which fed more applications, which
fed the iPhone and set the stage for the iPad, which fed the App
Store, which led to more loyal customers and, of course, to more
developers.
Apple Without Steve Jobs
Apple’s future is uncertain. It floundered when Jobs was fired in
the 1990s, and it could flounder again. Sure, it’ll be around for
a long time, but the days of its incredible innovative leadership
could be, alas, over. Smart investors must consider the innovations coming from Apple in a post-Steve-Jobs world. Will Apple’s
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new CEO, Tim Cook, take the same bold risks that Steve Jobs did?
In the years since Tim took over, we’ve seen improvements to
existing products like the iPhone, iPad, iMac, and iPod, but few
new innovations beyond Apple Watch and Apple Pay.
Will Apple come out with an iCar and iGoggles (mixed reality device) like many are hoping? Or will innovation at Apple be
limited to incremental improvements to existing products? That’s
the trillion dollar question.
A huge question for many investors is whether the
company can be successful without Steve Jobs. What
do you think? Has Tim Cook been innovative enough
since taking over Apple? Will he be a bold innovator
like Steve Jobs? Would you be willing to invest in Apple
with Tim Cook at the helm? Why or why not?
3-15. Microsoft took an early lead in the development of tablet devices (like the iPad), and it had the world’s leading operating system and applications for more than
20 years. Provide five reasons why Microsoft has not
been able to achieve the same success that Apple has.
Most industry analysts would agree that the skills and
abilities of Microsoft’s 124,000 employees are as good,
on average, as Apple’s.
QUESTIONS
3-12. Which of Porter’s four competitive strategies does
Apple engage in? Explain.
3-13. What do you think are the three most important factors in Apple’s past success? Justify your answer.
3-14. Steve Jobs passed away in October 2011. Until his
3-16. Considering your answers to the previous four questions if you had a spare $5,000 in your portfolio and
wanted to buy an equity stock with it, would you buy
AAPL (Apple)? Why or why not?
death, he had been the heart and soul of Apple’s innovation. Today, 123,000 Apple employees continue
onward in his absence with Tim Cook as the new CEO.
Complete the following writing exercises.
3-17. Suppose your first job after graduating from college is working at a large
insurance company. Your boss asks you to analyze the impact self-driving
cars will have on revenues from car insurance policies. List four ways selfdriving cars could impact the insurance industry. Justify your answers.
3-18. Visit www.distrowatch.com. Click on one of the top five listed Linux distributions (like Mint, Manjaro, Debian, Ubuntu, or Solus). Click on the
Screenshots link for that distribution. List some similarities between this
operating system and your current operating system. Summarize the
advantages and disadvantages of switching from your current operating
system to a Linux distribution.
ENDNOTES
1. Bernard Marr, “Really Big Data at Walmart: Real-Time Insights from
Their 40+ Petabyte Data Cloud,” Forbes, January 23, 2017, accessed
May 30, 2018, www.forbes.com/sites/bernardmarr/2017/01/23/reallybig-data-at-walmart-real-time-insights-from-their-40-petabyte-data-cloud.
2. Pamela Vagata and Kevin Wilfong, “Scaling the Facebook
Data Warehouse to 300 PB,” Facebook.com, accessed May 30,
2018, https://code.facebook.com/posts/229861827208629/
scaling-the-facebook-data-warehouse-to-300-pb.
3. Kashmir Hill, “Blueprints of NSA’s Ridiculously Expensive Data Center
in Utah Suggest It Holds Less Info Than Thought,” Forbes.com, accessed
May 30, 2018, www.forbes.com/sites/kashmirhill/2013/07/24/
blueprints-of-nsa-data-center-in-utah-suggest-its-storage-capacity-islessimpressive-than-thought.
4. Cisco Systems, Inc., “VNI Forecast Highlights,” Cisco.com, accessed
May 30, 2018, www.cisco.com/c/m/en_us/solutions/service-provider/vniforecast-highlights.html.
5. Amazon, “Amazon Celebrates Biggest Holiday; More Than Four Million
People Trialed Prime in One Week Alone This Season,” press release,
6.
7.
8.
9.
10.
11.
December 26, 2017, accessed May 30, 2018, http://phx.corporate-ir.
net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2324045.
General Electric, “Industrial Internet,” accessed May 30, 2018, www
.ge.com/reports/tag/industrial-internet/.
Ibid.
Jennifer Warnick, “88 Acres: How Microsoft Quietly Built the City of
the Future,” Microsoft Corp., accessed May 30, 2018, www.microsoft
.com/en-us/news/stories/88acres/88-acres-how-microsoft-quietlybuiltthe-city-of-the-future-chapter-1.aspx.
Allan V. Cook, Ryan Jones, Ash Raghavan, and Irfan Saif, “Digital Reality:
The Focus Shifts from Technology to Opportunity,” Deloitte Insights,
December 5, 2017, accessed May 30, 2018, www2.deloitte.com/insights/
us/en/focus/tech-trends/2018/immersive-technologies-digital-reality.html.
Eric Johnson, “Choose Your Reality: Virtual, Augmented or Mixed,”
Re/code, July 27, 2015, accessed May 30, 2018, www.casact.org/
community/affiliates/bace/0517/KPMG.pdf.
See Microsoft’s site for the latest MR applications being developed for
HoloLens: www.microsoft.com/microsoft-hololens/en-us.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 3
12. KPMG, “The Chaotic Middle: The Autonomous Vehicle, Insurance and
Potential New Market Entrants,” May 12, 2017, accessed May 30,
2018, www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/
Documents/automobile-insurancein-the-era-of-autonomous-vehiclessurvey-results-june-2015.pdf.
13. Saeed Elnai, “The Uber Accident, Waymo Technology and the
Future of Self-Driving Cars,” Forbes, May 24, 2018, accessed May
30, 2018, www.forbes.com/sites/forbestechcouncil/2018/05/24/
the-uber-accident-waymo-technology-and-the-future-of-self-driving-cars.
14. Jack Nicas, “Apple, Spurned by Others, Signs Deal with Volkswagen for
Driverless Cars,” The New York Times, May 23, 2018, accessed May 30,
2018, www.nytimes.com/2018/05/23/technology/apple-bmw-mercedesvolkswagen-driverless-cars.html.
15. KPMG, “The Chaotic Middle: The Autonomous Vehicle, Insurance and
Potential New Market Entrants,” May 12, 2017, accessed May 30,
2018, www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/
Documents/automobile-insurancein-the-era-of-autonomous-vehiclessurvey-results-june-2015.pdf.
16. Network of Employers for Traffic Safety, “10 Facts Employers Must
Know,” accessed May 30, 2018, http://trafficsafety.org/safety/
fleet-safety/10-facts-employers-must-know.
17. Liz Stinson, “For Super Bowl, Nike Uses 3-D Printing to Create a Faster
Football Cleat,” Wired, January 10, 2014, accessed May 30, 2018,
www.wired.com/2014/01/nike-designed-fastest-cleat-history.
18. Scott Grunewald, “Nike’s 3D Printed Sprinting Shoe the Zoom Superfly
Flyknit Will Be Worn at the 2016 Olympic Games in Rio,” 3DPrint.com,
April 27, 2016, accessed May 30, 2018, https://3dprint.com/131549/
nike-zoom-superfly-flyknit.
19. See EDAG’s GENESIS prototype car at www.EDAG.de.
20. “Net Applications,” accessed May 30, 2018, www.netapplications.com.
21. Previously called metro-style. Name change by Microsoft, reputedly
because of a trademark lawsuit from Europe.
22. “Net Applications,” accessed May 30, 2018, www.netapplications.com.
23. DistroWatch.com, accessed May 30, 2018, www.distrowatch.com.
24. “Net Applications,” accessed May 30, 2018, www.netapplications.com.
25. Pew Research Center, “Device Ownership,” February 1, 2018, accessed
May 30, 2018, www.pewinternet.org/fact-sheet/mobile.
26. “Unlocking the Cloud,” The Economist, May 28, 2009.
27. Not quite true. Much of the design and possibly some of the code can
be reused between native applications. But, for your planning, assume
that it all must be redone. Not enough will carry over to make it worth
considering.
28. Cisco Systems Inc., “Cisco Visual Networking Index: Global Mobile
Data Traffic Forecast Update, 2016–2021 White Paper,” Cisco.com,
March 28, 2017, accessed May 31, 2018, www.cisco.com/c/en/us/
solutions/collateral/service-provider/visual-networking-index-vni/mobilewhite-paper-c11-520862.html.
29. Ibid.
30. Horace Dediu, “Late Late Majority,” Asymco.com, May 4, 2016,
accessed May 30, 2018, www.asymco.com/2014/07/08/
late-late-majority.
31. Pew Research Center, “Device Ownership,” February 1, 2018, accessed
May 30, 2018, www.pewinternet.org/fact-sheet/mobile.
32. Statista, “Mobile Retail E-commerce Sales in the United States
from 2013 to 2021 (in Billion U.S. Dollars),” Statista.com,
accessed May 30, 2018, www.statista.com/statistics/249855/
mobile-retail-commerce-revenue-in-the-united-states/.
33. Pew Research Center, “Device Ownership,” February 1, 2018, accessed
May 30, 2018, www.pewinternet.org/fact-sheet/mobile.
Hardware, Software, and Mobile Systems
159
34. SnoopWall, “SnoopWall Flashlight Apps Threat Assessment Report,”
October 1, 2014, SnoopWall.com, accessed May 30, 2018, www
.snoopwall.com/threat-reports-10-01-2014.
35. Symantec Corporation, “Internet Security Report,” Symantec.com,
Volume 20, April 2015, accessed May 30, 2018, www4.symantec
.com/mktginfo/whitepaper/ISTR/21347932_GA-internet-securitythreatreport-volume-20-2015-social_v2.pdf.
36. Google, “Android Security 2014 Year in Review,” GoogleUserContent
.com, accessed May 30, 2018, http://static.googleusercontent.com/media/
source.android.com/en/us/devices/tech/security/reports/Google_Android_
Security_2014_Report_Final.pdf.
37. Teena Maddox, “Research: 74 Percent Using or Adopting BYOD,”
ZDNet, January 5, 2015, accessed May 30, 2018, www.zdnet.com/
article/research-74-percent-using-or-adopting-byod.
38. “CDH,” accessed May 30, 2018, www.cdh.com.
39. Robert McMillan, “IBM Worries iPhone’s Siri Has Loose Lips,” last
modified May 24, 2012, www.cnn.com/2012/05/23/tech/mobile/
ibmsiri-ban/index.html?iphoneemail.
40. Artyom Dogtiev, “App Download and Usage Statistics,” BusinessofApps,
May 25, 2018, www.businessofapps.com/data/app-statistics/.
41. Joe Rossignol, “What You Need to Know About iOS Malware
XcodeGhost,” MacRumors, March 4, 2016, www.macrumors
.com/2015/09/20/xcodeghost-chinese-malware-faq.
42. Larry Magid, “App Privacy Issues Deeply Troubling,” The Huffington
Post, March 4, 2016, www.huffingtonpost.com/larry-magid/iphoneappprivacy_b_1290529.html.
43. Terrie Morgan-Besecker, “Cellphone Apps Can Invade Your Privacy,”
Government Technology, March 4, 2016, www.govtech.com/applications/
Cellphone-Apps-Can-Invade-Your-Privacy.html.
44. Horia Ungureanu, “TAG Microsoft, HoloLens, Augmented Reality
Microsoft HoloLens Full Processor, RAM and Storage Specs Revealed:
All You Need to Know,” Tech Times, May 4, 2016, accessed May
30, 2018, www.techtimes.com/articles/155683/20160504/
microsofthololens-full-processor-ram-and-storage-specs-revealed-all-youneed-toknow.htm.
45. Ken Yeung, “Microsoft Partners with Autodesk to Bring 3D
Product Design to HoloLens,” VentureBeat, November 30, 2015,
accessed May 30, 2018, http://venturebeat.com/2015/11/30/
microsoft-partners-with-autodesk-to-bring-3d-product-design-to-hololens.
46. Will Shanklin, “Apple Watch Review: Elegant, Delightful . . . and
Completely Optional,” April 29, 2015, Gizmag.com, accessed May 30,
2018, www.gizmag.com/apple-watch-review-iwatch-review/37244.
47. “Portfolio’s Worst American CEOs of All Time,” CNBC.com, accessed
May 30, 2018, www.cnbc.com/id/30502091?slide=8.
48. “Net Applications,” accessed May 30, 2018, www.netapplications.com.
49. Marketing Charts, “Apple Remains the Retail Leader in Sales
per Square Foot,” Marketingcharts.com, August 7, 2017,
accessed May 30, 2018, www.marketingcharts.com/industries/
retail-and-e-commerce-79421.
50. Yukari Iwatani Kane and Ian Sherr, “Secrets from Apple’s Genius Bar:
Full Loyalty, No Negativity,” Wall Street Journal, last modified June 15,
2011, http://online.wsj.com/article/SB10001424052702304563104
576364071955678908.html.
51. Apple presentation at the Apple Worldwide Developers Conference,
June 6, 2011.
52. Apple Inc., “Developer Earnings from the App Store Top $70 Billion,”
Apple.com, June 1, 2017, accessed May 30, 2018, www.apple.com/
newsroom/2017/06/developer-earnings-from-the-app-store-top70-billion/.
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CHAPTER
4
The Cloud
“So, you think the cloud is the answer to our problems?” Jessica
MyLab MIS
Using Your Knowledge
Questions 4-1, 4-2, 4-3
Ramma, CEO of eHermes, is meeting with Seth Wilson, director of IT services,
and Victor Vazquez, COO, to discuss eHermes’ data storage costs.
“Yes, that’s right. We could substantially reduce our costs if we outsourced
our data storage to the cloud,” Seth says confidently.
“The what?” Victor says, annoyed.
“The cloud. We move all of our data to the cloud.”
Jessica is curious. “OK, Seth, I’ll bite. What’s the cloud?”
“We lease storage capacity from a third party and access it over the
Internet.”
Victor is confused. “You mean we’d lease hard drives rather than buy
them?”
161
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CHAPTER 4 The Cloud
“How about $10 per
“Well, not exactly. We wouldn’t be installing any more hard drives in our data center. The cloud would allow us to lease online storage on very, very flexible, pay-asyou-go terms. As our business grows, we can acquire more storage and scale it to
meet our needs.”
“You mean each day? We can change the terms of our lease on a daily basis?”
Victor is skeptical. “OK, so how much does it cost? This can’t be cheap.”
“How about $10 per terabyte?”
Jessica’s puzzled at that. “What do you mean $10 per terabyte?”
“I mean we can get 1 terabyte of online storage for about $10 per month.” Seth
grins as he says this.
“What?” Victor is dumbfounded.
“Yeah, that’s it. We can get as much storage as we want, and our systems
automatically upload all incoming data from our mobile storefronts. The net
difference would be that our average monthly storage costs would be at least
50 percent less than they are now. And that’s not counting the power savings, the
time saved doing backups, or the fact that we wouldn’t have to configure any additional new hardware.” Seth isn’t quite sure, but he thinks the actual storage costs
could be less.
“Seth, you’ve got to be kidding. We can save tens of thousands of dollars in storage costs. This is huge. The money we spend on storage has increased 350 percent in
the past year. The company is growing so quickly, we’ll need these cost savings. Plus
you have the new automated inventory identification
development project you’re working on. The data
storage costs on that project will be considerable.”
As Victor says this, in the back of his mind he’s thinking, “If it’s true.”
“Well, it’s good; I don’t know about huge. We’d
have additional development costs to set up our
systems, and that will take some time. I also worry
about being locked into a single vendor, and I have
some security concerns.”
“Seth, give me a plan. I want a plan,” Jessica
says, thinking what these savings could mean to
the next two quarters . . . and beyond.
“I’ll give you something next week.”
“I want it by Friday, Seth.”
terabyte?”
Source: Haiyin Wang/Alamy Stock Photo
Study
QUESTIONS
Q4-1
Why are organizations moving to the cloud?
Q4-2
How do organizations use the cloud?
Q4-3
What network technology supports the cloud?
Q4-4
How does the Internet work?
Q4-5
How do Web servers support the cloud?
Q4-6
How can eHermes use the cloud?
Q4-7
How can organizations use cloud services securely?
Q4-8
2029?
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CHAPTER 4 The Cloud
Chapter
PREVIEW
Q4-1
163
If you go into business for yourself, there’s an excellent chance you’ll have a problem
just like eHermes’. What is the best way to support your information systems? Should
you use the cloud? Most likely, the answer will be yes. So, then, which of your
applications should use it and how? You need the knowledge of this chapter to participate in the conversations you’ll have. Of course, you could just rely on outside experts,
but that doesn’t work in the 21st century. Many of your competitors will be able to ask
and understand those questions—and use the money their knowledge saves them for
other purposes.
Or what if you work for a large company that has embraced the Internet of Things
(IoT)? Will you make products that send and receive data across the Internet? How will
your products connect to the cloud? Will a cloud offering make sense for you and your
customers? How will you know without some knowledge of the cloud?
We begin this chapter with an overview of where the cloud came from, why
organizations are moving toward it, and how they use it. Then, in Q4-3 and Q4-4, we
will discuss local area networks and the fundamentals of the Internet. We then look
at how Web servers function, basic steps for setting up a cloud presence, and cloud
security. We’ll wrap up with the cloud in 2029.
Why Are Organizations Moving to the Cloud?
We define the cloud as the elastic leasing of pooled computer resources over the Internet. The term
cloud is used because most early diagrams of three-tier and other Internet-based systems used a
cloud symbol to represent the Internet, and organizations came to view their infrastructure as
being “somewhere in the cloud.” To understand its importance, you need to first know where the
term the cloud came from.
From about the early 1960s to the late 1980s, organizations primarily used mainframes,
or large-scale high-speed centralized computers, for their internal data processing needs (see
Figure 4-1). A mainframe architecture supported connections between a central mainframe
and numerous thin clients (sometimes called computer terminals) which were essentially a
screen, a keyboard, and a network connection. All applications, data, and processing power were
located on the mainframe. There was no cloud as we currently understand it because the Internet
had not yet arrived.
By the early 1990s, Internet usage had started taking off. Users were connecting their personal
computers (stand-alone clients) to the Internet and organizations were buying servers to host their
Web sites and data (in-house hosting). As you read in Chapter 3, a client-server architecture
allows clients (users) to send requests across the Internet to severs. Servers respond to requests by
sending data back to clients. For example, a user sitting at home can click on a link that sends a
Web request to a Web server. The Web server then sends a copy of the Web page back to the user. As
shown in Figure 4-2, applications and data storage can reside on clients, servers, or both. Processing load can also be shared between clients and servers.
Applications
FIGURE 4-1
The Mainframe Era
(1960s–1980s)
Data Storage
Thin Client
Local
Network
Processing
Mainframe
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CHAPTER 4 The Cloud
Applications
FIGURE 4-2
The Client-Server Era
(1990s–2000s)
Internet
Data Storage
Processing
Stand-Alone Client
Server
The client-server architecture was more appealing to organizations than mainframes because
servers were much less expensive. Mainframes cost millions of dollars, but servers only cost thousands of dollars. Servers were also more scalable—or easily able to respond to incremental growth
in demand—than mainframes because their incremental cost was lower. The client-server architecture also allowed users to access systems from anywhere in the world as long as they had an
Internet connection. What we now know as the cloud had arrived, but modern cloud computing
was still a few years away. Mainframes didn’t entirely go away with the advent of the client-server
architecture. In fact, there are still some large organizations (e.g., large banks) that use mainframes
to process daily transactions.
Cloud Computing
Until about 2008 or so, most organizations constructed and maintained their own computing
infrastructure. Organizations purchased or leased hardware; installed it on their premises; and used
it to support organizational email, Web sites, e-commerce sites, and in-house applications such
as accounting and operations systems. After 2008, however, organizations began to move their
computing infrastructure to the cloud.
Cloud computing architecture allows employees and customers to access organizational
data and applications located in the cloud. As shown in Figure 4-3, applications, data, and processing power can be used remotely with a variety of devices including PCs, thin clients, mobile devices,
and IoT devices. Organizations no longer need to purchase, configure, and maintain expensive
computing infrastructure. Organizations are shifting to the cloud for some of the same reasons they
shifted to a client-server architecture—reduced costs and improved scalability.
But there are additional benefits to using the cloud. At the beginning of this chapter we defined
the cloud as the elastic leasing of pooled computer resources over the Internet. Consider each of the
italicized terms in the definition to explore these benefits.
IoT Devices
Cloud Service Providers
Mobile Clients
Applications
Data Storage
Processing
Thin Clients
FIGURE 4-3
The Cloud Computing Era
(2008–Current)
Stand-Alone Clients
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CHAPTER 4 The Cloud
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Elastic
The term elastic, which was first used this way by Amazon.com, means that leased computing
resources can be increased or decreased dynamically, programmatically, in a short span of time
and that organizations pay for only the resources they use.
Elasticity is not the same thing as scalability, which is the ability to respond to slow incremental growth in demand. A system’s ability to add 1,000 new clients per year for the next 10 years
(an increase) is an example of scalability. A small local news channel’s ability to handle Web page
requests from everyone on the planet about a one-time news story (massive increase and decrease)
is an example of elasticity.
Cloud-based hosting offers considerable elasticity that traditional client-server environments
don’t offer. An organization could purchase enough server capacity to respond to any increase in
demand, but it would be extremely expensive. The same organization could lease the capacity from
a cloud vendor on an as-needed basis for a fraction of the price.
Pooled
The second key in the definition of the cloud is pooled. Cloud resources are pooled because many different organizations use the same physical hardware; they share that hardware through virtualization. Virtualization technology enables the rapid creation of new virtual machines. The customer
provides (or creates in the cloud) a disk image of the data and programs of the machine it wants to
provision. Virtualization software takes it from there.
Virtualization increases the scalability of an organization’s systems because it can quickly
respond to incremental growth in demand. New virtual machines can be created in a few minutes.
But ordering, shipping, installing, and configuring a physical server can take days. Virtualization also reduces costs. Hundreds of virtual machines (virtual servers) can reside on a single
physical server. Thus, the cost of the physical server is spread across each of the individual virtual
machines.
Over the Internet
Finally, with the cloud, the resources are accessed over the Internet. “Big deal,” you’re saying.
“I use the Internet all the time.” Well, think about that for a minute. Accessing resources over the
Internet means they aren’t stored locally. From an organization’s point of view, it doesn’t have to
have any servers on its premises anymore. It doesn’t have to pay for power to run its servers, buy
backup generators in case the power goes out, lease the additional commercial space to store the
servers, heat and cool the server room, or install specialized fire suppression systems in case a fire
breaks out. It also doesn’t have to pay for someone to physically care for its servers by replacing
broken parts or upgrading components. Physically managing your own computing infrastructure
is costly. For many companies it has become too costly.
Why Do Organizations Prefer the Cloud?
It is likely that in the future all or nearly all computing infrastructure will be leased from the cloud,
but we’re not there yet. Not all organizations have fully embraced cloud computing. There are still
racks of servers filling up in-house data centers. But the list of companies that have embraced
cloud computing is growing rapidly. Well-known organizations like Netflix, Verizon, Disney, GE,
and Comcast have all shifted to the cloud.1
In fact, most people don’t realize how quickly organizations have shifted to the cloud. Amazon launched Amazon Web Services (AWS) in 2006 largely as an experiment. Most industry
analysts saw it as a cost center that probably wouldn’t generate revenue for many years, if ever.
As shown in Figure 4-4, by the first quarter of 2018 revenue from AWS was $5.44B,2 and annual
revenue was expected to be $26.1B.3 That’s tremendous growth in a short period of time. AWS
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CHAPTER 4 The Cloud
Amazon Web Services (AWS) Revenue (in billions)
$6.00
$5.11
Revenue in Billions
$5.00
$4.58
$4.10
$4.00
$3.00
$2.00
$1.00
$5.44
$1.05 $1.01 $1.17
$1.42 $1.57
$1.82
$2.09
$2.41 $2.57
$2.89
$3.23
$3.54
$3.66
$–
FIGURE 4-4
AWS Revenue Growth
Companies that harvest user data
from network-enabled devices and
then sell them can create privacy
concerns. The Ethics Guide on pages
176–177 examines these concerns.
Q1
2014
Q2
Q3
Q4
Q1
2015
Q2
Q3
Q4
Q1 Q2
2016
Quarter
Q3
Q4
Q1
2017
Q2
Q3
Q4
Q1
2018
also generated more than half of the operating income for Amazon as a whole and was growing twice as fast as its e-commerce counterpart. What is even more amazing is that Amazon
boasts 33 percent market share of the cloud computing market with more than a million active
customers!4 A million customers may not sound like a lot, but these aren’t individual consumers buying items on Amazon.com; they are large companies like Adobe Systems ($124B market
cap), Netflix Inc. ($157B market cap), and Pfizer Inc. ($213B market cap). One million of this
type of customer is a lot.
Several factors have pushed organizations toward cloud-based hosting, including lower costs,
ubiquitous access, improved scalability, and elasticity. But there are other reasons to shift to the
cloud. Figure 4-5 compares and contrasts cloud-based and in-house (client-server) hosting. As you
can see, the positives are heavily tilted toward cloud-based hosting. The cloud vendor Rackspace
will lease you one medium server for less than a penny per hour. You can obtain and access that
server today, actually within a few minutes. Tomorrow, if you need thousands of servers, you can
readily scale up to obtain them. Furthermore, you know the cost structure; although you might
have a surprise in terms of how many customers want to access your Web site, you won’t have any
surprises about how much it will cost.
Another positive is that as long as you’re dealing with large, reputable organizations, you’ll be
receiving best-of-breed security and disaster recovery. In addition, you need not worry that you’re
investing in technology that will soon be obsolete; the cloud vendor is taking that risk. All of this
is possible because the cloud vendor is gaining economies of scale by selling to an entire industry,
not just to you. Finally, cloud computing allows you to focus on your business, not spend time
maintaining infrastructure. You can outsource functions that are not your core competency and
focus on those that give you a competitive advantage.
The negatives of cloud computing involve loss of control. You’re dependent on a vendor;
changes in the vendor’s management, policy, and prices are beyond your control. Further, you don’t
know where your data—which may be a large part of your organization’s value—is located. Nor do
you know how many copies of your data there are or even if they’re located in the same country as
you are. Finally, you have no visibility into the security and disaster preparedness that is actually in
place. Your competition could be stealing your data and you won’t know it.
The positives and negatives of in-house hosting are shown in the second column of
Figure 4-5. For the most part, they are the opposite of those for cloud-based hosting; note, however,
the need for personnel and management. With in-house hosting, not only will you have to construct
your own data center, you’ll also need to acquire and train the personnel to run it and then manage
those personnel and your facility.
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CHAPTER 4 The Cloud
Cloud
167
In-house
Positive:
Small capital requirements
Control of data location
Speedy development
In-depth visibility of security and disaster preparedness
Superior scalability to growing or fluctuating demand
Known cost structure
Possibly best-of-breed security/disaster preparedness
No obsolescence
Industry-wide economies of scale, hence cheaper
Focus on core business, not infrastructure
Negative:
Dependency on vendor
Significant capital required
Loss of control over data location
Significant development effort
Little visibility into true security and disaster preparedness
capabilities
Difficult (impossible?) to accommodate fluctuating demand
Ongoing support costs
Staff and train personnel
Increased management requirements
Annual maintenance costs
Cost uncertainties
Obsolescence
FIGURE 4-5
Comparison of Cloud and
In-House Alternatives
When Does the Cloud Not Make Sense?
The cloud can help keep critical
systems online during periods of
extreme demand. The Security Guide
on pages 198–199 looks at how
the cloud could have helped one such
system.
Cloud-based hosting makes sense for most organizations. The only organizations for which it may
not make sense are those required by law or by industry standard practice to have physical control over their data. Such organizations might be forced to create and maintain their own hosting
infrastructure. A financial institution, for example, might be legally required to maintain physical
control over its data. Even in this circumstance, however, it is possible to gain many of the benefits of
cloud computing using private clouds and virtual private clouds, possibilities we consider in Q4-7.
Q4-2
How Do Organizations Use the Cloud?
Now that you know what the cloud is, we will look at specific examples of how organizations use the
cloud. We’ll look at how a car manufacturer can benefit from the cloud’s resource elasticity, pooling,
and unique Internet connectivity.
Resource Elasticity
Suppose a car manufacturer creates an ad to run during the Academy Awards. It believes it has a
fantastic ad that will result in millions of hits on its Web site. However, it doesn’t know ahead of time
if there will be a thousand, a million, 10 million, or even more site visits. Further, the ad may appeal
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more to one nationality than to another. Will 70 percent of those visits arise in the United States
and the rest in Europe? Or will there be millions from Japan? Or Australia? Given this uncertainty,
how does the car manufacturer prepare its computing infrastructure? The car manufacturer knows
that if it cannot provide very short response time (say, a fraction of a second), it will lose the benefit
of an incredibly expensive ad. On the other hand, if the ad is a flop, preprovisioning of thousands
of servers will add to the accumulation of wasted money.
Figure 4-6 shows an example of this situation, based on a real case supported by Amazon’s
CloudFront. Suppose Figure 4-6 shows the processing on the car manufacturer’s Web site during
the Academy Awards. Throughout the day, the car manufacturer is delivering less than 10 Gbps
of its content to users. However, as soon as its ad runs (2 PM in the Hawaii-Aleutian time zone
where the data was collected), demand increases sevenfold and stays high for half an hour. After
the announcement of Best Picture, when the ad runs again, demand again increases to 30 and 40
Gbps for an hour and then returns to its base level.
Without an increase in servers, response time will be 3 or 5 seconds or more, which is far too
long to maintain the attention of an Academy Awards viewer. However, the car manufacturer has
contracted with its cloud vendor to add servers, wherever needed worldwide, to keep response time
to less than 0.5 seconds. Using cloud technology, the cloud vendor will programmatically increase
its servers to keep response time below the 0.5-second threshold. As demand falls after the ad runs
a second time, it will release the excess servers and reallocate them at the end of the awards.
In this way, the car manufacturer need not build or contract for infrastructure that supports
maximum demand. Had it done so, the vast majority of its servers would have been idle for most of
the evening. And, as you’ll learn, the cloud vendor can provision servers worldwide using the cloud;
if a good portion of the excess demand is in Singapore, for example, it can provision extra servers
in Asia and reduce wait time due to global transmission delays.
Pooling Resources
The servers that the car manufacturer needed for these few hours were much less costly because
it only needed them for a short time. The servers that it used for the Academy Awards can be reallocated to CPA firms that need them later that same day, to textbook publishers who need them for
online student activity on Monday, or to the hotel industry that needs them later the next week.
An easy way to understand the essence of this development is to consider electrical power. In
the very earliest days of electric power generation, organizations operated their own generators to
create power for their company’s needs. Over time, as the power grid expanded, it became possible
to centralize power generation so that organizations could purchase just the electricity they needed
from an electric utility.
Both cloud vendors and electrical utilities benefit from economies of scale. According to this principle, the average cost of production decreases as the size of the operation increases. Major cloud
Need: Scalability
80
Volume of Data Delivered
(Gbps)
70
FIGURE 4-6
Example Video Banner Ad
Customer
Peak usage over 60 Gbps
60
50
40
30
20
10
0
8.00 AM
9.00 AM
10.00 AM
11.00 AM
12.00 PM
1.00 PM
2.00 PM
3.00 PM
4.00 PM
5.00 PM
6.00 PM
7.00 PM
8.00 PM
9.00 PM
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FIGURE 4-7
Apple Data Center in
Maiden, NC
Source: ©2018 Google LLC, used with
permission. Google and the Google logo
are registered trademarks of Google LLC.
vendors operate enormous Web farms. Figure 4-7 shows the building that contains the computers
in the Web farm that Apple constructed in 2011 to support its iCloud offering. This billion-dollar
facility contains 505,000 square feet.5 Amazon, IBM, Google, Microsoft, Oracle, and other large
companies each operate several similar farms worldwide.
Over the Internet
The car manufacturer in the previous example has contracted with the cloud vendor for a maximum response time; the cloud vendor adds servers as needed to meet that requirement. As stated,
the cloud vendor may be provisioning, nearly instantaneously, servers all over the world. How does
it do that? And not for just one customer, like the car manufacturer, but for thousands?
In the old days, for such interorganizational processing to occur, developers from the car manufacturer had to meet with developers from the cloud vendor and design an interface. “Our programs
will do this, providing this data, and we want your programs to do that, in response, sending us this
other data back.” Such meetings took days and were expensive and error-prone. Given the design,
the developers then returned home to write code to meet the agreed-on interface design, which may
not have been understood in the same way by all parties.
It was a long, slow, expensive, and prone-to-failure process. If organizations had to do that
today, cloud provisioning would be unaffordable and infeasible.
Instead, the computer industry settled on a set of standard ways of requesting and receiving
services over the Internet. You will learn about some of these standards in Q4-5. For now, just realize those standards enable computers that have never “met” before to organize a dizzying, worldwide dance to deliver and process content to users on PCs, iPads, Google phones, Xboxes, and even
exercise equipment in a tenth of second or less. It is absolutely fascinating and gorgeous technology!
Unfortunately, you will have the opportunity to learn only a few basic terms in Q4-3 and Q4-4.
Cloud Services from Cloud Vendors
Organizations can use the cloud in several different ways. The first and most popular way is obtaining cloud services from cloud service vendors. But not all organizations use cloud services to the
same extent. You can use more of the cloud or less. It’s up to you. As a business professional, you’ll
need to understand the differences in cloud service levels.
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CHAPTER 4 The Cloud
To help you understand these differences, we’ll use a metaphor related to transportation and
then relate it to cloud service offerings.
Transportation as a Service
Suppose you need to get to and from work each day. You have four options for satisfying your transportation needs. You can build a car, buy a car, rent a car, or take a taxi. Each has its own advantages
and disadvantages. As shown in Figure 4-8, at one end of the spectrum, you manage your own
transportation completely (building a car). At the other end of the spectrum, your transportation
is managed by someone else (a taxi service).
For example, if you decide to buy a car rather than build one, you are essentially outsourcing
some of your transportation to a car manufacturer. You don’t have to buy the car parts, assemble
the car, or test it to make sure it works properly. It might initially seem cheaper to build your own
car. But realistically, you may not have the time, knowledge, skill, or patience to actually build a
reliable car. It may end up cheaper to buy a car rather than build one.
Similarly, if you decide to rent a car, you’re essentially outsourcing more of your transportation to someone else. By renting a car you don’t have to pay for vehicle registration and taxes. You
also don’t have to make any repairs or clean the car. You’re doing less work but potentially paying
more. The same is true of the difference between renting a car and taking a taxi. If you take a taxi,
you don’t have to buy car insurance, drive the car, or buy gas. In fact, you don’t even need a driver’s
license. Again, you’re accomplishing the same thing—getting to and from work. You’re just managing less of your transportation.
Types of Cloud Service Offerings
The “transportation as a service” metaphor helps explain how organizations use cloud services to move
away from a traditional on-premises model in which they must provide all services internally. Depending on their choice of cloud services, organizations manage less of their infrastructure, platform, and
software functions. In general, one type of service isn’t necessarily better than another. What is best for
an individual organization depends upon the way in which its managers want to use the cloud. Cloudbased service offerings can be organized into the three categories shown in Figure 4-9.
As shown in Figure 4-10, the most basic cloud offering is infrastructure as a service (IaaS),
which is the cloud hosting of a bare server computer, data storage, network, and virtualization.
Rackspace Inc. provides hardware for customers to load whatever operating system they want, and
FIGURE 4-8
Transportation as
a Service
Build a Car
Buy a Car
Rent a Car
Take a Taxi
Traditional
On-Premises
Infrastructure
as a Service
(IaaS)
Platform as a
Service
(PaaS)
Software as a
Service
(SaaS)
Gas
Gas
Gas
Gas
Driving
Driving
Driving
Driving
Insurance
Insurance
Insurance
Insurance
Cleaning
Cleaning
Cleaning
Cleaning
Repairs
Repairs
Repairs
Repairs
Registration
Registration
Registration
Registration
Testing
Testing
Testing
Testing
Assembly
Assembly
Assembly
Assembly
Auto Parts
Auto Parts
Auto Parts
Auto Parts
You Manage
Vendor Manages
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CHAPTER 4 The Cloud
FIGURE 4-9
Three Fundamental Cloud
Types
Cloud Service
Users
Examples
SaaS
Employees
Customers
Salesforce.com
iCloud
Office 365
PaaS
Application developers
Application testers
Google App Engine
Microsoft Azure
AWS Elastic Beanstalk
IaaS
Network architects
Systems administrators
Amazon EC2 (Elastic Compute Cloud)
Amazon S3 (Simple Storage Service)
171
Amazon licenses S3 (Simple Storage Service), which provides unlimited, reliable data storage in the
cloud. The cost savings of IaaS over traditional on-premises hosting can be substantial.
The second category of cloud hosting is platform as a service (PaaS), whereby vendors
provide hosted computers with an operating system, runtime environment, and middleware like
a Web server or a DBMS. Microsoft Windows Azure, for example, provides servers installed with
Windows Server. Customers of Windows Azure then add their own applications on top of the hosted
platform. Microsoft SQL Azure provides a host with Windows Server and SQL Server. Oracle On
Demand provides a hosted server with Oracle Database. Again, for PaaS, organizations add their
own applications to the host. Amazon EC2 provides servers with Windows Server or Linux installed.
An organization that provides software as a service (SaaS) provides not only hardware infrastructure and an operating system but application programs and databases as well. For example,
Salesforce.com provides hardware and programs for customer and sales tracking as a service. Similarly, Google provides Google Drive and Microsoft provides OneDrive as a service. With Office 365,
Exchange, Skype for Business, and SharePoint applications are provided as a service “in the cloud.”
For each of these applications, you just sign up for them and learn how to use them. You
don’t have to worry about buying hardware, loading an operating system, setting up a database, or
installing software. All of that is managed by the cloud service provider. Much like using a taxi—you
just jump in and go.
As a business professional you’ll need to know the advantages and disadvantages of onpremises hosing, IaaS, PaaS, and SaaS. Your choice of cloud service will be driven by your competitive
environment, business strategy, and technical resources. Much like the “transportation as a service”
metaphor mentioned earlier, not everyone should build, own, or even rent a car.
If you’re a working professional living in a big city, maybe taking a taxi is your best transportation option (SaaS). If you’re always on the road traveling for business, renting a car in each city
might be the right choice (PaaS). If you own a large package delivery company, you might want
FIGURE 4-10
Cloud Service Offerings
Traditional
On-Premises
Infrastructure
as a Service
(IaaS)
Platform as a
Service
(PaaS)
Software as a
Service
(SaaS)
Applications
Applications
Applications
Applications
Data
Data
Data
Data
Runtime
Runtime
Runtime
Runtime
Middleware
Middleware
Middleware
Middleware
OS
OS
OS
OS
Virtualization
Virtualization
Virtualization
Virtualization
Servers
Servers
Servers
Servers
Storage
Storage
Storage
Storage
Network
Network
Network
Network
You Manage
Vendor Manages
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CHAPTER 4 The Cloud
to buy a fleet of trucks (IaaS). If you’re a high-performance racecar driver, you may need to build
your own specialized racing vehicle (on-premises). Making the right choice between cloud services
is really more about finding the right fit with your organization’s needs.
Content Delivery Networks
Another major use of the cloud is to deliver content from servers placed around the world. A content
delivery network (CDN) is a system of hardware and software that stores user data in many different geographical locations and makes those data available on demand. A CDN provides a specialized
type of PaaS but is usually considered in its own category, as it is here. To understand how a CDN
delivers content, let’s compare it to how traditional servers deliver content.
Figure 4-11 shows a server located in California delivering content to users around the United
States. Suppose this hypothetical California-based media company streams HD movies to millions
of homes around the country. The bandwidth usage from this company would be tremendous. To
give you an idea of how much this might be, reports indicate that Netflix traffic consumes 35 percent of all Internet traffic in North America during peak evening hours.6 This level of bandwidth
consumption would be costly to deliver and would slow content delivery from other companies.
Figure 4-12 shows how this online media company could use a CDN to store copies of its movies. The CDN vendor replicates movies on servers, possibly worldwide, in order to speed up response
time. When a user at home requests a movie, the request is transmitted to a routing server that
determines which CDN server will deliver the movie to the user the fastest. Because traffic changes
rapidly, such determinations are made in real time. A request for content at one moment in time
could be served by a computer in, say, San Diego, and a few moments later, that same request from
that same user might be served by a computer in Seattle.
In addition to movies, CDNs are often used to store and deliver content that seldom changes.
For example, the company banner on an organization’s Web page might be stored on many CDN
servers. Various pieces of the Web page could be obtained from different servers on the CDN; all
such decisions are made in real time to provide the fastest content delivery possible.
Figure 4-13 summarizes CDN benefits. The first two are self-explanatory. Reliability is increased
because data are stored on many servers. If one server fails, any of a potentially large number of
other servers can deliver the content. You will learn about denial-of-service (DoS) attacks. For
now, just understand that such security threats send so much data to a given server that the
server’s performance for legitimate traffic becomes unacceptable. By having multiple servers,
CDNs help to protect against such attacks.
FIGURE 4-11
Traditional Server Content
Distribution
Media Company
Home Users
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CHAPTER 4 The Cloud
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Media Company
Home Users
FIGURE 4-12
Distributed CDN Servers
CDN Server
In some cases, CDNs reduce access costs for mobile users (those who have a limited data
account). By delivering the data faster, site connection charges can be reduced. Finally, many (but
not all) CDN services are offered on a flexible, pay-as-you-go basis. Customers need not contract for
fixed services and payments; they pay only for what they use, when they use it. Some of the leading
CDN vendors include Amazon CloudFront, Akamai, CloudFlare CDN, and MaxCDN.
Using Web Services Internally
The final way that organizations can use cloud technology is to build internal information systems
using Web services. Strictly speaking, this is not using the cloud because it does not provide elasticity or the advantages of pooled resources. It does advantageously use cloud standards, however, so
we include it here.
Figure 4-14 shows a Web services inventory application at a hypothetical online bicycle part
retailer named Best Bikes. In this example, Best Bikes is running its own servers on its own infrastructure. To do so, Best Bikes sets up a private internet within the company, an internet that is
generally not reachable from outside the company. Best Bikes writes the applications for processing inventory using Web services standards, applications publish a WSDL, the Web services are
accessed by other applications within the company using SOAP, and data are delivered using JSON.
Application users access the inventory Web services using JavaScript that is sent down to the users’
browsers. All of these will be discussed later in this chapter in Q4-5.
Users of the inventory Web services include Sales, Shipping, Customer Service, Accounting,
and other departments. Internal applications can use the inventory Web services like building
blocks. They can use the services that they need—and no more. Because the Web services are
Benefits of Content Delivery Networks
FIGURE 4-13
Benefits of Content Delivery
Networks
•
•
•
•
•
•
Decreased, even guaranteed, loadtime
Reduced load on origin server
Increased reliability
Protection from DoS attacks
Reduced delivery costs for mobile users
Pay-as-you-go
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CHAPTER 4 The Cloud
Private Internet
Browsers in
Browsers in
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept
Sales Dept
Inventory
application
service requests
& responses
FIGURE 4-14
Web Services Principles
Applied to Inventory
Applications
Browsers in
Browsers in
Customer
Browsers in
Customer
Browsers in
Service
Customer
Service
Customer
Service
Service
Inventory
Applications
Inventory
application
service requests
& responses
Web Servers
Database server
service requests &
responses
Browsers in
Browsers in
Shipping
Browsers in
Shipping
Browsers in
Shipping
Browsers in
Shipping
Shipping
DBMS
Browsers in
Browsers in
Accounting
Browsers in
Accounting
Accounting
DB
Database Server
encapsulated, the inventory system can be altered without affecting other applications. In this way,
systems development is more flexible, and it will be faster and hence less costly.
As stated, however, this is not a cloud. In this example, Best Bikes has a fixed number of servers;
no attempt is made to make them elastic. Also, the servers are dedicated to inventory. During idle
periods, they are not dynamically reused for other purposes. Some organizations remove this limit
by creating a private cloud, as discussed in Q4-7.
Q4-3
What Network Technology Supports the Cloud?
A computer network is a collection of computers that communicate with one another over transmission lines or wirelessly. As shown in Figure 4-15, the four basic types of networks are personal
area networks, local area networks, wide area networks, and internets.
A personal area network (PAN) connects devices located around a single person. Most PAN
devices connect wirelessly to other devices located within 10 meters. A local area network (LAN)
connects computers that reside in a single geographic location on the premises of the company that
operates the LAN. The number of connected computers can range from two to several hundred.
The distinguishing characteristic of a LAN is a single location. A wide area network (WAN) connects computers at different geographic locations. The computers in two separated company sites
must be connected using a WAN. To illustrate, a smartwatch or fitness tracker will create a PAN
by connecting to a student’s smartphone. The computers for a college of business located on a
single campus can be connected via a LAN. The computers for a college of business located on
multiple campuses must be connected via a WAN.
Type
FIGURE 4-15
Basic Network Types
Characteristic
Personal area network (PAN)
Devices connected around a
single person
Local area network (LAN)
Computers connected at a single
physical site
Wide area network (WAN)
Computers connected between two or
more separated sites
The Internet and internets
Networks of networks
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CHAPTER 4 The Cloud
See what a typical workday would
look like for someone who manages networks in the Career Guide
on page 201.
175
The single- versus multiple-site distinction between LANs and WANs is important. With a LAN,
an organization can place communications lines wherever it wants because all lines reside on its
premises. The same is not true for a WAN. A company with offices in Chicago and Atlanta cannot
run a wire down the freeway to connect computers in the two cities. Instead, the company contracts
with a communications vendor licensed by the government and that already has lines or has the
authority to run new lines between the two cities.
An internet is a network of networks. Internets connect LANs, WANs, and other internets.
The most famous internet is “the Internet” (with an uppercase letter I), the collection of networks
you use when you send email or access a Web site. In addition to the Internet, private networks of
networks, called internets, also exist. A private internet used exclusively within an organization is
sometimes called an intranet.
The networks that make up an internet use a large variety of communication methods and
conventions, and data must flow seamlessly across them. To provide seamless flow, an elaborate
scheme called a layered protocol is used. The details of protocols are beyond the scope of this text.
Just understand that a protocol is a set of rules and data structures for organizing communication.
Computers need to use protocols so they can exchange data. People use similar protocols to communicate. People, for example, follow a conversational protocol that says when one person talks,
the other person listens. They switch back and forth until they are done communicating. Without
a protocol for conversations, people would continually talk over each other and nothing would be
communicated.
There are many different protocols; some are used for PANs, some are used for LANs, some are
used for WANs, some are used for internets and the Internet, and some are used for all of these. We
will identify several common protocols in this chapter.
What Are the Components of a LAN?
As stated, a LAN is a group of computers connected together on a single site. Usually the computers are located within a half-mile or so of each other. The key distinction, however, is that all of the
computers are located on property controlled by the organization that operates the LAN. This means
that the organization can run cables wherever needed to connect the computers.
Figure 4-16 shows a LAN typical of those in a small office or home office (SOHO). Typically,
such LANs have fewer than a dozen or so computers and printers. Many businesses, of course, operate LANs much larger than this one. The principles are the same for a larger LAN, but the additional
complexity is beyond the scope of this text.
The computers and printers in Figure 4-16 communicate via a mixture of wired and wireless
connections. Some devices use wired connections, and others use wireless connections. The devices
and protocols used differ for wired and wireless connectivity.
The Institute for Electrical and Electronics Engineers (IEEE, pronounced “I triple E”) sponsors
committees that create and publish protocol and other standards. The committee that addresses
LAN standards is called the IEEE 802 Committee. Thus, IEEE LAN protocols always start with the
numbers 802.
The IEEE 802.3 protocol is used for wired LAN connections. This protocol standard, also
called Ethernet, specifies hardware characteristics, such as which wire carries which signals. It
also describes how messages are to be packaged and processed for wired transmission over the LAN.
Most personal computers today support what is called 10/100/1000 Ethernet. These products conform to the 802.3 specification and allow for transmission at a rate of 10, 100, or 1,000
Mbps (megabits per second). Switches detect the speed a given device can handle and communicate
with it at that speed. If you check computer listings at Dell, Lenovo, and other manufacturers, you
will see PCs advertised as having 10/100/1000 Ethernet. Today, speeds of up to 1 Gbps are possible
on wired LANs.
By the way, the abbreviations used for communications speeds differ from those used for
computer memory. For communications equipment, K stands for 1,000, not 1,024 as it does for
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
ETHICS GUIDE
REVERSE ENGINEERING PRIVACY
Wendy entered the classroom and made her way up
the stairs to the back row. She normally didn’t like to sit in
the back of the room, but she had been late on the first day
of class, and the instructor had mandated assigned seating
during that session. The semester felt like it was dragging on,
and she couldn’t wait to begin her marketing internship in the
city that summer. She had worked for the same company the
previous summer, and she was confident that she would be
offered a full-time position once she graduated. Her thoughts
of city life were interrupted when the instructor entered at the
front and abruptly started class.
The class was required for business students, and it covered a variety of technology-related topics. The session began
in the usual way—with an overview of current popular press
articles. The instructor started the class by discussing an article that quickly grabbed the attention of the class. “Did you
know that billboards are spying on you?” he said. “Well, let me
rephrase that—they are not exactly spying, but they do know
more about you than you think.”
The Billboards Are Watching
“You may have noticed a number of digital billboards popping
up around the city,” the instructor continued. “They can be
programmed to display a variety of ads throughout the day. If
you’ve seen one, you may have thought it just cycles through a
fixed set of advertisements over the course of the day, changing about every 10 seconds. However, the ad
selection process is very
dynamic, and the time of
day that each advertisement is displayed is quite
intentional. In fact, the
billboard knows which
types of demographic
and socioeconomic segments are driving by the
billboard throughout the
day.”7 The class seemed
skeptical about this statement—how could this be
possible?
The instructor then explained how it worked. “Cell phone
companies collect vast quantities of location data about their
customers. This is because customers’ phones are continuously communicating their location to cell towers in order
to send and receive data. They also manage the process of
identifying the nearby towers with the strongest signal. As
a by-product of this process, phone companies know where
you are at all times of the day as long as you are carrying
your phone.”
The instructor smiled matter-of-factly and continued,
“They then take these massive data sets containing customer
location data and sell them to third parties, in this case,
companies advertising via billboards. These companies then
analyze the location data and segment people into various
groups—sports fans who have been to a stadium several times,
people who like sailing and spend time at the yacht club every
weekend, people who stop at a specific coffee shop every morning. Once these segments are identified, advertising companies
determine when the highest number of people in each segment are driving by the digital billboards and display targeted
ads accordingly.”
Privacy Please
After describing the general process of how these billboards
work, the instructor opened up the floor for students to comment. The students seemed to fall into one of two distinct
Source: Aurélio Scetta/Alamy Stock Vector
176
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CHAPTER 4 The Cloud
opinions. Some thought the technology was cool and that
billboards displaying targeted advertisements based on their
data was yet another example of the innovation and limitless
reach of the information age. Others found the billboards to
be another egregious example of companies operating with
reckless abandon concerning the privacy and security of consumer data. After a number of students on each side shared
their thoughts, the instructor offered some new insights to
take the discussion a step further.
“Those of you who are concerned about the security of
your data are justified in your position. There was a recent
article that discussed the agreement you make when you
allow apps on your phone to access your location data—you
are essentially agreeing that they can take your data and sell
it, and it may pass between any number of third parties before
it is actually used for targeted advertising. This clearly poses
a potential security risk if the data is compromised. This is
177
especially worrisome because companies are not diligent
about removing personally identifiable information (PII).8
And to make matters worse, it was recently revealed that
Android phones were collecting and storing location data even
when location-based services were disabled.”9
These revelations riled up the class even more and further polarized the two groups of students. Wendy wasn’t
exactly sure to which camp she belonged. As a marketing
major, she recognized the tremendous potential in creating
targeted advertising campaigns. However, as a private citizen,
the thought of companies knowing everywhere she had been
since she started using her cell phone and the ease with which
these companies shared this data with other organizations
without her permission felt wrong and unsettling. She started
wondering about her future career in marketing. Could
she work for a company that takes advantage of consumer
data—her data—in this way?
DISCUSSION QUESTIONS
1. According to the definitions of the ethical principles
defined previously in this book:
a. Do you think tracking a customer’s physical location
throughout the day is ethical according to the categorical imperative?
b. Do you think tracking a customer’s physical location
throughout the day is ethical according to the utilitarian perspective?
2. Why do you think Wendy is conflicted? Is it OK to track
other people but not want your own movements tracked?
Why?
3. Most people don’t read the terms when they sign up for
a new service. Do you think it’s OK for a company to
do whatever it wants with customer data if it specifically notes it in the terms of the contract? If the contract is extraordinarily lengthy, written in legalese, and
displayed in a tiny font, is it reasonable to assume that
a typical person will read and understand it? Is it the
company’s responsibility to make sure its customers
understand it?
4. Suppose the cellular company shares network signal
strength data from the customer’s phone with a thirdparty marketing company. The marketing firm can then
use the data to compute the customer’s location throughout the day. How might sharing corporate “network” data
be a potential customer privacy violation?
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CHAPTER 4 The Cloud
Laptop 1
Laptop 2
Phone 1
Phone 2
Wireless connections (dotted lines)
use IEEE 802.11
Computer 1
LAN devices acts as a router,
switch, and wireless access point
(AP)
Internet
FIGURE 4-16
Typical Small Office/Home
Office (SOHO) LAN
Internet
Service
Provider
Computer 2
Wired connections (solid lines) use
IEEE 802.3
Computer 3
Printer
Fax
memory. Similarly, M stands for 1,000,000, not 1,024 * 1,024; G stands for 1,000,000,000, not
1,024 * 1,024 * 1,024. Thus, 100 Mbps is 100,000,000 bits per second. Also, communications
speeds are expressed in bits, whereas memory sizes are expressed in bytes. These are different units
of measurement. One byte consists of eight bits. This means a 1 MB file would consist of 8,388,608
bits. If you sent a 1 MB file over a 1 Mbps connection, it would take more than 8 seconds to send
because your connection speed is measured in bits per second, not bytes per second.
Wireless LAN connections use the IEEE 802.11 protocol. Several versions of 802.11 exist,
and as of 2018, the most current one is IEEE 802.11ac. The differences among these versions are
beyond the scope of this discussion. Just note that the current standard, 802.11ac, allows speeds
of up to 1.3 Gbps, though few users have an Internet connection fast enough to take full advantage
of that speed. The next version, 802.11ax, promises speeds around 10 Gbps.
Bluetooth is another common wireless protocol used to make PAN connections. It is designed
for transmitting data over short distances, replacing cables. Devices, such as wireless mice, keyboards, printers, and headphones, use Bluetooth to connect to desktop computers. Other devices
like smartwatches and fitness trackers can use Bluetooth to connect to smartphones and send data
over the Internet. More and more devices like clothing, automobiles, and sports equipment are
becoming Bluetooth enabled.
Connecting Your LAN to the Internet
Although you may not have realized it, when you connect your SOHO LAN, phone, iPad, or Kindle
to the Internet, you are connecting to a WAN. You must do so because you are connecting to computers that are not physically located on your premises. You cannot start running wires down the
street to plug in somewhere.
When you connect to the Internet, you are actually connecting to an Internet service
provider (ISP). An ISP has three important functions. First, it provides you with a legitimate
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Internet address. Second, it serves as your gateway to the Internet. The ISP receives the communications from your computer and passes them on to the Internet, and it receives communications
from the Internet and passes them on to you. Finally, ISPs pay for the Internet. They collect money
from their customers and pay access fees and other charges on your behalf.
Figure 4-17 shows the three common alternatives for connecting to the Internet. Notice that
we are discussing how your computer connects to the Internet via a WAN; we are not discussing the
structure of the WAN itself. WAN architectures and their protocols are beyond the scope of this text.
Search the Web for “leased lines” or “PSDN” if you want to learn more about WAN architectures.
SOHO LANs (such as that in Figure 4-16) and individual home and office computers are commonly connected to an ISP in one of three ways: a special telephone line called a DSL, a cable TV
line, or a wireless-phone-like connection.
Digital Subscriber Line (DSL)
A digital subscriber line (DSL) operates on the same lines as voice telephones, but it operates so it
does not interfere with voice telephone service. Because DSL signals do not interfere with telephone
signals, DSL data transmission and telephone conversations can occur simultaneously. A device at
the telephone company separates the phone signals from the computer signals and sends the latter
signal to the ISP. Digital subscriber lines use their own protocols for data transmission.
Cable Line
A cable line is the second type of WAN connection. Cable lines provide high-speed data transmission using cable television lines. The cable company installs a fast, high-capacity optical fiber cable
to a distribution center in each neighborhood it serves. At the distribution center, the optical fiber
cable connects to regular cable-television cables that run to subscribers’ homes or businesses. Cable
signals do not interfere with TV signals.
Because as many as 500 user sites can share these facilities, performance varies depending
on how many other users are sending and receiving data. At the maximum, users can download
FIGURE 4-17
Summary of LAN Networks
Type
Local area
network
Topology
Transmission
Line
Local area
network
UTP or optical
fiber
Local area
network with
wireless
DSL modem to
ISP
Cable modem
Connections to ISP
to the
Internet
WAN wireless
Transmission
Speed
Equipment
Used
Protocol
Commonly Used
Remarks
Switch
NIC
UTP or optical
IEEE 802.3
(Ethernet)
Switches connect devices,
multiple switches on all but
small LANs.
UTP or optical for Up to 1.3 Gbps
nonwireless
connections
Wireless
access point
Wireless NIC
IEEE 802.11ac,
(802.11ax not yet
common)
Access point transforms
wired LAN (802.3) to wireless
LAN (802.11).
DSL telephone
Personal:
Upstream to 1 Mbps,
downstream to
40 Mbps (max 10
likely in most areas)
DSL modem
DSL-capable
telephone line
DSL
Can have computer and
phone use simultaneously.
Always connected.
Cable TV lines to
optical cable
Upstream to
1 Mbps
Downstream
20 Mbps to 100 Mbps
Cable modem
Cable TV cable
Cable
Capacity is shared with other
sites; performance varies
depending on others’ use.
Wireless
connection to
WAN
500 Kbps
to 1.7 Mbps
Wireless
WAN modem
One of several
wireless
standards
Sophisticated protocols
enable several devices to
use the same wireless
frequency.
Common:
10/100/1000 Mbps
Possible: 1 Gbps
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data up to 50 Mbps and can upload data at 512 Kbps. Typically, performance is much lower than
this. In most cases, the download speed of cable lines and DSL lines is about the same. Cable lines
use their own protocols.
WAN Wireless Connection
A third way you can connect your computer, mobile device, or other communicating device is via
a WAN wireless connection. Amazon’s Kindle, for example, uses a Sprint wireless network to provide wireless data connections. The iPhone uses a LAN-based wireless network if one is available
and a WAN wireless network if not. The LAN-based network is preferred because performance is
considerably higher. As of 2018, WAN wireless provides average performance of 1.0 Mbps with
peaks of up to 3.0 Mbps, as opposed to the typical 50 Mbps for LAN wireless.
Q4-4
How Does the Internet Work?
This section will give you the basic understanding of how the Internet works and enable you to be
an effective consumer of cloud services. The cloud resides in the Internet. So, in order to learn how
the cloud works, you need a basic understanding of how the Internet works. With that background,
you will learn how it is possible for a cloud vendor to provide dramatic elasticity to support the
workload shown in Figure 4-6.
The Internet and the U.S. Postal System
FIGURE 4-18
Comparison of the Postal
System and the Internet
The technology that underlies the Internet and the additional technology that enables the cloud
to work are complicated. To explain how the Internet works, we’ll use a simplified example, shown
in Figure 4-18, comparing the movement of packages in the U.S. postal system to the movement
of packets through the Internet. This is a highly simplified, but useful, example for explaining the
basics of how the Internet works. We will stay at a high level and help you learn overarching concepts and basic definitions.
The Internet works much like the U.S. postal system in that both systems transport things from
one location to another. The Internet transports email, while the U.S. postal system sends paper
mail. Comparing the Internet to the U.S. postal system allows you to relate new Internet terms to a
system with which you’re already familiar (the U.S. postal system).
Steps to Send Package
Postal System
Internet Equivalent
1. Assemble package
Package
Packet
2. Put name on package
Person’s name (e.g., BigBank Inc. or
Jane Smith)
Domain name (e.g., www.BigBank.com)
3. Look up address
Phone book
DNS
4. Put address on package
Mailing address (e.g., 123 Park Ave, New York,
NY, 10172)
IP address (e.g., 10.84.8.154)
5. Put registered mail sticker on
package
Registered Mail
TCP
6. Ship package
Airlines (e.g., Delta Air Lines, Inc.)
Airports (e.g., Seattle-Tacoma International
Airport)
Carriers (e.g., Sprint Corp.)
Routers
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Step 1: Assemble Package (Packets)
Suppose you are sitting in your apartment in Seattle and you want to send a box of cookies to your
friend, Jane Smith, working at BigBank Inc. in New York City. The Internet equivalent of this is
sending a packet, or a formatted message that passes through networks, to BigBank’s Web server
requesting a copy of its main Web page. Packets wind their way through the Internet much the
same way packages wind their way through the U.S. postal system. The cookies are created and
boxed up by you, a person. The contents of the packet, on the other hand, are created by applications
like Google Chrome, Firefox, Safari, Skype, or FileZilla.
Step 2: Put Name on Package (Domain Names)
The next step in sending a package through the U.S. postal system is to put a name on the package.
On your package of cookies you might write “BigBank Inc.” or “Jane Smith.” On the packet you put a
domain name, or a worldwide-unique name affiliated with a public IP address (discussed in Step 3).
Examples of domain names include www.bigbank.com, www.microsoft.com, or www.university.edu.
It is not necessary for packets to contain a domain name. In fact, many don’t. Just like with the
U.S. postal system, the address is more important than the recipient name.
Step 3: Look Up Address (IP Address)
Before you can send your box of cookies to your friend you need to put a shipping address on the
package (e.g., 123 Park Ave, New York, NY, 10172). Just like regular postal mail, every location
on the Internet needs a unique address. For reasons beyond this discussion, an Internet address is
called an IP address, which is a number that identifies a particular device. Public IP addresses
identify a particular device on the public Internet. In order to get on the Internet, every device must
have access to a public IP address.
IP Addresses
IP addresses have two formats. The most common form, called IPv4, has a four-decimal dotted
notation such as 137.190.8.10. Unfortunately, there are only 4 billion IPv4 addresses that can be
used by all 7 billion people on the earth. As a result, a second format of IP addresses called IPv6 is
being adopted—slowly. It has a longer format (e.g., 0:0:0:0:0:ffff:89be:80a), which accommodates
340 undecillion addresses. That’s plenty of IP addresses—for now. In your browser, if you enter an
IPv4 address like http://137.190.8.10 or an IPv6 address like 0:0:0:0:0:ffff:89be:80a, your browser
will connect with the device on the public Internet that has been assigned to this address.
DNS
Most people don’t remember addresses. It’s easier to remember a name like Jane Smith or BigBank Inc. and look up the mailing address in a phone book (or an Internet-based phone book).
The Internet works the same way. Nobody wants to type IP addresses like http://165.193.140.14
to find a particular site. It is easier to enter names like www.pandora.com or www.woot.com or www
.pearsonhighered.com.
Because public IP addresses must be unique worldwide, their assignment is controlled by a
centralized organization named ICANN (Internet Corporation for Assigned Names and Numbers). ICANN administers a directory naming system, like a phone book, called Domain Name
System (DNS) that assigns domain names to IP addresses. When an organization or individual
wants to register a domain name, it goes to a company that applies to an ICANN-approved agency
to do so. GoDaddy (www.godaddy.com) is an example of such a company (Figure 4-19).
GoDaddy, or a similar agency, will first determine if the desired name is unique worldwide. If
so, then it will apply to register that name to the applicant. Once the registration is completed, the
applicant can affiliate a public IP address with the domain name, much like your name is associated
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FIGURE 4-19
GoDaddy Screenshot
Source: © 2018 GoDaddy Operating
Company, LLC. All rights reserved.
with a single postal address. From that point onward, traffic for the new domain name will be routed
to the affiliated IP address.
In 2016, the U.S. Department of Commerce gave up oversight of ICANN to a diverse group
of governments and companies. Most tech companies applauded the handover. But critics worry
that less-free countries may try to influence ICANN to disallow domain names for dissident groups,
thereby kicking them off the Internet. At this point, ICANN is still located in the United States and
must obey U.S. laws. Time will tell if the transition proves to be a good one.
Step 4: Put Address on Package (IP Address on Packet)
Every time you enter a domain name (e.g., www.washington.edu) into your Web browser, your computer sends a lookup (resolution) request to a DNS server asking it for the IP address that corresponds with that domain name. The DNS server responds with the IP address that your operating
system then puts on packets to be sent to that site.
Note two important points: First, several (or many) domain names can point to the same IP
address. This is the real-world equivalent of multiple people (i.e., a family) sharing the same postal
mailing address. Second, the affiliation of domain names with IP addresses is dynamic. The owner
of the domain name can change the affiliated IP addresses at its discretion, much like you can
change your affiliation with a specific mailing address if you decide to move.
Before we leave addressing, you need to know one more term. A URL (Uniform Resource
Locator) is an address on the Internet. Commonly, it consists of a protocol (such as http:// or ftp://)
followed by a domain name or public IP address. A URL is actually quite a bit more complicated than
this description, but that detailed knowledge is beyond the scope of this text, so we’ll hurry along.
The preferred pronunciation of URL is to say the letters U, R, L.
Step 5: Put Registered Mail Sticker on Package (TCP)
After your package is addressed, you need to guarantee that it gets delivered using registered mail.
Registered mail guarantees delivery by requiring the recipient to sign a receipt that is then sent
back to the sender. The same is true of packets. The Transmission Control Protocol (TCP) is
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a core Internet protocol that guarantees the reliable delivery of packets. TCP is the equivalent of
registered mail in the postal system. TCP information is added to packets just like registered mail
stickers are added to postal packages. They guarantee delivery by requiring the receiver to send back
an acknowledgement that the packet was received. If no acknowledgement is received, it will keep
trying to sending the packet a certain number of times before it gives up.
Step 6: Ship Package (Packets Transported by Carriers)
Figure 4-20 illustrates a simplified path that your packet may take through the Internet. To begin,
note that this example is an internet because it is a network of networks. It consists of two LANs
(yours and the bank’s) and four networks. (In truth, the real Internet consists of tens of thousands
of networks, but to conserve paper, we don’t show all of them.) A hop is the movement from one
network to another. This term is frequently used by cloud vendors when they discuss provisioning
servers to minimize the number of hops. As drawn, in Figure 4-20, the shortest path from you to the
bank’s LAN consists of four hops. Your box of cookies will take a similar number of hops between
postal facilities as it moves across the country.
At this point, we should mention that most hosts connected to a LAN share a single public
IP address, much like a family living in a house shares a single postal address. Each internal host
receives a private IP address that identifies a particular device on a private network. Private IP
addresses are used for traffic going to other devices on the LAN. But all traffic leaving the LAN uses
the single shared public IP address to cross the Internet. All private IP addresses are managed by a
LAN device like the one shown in Figure 4-16.
Carriers
FIGURE 4-20
Using the Internet to Request
a Web Page
In the U.S. postal system, your package weaves its way toward its destination through multiple airports. It does so aboard airplanes owned by airlines like Delta Air Lines, Southwest Airlines, and United
Airlines. Similarly, as your packet moves across the Internet, it passes through routers (airports),
which are devices that connect different networks together. Routers, and many of the networks
they’re connected to, are owned by large telecommunication providers (airlines) known as carriers. Some of these large carriers include Sprint, AT&T, Verizon Business, and XO Communications.
These large carriers exchange Internet traffic freely at physical locations called Internet exchange
points (IXP). Large carriers exchange traffic without charging each other access fees via peering
agreements. Carriers make revenue by collecting subscription fees from end users but not from peers.
The problem with peering is that some people use more bandwidth than others. Netflix, for
example, accounts for more than 35 percent of all Internet traffic in North America between 9 PM
and 12 AM.10 Carriers argue that they should be able to charge varying rates based on content,
application, or the user requesting the data.
Network 3
You in Seattle
Your LAN
Friend at BigBank
Internet
Service
Provider
BigBank’s
LAN
Network 4
Network 1
Network 2
Internet
Service
Provider
The Internet
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Net Neutrality
Netflix, eBay, Yahoo!, and Amazon say that allowing carriers to charge these varying rates could
hurt consumers and innovation. They believe in the net neutrality principle, where all data is
treated equally. They argue that carriers should not be allowed to decide which sites load quickly,
which apps are allowed on a network, and which content is acceptable.
In 2015, the Federal Communications Commission (FCC) approved new net neutrality regulations that ensured ISPs could not discriminate between different types of Internet traffic. This meant
all consumers would have access to content on an equal basis. This ruling in many ways rendered
the Internet a utility like water or electricity that would be governed by comparable regulations.
However, in 2017 the FCC reversed the previous ruling and classified Internet services as an
information service. This meant ISPs could manage the flow of network traffic over their networks.
Several states have begun fighting these new regulations in court.
Q4-5
How Do Web Servers Support the Cloud?
At this point, you know basic networking terms and have a high-level view of how the Internet
works. To understand the value of the cloud as well as how it works and how your organization can
use it, you need to know a bit about the processing that occurs on a Web server. For this discussion,
we will use the example of a Web storefront, which is a server on the Web from which you can buy
products.
Suppose you want to buy an item from zulily, a private buyer’s site that sells clothing. To do so,
you go to www.zulily.com and navigate to the product(s) you want to buy (see Figure 4-21). When
you find something you want, you add it to your shopping cart and keep shopping. At some
point, you check out by supplying credit card data. But what happens when your order data arrives
at the server?
FIGURE 4-21
Sample of Commerce Server
Pages; Product Offer Pages
Source: Courtesy of Zulily Inc. Used by
permission.
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When you enter www.zulily.com in your browser, the browser sends a request that travels over
the Internet to a computer in the server tier at the zulily site. In response to your request, a servertier computer sends back a Web page, which is a document coded in, usually, html (and, as discussed in Chapter 3, probably includes CSS, JavaScript, and other data).
Three-Tier Architecture
Almost all Web applications use the three-tier architecture, which is a design of user computers
and servers that consists of three categories, or tiers, as shown in Figure 4-22. The user tier consists of computers, phones, and other mobile devices that have browsers that request and process
Web pages. The server tier consists of computers that run Web servers and process application
programs. The database tier consists of computers that run a DBMS that processes requests to
retrieve and store data. Figure 4-22 shows only one computer at the database tier. Some sites have
multicomputer database tiers as well.
Web servers are programs that run on a server-tier computer and manage traffic by sending
and receiving Web pages to and from clients. A commerce server is an application program that
runs on a server-tier computer. Typical commerce server functions are to obtain product data from
a database, manage the items in a shopping cart, and coordinate the checkout process. When a
request comes to the server, the Web server examines it and sends it to the proper program for processing. Thus, the Web server passes e-commerce traffic to the commerce server. It passes requests
for other applications to those applications. In Figure 4-22, the server-tier computers are running
a Web server program, a commerce server application, and other applications having an unspecified purpose.
Watch the Three Tiers in Action!
Suppose the user of the Web page in Figure 4-21 clicks on shoes and then selects a particular shoe,
say, the Darkish Gray Dorine Mary Jane shoe. When the user clicks on that shoe, the commerce
server requests that shoe’s data from the DBMS, which reads it from the database and then returns
the data (including pictures) to the commerce server. That server then formats the Web page with
the data and sends the html version of that page to the user’s computer. The result is the page shown
in Figure 4-23.
FIGURE 4-22
Three-Tier Architecture
Instructions
and Data
Web Browsers
Web Browsers
Web Browsers
Web Browsers
Web Browsers
html
via http
User Computers
(User Tier)
Commerce
Other
Server
Applications
Commerce
Other
Application
.....Other
Server
Applications
Commerce
Application
.....Other
Server
Applications
Commerce
Web Server Applications
Application
.....
Server
(Apache,
IIS)
Web Server
Application
.....
(Apache, IIS)
Web Server
(Apache,
IIS)
Web Server
(Apache, IIS)
Web Server Computers
(Server Tier)
DBMS
DB
DBMS Computer
(Database Tier)
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FIGURE 4-23
Product Page
Source: Courtesy of Zulily Inc. Used by
permission.
Service-Oriented Architecture (SOA)
The cloud would be impossible without a design philosophy called the service-oriented
architecture (SOA). According to this philosophy, all interactions among computing devices are
defined as services in a formal, standardized way. This philosophy enables all the pieces of the cloud
to fit together, as you will see. However, understanding SOA (pronounced SO-ah) in depth requires
you to learn more computer science than you need as a business professional. So, the best way for
you to understand SOA is via a business analogy.
A SOA Analogy
Figure 4-24 shows an arrangement of departments at a hypothetical online bicycle part retailer
named Best Bikes. The Sales Department receives order requests and follows a process to have them
approved for shipping. On request, the Credit Department verifies customer credit as needed to
approve orders, and the Inventory Department verifies the availability of the inventory needed to
fulfill an order.
In an informal, non-SOA-type organization, one salesperson would contact someone he or she
knows in Credit and ask something like “Can you approve an allocation of $10,000 of credit to the
ABC Bicycle Company?” In response, the credit person might say, “Sure,” and the salesperson might
note the name of the person who approved the amount. Some days, he or she might remember to
record the date; other days, not so. Another salesperson might do something else, say, contact a
different person in Credit and ask something like, “I need $5,000 in credit for Order 12345,” and
that other person in Credit might say, “I don’t know, send the order over, and if I can, I’ll write
’Approved’ on it.” Other irregular, but similar, interactions could occur between the Sales and the
Inventory departments.
Such operations are definitely not service-oriented. People are asking for credit verification
in different ways and receiving responses in different ways. The process for approving an order
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Customers
Order
Requests
Sales
Department
st
que
s Re
Sale
Inve
ntor
FIGURE 4-24
Approval Request Interactions Among Three
Departments
y Re
Credit
Department
nse
spo
/ Re
que
st /
R
esp
ons
e
Inventory
Department
varies from salesperson to salesperson, and possibly from day to day with the same salesperson.
The records of approvals are inconsistent. Such an organization will have varying levels of process
quality and inconsistent results, and should the company decide to open a facility in another city,
these operations cannot be readily duplicated, nor should they be.
Using SOA principles, each department would formally define the services it provides.
Examples are:
For the Credit Department:
• CheckCustomerCredit
• ApproveCustomerCredit
For the Inventory Department:
• VerifyInventoryAmount
• AllocateInventory
• ReleaseAllocatedInventory
Further, for each service, each department would formally state the data it expects to receive
with the request and the data it promises to return in response. Every interaction is done exactly
the same way. There is no personal contact between certain people in the departments; no salesperson need know who works in Credit or Inventory. Instead, requests are emailed to a generic email
address in Credit or Inventory, and those departments decide who will process the request and
how it will be processed. No department has or need have any knowledge of who works in another
department nor how the department accomplishes its work. Each department is free to change
personnel task assignments and to change the way it performs its services, and no other department
needs to know that a change occurred. In SOA terms, we would say the work of the department is
encapsulated in the department.
With this organization, if Best Bikes wants to add another Inventory Department in another
city, it can do so and no salesperson need change the way he or she sets up, submits, or receives
responses to requests. Sales continues to send a VerifyInventoryAmount service request, formatted
in the standard way, to the same email address.
With multiple sites, the Inventory function would change the way it implements service
requests to first identify which of the several Inventory Departments should process the request.
Sales would not know, nor need to know, this happened. Best Bikes could dynamically create
1,000 Inventory Departments and the Sales Department need not change anything it does. Later,
it could reduce those 1,000 Inventory Departments to three, and, again, sales need not make
any change.
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SOA for Three-Tier Architecture
From this discussion, you can see how SOA is used to enable cloud processing. The description
and advantages and disadvantages of this analogy for SOA are the same for the cloud. Consider
Figure 4-25, which shows the three-tier architecture with SOA drawn in. In this case, the commerce
server application formally defines services that browsers can request, the data they must provide
with the request, and the data that each will receive in response to the request. Sample services are:
•
•
•
•
ObtainPartData
ObtainPartImages
ObtainPartQuantityOnHand
OrderPart
And so forth. Again, each service also documents the data it expects and the data it will return.
Now, JavaScript (or another code language) is written to invoke these services correctly. That
JavaScript is included as part of the Web pages the server sends to the browsers, and when users
employ the browsers to purchase, the JavaScript behind the Web page invokes the services in the
correct way.
The server tier can consist of three servers at 3 AM, 3,000 servers at 11 AM, 6,000 servers at
6 PM, and 100 servers at 10 PM. Furthermore, those servers can move around the world; at one
time of day, they can be all located in the United States, and at another time of day, they can all be
located in Europe, and so on. Nothing, absolutely nothing, in the browsers need change as these
servers are adjusted.
To take advantage of the multiple Web servers, a load-balancing program receives requests
and sends them to an available server. The load-balancing program keeps data about the speed and
health of all its assigned Web servers and allocates work to maximize throughput.
In addition, on the back end, SOA services are defined between the Web server and the database server. Accordingly, the database server need do nothing as the number and location of Web
servers is adjusted. And that’s a two-way street. Nothing in the Web servers need be changed if the
number and location of database servers is adjusted. However, load balancing for database servers
is considerably more complicated.
Do not infer from this discussion that SOA services and the cloud are only used for three-tier
processing. Such services and the cloud are used for multitudes of applications across the Internet.
This three-tier application is just an example.
html with JavaScript that correctly
requests services and processes responses
Browser
Browser
FIGURE 4-25
SOA Principles Applied to
Three-Tier Architecture
…
Database server
service requests
& responses
Commerce
Commerce
Server
Commerce
Server
Commerce
Web Server
Server
Commerce
Web Server
Server
Commerce
Web Server
Server
Web Server
Server
Web Server
Web Server
1, 3, 100, 1000, etc.
Web Servers
DB Load Balancer
Browser
Load Balancer
Browser
Commerce server
service requests
& responses
DBMS
DB
DBMS
DB
DBMS
DB
1, 3, 50
Database Servers
Browser
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From this discussion, you can understand how cloud elasticity is possible. However, for many
organizations to use the cloud and to be able to mix and match Web services, they need to agree
on standard ways of formatting and processing service requests and data. That leads us to cloud
standards and protocols. Again, we discuss these at a very high level.
Internet Protocols
A protocol is a set of rules and data structures for organizing communication. Because the cloud’s
Web services use the Internet, the protocols that run the Internet also support cloud processing.
We will start with them.
TCP/IP Protocol Architecture
The basic plumbing of the Internet is governed by protocols that are defined according to an
arrangement called the TCP/IP protocol architecture. This architecture has five layers; one or
more protocols are defined at each layer. Data communications and software vendors write computer programs that implement the rules of a particular protocol. (For protocols at the bottom layer,
the physical layer, they build hardware devices that implement the protocol.)
Internet Protocols: http, https, smtp, and ftp
The only Internet protocols that you as a business professional are likely to encounter are those
at the top, or the application layer of the TCP/IP architecture, shown in Figure 4-26. Hypertext
Transfer Protocol (http) is the protocol used between browsers and Web servers. When you use
a browser such as Chrome, Safari, or Firefox, you are using a program that implements the http
protocol. At the other end there is a server that also processes http. Even though your browser and
the server have never “met” before, they can communicate with one another because they both
follow the rules of http. Similarly, in Figure 4-25, the browsers send and receive service requests to
and from the commerce server using http.
As you will learn, there is a secure version of http called https. Whenever you see https in your
browser’s address bar, you have a secure transmission and you can safely send sensitive data like
credit card numbers. When you are on the Internet, if you do not see https, then you should assume
that all of your communication is open and could be published on the front page of your campus
newspaper tomorrow morning. Hence, when you are using http, email, text messaging, chat, videoconferencing, or anything other than https, know that whatever you are typing or saying could
be known by anyone else.
Two additional TCP/IP application-layer protocols are common. smtp, or Simple Mail
Transfer Protocol, is used for email transmissions (along with other protocols). ftp, or File
Transfer Protocol, is used to move files over the Internet. Google Drive and Microsoft OneDrive
use ftp behind the scenes to transmit files to and from their cloud servers to your computer.
WSDL/SOAP
Application layer
protocols
FIGURE 4-26
Protocols That Support Web
Services
Internet ‘plumbing’
protocols
Web Service Protocols
http, https,
smtp, ftp
4 more layers
of protocols
Internet Protocols
(TCP/IP Protocol
Architecture)
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WSDL, SOAP, XML, and JSON
To wrap up the discussion, we will briefly consider four standards used extensively for Web services
and the cloud. Those standards and their purpose are as follows:
WSDL (Web Services Description A standard for describing the services, inputs and outputs,
Language)
and other data supported by a Web service. Documents
coded according to this standard are machine readable and
can be used by developer tools for creating programs to
access the service.
SOAP (no longer an acronym)
A protocol for requesting Web services and for sending
responses to Web service requests.
XML (eXtensible Markup
Language)
A markup language used for transmitting documents.
Contains much metadata that can be used to validate the
format and completeness of the document, but includes
considerable overhead (see Figure 4-27a).
JSON (JavaScript Object
Notation)
A markup language used for transmitting documents.
Contains little metadata and is preferred for transmitting
volumes of data between servers and browsers. While
the notation is the format of JavaScript objects, JSON
documents can be processed by any language (see Figure
4-27b).
Service authors (computer programmers) create WSDL documents to describe the services they
provide and the inputs and outputs required. These WSDL documents are seldom read by humans.
Instead, developer tools like Microsoft Visual Studio read the WSDL to configure the programming
environment for programmers who write code to access that service.
As shown in Figure 4-26, SOAP, which is not an acronym though it looks like one, is a protocol
that sits on top of http and the lower-level Internet protocols. Sits on top of means that it uses http
to send and receive SOAP messages. (SOAP can also use smtp.) Programs that use Web services
issue SOAP messages to request services; the Web service uses SOAP messages to return responses
to service requests.
Finally, XML and JSON are ways of marking up documents so that both the service requestor
and the service provider know what data they’re processing. Figure 4-27 shows a simple example
of both. As you can see, XML documents contain as much metadata as they do application data.
These metadata are used to ensure that the document is complete and properly formatted. XML is
FIGURE 4-27A
Example XML Document
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{
FIGURE 4-27B
Example JSON Document
}
191
"firstName": "Kelly",
"lastName": "Summers",
"dob": "12/28/1985",
"address": {
"streetAddress": "309 Elm Avenue",
"city": "San Diego",
"state": "CA",
"postalCode": "98225"
},
"phoneNumber": [
{
"type": "home",
"number": "685 555-1234"
},
{
"type": "cell",
"number": "685 555-5678"
}
]
used when relatively few messages are being transmitted and when ensuring a complete and correct
document is crucial. Both WSDLs and SOAP messages are coded in XML.
As its name indicates, JSON uses the notation for JavaScript objects to format data. It has much
less metadata and is preferred for the transmission of voluminous application data. Web servers use
JSON as their primary way of sending application data to browsers.
With this technical background, you should no longer be skeptical that the benefits of the cloud
are real. They are. However, this fact does not mean that every organization uses the cloud well. In
the remainder of this chapter, we will describe generic ways that organizations can use the cloud,
discuss how eHermes in particular can use the cloud, and, finally, discuss an exceedingly important
topic: cloud security.
Q4-6
How Can eHermes Use the Cloud?
eHermes is an innovative startup company with a relatively small IT department. As such, it is
unlikely to have the resources necessary to develop a large server infrastructure. Instead, it is far
more likely to take advantage of cloud services provided by cloud vendors.
SaaS Services at eHermes
Software as a service requires little investment in the hardware and software system components.
The SaaS vendor administers and manages the cloud servers and makes the software available,
usually as a thin client. eHermes will, however, need to transfer existing data, create new data,
develop procedures, and train users.
Some of the SaaS products that eHermes could use are:
•
•
•
•
•
•
Google Mail
Google Drive
Office 365
Salesforce.com
Microsoft CRM OnLine
And many others
You already know what the first three SaaS offerings are. Salesforce.com and Microsoft’s CRM
OnLine are customer relationship management systems, which you will learn about in Chapter 6.
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PaaS Services at eHermes Security
With PaaS, eHermes leases hardware and operating systems in the cloud from the cloud vendor.
For example, it can lease EC2 (Elastic Cloud 2, a PaaS product offered by Amazon), and Amazon
will preinstall either Linux or Windows Server on the cloud hardware. Given that basic capability,
eHermes would then install its own software. For example, it could install its own, in-house developed applications, or it could install other applications licensed from a software vendor. It could also
license a DBMS, say, SQL Server from Microsoft, and place it on an EC2 Windows Server instance. In
the case of software licensed from others, eHermes must purchase licenses that permit replication
because Amazon will replicate it when it increases servers.
Some cloud vendors include DBMS products in their PaaS services. Thus, eHermes could obtain
Windows Servers with SQL Server already installed from the Microsoft Azure cloud offerings. That
option is likely what Seth was considering when he mentioned the $10 per TB per month.
DBMS are also included in other vendors’ cloud offerings. As of May 2018, Amazon offers the
following DBMS products with EC2:
Amazon Relational
Database Service (RDS)
A relational database service supporting MySQL, Oracle, SQL Server,
or PostgreSQL
Amazon DynamoDB
A fast and scalable NoSQL database service
Amazon ElastiCache
A very fast in-memory cache database service
Amazon Redshift
A petabyte-scale data warehouse
Amazon Neptune
A fast, fully managed graph database for complex hierarchical
structures
Finally, eHermes might use a CDN to distribute its content worldwide as it grows and expands
into new markets.
IaaS Services at eHermes
As stated, IaaS provides basic hardware in the cloud. Some companies acquire servers this way
and then load operating systems onto them. Doing so requires a considerable technical expertise
and management. A company like eHermes is more likely to spend its valuable resources on
developing its own mobile storefronts and internal systems rather than spending time configuring servers.
eHermes might, however, obtain data storage services in the cloud. Amazon, for example, offers
data storage with its S3 product. Using it, organizations can place data in the cloud and even have
that data be made elastically available. Again, however, an organization like eHermes would more
likely use SaaS and PaaS because of the added value they provide.
Q4-7
How Can Organizations Use Cloud Services
Securely?
The Internet and cloud services based on Internet infrastructure provide powerful processing
and storage services at a fraction of the cost of private data centers. However, the Internet is
a jungle of threats to data and computing infrastructure. Some of the biggest threats to cloud
services include insecure interfaces, data loss, and data leakage. How can organizations realize
the benefits of cloud technology without succumbing to those threats?
The answer involves a combination of technologies that we will address, at a very high level,
in this question. As you read, realize that no security story is ever over; attackers constantly
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strive to find ways around security safeguards, and occasionally they succeed. Thus, you can
expect that cloud security will evolve beyond that described here throughout your career. We
begin with a discussion of VPNs, a technology used to provide secure communication over the
Internet.
Virtual Private Networks (VPNs)
A virtual private network (VPN) uses the Internet to create the appearance of private, secure
connections. In the IT world, the term virtual means something that appears to exist but in fact
does not. Here, a VPN uses the public Internet to create the appearance of a private connection on
a secure network.
A Typical VPN
Figure 4-28 shows one way to create a VPN to connect a remote computer, perhaps used by an
employee working at a hotel in Miami, to a LAN at a Chicago site. The remote user is the VPN client.
That client first establishes a public connection to the Internet. The connection can be obtained by
accessing a local ISP, as shown in Figure 4-28, or, in some cases, the hotel itself provides a direct
Internet connection.
In either case, once the Internet connection is made, VPN software on the remote user’s computer establishes a connection with the VPN server in Chicago. The VPN client and VPN server
then have a secure connection. That connection, called a tunnel, is a virtual, private pathway
over a public or shared network from the VPN client to the VPN server. Figure 4-29 illustrates the
connection as it appears to the remote user.
To secure VPN communications over the public Internet, the VPN client software encrypts, or
codes, messages so their contents are protected from snooping. Then the VPN client appends the
Internet address of the VPN server to the message and sends that packet over the Internet to the
VPN server. When the VPN server receives the message, it strips its address off the front of the message, decrypts the coded message, and sends the plain text message to the original address inside the
LAN. In this way, secure private messages are delivered over the public Internet.
Using a Private Cloud
A private cloud is a cloud owned and operated by an organization for its own benefit. To create
a private cloud, the organization creates a private internet and designs applications using Web
services standards as shown in Figure 4-14 (page 174). The organization then creates a farm of
Used during
tunnel setup
Chicago Site
Local Area
Network 1
ISP
VPN
Server
FIGURE 4-28
Remote Access Using
VPN; Actual Connections
Tunnel
Internet
VPN Client
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CHAPTER 4 The Cloud
Chicago Site
Local Area
Network 1
Remote
Client
FIGURE 4-29
Remote Access Using VPN;
Apparent Connection
servers and manages those servers with elastic load balancing just as the cloud service vendors do.
Because of the complexity of managing multiple database servers, most organizations choose not
to replicate database servers. Figure 4-30 illustrates this possibility.
Private clouds provide security within the organizational infrastructure but do not provide
secure access from outside that infrastructure. To provide such access, organizations set up a VPN
and users employ it to securely access the private cloud as shown in Figure 4-31.
Private clouds provide the advantages of elasticity, but to questionable benefit. What can organizations do with their idle servers? They could realize some cost savings by shutting down the idle
servers. But unlike the cloud vendors, they cannot repurpose them for use by other companies. Possibly
a large conglomerate or major international company could balance processing loads across
subsidiary business units and across different geographical regions. 3M, for example, might balance
processing for its different product groups and on different continents, but it is difficult to imagine
that, in doing so, it would save money or time. A company like eHermes is very unlikely to develop
a private cloud.
Amazon, Microsoft, IBM, Google, and other major cloud service vendors employ thousands of
highly trained, very highly skilled personnel to create, manage, administer, and improve their cloud
services. It is unimaginable that any non-cloud company, even large ones like 3M, could build and
operate a cloud service facility that competes. The only situation in which this might make sense is
if the organization is required by law or business custom to maintain physical control over its stored
data. Even in that case, however, the organization is unlikely to be required to maintain physical
control over all data, so it might keep critically sensitive data on-premises and place the rest of the
Browsers in
Browsers in
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept in
Browsers
Sales
Dept
Sales
Inventory
application
service requests
& responses
Private Cloud
Browsers in
Browsers in
Customer
Browsers in
Customer
Browsers in
Service
Customer
Service
Customer
Service
Service
Elastic Load
Balancer
Inventory & Other
Applications
Web servers
Browsers in
Browsers in
Shipping
Browsers in
Shipping
Browsers in
Shipping
Browsers in
Shipping
Shipping
FIGURE 4-30
Private Cloud for Inventory
and Other Applications
Database server
service requests &
responses
DBMS
Inventory
application
service requests
& responses
Browsers in
Browsers in
Accounting
Browsers in
Accounting
Accounting
DB
Database Server
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VPN
Private Cloud
Users
Organization’s Private
Computing Infrastructure
FIGURE 4-31
Accessing Private Cloud over
a Virtual Private Network
data and related applications into the facilities of a public cloud vendor. It might also use a virtual
private cloud, which we consider next.
Using a Virtual Private Cloud
A virtual private cloud (VPC) is a subset of a public cloud that has highly restricted, secure
access. An organization can build its own VPC on top of public cloud infrastructure like AWS or
that provided by other cloud vendors. The means by which this is done are beyond the scope of this
text, but think of it as VPN tunneling on steroids.
Using a VPC, an organization can store its most sensitive data on its own infrastructure and
store the less sensitive data on the VPC. In this way, organizations that are required to have physical
control over some of their data can place that data on their own servers and locate the rest of their
data on the VPC as shown in Figure 4-32. By doing so, the organization gains the advantages of
cloud storage and possibly cloud processing for that portion of its data that it need not physically
control.
Organization’s
Computing
Infrastructure
(sensitive data
stored here)
VPN
Virtual
Private
Cloud
(other data
stored here)
Public Cloud
Users
FIGURE 4-32
Using a Virtual Private Cloud
(VPC)
Cloud Service Vendor
Computing Infrastructure
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SO WHAT?
QUANTUM LEARNING
If you are reading this textbook as part of a college course, then
you probably already recognize the value of learning. Learning has been a fundamental part of your life for as long as you
can remember. Some of the knowledge you have acquired has
been “book” knowledge learned in school, while some has been
“street smarts” learned while interacting with new people in
new places. For example, the first time someone broke a promise
to you, it probably affected the way you perceive the trustworthiness of others. As a result, the next time someone promised
you something, a small part of you might have questioned
whether that person would actually keep his word.
This ability of humans to interpret complex situations
and social interactions, and remember and learn from past
experiences, enables us to survive and thrive in dynamic and
rapidly changing environments. What you may not realize is
that computers are becoming better at learning in this dynamic
way, too.
Learning to Learn
Many people perceive computers to be systems with very rigid
operations; they can only carry out finite sets of tasks based
on seemingly endless lines of computer code that tell them
what to do. However, the walls of rigid computer code are
breaking down as machine learning becomes more widely
used in a number of industries. Machine learning, in a basic
sense, is the ability of computers to learn dynamically rather
than being explicitly told what to do via restrictive sets of
coded instructions. Machine learning is based on the iterative
generation of models; the computer has the ability to adapt
to these models and interpret them differently over time. This
capability is important because it allows the computer to
identify patterns and other insights without being directed to
the features it should analyze or being told where to find those
features in large sets of data.11
The ability of computers to learn iteratively and
dynamically has important implications for many real-world
applications. Machine learning techniques have been used
for fraud detection, credit score analysis, network intrusion
detection, and image recognition.12 Future applications of
machine learning will likely include the development of artificial
intelligence personal assistants and autonomous cars.13
As a more specific example, think about the ways in
which companies are turning to social media for insight about
how their products and services are perceived by customers.
Companies use machine learning tools to analyze customer
tweets. Then they identify trends in how customers feel
about different advertising campaigns. Based on the results,
Source: Iconimage/Fotolia
companies can curtail campaigns that are not having the
desired effect and roll out more effective campaigns on a larger
scale.14
Computer scientists and executives are looking to the
future of machine learning to see how advancements may
change their industries. Many have an eye on the world of
quantum computing as the next big advancement for machine
learning due to its ability to increase the speed at which
computers can process data.
One Quantum Step for Computers, One Giant
Step for Learning
Quantum computing has been a topic of interest for scientists
and innovators for many years. The fundamental difference
between a quantum computer and a regular computer is the
way in which computers manage information—bits. A standard
computer uses 1s and 0s as the basis for all of its operations. For
example, when you enter an A on the keyboard, the computer
interprets this as “01000001.” In contrast, a quantum
computer can encode information in what are called qubits,
which can be represented as a 1, a 0, or both at the same time.
The capacity for this third state allows tasks to be carried out
much more quickly and has the potential to yield exponential
growth in the processing capability of computers.
Quantum computing also enhances computers’ ability
to learn. Right now there is still a huge gap between how
computers adapt through machine learning and how humans
learn. Quantum computing has the potential to narrow this gap
as computers become increasingly able to learn how to interpret
and adapt more complex datasets with little to no direction.15
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CHAPTER 4 The Cloud
The implications of quantum computing for machine
learning and the creation of a more powerful artificial
intelligence are profound. However, even if quantum
computers have the capacity to process mammoth data sets,
standardization of schemas and metadata will still be needed to
ensure that the correct types of data are being considered for
analysis.16 Once infrastructure and data management hurdles
are overcome, quantum computing stands to revolutionize
almost everything that we do with 1s, 0s, or both!
Questions
1. Think about the last time you learned how to do something
new. How long did it take for you to master it? What types of
learning mechanisms did you use, and how varied were your
approaches to learning? Think about the inherent limitations of computers in learning new operations. What would
a computer have to do to master this same skill?
Q4-8
197
2. The feature provides the example of a company using
social media analysis to evaluate customer sentiment and
customize advertising based on consumers’ tweets. Why
would this type of analysis require a machine learning
approach?
3. Conduct an Internet search to find the binary codes for
ASCII keyboard characters. A common first task that
programmers use to test their code is to have the system
print “Hello World” on the screen. Use the binary codes
for these characters to write “Hello World” as a computer
would see it.
4. The article mentions that quantum computers will have
tremendous processing power and revolutionize a number
of computer applications. Conduct an Internet search to
identify specific examples of how quantum computers may
be used in the future.
2029?
So where does the cloud go in the next 10 years? Absent some unknown factor such as a federal tax on
Internet traffic, cloud services will become faster, more secure, easier to use, and cheaper. Fewer and
fewer organizations will set up their own computing infrastructure; instead, they will benefit from
the pooling of servers across organizations and from the economies of scale produced by cloud
vendors.
But, looking a bit deeper, the cloud brings both good and bad news. The good news is that
organizations can readily obtain elastic resources at very low cost. This trend will benefit everyone
from individuals on the iCloud or Google Drive, to small groups using Office 365, to companies like
eHermes using PaaS, to huge organizations using IaaS.
The overall size of the cloud is getting bigger too. For example, Google’s Project Loon looks to
seed the atmosphere with high-altitude balloons capable of providing Internet access to previously
unreachable parts of the planet. And Google isn’t stopping there. It’s also making the cloud faster.
Google Fiber aims to offer users 1 Gbps connections to the Internet. That’s 100 times faster than
the average broadband connection. Comcast responded to Google’s plans by announcing its own
gigabit-per-second service.
So what’s the bad news? Remember that 500,000-square-foot Apple Web farm in Figure 4-7?
Note the size of the parking lot. That tiny lot accommodates the entire operations staff. According
to Computerworld, that building employs an operations staff of 50 people, which, spread over three
shifts, 24/7, means that not many more than eight people will be running that center at any one
time. Seems impossible, but is it? Again, look at the size of the parking lot.
And it’s not just large companies like Apple. In 2018, every city of almost any size still supports
small companies that install and maintain in-house email Exchange and other servers. If SaaS
products like Google Drive or Office 365 replace those servers, what happens to those local jobs?
They’re gone! See Collaboration Exercise 4,page 204, for more on this topic.
But, with computing infrastructure so much cheaper, there have to be new jobs somewhere.
By 2029, where will they be? For one, there will be more startups. Cheap and elastic cloud services
enable small startups like the football player evaluation company Hudl (www.hudl.com) to access
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SECURITY GUIDE
IRS SYSTEMS OVERTAXED
The most common signs people look for when
deciding to replace a computer or phone are rapidly depleted
batteries, sluggish processing times, system crashes, and
excessive physical abuse to the case or screen. If you have a
device that is suffering from some (or all) of these symptoms,
why haven’t you replaced it? In many cases, people choose to
delay replacing a device either because they do not have the
resources to do so or they do not have the time. They simply
wait until an absolute system failure, when they have no
choice but to proceed with the upgrade.
Not surprisingly, companies often follow a similar strategy for managing their IT infrastructures. Outdated enterprise
systems, also called legacy systems, can also show signs of
duress over time. But as long as they don’t severely disrupt
business operations, they continue to be used. This is because
executives and strategists within the organization often prefer
to allocate resources to parts of the business with more glaring
needs. In other words, if the system is not completely broken,
why should we pay to fix it? Unfortunately, it is common for
legacy systems to fail at the worst possible moment, like the
middle of the holiday shopping season or, in the case of the
IRS, April 17, 2018—Tax Day.
Be Right Back, in 7,981 Years!
The IRS experienced a critical system failure on the deadline
for Americans to file their taxes. The system was inaccessible
for direct bank account payments and e-filing services from
the early morning hours on Tuesday until about 5 PM.17 In
spite of the poor timing of this failure, a number of highranking officials in the IRS expressed some degree of astonishment that this type of IT infrastructure breakdown had
not already occurred. When describing the systems (some
circa 1960s) used by the IRS for processing tax payments,
the IRS Deputy Commissioner for operations support commented that about 64 percent of IRS systems are considered
aged and 32 percent of software is multiple releases behind
industry standards.18
Comically, visitors to the IRS site attempting to file were
greeted with a message indicating that systems were down
due to planned maintenance but that they would return on
December 31, 9999. While some found this message humorous, the diminishing resources of the IRS over the past several years can be labeled anything but funny to those trying
to manage the operations of this massive government agency.
The IRS budget sank 80 percent from where it was in 2010.19
Further exacerbating the problem is the constant barrage of
daily cyberattacks against the IRS, which the organization
must mitigate.20
Does the IRS Have Its Head in the Clouds?
Should It?
Many organizations that maintain their own IT infrastructure are transitioning to cloud-based operations. This strategy
allows highly specialized experts (benefiting from the economies of scale derived from managing numerous organizations’
infrastructures) to manage your systems and data so that your
organization can focus on its own expertise. In the case of the
IRS, a cloud-based model seems especially appropriate due to
the ability of cloud operations to more easily scale up during
times of high demand and then ramp back down during times
of little activity. (This clearly lines up with the frenzied activity of the tax season versus the rest of the year, as roughly
15 percent of Americans waited until the last possible week
to file taxes in 2016.)21 As a comparable example, consider
Source: Markus Mainka/Alamy Stock Photo
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Amazon, which handles a constant stream of orders throughout the year but handles exceptional increases in traffic volume around the holiday season. Specifically, in 2017 Amazon
handled just under 13 million orders over the 2 days spanning
199
Thanksgiving Day and Black Friday.22 Perhaps the IRS will
follow the mass exodus of companies heading to the cloud so
that we can all wait until the last minute to file our taxes without crashing their systems!
DISCUSSION QUESTIONS
1. Is it time for you to upgrade either your phone or your
laptop? If so, what are the indicators that you look for to
determine whether your device is beginning to become
unstable or fail? What other types of legacy systems have
you encountered?
2. The IRS system crash of 2018 is the most recent example
of a high-profile IT-infrastructure debacle with the U.S.
government. Can you think of any other recent examples
of government-related IT problems?
3. From a security perspective, what are the pros and cons of
the government using such outdated IT systems for handling tax filings?
4. What types of interactions do you have with the cloud? Do
you back up personal documents, like photos and music,
on the cloud? Do you use it strictly for productivity-related
files and collaboration? What are the benefits and drawbacks of the cloud for you relative to storing files locally
on your devices?
CDN and other cloud services for next to nothing, a capability that would have taken years and
thousands of dollars in the past. Go to its site to check its response time; it’s fast!
There may be additional new cloud services beyond IaaS, PaaS, and SaaS. Cloud service
providers may provide Analytics as a Service (AaaS) to help companies analyze the mountains
of big data they’re collecting. They may go even further and provide Business Process as a Service (BPaaS). Companies could then outsource common business processes like shipping and
procurement. In fact, the cloud may evolve into Everything as a Service (EaaS) where all aspects
of your business can be outsourced to a service provider—except the one aspect where you add
value.
But what else? The cloud will foster new categories of work. By 2029, everything will be
connected to everything else. Consider remote action systems, IS that provide computer-based
activity or action at a distance. By enabling action at a distance, remote action systems save time
and travel expense and make the skills and abilities of an expert available in places where he or
she is not physically located. They also enable experts to scale their expertise. Let’s look at a few
examples.
Telemedicine is a remote action system that healthcare professionals use to diagnose and
treat patients in rural or remote areas. Doctors videoconference with patients at local drugstores,
where they can transmit diagnostic readings like blood pressure and temperature. The telemedicine
market is expected to exceed $49 billion by 2023.23 In Canada, Dr. Mehran Anvari regularly performs telesurgery, in which telecommunications link the surgeon to robotic equipment at distant
locations, on patients more than 400 kilometers away.24 Such examples, which are still somewhat
rare, have problems that must be overcome, but they will become more common by 2029. In fact,
the largest healthcare provider in the United States, UnitedHealthcare, recently announced that all
video-based doctor visits will be covered just like regular doctor visits.25
Other uses for remote systems include telelaw enforcement, such as the RedFlex system that
uses cameras and motion-sensing equipment to issue tickets for red-light and speeding violations.
The RedFlex Group, headquartered in South Melbourne, Victoria, Australia, earns 87 percent of its
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revenue from traffic violations in the United States. It offers a turnkey traffic citation information
system that includes all five components.
Many remote systems are designed to provide services in dangerous locations, such as robots
that clean nuclear reactors or biologically contaminated sites. Drones and other unoccupied military equipment are examples of remote systems used in war zones. Private security and law enforcement will increasingly take advantage of remotely controlled flying drones and robots. You may
see an upgraded form of Knightscope’s wheeled robot, named K7, patrolling your neighborhood
in 2029.
But, even with these new opportunities, the news isn’t all good. New York’s Metropolitan
Opera is arguably the finest opera company in the world. To see a live performance, you can drive
to Manhattan, park your car, taxi to Lincoln Center, and pay $300 per seat. Or you can watch
the same opera, remotely broadcast via Met Live, at a local movie theater, park your car for free,
pay $12, and take a seat in the fourth row, where via the magic of digital broadcasting you can
see details like the stitching on the singers’ costumes. Details you just can’t see from the $300
seats at the Met. And the sound quality is better. Wonderful, but now, who will go to a local opera
performance?
Access to remote action systems reduces the value of local mediocrity. The claim “Well, I’m
not the best, but at least I’m here” loses value in an interconnected world. In 1990, when former
Secretary of Labor Robert Reich wrote The Work of Nations,26 he could sensibly claim that those
who provide routine face-to-face services are exempt from the dangers of offshoring. That claim
loses validity in an interconnected world.
By 2029, the value of the top-notch performers increases, possibly exponentially. Four million
people watch the average Met Live broadcast; agents for the artists who perform at that venue will
negotiate a sizable part of that $120 million gate. A famous surgeon or skating coach can reach
a bigger market, faster and better, and be much better paid. So, if you can be the world’s best at
something, do it!
But what about the rest of us? If you’re not the world’s expert at something, then find a way
to be indispensable to someone who is. Own the theaters that broadcast Met Live. Own the skating
rink for the remote figure skating coach. Be the vendor of the food at some teleaction event.
Or become essential to the development, use, and management of information systems that
support these new opportunities. A business background with IS expertise will serve you very well
between now and 2029. The next six chapters discuss many existing and new IS applications. Keep
reading!
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CAREER GUIDE
Source: Rebecca Cengiz Robbs,
Carbonite, Senior Network Manager
1
Name: Rebecca Cengiz-Robbs
Company: Carbonite
Job Title: Senior Network Manager
Education: University of Utah
How did you get this type of job?
I think it’s a combination of skill, attitude, and networking. I was working as a network engineer when
I was promoted to manager. I had been an engineer
for four and a half years and hoped to stay in a technical position for a few more years. However, with
my strong organizational skills and my willingness to
volunteer for projects, it evolved into a management
position. I also have a manager who is motivated to
help his employees improve and advance.
2
5
When I am interviewing potential candidates I look
for someone who is smart and happy. I’ve hired
less experienced people because they were educated, intelligent, and organized and had a good
attitude. Technical skills are easy to teach; attitude
and intelligence are not.
6
What attracted you to this field?
What does a typical workday look like for
you (duties, decisions, problems)?
I have remote engineers, so I host a daily team call
so we all stay connected and aware of short- and
long-term projects. I am responsible for negotiating and maintaining support contracts for network
equipment; purchasing equipment for new projects and upgrades; coordinating with other teams
on projects that impact infrastructure; monitoring and managing bandwidth capacity, network
assets, and inventory; and managing the work and
advancement of network engineers.
4
7
What advice would you give to someone
who is considering working in your field?
In addition to technical skills and a good work
ethic, I’d develop emotional intelligence and build
a personal network. Often in IT, it’s who you know
and how you get along with people that will help
you stand out and advance.
What do you like most about your job?
I like how there is always something to learn
from day-to-day tasks, new projects, and my colleagues. At first I was intimidated by how much I
didn’t know. Now I’m glad I don’t know everything
and that I am surrounded by smart engineers who
are willing to learn, teach, and help each other.
Are education or certifications important in
your field? Why?
This question is frequently debated by my colleagues. Most of the engineers at my company do
not have a college degree. Some have certifications.
I often hear that the only thing that matters is what
you can do on the job, not a piece of paper. I believe
education and certifications are both important
in addition to technical skills. My degree gave me
an advantage when I was looking for my first job.
I had very little experience, but my manager was
impressed with my academic accomplishments and
took a chance on me. Based on my experience as a
manager, I see that engineers with education have
more motivation, focus, and ability to juggle multiple
projects. They often communicate (verbally and in
writing) better than engineers without degrees.
I worked in the tourism industry before making a
career change. I was attracted to IT by the wide
variety of disciplines and the abundant opportunities, especially for women. After working as a network administrator and being able to get exposure
to storage, backups, computing, security, and networking, I realized I liked networking the best.
3
What skills would someone need to do well
at your job?
8
What do you think will be hot tech jobs in
10 years?
Anything to do with cloud computing: software
engineering, network infrastructure and engineering, storage, computing, and automation.
201
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202
CHAPTER 4 The Cloud
ACTIVE REVIEW
Use this Active Review to verify that you understand the ideas
and concepts that answer the chapter’s study questions.
Why are organizations moving to
the cloud?
Q4-1
Define cloud and explain the three key terms in your definition.
Describe the differences between mainframe, client-server, and
cloud architectures. Explain the difference between scalability
and elasticity. Using Figure 4-5 as a guide, compare and contrast
cloud-based and in-house hosting. What factors encourage organizations to move to the cloud? When does it not make sense to
use a cloud-based infrastructure?
Q4-2
How do organizations use the cloud?
Describe how an organization can benefit from the cloud’s resource
elasticity, pooling, and unique Internet connectivity. Define SaaS,
PaaS, and IaaS. Provide an example of each. For each, describe
the business situation in which it would be the most appropriate
option. Define CDN and explain the purpose and advantages of a
CDN. Explain how Web services can be used internally.
What network technology supports
the cloud?
Q4-3
Define computer network. Explain the differences among PANs,
LANs, WANs, intranets, internets, and the Internet. Describe
protocol and explain the purpose of protocols. Explain the key
distinction of a LAN. Describe the purpose of each component
in Figure 4-16. Define IEEE 802.3 and 802.11 and explain how
they differ. List three ways of connecting a LAN or computer to
the Internet. Explain the nature of each.
Q4-4
How does the Internet work?
Describe how the Internet and the U.S. postal system are similar. Define IP address and explain why public IP addresses are
necessary to deliver packets. Describe the purpose of a domain
name and explain how such names are associated with public IP
addresses. Explain the purpose of TCP. Explain the role for agencies like GoDaddy. Define URL. Define peering agreements and
explain why carriers make them. Would a company like Netflix
be for or against net neutrality? Explain why.
Q4-5
How do Web servers support the cloud?
Define three-tier architecture and name and describe the role
of each tier. Explain the role of each tier in Figure 4-22 as
well as how the pages in Figures 4-21 and 4-23 are processed.
Using the department analogy, define SOA and explain why
departments are encapsulated. Summarize the advantages of
using SOA in the three-tier architecture. Define TCP/IP protocol architecture and explain, in general terms, the purpose
of http, https, smtp, and ftp. Define the purpose and role of
WSDL, SOAP, XML, and JSON. State a key difference between
XML and JSON.
Q4-6
How can eHermes use the
cloud?
First, state why eHermes is likely to use the cloud. Name and
describe SaaS products that eHermes could use. Explain several
ways that eHermes could use PaaS offerings. Summarize why it
is unlikely that eHermes would use IaaS.
How can organizations use cloud
services securely?
Q4-7
Explain the purpose of a VPN and describe, in broad terms, how
a VPN works. Define the term virtual and explain how it relates to
VPN. Define private cloud. Summarize why the benefits of a private
cloud are questionable. What kind of organization might benefit
from such a cloud? Explain why it is unlikely that even very large
organizations can create private clouds that compete with public
cloud utilities. Under what circumstance might a private cloud
make sense for an organization? Define VPC and explain how and
why an organization might use one.
Q4-8
2029?
What is the likely future for the cloud? Summarize the good and
bad news the cloud brings. Explain why the photo in Figure 4-7
is disturbing. Describe three categories of remote action systems.
Explain how remote systems will increase the value of superexperts but diminish local mediocrity. What can other-thansuper-experts do? Summarize how this 2029 discussion pertains
to your career hopes.
Using Your Knowledge with eHermes
Name the principal advantage of the cloud to eHermes. For hosting its data, which cloud offering—SaaS, PaaS, or IaaS—makes
the most sense, given the size and nature of eHermes’ business?
Explain how eHermes could use that offering. If eHermes were
larger and employed a more sophisticated IT staff, name another
alternative that would make sense. Explain why.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 4 The Cloud
203
KEY TERMS AND CONCEPTS
10/100/1000 Ethernet 175
Bluetooth 178
Cable line 179
Carrier 183
Client-server architecture 163
Cloud 163
Cloud computing architecture 164
Commerce server 185
Computer terminal 163
Content delivery network (CDN) 172
Database tier 185
Digital subscriber line (DSL) 179
Domain name 181
Domain Name System (DNS) 181
Elastic 165
Encapsulated 187
Ethernet 175
File Transfer Protocol (ftp) 189
Hop 183
https 189
Hypertext Transfer Protocol (http) 189
ICANN (Internet Corporation for Assigned Names and
Numbers) 181
IEEE 802.3 protocol 175
IEEE 802.11 protocol 178
Infrastructure as a service (IaaS) 170
Internet 175
Internet exchange points (IXP) 183
Internet service provider (ISP) 178
Intranet 175
IP address 181
IPv4 181
IPv6 181
Local area network (LAN) 174
Mainframe architecture 163
Mainframes 163
Net neutrality 184
Network 174
Over the Internet 165
Packet 181
Peering 183
Personal area network (PAN) 174
Platform as a service (PaaS) 171
Pooled 165
Private cloud 193
Private IP address 183
Protocol 175
Public IP address 181
Remote action system 199
Routers 183
Scalable 164
Server tier 185
Service-oriented architecture (SOA) 186
Simple Mail Transfer Protocol (smtp) 189
Small office/home office (SOHO) 175
Software as a service (SaaS) 171
TCP/IP protocol architecture 189
Telelaw enforcement 199
Telemedicine 199
Telesurgery 199
The Internet 175
Thin client 163
Three-tier architecture 185
Transmission Control Protocol
(TCP) 182
Tunnel 193
URL (Uniform Resource Locator) 182
User tier 185
Virtual private cloud (VPC) 195
Virtual private network (VPN) 193
WAN wireless 180
Web page 185
Web servers 185
Wide area network (WAN) 174
MyLab MIS
To complete the problems with MyLab MIS, go to EOC Discussion Questions in the MyLab.
USING YOUR KNOWLEDGE
4-1. Define cloud, and explain the three key terms in your defi-
MyLab MIS
nition. Compare and contrast cloud-based and in-house
hosting using the comparison presented in Q4-1 as a
guide. In your opinion, explain the three most important
factors that make cloud-based hosting preferable to inhouse hosting.
4-2. Apple invested more than $3B in the North Carolina data
MyLab MIS
center mentioned in Q4-2. For Apple to spend such a sum,
it must perceive the iCloud as being a key component of its
future. Explain all the ways you believe the iCloud will give
Apple a competitive advantage over other mobile device
vendors.
4-3. Suppose you manage a group of seven employees in a small
MyLab MIS
business. Each of your employees wants to be connected to
the Internet. Consider two alternatives:
Alternative A: Each employee has his or her own device
and connects individually to the Internet.
Alternative B: The employees’ computers are connected
using a LAN, and the network uses a single device to connect to the Internet.
a. Sketch the equipment and lines required for each
alternative.
b. Explain the actions you need to take to create each
alternative.
c. Which of these two alternatives would you recommend?
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
204
CHAPTER 4 The Cloud
4-4. Go to http://aws.amazon.com. and search for AWS data-
4-5. Suppose Seth wants eHermes to set up a private inter-
base offerings. Explain the differences among Amazon’s RDS, DynamoDB, ElastiCache, Redshift services,
and Neptune. Which of these would you recommend
for storing eHermes’ data? (By the way, whenever you
query the Internet for any AWS product, be sure to
include the keyword AWS in your search. Otherwise,
your search will result in Amazon’s lists of books
about the item you’re searching for.)
net, and he justifies this request on the basis of better security. Explain why that is not a good decision
and rebut his claim about security by suggesting that
eHermes use a VPC. Justify your suggestion.
4-6. In five sentences or fewer, explain how the cloud will
affect job prospects for you between now and 2029.
COLLABORATION EXERCISE 4
Using the collaboration IS you built, collaborate with a group of students to answer the following questions.
The cloud is causing monumental changes in the information
systems services industry. In every city, you will still see the
trucks of local independent software vendors (ISVs) driving to
their clients to set up and maintain local area networks, servers,
and software. You’ll know the trucks by the Microsoft, Oracle, and
Cisco logos on their sides. For years, those small, local companies
have survived, some very profitably, on their ability to set up and
maintain LANs, connect user computers to the Internet, set up
servers, sell Microsoft Exchange licenses, and install other software on both servers and user computers.
Once everything is installed, these companies continued to
earn revenue by providing maintenance for problems that inevitably developed and support for new versions of software, connecting
new user computers, and so forth. Their customers vary, but generally are smaller companies of, say, 3 to 50 employees—companies
that are large enough to need email, Internet connections, and possibly some entry-level software applications such as QuickBooks.
4-7. Using the knowledge of this chapter and the intuition
of the members of your team, summarize threats that
cloud services present to such ISVs.
4-8. Suppose your team owns and manages one of these
ISVs. You learn that more and more of your clients
are choosing SaaS cloud services like Google for email,
rather than setting up local email servers.
a. What, if anything, can you do to prevent the
encroachment of SaaS on your business?
b. Given your answer to question 4-8a, identify three
alternative ways you can respond.
c. Which of the three responses identified in your
answer to question 4-8b would you choose? Justify
your choice.
4-9. Even if SaaS eliminates the need for email and other
local servers, there will still remain viable services that
you can provide. Name and describe those services.
4-10. Suppose instead of attempting to adapt an existing
ISV to the threat of cloud services, you and your teammates decide to set up an entirely new business, one
that will succeed in the presence of SaaS and other
cloud services. Looking at businesses in and around
your campus, identify and describe the IS needs those
businesses will have in the cloud services world.
4-11. Describe the IS services that your new business could
provide for the business needs you identified in your
answer to question 4-10.
4-12. Given your answers to questions 4-7 through 4-11,
would you rather be an existing ISV attempting to
adapt to this new world or an entirely new company?
Compare and contrast the advantages and disadvantages of each alternative.
4-13. Changing technology has, for centuries, eliminated
the need for certain products and services and created
the need for new products and services. What is new,
today, however, is the rapid pace at which new technology is created and adapted. Using cloud services
as an example, create a statement of the posture that
business professionals should take with regard to technology in order to thrive in this fast-changing environment. Notice the verb in this assignment is thrive and
not just survive.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 4 The Cloud
205
CASE STUDY 4
Salesforce.com
In 1999, Marc Benioff was writing software in a small San Francisco apartment with two other cofounders of his new company.
Together they created a cloud enterprise software used by millions of people today. Prior to starting the new company, Benioff
was a successful executive at Oracle. But he was tired of the big
company culture. He wanted to leave Oracle, but leaving such a
successful job was a very hard decision. After some deep reflection
and a bit of soul searching, Benioff decided to trust himself and
start a new company called Salesforce.com.
Growing Salesforce.com
Benioff knew he wouldn’t be able to go it alone. He didn’t have
the experience or the skills he needed to create what he envisioned. Finding the right people was a challenge. Even after he
found the right people, he had to convince them that his vision
of a people-focused software company would actually work. That
was hard, too. Finally, once his team was in place, he faced a third
challenge—he needed to raise a lot of money to develop the large
systems the company needed.
Investors and venture capitalists weren’t really interested in
his idea, so Benioff turned to friends. Luckily, he had some successful friends, including founders and investors at companies
like Oracle, Dropbox, and CNET. With money in hand, Benioff
and his cofounders were able to launch one of the very earliest
enterprise software as a service (SaaS) companies in the world.
A Force to Be Reckoned With
Today, Salesforce.com dominates the market for customer relationship management (CRM) software. It consistently outsells
giants like SAP, Oracle, Microsoft, and IBM. About one-third of
Salesforce.com customers are small businesses; the rest are larger
organizations. It’s estimated that Salesforce.com has a 20 percent
share of the $40 billion CRM software market.27
As of 2018, Salesforce.com’s market capitalization was more
than $98 billion, and it is one of the most valued cloud computing companies in the United States. Even more amazing is how
quickly Salesforce.com has grown. Since its initial public offering
(IPO) in 2004, Salesforce.com’s stock price has grown from $4
per share (adjusting for a stock split) to more than $130 per share
(a P/E ratio of 147).28 That’s a 3,150 percent increase in stock
price in 14 years, or 262 percent annual growth every year since
its IPO. That is a tremendous amount of growth for any company.
And Salesforce.com has gone worldwide, too. It has been translated into more than 15 different languages.
Salesforce.com has been more than just a financial success.
It has been given numerous awards, including “100 Best Companies to Work For,” “World’s Most Admired Companies,” and
“Most Innovative Companies in the World.”29
As an organization, Salesforce.com focuses on four pillars
of success: trust, growth, innovation, and equality. To build
trust, Salesforce.com communicates openly with its customers.
It promises to do what it takes to keep customer data secure. To
promote growth, Salesforce.com focuses on the success of its
customers. By maintaining positive relationships with existing customers, the company continues to grow. Salesforce.com
works to innovate in what it does with the hope that its ideas
drive positive change in the company, the industry, and even the
world. Finally, Salesforce.com pursues equality and is committed
to hiring employees from every background. This focus helps it
thrive.
QUESTIONS
4-14. Go to www.salesforce.com, and click on the “Try for
Free” button. Fill in the required fields and start your
free trial. This will take you to a test site full of data for
a company named Acme. Click on the “Take a Tour
of Salesforce.com” link on the upper left-hand side of
the screen. Walk through the automated tour labeled
“Manage Your Pipeline (13 steps).”
a. Why would these dashboards be useful to a marketing or sales manager?
b. How could Salesforce.com help a sales manager
increase sales?
c. How long do you think it would take you to learn
the basics of Salesforce.com?
4-15. Explain why a company like Salesforce.com requires so
Source: Richard Levine/Alamy Stock Photo
much money to become successful. Once the software
is built, what are the incremental costs of adding additional customers? How does this affect profitability?
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206
CHAPTER 4 The Cloud
4-16. Why was it critical to choose the right team of people
to get Salesforce.com off the ground? What types of
skills would be necessary to create a CRM like Salesforce.com?
4-17. Why did tech giants like SAP, Oracle, Microsoft, and
IBM miss the opportunity to produce a SaaS CRM like
Salesforce.com? What might keep large tech companies from identifying potential opportunities like Salesforce.com?
4-18. What could be driving the tremendous growth in
Salesforce.com’s stock price and revenue? Why do
you think investors put such a high premium on
Salesforce.com’s stock?
4-19. Why do you think Salesforce.com chose trust, growth,
innovation, and equality as its four pillars of success?
Why are these important for a company that provides
CRM software?
4-20. CRM software is just one type of software service.
Companies might be open to trying additional types
of SaaS after having a great experience with Salesforce
.com. What other types of software might be good candidates for future expansion for Salesforce.com? Why?
Complete the following writing exercises.
4-21. Suppose that you work at eHermes and Victor tells you that he doesn’t
believe that cheap, elastic provisioning of data storage is possible. “There
has to be a catch somewhere,” he says. Write a one-page memo to him
explaining how the cloud works. In your memo, include the role of standards for cloud processing.
4-22. Suppose you manage a sales department that uses the SaaS product
Salesforce.com. One of your key salespeople refuses to put his data into
that system. “I just don’t believe that the competition can’t steal my data,
and I’m not taking that risk.” How do you respond to him?
ENDNOTES
1. Eric Jhonsa, “Amazon’s New Cloud Deal with Verizon Signals
a Bigger Trend,” The Street, May 15, 2018, accessed June 5,
2018, http://realmoney.thestreet.com/articles/05/15/2018/
amazons-new-cloud-deal-verizon-signals-bigger-trend.
2. Yahoo! Finance, SEC Filings, accessed June 5, 2018, http://finance.
yahoo.com/q/sec?s=AMZN+SEC+Filings.
3. Bob Evans, “Top Cloud Vendors Will Crush $100 Billion in 2018
Revenue; Microsoft, Amazon, IBM Hit $75 Billion?,” Forbes,
May 21, 2018, accessed June 5, 2018, www.forbes.com/sites/
bobevans1/2018/05/21/top-cloud-vendors-will-crush-100-billion-in2018-revenue-microsoft-amazon-ibm-hit-75-billion/.
4. Jordan Novet, “Microsoft Narrows Amazon’s Lead in Cloud, but the
Gap Remains Large,” CNBC, April 27, 2018, accessed June 5, 2018,
www.cnbc.com/2018/04/27/microsoft-gains-cloud-market-share-in-q1but-aws-still-dominates.html.
5. Patrick Thibodeau, “Apple, Google, Facebook Turn N.C. into Data
Center Hub,” Computerworld, June 3, 2011, accessed June 5,
2018, www.computerworld.com/article/2508851/data-center/applegooglefacebook-turn-n-c-into-data-center-hub.html.
6. Signiant, “The Need for Speed Series Part 1: In a Changing
Media Landscape,” Studiodaily, March 20, 2018, accessed
June 5, 2018, http://partners.studiodaily.com/signiant/content/
the-need-for-speed-series-part-1-in-a-changing-media-landscape.
7. Hiawatha Bray, “When the Billboard Has a Brain,” The Boston Globe,
April 6, 2018, www.bostonglobe.com/business/2016/05/18/whenbillboard-has-brain/TjUFP907S0nUKmqsLihsaN/story.html.
8. Christopher Mims, “Your Location Data Is Being Sold—Often Without
Your Knowledge,” The Wall Street Journal, April 6, 2018, www.
wsj.com/articles/your-location-data-is-being-soldoften-without-yourknowledge-1520168400.
9. Swati Khandelwal, “Google Collects Android Location Data Even When
Location Service Is Disabled,” The Hacker News, April 6, 2018, http://
thehackernews.com/2017/11/android-location-tracking.html.
10. Signiant, “The Need for Speed Series Part 1: In a Changing
Media Landscape,” Studiodaily, March 20, 2018, accessed
June 5, 2018, http://partners.studiodaily.com/signiant/content/
the-need-for-speed-series-part-1-in-a-changing-media-landscape.
11. SAS, “Machine Learning: What It Is & Why It Matters,” SAS.com,
accessed June 5, 2018, www.sas.com/it_it/insights/analytics/machinelearning.html.
12. Ibid.
13. Lukas Biewald, “How Real Businesses Are Using Machine
Learning,” TechCrunch.com, March 19, 2016, accessed
June 5, 2018, http://techcrunch.com/2016/03/19/
how-real-businesses-are-usingmachine-learning.
14. Ibid.
15. Tom Simonite, “Google’s Quantum Dream Machine,”
TechnologyReview.com, December 18, 2015, accessed June 5, 2018,
www.technologyreview.com/s/544421/googles-quantum-dream-machine.
16. Jennifer Ouellette, “How Quantum Computers and Machine Learning
Will Revolutionize Big Data,” Wired, October 14, 2013, accessed
June 5, 2018, www.wired.com/2013/10/computers-big-data.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 4 The Cloud
17. Elizabeth Weise, “IRS Site Back Up and Running—Drawing on
Computer Codes That Date Back to the 1960s,” USA Today,
April 18, 2018, www.usatoday.com/story/tech/news/2018/04/18/
irs-site-back-up-and-running-drawing-computer-codes-date-back1960-s/528468002/.
18. Ibid.
19. Thomas Claburn, “It’s US Tax Day, so of Course the IRS’s Servers Have
Taken a Swan Dive,” The Register, April 17, 2018, www.theregister
.co.uk/2018/04/17/irs_systems_stumble/.
20. Ibid.
21. Ben Casselman, “Everyone Files Their Taxes at the Last Minute,”
FiveThirtyEight, April 15, 2016, http://fivethirtyeight.com/features/
everyone-files-their-taxes-at-the-last-minute/.
22. Rob Stott, “Amazon’s Share of Black Friday Transactions Will Shock
You,” DealerScope, November 27, 2017, www.dealerscope.com/article/
hitwise-amazons-share-black-friday-transactions-will-shock.
23. P&S Market Research, “Telemedicine Market to Cross $48.8 Billion
by 2023: P&S Market Research,” Globenewswire.com, May 30,
24.
25.
26.
27.
28.
29.
207
2018, accessed June 5, 2018, http://globenewswire.com/newsrelease/2018/05/30/1513647/0/en/Telemedicine-Market-to-Cross-488-Billion-by-2023-P-S-Market-Research.html.
Rose Eveleth, “The Surgeon Who Operates from 400km Away,”
BBC.com, May 16, 2014, accessed June 5, 2018, www.bbc.com/future/
story/20140516-i-operate-on-people-400km-away.
Issie Lapowsky, “Video Is About to Become the Way We All Visit the
Doctor,” Wired, April 30, 2015, accessed June 5, 2018, www.wired
.com/2015/04/united-healthcare-telemedicine.
Robert Reich, Work of Nations: Preparing Ourselves for Twenty-First
Century Capitalism (New York: Vintage Books, 1992), p. 176.
PYMNTS, “Salesforce’s Revenues Grow to $3B,” June 4, 2018,
accessed June 7, 2018, www.pymnts.com/news/b2b-payments/2018/
salesforce-revenue-growth.
Yahoo! Finance, “Salesforce.com, Inc. (CRM),” accessed June 7, 2018,
http://finance.yahoo.com/quote/CRM/http://finance.yahoo.com/quote/
CRM/.
Salesforce.com, “Recognition,” accessed June 7, 2018, www.salesforce
.com/company/recognition/.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Teaching Case
Improving the clinical-care pathway of an
Ayurvedic hospital: a teaching case for
developing process improvement
capabilities
Wasana Bandara1, Dharshani Thennakoon1,2, Rehan Syed1, Paul Mathiesen1, K K D S Ranaweera 3,4
1
Business Process Management Discipline, Information Systems School, Queensland University of Technology, Brisbane, Australia;
Faculty of Management and Finance, Department of Human Resources Management, University of Colombo, Colombo, Sri Lanka;
3
Bandaranaike Memorial Ayurvedic Research Institute, Maharagama, Sri Lanka;
4
Department of Food Science and Technology, University of Sri Jayewardenepura, Nugegoda, Sri Lanka
2
Correspondence:
W Bandara, Business Process Management Discipline, Information Systems School, Queensland University of Technology,
2 George Street, Brisbane, QLD 4000, Australia.
E-mail: w.bandara@qut.edu.au
Abstract
Business Process Management (BPM) is a topic that has received immense attention in
information systems research and practice. While its adoption has been increasing rapidly,
many companies struggle to find BPM professionals with the appropriate skills, hence BPM
education has been an area of increasing interest as well. One big challenge for BPM
education is the lack of teaching resources. Appropriately written BPM teaching cases
derived from real-life case scenarios has been recognised as a valuable means to address
this gap. Yet, teaching cases that are rich in context dedicated to BPM are still scarce. This
teaching case, specifically developed for business process improvement education
purposes, is designed as a rich resource to address this gap. Teaching notes with an
extensive set of multimedia ancillary material are also available to instructors upon request.
This case study is based on a real-life patient-care process of a national Ayurvedic hospital in
Sri Lanka. With its position as the leading national institute for Ayurvedic research and
teaching, the hospital has the potential to make striding impacts with Ayurvedic innovations
both nationally and globally. This narrative describes the current patient-care process in
detail, challenging students to analyse the current process and derive justifiable high-impact
creative/innovative recommendations that are feasible to the case’s context and improve
business processes at the hospital.
Journal of Information Technology Teaching Cases (2016) 6, 111–120. doi:10.1057/jittc.2016.4;
advance online publication, 24 May 2016
Keywords: process management; business process improvement; teaching; patient care; clinicalcare pathways; Ayurveda
Introduction
n any organisation the effectiveness of core business
processes is critical to sustained delivery of services and
agreeable customer outcomes. As supported by Hellström
et al. (2010), this business imperative is justifiably of significant importance in the healthcare industry, especially when
organisations are heavily impacted by operational and
national constraints. On the basis of this resource-focussed
context, Business Process Management (BPM) can provide a
I
‘set of methods, techniques and software tools supporting the
design, enactment, control and analysis of operational business processes in order to facilitate an optimised value
creation’ (Houy et al., 2010: 621). The healthcare industry in
particular will benefit from this approach as Osterweil (2011:
187) acknowledges that ‘carefully defined processes can be
effective tools for guiding and coordinating the actions of
healthcare professionals’. This imperative is also driven by
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global healthcare challenges such as ‘declining resources and
increasing patient complexity with an increasing need for
high-quality healthcare services’ (Helfert, 2009: 937). In this
teaching case, the healthcare provider in question (the
Navinna Ayurvedic Hospital) is highly constrained in terms
of physical, financial and human resources (HR). This necessitates the stringent and targeted application of process
improvement methods that support the effective delivery of
patient services aligned with the ethos of this organisation.
Weerasinghe et al. (2014) view BPM as important for developing nations considering the impact process improvement
can bring on these nations.
The rapidly developing nation of Sri Lanka is currently at a
crossroads, embracing new Western medical practices while
holding true to established, widely accepted and deeply cultural
medical programs. The practice of Ayurveda is one such holistic
approach to the management of patient well-being that has long
been applied with much success. Now, with widespread acceptance both domestically and internationally, the demand for
Ayurvedic healing is rapidly increasing.
This case study is based on the leading Ayurveda research
institute and healthcare provider: Navinna Ayurvedic Hospital
in Sri Lanka. It is a not-for-profit national institution, where,
in addition to the provision of patient healthcare services, the
hospital plays a vital role in the delivery of much-needed
teaching and research programs to advance the quality of
Ayurvedic healing and improve patient outcomes. These
deliverables must be achieved under tight fiscal constraints
from the government as well as increased scrutiny from the
community in general, as funding for continued research and
practice is always under threat. The fact that the hospital
operates on a not-for-profit basis increases the obvious cost
and revenue efficiencies they must strictly adhere to.
The appropriate use of ‘real-world’ teaching cases supports
the current challenge of BPM education where there exists a
gap in appropriate teaching resources that have been derived
from real organisational scenarios. This teaching case (with a
detailed supporting resource kit) has been designed to help
address this known gap. On the basis of the provided
narrative, students are tasked with creating innovative and
effective process improvement ideas that support sustainable
excellence in the provision of patient services.
BPM is considered as a suitable approach for consolidation
and effective management of all patient-care functions to
achieve operational efficiencies (Jain, 2009). The effectiveness
of automation for patient-care processes has been questioned
by the healthcare industry, and BPM has been acknowledged
as an alternative for streamlining all healthcare processes.
Furthermore, the access to healthcare services located in the
urban areas by rural communities has been identified as a
critical issue faced by many developing countries (Mitra et al.,
2008). The positive results produced by introducing BPM in
the public-sector healthcare establishments were reported by
Ramani (2004). To advance the practices of the Navinna
Ayurveda Hospital and ensure continued quality of healthcare, it is now critical to document and analyse the core
business processes of this organisation and establish a set of
metrics by which it can be managed. By improving the
business operations of the hospital there will be a direct
impact upon the national healthcare system, an opportunity
to cater for international demand and, most importantly,
improved patient outcomes that are sustainable.
Background
According to Obeyesekere (1976), Ayurveda is considered
more than a medicine as its base stems from religion and
ritual. Before being introduced to Allopathy (‘Allopathy’ is a
term used to refer to the broad category of medical practice
that is commonly known as ‘Western medicine’), it was
Ayurveda that treated the ill of Sri Lanka. At present, a system
of plural medicine exists in Sri Lanka where both Western
biomedicine and Ayurveda are seen as equal alternate forms of
medication. Predominantly, Ayurveda has been identified
with wellness and around it have emerged many luxury
Ayurvedic solutions for indulgence and pampering. This has
succeeded in catering to a domestic market and has also
opened avenues for international exposure in terms of Ayurvedic exports and as a means of attracting tourism. Although
the practice is gaining popularity globally (and widely used by
Sri Lankans), the need for identifying Ayurveda as a holistic
medical alternative has been under pressure with Ayurvedic
forms of treatment being critically tested on the patient
outcomes it delivers.
Bandaranaike Memorial Ayurveda Research Institute
(Ministry of Health and Indigenous Medicine, 2015a), based
in Navinna, Sri Lanka (also known as the Navinna Ayurveda
Hospital) was set up in 1962 as a national research institute for
Ayurveda in Sri Lanka. The mission of the hospital is to be the
national leader in Ayurvedic research; to be engaged in
focussed and well-planned research and development in every
aspect of Ayurveda; and to enhance and improve the contribution of Ayurvedic medicine to patient well-being. Apart
from the research activities that it conducts, the institute
provides services to both out-patients and also has separate
wards to cater to patients who need in-house treatment. The
hospital is an institution that belongs to the Ministry of Health
and Indigenous Medicine of Sri Lanka and comes under the
direct purview of the Department of Ayurveda (Ministry of
Health and Indigenous Medicine, 2015b).
The hospital runs as a complete not-for-profit organisation.
The funding for the hospital comes from the Department of
Ayurveda (under the Ministry of Health and Indigenous
Medicine). All doctors who practice at the Navinna Hospital
have had intensive training at Sri Lankan universities where
they have received specialised training in the practice of
Ayurveda for at least 6 years. Further, the hospital is also the
largest Ayurvedic teaching hospital in Sri Lanka. Other staff
members such as the nurses, attendants (also known as health
service assistants), pharmacists, research officers and lab
assistants are also well-trained professionals in the field who
have undergone special training on Ayurveda and are fully
qualified in Ayurvedic aspects related to their job roles.
A severe shortage of qualified staff who can competently
conduct these activities has been an ongoing issue. The
hospital currently has 125 personnel, which includes
31 doctors, 8 nurses, 1 sister who overlooks the nurses, 15
ward attendants and 5 kitchen staff among the other staff.
Figure 1 provides an overview of the hospital’s organisational
structure in terms of staff designations at the strategic levels
and the different divisions falling under them. The focus of
this case is on the patient-care area, hence related roles specific
to these tasks are listed further in Figure 1.
Recent organisational performance reviews have highlighted
the need for proper formalisation, documentation and rapid
review of the business processes undertaken at the hospital.
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Commissioner of Ayurveda
Director
Deputy
Director Admin
Assistant Director
(AD) Admin
AD Patient
Care
Management
Unit
AD Outreach
Health Services
Clinics
General
Maint. Unit
Wards
Drug Manuf.acturing
Unit
General
Stores
Drug Stores
Staff Dev
Unit
Internal Audit
Support Staff
AD Finance
Biodiversity
Centre & Nursery
Testing Unit
Public Interaction
and Extension
Unit
Internal Lab
Dispensary Unit
Kitchen
Sanitation &
Maintanance. Unit
Biochemical and Pathalogy
Unit
AD R&D
Legal
Officer
Standardisation
Division
Research Division
Phamocognacy
Division
Statistics
Unit
Lab Unit
Lab Maint
Unit
Ethical Review &
Intellectual Property Rights
Knowledge
Division
Library &
Literary Section
Publication
Unit
Audio Visual
Unit
ICT Unit
Ticket Office
• Doctors (31)
• Chief Medical Officer
• Resident
Medical
Officer
• Sisters (1)
• Nurses (8)
• Medical
Laboratory
Technician
• Ward Attendants (1)
Figure 1 Organisational structure.
The Navinna Ayurveda Hospital management has shared (see
Figure 2) a high-level overview of the core processes conducted
and have identified some significant issues and opportunities for
improvement within their patient-care processes. A detailed
analysis of the end-to-end process, from when an individual
enters the hospital as a ‘patient’ to the time the patient leaves the
hospital, is discussed in the sections that follow. Improvements in
this process will have a direct impact upon the thousands of Sri
Lankans who reach out to Navinna hospital for Ayurvedic
services to address their healthcare needs.
Detailed description of current scenario
For the Navinna Ayurveda Hospital management, it is not
only what is being delivered to the client that is important but
also how the service is being delivered. Coherent communication and patient safety are also aspects that the Navinna
Ayurveda Hospital aims to achieve. One issue is patient
waiting times, which negatively affects the hospital’s reputation; elimination of these long waiting times is a key objective.
Furthermore, patient errors are numerous, especially for those
patients who see multiple doctors or who have multiple
chronic diseases. This is partially influenced not only by the
weaknesses of existing processes and information management, but also because of the nature of Ayurveda itself and its
unique ways and methods of treatment. Reducing such errors
is paramount to ensure compliance with emerging National
health standards, another key imperative.
The value chain of the hospital is depicted above in
Figure 2. All organisational units represented here complement the activities of and are heavily interdependent on
each other. The support activities have been identified to be
crucial in the implementation of the primary activities. Both
the primary and support activities are described in the
sections that follow.
The patient-care chain directly and indirectly interacts with
a large number of areas (hence many different stakeholder
groups) within the hospital and therefore is a very complex
process. There are three main variants (different types of
patients) who seek services through the patient-care process.
They are (1) patients of the outdoor patient department
(hereinafter referred to as OPD), (2) patients who seek services
at the different clinics held at the hospital and (3) patients who
undergo in-house treatment within the hospital. The hospital
has identified two types of patients within its care process:
(1) the first-time patients who will always be directed to the
OPD (where they may be recommended for further visits to
the OPD, treatment at the clinics or in-house treatment) and
(2) the repeat patients who can be either patients to the OPD
or the clinics (this is further elaborated in the sections ‘Patient
registration’, ‘Outdoor patient department’, ‘Clinical care’ and
‘In-house treatment’).
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Support Activities
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Strategic Planning, Auditing and Finance
Administration and Human Resource Management (HRM)
Ayurveda Research and Outreach Health Services
Procurement
Patient
Registration
Out Patient
Department
(OPD), Clinical
Care,
In-House Care
Pharmacy,
In-Door
Dispensary
(IDD), Out
Patient
Dispensary
Health
Information
Management
Laboratory
Services,
Patient Diet
Management
Figure 2 Overview of core process areas at the Navinna Hospital.
Patient registration
A patient’s first point of interaction after entering the hospital
is with the ticket issue counter (hereafter referred to as the
‘ticket counter’). This is a very small counter with little
physical space available to attend to the registration of all
patients at the hospital. There are two different queues: one for
the ‘first-time’ patients and another for repeat patients of the
hospital. As no proper directions are given, the patients
themselves have to identify the ticket counter, which is
situated a distance away from the entrance to the hospital,
and they must also identify the specific queues to which they
belong.
If it is a first-time patient, he/she will be given a prescription
form by the ticket clerks at the ticket counter, to be filled in
and handed to the Doctor by the patient. The form will require
the patient to fill in details such as the name, address, age,
gender and the occupation of the patient. At this point, a
record starts for the patient at the ticket counter, and he/she
will be issued with a registration number. The registration
number comes with a numerator and a denominator. The
denominator denotes the month (where an alphabetical index
is used to represent the different months, where January is
represented by A and February by B, etc.) in which the patient
visited the hospital for the first time, and the numerator
denotes the number that is assigned to the patient. Together
with this registration number, the patient is also issued with a
registration form that the patient should always bring along
with him/her when he/she visits the hospital. This form also
needs to be completed by the patient and requires (1) the
registration number issued to the patient, (2) the name of
the patient and (3) the date. The summary details on the
prescription form are also entered by the staff in a separate
manual log book that is maintained by the ticket counter. It
captures the date, and the patients (including name, age,
registration number and residential details) that were treated
on that date. This is used for record-keeping purposes to know
the exact number of patients who were treated within the day/
week/month and so on. Upon registration, the patient is then
directed to the OPD. Here a doctor will examine the patient
and will record details of the diagnosis and the prescription for
medicine on the prescription form that was issued to the
patient at the ticket counter.
If the patient is a repeat patient (either of the OPD or of the
clinics that are explained further in the sections ‘Outdoor
patient department’ and ‘Clinical care’, respectively), the
patient’s records should already be available with the ticketissuing counter. Upon submission of the registration form
(which the patient at the initial visit is given to carry with them
on any occasion that they visit the hospital for medication),
the ticket clerks will retrieve the records from the filing shelf
where the records are maintained (see the section ‘Recordkeeping and health information management’ for further
details). The retrieved record is then handed over to the
patient who is either directed or escorted to the waiting area
near the consultation chamber.
It is clear that the ticket-issuing process is time consuming
and, although the staff do try to be as efficient as possible,
there are long queues especially during the peak hours. Often
there is a lack of staff to handle the work load, at which times
other hospital staff (from various designations) are called in
for assistance. This ad hoc allocation of staff as need arises has
created obvious issues from a HR perspective, as issues like
establishing clear role accountability and training are frequently overlooked.
Outdoor patient department
Patients, who need medical or surgical care but are not in
acute emergency, generally attend the OPD. A permanent
cadre of Ayurvedic doctors performs general physician services for OPD patients. They may refer patients to specialist
consultations at the clinics or for in-house care when they
deem it necessary, and thus the OPD also acts as a filter for inhouse admissions and specialist consultations at the clinics.
On any given day, the OPD provides services to approximately
250 patients.
Patients who get their prescription forms at the ticketissuing counter have to find their own way to the waiting area
of the OPD, as the direction from the ticket counter is not
clearly displayed. The waiting area sometimes lacks capacity to
allow for seating facilities for all the patients of the OPD. The
patients wait (for a duration that may vary from a minimum
of 10 min to 90 min depending on the peak and off-peak
hours) for their appointment. As patients are not informed or
called for consultation, they have to be very attentive to work
out when to walk in to see the doctor. Some consultation
chambers are situated in a common hall and are attended by
three or four doctors. The doctor takes historical patient
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details from the prescription form (which the patient obtained
from the ticker counter, in the case of repeat patients) and
examines him/her. The doctor also informs the patient
regarding his/her ailment, plan of treatment and prognosis
and accordingly may prescribe drugs and/ or additional tests.
The patient may also be given a date for revisits where deemed
necessary. Where necessary, patients will be directed to the
clinics if the patient requires specialised treatment for their
ailments or for in-house admission. For each consultation of
this nature, a doctor takes approximately 5–10 min.
Clinical care
Ayurvedic doctors specialising in various ailments such as
cardiac disorders, eye problems, diabetes and so on can be
consulted at the clinics. Clinics are held on Monday–Friday –
8.00 am–4.00 pm. There are 18 specialised areas of treatment,
and normally three clinics are held for approximately a
hundred patients on any given day. The patients have to be
vigilant about the timetables of the clinics as they are not welldisplayed, and there is no point of contact available to the
patients to get information about the clinics. All clinics are
dispersed around a generic area of the hospital that the
patients must locate by themselves. Similar to the OPD
consultations, the patients who receive their prescription form
at the ticket counter find their way to the clinics (as it is not
displayed) and wait for their turn to consult a doctor.
In-house treatment
The hospital has four separate wards – one each for (i) males,
(ii) females, (iii) children and expectant women, and (iv) the
clergy. Twenty five patients can be accommodated in each
ward except the one for the clergy, which can accommodate
only up to 10 patients at a time. On any given occasion, all the
wards except for the ward for clergy are full and in total
accommodate an average of 75 patients a day.
Despite being recommended by a doctor at the OPD or a
clinic, not all patients are accommodated for in-house treatment because of lack of capacity. However, in case of capacity
problems, special preference is given to patients who are firsttime patients waiting to be admitted. Patients who have been
admitted at the different wards on prior occasions will only be
admitted if 3 months have elapsed after the last date of them
being discharged from the ward. This is recognised as a
general rule applied by the hospital to provide its services to
the majority of the masses who seek in-house medication at
the hospital.
To admit a patient to a ward, a referring doctor must first
informally check the available ward capacity by consulting
with the ward staff. The Chief Medical Officer (CMO) at the
OPD is also kept informed about the ward occupancy details
by the duty nurse on a daily basis.
The patient takes the prescribed admission document
offered by the doctor to the Resident Medical Officer’s
(RMO) office. The RMO at this stage approves the patient
admission. The RMO considers both patient details and the
availability of space at the wards before approving admittance
to the ward. Upon approval, the patient’s details are provided
by the patient or the patient’s guardian to the staff (most
probably a clerk) at the RMO’s office who completes an inhouse registration application for the patient. The application
form includes details such as the name, age, gender, marital
status and residential address of the patient and/or guardian.
The patient and the guardian then leave for the ward with the
in-house registration application and hands it over to the
nurse in-charge of the ward at the particular point in time.
The nurse will then record details of the patient in the log
book maintained at the ward. As a general hospital rule, inhouse patient admissions are only allowed from 8.00 am to
11.30 am and 2.00 pm to 3.30 pm.
Upon admission, the patient is given a special ward-patient
ID number. This number is different from the number that the
patient was initially registered with. A separate patient register
is maintained in each ward by a nurse that includes details
such as (1) the number of cases from the commencement of
the year, (2) number of cases from the commencement of the
month, (3) the name of the patient, (4) age of the patient, (5)
gender of the patient, (6) marital status of the patient, (7) the
religion and ethnicity of the patient, (8) date and time of
admission to the hospital, (9) number of days the patient was
ill before admission or the date on which he/she fell ill and
(10) place at which he/she fell ill or was wounded. Upon
discharge, the date and time at which the patient was
discharged will also be noted in the register. Once a patient is
admitted to a ward for in-house treatment, they will be subject
to care and medication from the staff at the ward. As soon as
the patient is admitted to a ward, the doctor-in-charge is
informed who then examines the patient. If the doctor-incharge is not available, another available doctor or the RMO
will be informed to examine the patient.
The doctors, who are in-charge of the wards, will examine
the patient and prescribe medicine and diets, and conduct
various medical examinations (e.g., urine, blood pressure,
heart, etc.) of the in-house patients on a daily basis. These will
be recorded separately for each patient in the prescription
forms (containing patient’s name, details of prescribed medicines and dietary requirements) used for in-house patients.
Apart from this, the patient’s condition is also recorded on a
daily basis by the doctor.
The average cost incurred by the hospital for an in-house
patient’s medicine amounts to Sri Lankan Rupees (LKR)
1500.00 (see Appendix for some further details related to costs
described here and currency conversions).The treatments
specified by the doctors will be provided by the nurses and
the attendants at the wards. The wards also have very basic
facilities of toilets, bathrooms and eating spaces for the
patients. Certain equipment within the wards was donated by
the patients and their caretakers. However, because of limited
infrastructure, some of the equipment has not been used. The
archaic design of the ward does not provide adequate privacy
for patients. Female patients have to take additional steps on
their own to ensure their privacy. The admission capacity can
be increased by utilising the ample space available at the
hospital (the hospital sits in an area of 18 acres of land with
sufficient buildings already established and in good condition,
which are not used in a very ‘space-wise’ manner). The
inadequate furniture for visitors makes it difficult for them to
manage their visits to the ward patients.
In-house patients are examined daily by the doctor-incharge. They will decide on the patient’s condition and make
the decision whether the patient needs further in-house
treatment or is ready to leave for home. If a patient is not fit
to leave for home, they will continue to remain at the hospital
on medication and under daily monitoring. The ward staff,
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although few in number to attend to all the work relating to
the in-house patients, try their utmost best to serve the
patients well. If it is decided that the patient no longer needs
treatment in-house, the patient will be set for discharge and
will be informed of it. In most cases, patients are advised by
the ward-in-charge doctor to continue with the prescribed
medication at home. The patient will have to purchase the
prescribed medicine externally if it is not available at the
indoor dispensary (IDD).
On certain occasions, because of the unavailability of
adequate space and inadequacy to handle a large number of
patients, certain patients cannot be accommodated in the
wards, and, therefore, they are required to visit the wards for
treatment either on a daily basis or on specific days.
The records of the patients’ medication history are kept at
the ward in a separate summary patient register. This is
maintained by the ward staff during a patient’s stay.
Record-keeping and health information management
Record-keeping primarily happens at the ticket counter that
has very small space availability. The records of the repeat
patients to the OPD are physically maintained in different
shelves at the counter. The shelves are labelled alphabetically
to denote the month in which the patient initially visited the
hospital (e.g., January – A, February – B, March – C) and the
frequency of visits that patient has paid to the hospital (e.g.,
a patient who has visited once – 1, a patient who has visited
twice – 2, etc.).
The records of patients to the clinics are also maintained at
the ticket counter separately from the records of the OPD
patients. They are stored according to the different clinics run
by the hospital. When a patient revisits the clinic, after the
very first time, his/her records will be retrieved manually on a
case by case basis by the staff at the ticket counter, for the
patient to produce to the doctor that she/he will be seeing. All
records of patients that exceed 3 months are physically
archived in the ticket office. They are bundled according to
the month and frequency system and stored away so they can
be retrieved if the need arises.
All related detailed documents of any discharged in-house
patient are maintained in a special archival system. As the
hospital has no separate records room, these documents of
patient history are maintained manually by the hospital’s Diet
Clerk in two separate cupboards stored according to the year
of admittance and the ward in which the patient was treated.
These records are kept for 5 years and rarely accessed unless
needed for future reference.
Out-patient dispensary, IDD and pharmacy
There are three points of supply of medicine within the
hospital, namely, the out-patient dispensary, the IDD (where
medicine containers are not always labelled) and the pharmacy. Both the out-patient pharmacy and the IDD deal mostly
with non-perishable medicine, whereas the pharmacy deals
mostly with perishable medicine and only caters to the inhouse patient requirements, making the prescribed Ayurvedic
medications. The out-patient dispensary caters to the OPD
patients. The IDD caters to the patients of the clinics as well as
the in-house patients. The distinction between the out-patient
dispensary and the IDD is not very clearly articulated to the
patients who sometimes confuse themselves when obtaining
the medicine from the relevant dispensary. Patients form long
queues at both dispensaries because of the severe lack of staff,
and often staff from other areas in the hospital are called in to
help out during peak hours.
The experienced and trained staff at the dispensary check
the patients’ prescriptions and issue the patients with the
necessary medicine. They know the medicines by heart, and
even though the medicine containers are not properly labelled,
the staff are confident that there is very little room for
mistakes in the issuing of medicine. The prescription forms
of the patient will be kept with the dispensary and later (at the
end of the day) returned to the ticket counter. Average cost of
medicine for an OPD patient is between LKR150.00 and
LKR400.00 for a clinical patient. If the required medicine is
not available with the out-patient dispensary or the IDD, the
patient or their caretakers will be informed to purchase the
medicine externally. A separate register for the different
categories of the issued medicine will be kept at the dispensary
for reporting purposes. This record will track the amount of
oil, tablets and other Ayurveda medicine that was issued for
the day/week/month from the dispensary or pharmacy. Medicine needed for the dispensaries will be requested by the
dispensary staff from the drug stores (the hospital’s drug
procurement and inventory management office, which is
discussed in detail in the section ‘Procurement’) through a
drug requisition form. This form includes details such as:
(1) the date of issue; (2) the different types of medicine issued;
(3) the quantities of medicine issued; and (4) the signature of
the staff at the pharmacy who issued the medicine.
The doctors at the wards will prescribe the medicine to be
issued to the patients each day during their ward rounds in the
morning. According to such prescription, the staff at the ward
will order medicine of a non-perishable nature from the IDD.
Upon receipt of the order from the ward the dispensary will
issue the medicine. They will keep record of the issued
medicine and send the book on which the request was placed
back to the ward. If the medicine is not available at the
dispensary, staff at the dispensary will inform the ward staff of
the unavailability who will then inform the caretakers of the
patient to source the medicine externally. A separate register
for the different categories of the issued medicine is kept at the
IDD for reporting purposes. This register will record the
amount of medicine in different forms that were issued by
them.
Requests for the medicines of a perishable nature will be
placed with the pharmacy. The ward staff will enter their
requirement on a special book requesting the pharmacy for
the medicine and send it across to the pharmacy upon which
the pharmacy will prepare the necessary medicine. The
pharmacy will keep record of the issued medicine and hand
over the book to the wards. A separate register for the different
wards and the issued medicine will be kept at the pharmacy
for reporting purposes.
The pharmacy and its functions are run in a very old
building within the hospital premises that is not built for this
purpose and hence sometimes creates difficulties for the staff
in the preparation of medicine. A doctor-in-charge at the
pharmacy and staff supports the activities. However, there is
certainly the need for more trained staff to work at the
pharmacy. There is special purpose machinery that is used
for the making of medicine, and some of this machinery is not
operational.
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Patient diet management
Patient diet management is a critical aspect of Ayurvedic
treatment and therefore is given high importance. Ayurvedic
meals promote good health and well-being and are prepared
according to the recommendations of the doctors.
The food for the patients conforming to the dietary plans
set by the Department of Ayurveda is decided by the doctorin-charge of the ward. The staff is of the view that these plans
are very old and at times outdated and are not suitable for the
current context. A Diet Clerk, on a daily basis, takes a record
of the food that needs to be prepared for the patients and
makes a chart of the details that she receives from the wards.
The Diet Clerk’s responsibility thereafter is to convey the meal
plan to the kitchen staff and ensure the patient is getting the
meals at the scheduled time. Once the meal plan message is
conveyed to the kitchen through a document (maintained by
the Diet Clerk), the kitchen staff prepares the meals and
delivers it to the appropriate wards. There are five kitchen
staff including the Diet Clerk, cooks and helpers. The hospital
incurs approximately LKR90 per patient on meals on any
particular day.
Nurses attached to the relevant wards will cross check the
meal with the prescriptions to ensure the correct meal is given
to the patient. There are also specific dietary plans for the
patients with different ailments (e.g., for diabetes patients) that
are specified by the Department of Ayurveda with the
collaboration of the Ministry of Health. The kitchen places
orders for the needed ingredients to prepare meals with the
registered suppliers of the hospital. The suppliers will deliver
the ordered ingredients to the hospital. The payment for the
suppliers is done by the Department of Ayurveda, and there
are times when there is a lack of funds to support essential
appropriate food requirements for the diverse patient needs,
and thus compromised meals are occasionally provided to the
patients.
Procurement
The Department of Ayurveda calls for quotations from
medicine, raw material and food suppliers on an annual basis
to supply to all Ayurvedic hospitals in Sri Lanka including the
Navinna Hospital.
At the Navinna Hospital, there are two stores; the drugs
store (which deals with all medicine storage and distribution),
and the general store (which stores all other procured goods
other than medicine). All shortages of medicinal requirements
are requested from the drugs stores (referred to as the ‘Stores’
hereinafter). The stores play a vital role in making the
medications available for the patients as and when required.
The stores get requests for different kinds of medicine from
the OPD, the IDD and the Pharmacy. On the basis of requests
and the experience of the officer-in-charge of the stores (who
has been doing the ordering for a long period of time), the
monthly orders will be placed with the relevant suppliers.
However, sometimes, there are delays in the supply of ordered
goods from the stores to the two dispensaries and the
pharmacy that creates a shortage of medicine to be issued to
the patients. Although the staff at the stores is experienced,
because of lack of training, they have limited professional
expertise in managing the stores.
Normally, the requirements are provided to the stores
through internal telephone calls. The pharmacy will request
the amounts of different raw materials needed to prepare the
medicine from the stores through a specified book entry
(though notifying of it is done informally over the phone). At
the time of issuing the medicine to the pharmacy, the staff of
the pharmacy will arrive at the store complex and receive the
goods in the presence of the store staff. The Store-in-charge
officer will be present when issuing the goods. The Storein-charge officer will note the details of the goods issued
in the book sent by the pharmacy and keep a copy of these
details for record purposes. The pharmacy will prepare the
necessary perishable medicine for the patients in the wards
and send the medicine to the stores. The stores will take a
stock of it and send it across to the IDD for distribution within
the wards.
One of the main suppliers to the hospital is the Ayurvedic
Drugs Corporation. All suppliers will be paid through the
Department of Ayurveda. The hospital will also call for
quotations from suppliers for certain types of medicine.
Records of orders placed, goods received as per orders made
and goods issued to the different sections of the hospital are
recorded in a separate registry. This enables the stores to
determine the available stock of different medicines at any
particular time and when to make orders in a timely manner.
Ayurvedic research
Research activity in the hospital is centred on clinical treatment and thus conducts well-planned research in every aspect
of Ayurveda to enhance and improve the contribution of
Ayurvedic medicine to the national healthcare services.
Research focusses on five main areas, namely, cancer, cardiovascular diseases, chronic kidney diseases, diabetes and dengue. All doctors of the hospital are attached to at least one of
the five areas of research. Undergraduate interns also conduct
research in collaboration with the research unit of the hospital.
Laboratory services
The laboratory services within the hospital include two main
sub-areas. One is the Botany division, which authenticates the
raw material used in the production of drugs, and the other is
the standardisation lab, which checks whether the medicine
used in the hospital complies with the physical and chemical
standards. These areas assist in quality assurance of the
medicine produced and used at the hospital.
Strategic planning
The Commissioner of Ayurveda (based at the Department of
Ayurveda) is the primary authority of the hospital as it is an
institution that comes under the purview of the Department of
Ayurveda. The operations of the hospital are headed by the
Hospital Director. The hospital is given authority and has the
autonomy to make decisions within the frameworks stipulated
by the Department of Ayurveda. However, approval of the
Commissioner is sought in all policy-related matters.
The Director of the hospital, two doctors in-charge of
administration and the OPD section CMO have regular meetings and are involved in official strategy-related matters and
short- and long-term planning. However, staff suggestions
and participation is always sought by the Director when
venturing out for new initiatives.
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HR management and administration
The officers in-charge of the HR management and administration activities mainly deal with the attendance, leave, salaryrelated matters and the maintenance of personal files of
employees. Table 1 depicts approximate monthly salaries of
some employees of the hospital.
Auditing and finance
General auditing of the hospital is done by the Auditor
General’s department that is responsible for all audit-related
activities in the public sector of Sri Lanka on an annual basis.
Apart from this, the internal audit team from the Department
of Ayurveda also conducts audits within the hospital.
The funds received from the treasury for research activities
are handled by the project offices of the research and development division that are established to administer the five
different research areas (discussed in the section ‘Challenges
and tasks’). The management unit overlooks the funds
allocated for the other expenses of the hospital. There are
administrative officers at the project offices and the management unit who look into the finance-related activities under
the purview of the Director of the hospital. The expenses
that the general office deals with are depicted in summary in
Table 2.
Table 1 Monthly Staff Salaries
Salary gradea
Doctors
• Special grade
• Senior medical officer
• Junior medical officer
Administration staff
• Administrative officer
• Development officer
• Research assistant
• Senior management assistant
• Junior management assistant
• Driver
• Senior nurse
• Junior nurse
Minor staff
• Ward attendant
• Labour – Senior
• Labour – Junior
Expenditures (LKR)
82,113
72,074
47,192
48,904
34,316
36,745
43,292
32,638
38,480
66,573
47,544
36,284
31,695
30,729
a
Employees within a certain function (e.g., ticket counter, dispensaries) may fall into different salary grades based on their seniority.
Table 2 Annual Expenditures
Item
Annual total expenditure on
medicine
Annul total cost on
administration activities
a
Expenditure (in Sri Lankan
Rupees – LKR)a
26,002,284
12,440,580
See Appendix for further financial details and currency conversion
information.
Challenges and tasks
Your team is requested to conduct a comprehensive process
analysis and improvement project for the patient-care process
described above. The main challenges are expected to centre
around: development of a detailed understanding of the
current (as-is) process; definition of a (graphical) process
model describing the process; identification of key performance indicators, benchmarks and other performance
metrics; conducting quantitative and qualitative analyses of
the as-is process performance; and proposal of opportunities
and recommendation for process improvements for the short
term (to be implemented in the next 3–6 months) and long
term (to be implemented in 12–18 months). It is important to
provide quantified and qualified benefits of the suggested
improvement ideas, with a high-level implementation strategy
and plan.
Furthermore, the hospital administration is aware of the
potential of IT solutions (such as EHR – Electronic patient
Health Records) and how they have become the ‘norm’ in the
healthcare service domain. However, with less than 5% of the
hospital staff having had any formal training in IT, hospital
executives have been concerned of the challenges of even
considering any automated solutions. They are fully aware of
the need to first better understand the underlying processes
and evaluate the stakeholders ‘readiness for technology’ before
any such recommendations are considered, and seek your
valued input for this as well.
A set of tasks (that will relate to the trainings you receive
from the course) are recommended (see below) to help you
address the challenges laid in front of you.
1. Describe what this case is about.
1.1. What are the main goals of this process?
1.2. What are the main phases of the described process? –
Derive a value chain depicting these.
1.3. Who are the key stakeholders in this process?
1.4. What roles do these different stakeholders play in the
process?
1.5. What areas/aspects of the process are not clear for you
– derive a detailed set of questions that you seek to ask
at the client-side interview.
1.6. What insights can you obtain about BPM in the
healthcare sector?
1.6.1. For what goals and purposes is BPM applied in the
healthcare sector?
1.6.2. What are some of the common issues with BPM in
the healthcare sector?
1.6.3. Can you find some useful cases that would be
relevant to the context of this case study (i.e., cases
from the developing context/cases about better
patient information management, etc.)?
2. Create a SIPOC diagram and an IGEO diagram to capture
the context of this process.
2.1. What are the advantages and disadvantages of these
two approaches?
2.2. For each area in the process chain, identify the main
activities and the involved stakeholders.
3. Model the current (as-is) scenario for this process, using
BPMN.
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3.1. Derive a high-level value chain that describes this
process, using correct modelling notations.
3.2. What modelling tool and technique will you use to
model this process? Justify your selection.
3.3. Document the modelling guidelines your team will use
for this modelling effort.
3.4. Apply the guidelines and derive a complete ‘as-is’
process model for this process.
3.5. Reflect how easy or difficult it was to abide by the
guidelines you had created – describe your response
with some samples from your work.
4. Provide a preliminary analysis of the process.
4.1. Derive a SWOT analysis about this process.
4.1.1. What are the strengths and weaknesses of doing a
SWOT analysis on the process?
4.2. What are the current constraints of the process?
4.3. Derive a stakeholder objective matrix for this process.
4.3.1. How are the objectives of the different stakeholders similar or different?
4.3.2. How can this effect the process improvement
initiative?
4.4. What aspects of the process can you do a Pareto
analysis on?
4.5. What other techniques can you use here to enhance
your preliminary understanding of the process?
4.6. Provide a summary document that articulates your
preliminary understanding of the process.
5. What are some of the issues of this process?
5.1. Maintain an issues register for this process.
5.2. How might you prioritise these issues?
5.3. Conduct a root cause analysis (making the relevant
assumptions as deemed relevant) to three of the top
priority issues identified by your team.
6. Provide a detailed analysis of the process’s current
performance.
6.1. What techniques might you use here to derive a
detailed performance matrix of the current process?
6.2. Conduct and show evidence of at least five relevant
KPIs (making the relevant assumptions as deemed
required for the analysis).
7. [Optional] Provide a summary document that articulates
your understanding and analysis of the current process.
8. Provide some short-term (within 3–6 months) and longterm (within 12–18 months) improvements for this
process.
8.1. Discuss your recommendations and how you derived
at it.
8.1.1. Which approach(es) did you use to generate these
improvement options (and why were these
approaches chosen)?
8.1.2. What are the constraints that hinder/influence
your recommendations?
8.2. Summarise your recommendations in a detailed business case.
9. What role can ICT play to improve healthcare?
9.1. Briefly identify the areas where ICT solutions can aid
with the issues and goals of this case.
9.2. Research and report on information systems that can
contribute to transform the functionalities of this
hospital.
9.3. What are the challenges this case must overcome in order
to be able to consider deploying these technologies?
10. [Optional] Summarise your recommendations in a detailed
report and present as a business case for consideration.
References
Helfert, M. (2009). Challenges of Business Processes Management in Healthcare:
Experience in the Irish healthcare sector, Business Process Management Journal
15(6): 937–952.
Hellström, A., Lifvergren, S. and Quist, J. (2010). Process Management in
Healthcare: Investigating why it’s easier said than done, Journal of
Manufacturing Technology Management 21(4): 499–511.
Houy, C., Fettke, P. and Loos, P. (2010). Empirical Research in Business Process
Management-Analysis of an Emerging Field of Research, Business Process
Management Journal 16(4): 619–661.
Jain, P. (2009). BPM in healthcare [www document] http://archivehealthcare.
financialexpress.com/200902/it@healthcare03.shtml (accessed 4 September 2015).
Ministry of Health and Indigenous Medicine (2015a). Bandaranayake Memorial
Ayurvedic Research Institute [www document] http://www.indigenousmedimini
.gov.lk/Research_institute.html (accessed 2 October 2015).
Ministry of Health and Indigenous Medicine (2015b). Overview [www
document] http://www.ayurveda.gov.lk/ (accessed 2 October 2015).
Mitra, S., Mitra, M. and Chaudhuri, B. (2008). Rural Cardiac Healthcare System-A
Scheme for Developing Countries, in TENCON 2008-IEEE Region 10 Conference
Hyderabad, 2008, pp. 1–5. doi:10.1109/TENCON.2008.4766548.
Obeyesekere, G. (1976). The Impact of Ayurvedic Ideas on the Culture and the
Individual in Sri Lanka, in C.M. Leslie (ed.) Asian Medical Systems: A
Comparative Study, Berkeley: University of California Press, pp. 201–226.
Osterweil, L.J. (2011). Context, Retrospection, and Prospection in Healthcare
Process Definitions, in F. Daniel, K. Barkaoui, and S. Dustdar (eds.) Business
Process Management Workshops: BPM 2011 International Workshops
(Clermont-Ferrand, France, 29 August); Revised Selected Papers, Part II (187).
Berlin, Heidelberg: Springer.
Ramani, K.V. (2004). IT Enabled Applications in Government Hospitals in India:
Illustrations of telemedicine, e-governance, and BPR, in 37th Annual Hawaii
International IEEE Conference on System Sciences (Hawaii, 2004); Hawaii:
IEEE, 1–8.
Weerasinghe, K., Bandara, W., Dharmasena, T., Kuruppubandara, M. and
Nawinna, D. (2014). Analysis and Improvement of a Construction Permit
Approval Process: A teaching case for developing business process development
capabilities, targeting developing nations, in Australasian Conference on
Information Systems (Auckland, New Zealand, 2014); Auckland: ACIS.
About the authors
Wasana Bandara is a fully tenured Senior Lecturer at
the Information Systems School, Queensland University of
Technology, Brisbane, Australia. She has published over 70
refereed articles in leading IS outlets. In addition to her research
interests in the IS discipline she also works in IS education topics.
Dharshani Thennakoon is a Lecturer in Human Resources
Management at the Faculty of Management and Finance,
University of Colombo, Sri-Lanka and is currently reading
for her Ph.D. at the Queensland University of Technology.
Her research interest is in the area of Human Resource
Management for Business Process Management and improvement initiatives.
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Rehan Syed is a Doctoral candidate at Information Systems
School, Queensland University of Technology. His research is
focussed towards understanding the characteristics of leadership in Business Process Management with a special concentration on developing countries. He specialises in information
system project management and business analysis for largescale and complex projects.
Paul Mathiesen is an Associate Lecturer in Business Process
Management at the Information Systems School, Queensland
University of Technology. He is Unit Coordinator for the
Business Process Management (BPM) unit and conducts
research in the Information Systems (IS) domain with a
primary focus on BPM expertise and capability development.
KKDS Ranaweera is fully tenured Professor at the University of
Sri Jayewardenepura – Sri Lanka, and headed the Department
of Food Science and Technology till 2011. He is the present
Director to the Bandaranaike Memorial Ayurvedic Research
Institute (BMARI) in Sri Lanka, and has a strong interest in
sustainable innovative practices of indigenous medicine.
Appendix
Additional financial information pertaining to the case (including
currency conversions)
This Appendix has two parts. Part A provides some additional
financial details about the case institute’s (Bandaranayake
Memorial Ayurvedic Research Institute) running costs.
Part B provides Sri Lankan currency conversion details.
Part A: Additional information about running costs
Total Expenditure (Annual) in Sri Lankan Rupees (LKR)
Description
Expenditure for a
month
Drugs for OPD
Drugs for clinics
Drugs for admitted
Patients
Electricity
Telephone
Water
Expenditure for a
year
657,132.00
956,588.00
553,137.00
7,885,584.00
11,479,056.00
6,637,644.00
278,000.00
25,000.00
79,000.00
3,336,000.00
300,000.00
948,000.00
Monthly Drug Expenditure for a patient in Sri Lankan Rupees
(LKR)
Description
OPD
Clinics
Admitted
Expenditure for a
month
Expenditure for a
year
103.00
332.00
5701.00
Number of patients – OPD (for a month)
New patients
4190
Repeat patients
2187
Total
6377
Number of patients – Clinics (for a month)
New patients
695
1236.00
3984.00
68,412.00
Repeat
patients
2033
2728
Daily expenditure on meals per patient – Rs 90/Number of medical officers – 31
Medical Officers’ Salaries (LKR)
Grade
Basic
Special grade
Senior medical officer
Junior medical officer
55,490.00
47,095.00
26,160.00
Allowances
26,623.00
24,979.00
21,032.00
Total
82,113.00
72,074.00
47,192.00
Administration Staff Salaries (LKR)
Grade
Basic
Allowances Total
Administrative officer
Development officer
Research assistant
Senior management
assistant
Junior management
assistant
Driver
27,695.00
15,430.00
17,515.00
22,910.00
Grade
Basic
Senior nurse
Junior nurse
44,785.00 21,788.00 66,573.00
28,620.00 18,924.00 47,544.00
21,209.00
18,886.00
19,230.00
20,382.00
48,904.00
34,316.00
36,745.00
43,292.00
13,990.00 18,648.00 32,638.00
18,900.00 19,580.00 38,480.00
Allowances Total
Minor Staff Salaries (LKR)
Grade
Basic
Attendant
Labour – Senior
Labour – Junior
17,070.00
13,170.00
12,330.00
Allowances
19,214.00
18,525.00
18,399.00
Total
36,284.00
31,695.00
30,729.00
Part B: Currency conversion details
Some currency conversion details are given here to provide a
basic understanding of the costs in relation to the country
context. The information is current as of March 2016.
The average currency conversion rate for Lankan Rupees
(LKR) is as follows:
AU$1.00 = LKR107.80
US$1.00 = LKR146.80
€1.00 = LKR165.09
Average monthly disposable salary (after tax) =
LKR37,000.00
Further information of this nature can be obtained from the
Central Bank of Sri Lanka (http://www.cbsl.gov.lk/htm/english/_cei/er/e_1.asp) and Department of Census and Statistics,
Sri Lanka (http://www.statistics.gov.lk/).
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CHAPTER
5
Database Processing
“The tricky part is correctly identifying the inventory item,” says Seth Wilson,
MyLab MIS
Using Your Knowledge
Questions 5-1, 5-2, 5-3
eHermes’ director of IT services. “We’ve tested hundreds of inventory items, and
we’re seeing about 85 percent accuracy in identifying items. The item needs to be
positioned and lighted correctly, and then the system identifies items pretty well. But
it doesn’t do well with one-of-a-kind items or items that are really old.”
“That sounds pretty good to me,” says Victor Vazquez, eHermes’ COO.
“Yes, it would really help us get items into inventory more quickly and accurately. Currently, customers have to manually upload images and a short description of each item. But sometimes the description isn’t that great. That makes
it hard for buyers to find the item they want. If we had more information about
each item—say, color, age, brand name, or type—it would be much easier for
customers to find the types of items they really want.”
Seth reaches over and puts a small toy tractor in the portable photography lightbox and clicks his mouse. The image appears on his monitor, and data starts filling
in below it. Pointing at the screen, he says, “Once we correctly identify the item,
we can also pull in customer reviews, product review videos, and links to the manufacturers’ sites, and we can show comparative prices of previously sold items.”
219
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CHAPTER 5
Database Processing
Victor smiles broadly. “Wow, this is great. Customers will love it. How long before
we can push this out?”
Seth winces slightly. “We’re still working out some of the details. We’re using
Google’s image classifier API to identify the images. Depending on the features we want,
it could cost us a few dollars per 1,000 images searched. But we’ll need more data storage, a redesigned database, a new application front end, and possibly a new DBMS.”
“Hmm . . . the image search doesn’t sound too expensive. But the database redesign and the new application sound pricey,” Victor says with a concerned tone.
“Not really. We can do the database redesign in house. We created it ourselves, so
it won’t cost much to redesign it. And I know a good local application developer, so that
cost will be minimal. The increased storage costs will be minimal because we’ve got a
fairly large NAS [Network Attached Storage] in our data center. It’s just figuring out all
the data flows, APIs, storage requirements, and security protections that are worrisome.
We’re sending and receiving data from multiple different data sources.”
Victor nods understandingly. “I see. It sounds like the data sources might be an
issue going forward.”
“For sure. We’d be relying on Google for all of our image identification. If they
increased their prices, we’d be at their mercy. We’d also be linking to videos on YouTube
and product pages at manufacturers’ sites, and we’d be pulling product reviews from
other online Web sites. Internally we’d be tying in past sales data. That would increase
our data processing needs. I just want to make sure it’s all going to work together.”
“That’s understandable. But don’t you think the rewards outweigh the risks?” Victor says, shaking his head.
“Of course,” Seth says, smiling. “It will be awesome. We can install these lightboxes in each mobile
storefront with built-in digital cameras. Sellers will
place their items in the lightboxes, and the boxes will
automatically recognize the items. In seconds the
system will fill in all related data fields, suggest an
approximate sale price, and start marketing the item
to potential buyers. Items would sell much more
quickly because sellers would more accurately price
their items based on the past sales of similar items.
Sellers wouldn’t have to write lengthy descriptions
anymore.”
“Sounds great. What’s our next step?”
“We’re seeing about 85 percent
“We’ve got some database redesign and application development work
accuracy in identifying items.”
to do. Then we’ll install a lightbox in a mobile storefront and test the data
Source: Haiyin Wang/Alamy Stock Photo
transfers and new systems. We’ve got a lot of work ahead of us.”
Study
QUESTIONS
Q5- 1
What is the purpose of a database?
Q5- 2
What is a database?
Q5- 3
What is a database management system (DBMS)?
Q5- 4
How do database applications make databases more useful?
Q5- 5
How are data models used for database development?
Q5- 6
How is a data model transformed into a database design?
Q5- 7
How can eHermes benefit from a database system?
Q5- 8
2029?
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Chapter
PREVIEW
Database Processing
221
Although you may not realize it, you access dozens, if not hundreds, of databases
every day. Every time you make a cell phone call, log on to the Internet, or buy something online using a credit card, applications behind the scenes are processing numerous databases. Use Snapchat, Facebook, Twitter, or LinkedIn, and again applications
are processing databases on your behalf. Google something, and yet again dozens of
databases are processed to obtain the search results.
As a user, you need know nothing about the underlying technology. From your perspective, “It just works,” to quote the late Steve Jobs. However, as a business professional in the 21st century, it’s a different story. You need the knowledge of this chapter
for four principal reasons:
1. When you participate in the development of any new business initiative, you need to
know if database technology can facilitate your project goals. If so, you need sufficient
knowledge to assess whether building that database is akin to building a small shed or
is closer to building a skyscraper. Victor, in the opening vignette of this chapter, needs
to have some knowledge to assess how hard (and thus how expensive) building that
new database will be.
2. Because databases are ubiquitous in commerce, billions upon billions of bytes of
data are stored every day. You need to know how to turn that data into a format from
which you can construct useful information. To that end, you might use one of many
different graphical tools to query that data. Or, to become truly proficient, you might
learn SQL, an international standard language for querying databases. Many business
professionals have done just that.
3. Business is dynamic, and information systems must adapt. Often such adaptation
means that the structure of the database needs to be changed. Sometimes it means
that entirely new databases must be created. As you will learn in this chapter, only
the users, such as yourself, know what and how details should be stored. You may
be asked to evaluate a data model like those described in Q5-4 to facilitate database
change and creation.
4. Finally, you might someday find yourself or your department in a material mess.
Maybe you don’t know who has which equipment, or where certain tools are located,
or what’s really in your supply closet. In that case, you might choose to build your own
database. Unless you’re an IS professional, that database will be small and relatively
simple, but it can still be very useful to you and your colleagues. Case Study 5 on page
253 illustrates one such example.
This chapter addresses the why, what, and how of database processing. We begin
by describing the purpose of a database and then explain the important components of
database systems. Next, we discuss data modeling and show how IS professionals use
data models to design database structure. We then discuss how a redesigned database
system could be used to solve the item identification and inventory problem at
eHermes. We’ll wrap up with pondering where database technology might be in 2029.
Q5-1
What Is the Purpose of a Database?
The purpose of a database is to keep track of things. When most students learn that, they wonder
why we need a special technology for such a simple task. Why not just use a list? If the list is long,
put it into a spreadsheet.
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FIGURE 5-1
A List of Student Grades
Presented in a Spreadsheet
Source: Excel 2016, Windows 10, Microsoft Corporation.
In fact, many professionals do keep track of things using spreadsheets. If the structure of
the list is simple enough, there is no need to use database technology. The list of student grades in
Figure 5-1, for example, works perfectly well in a spreadsheet.
Suppose, however, that the professor wants to track more than just grades. Say that the professor wants to record email messages as well. Or perhaps the professor wants to record both email
messages and office visits. There is no place in Figure 5-1 to record that additional data. Of course,
the professor could set up a separate spreadsheet for email messages and another one for office
visits, but that awkward solution would be difficult to use because it does not provide all of the data
in one place.
Instead, the professor wants a form like that in Figure 5-2. With it, the professor can record
student grades, emails, and office visits all in one place. A form like the one in Figure 5-2 is difficult,
if not impossible, to produce from a spreadsheet. Such a form is easily produced, however, from a
database.
The key distinction between Figures 5-1 and 5-2 is that the data in Figure 5-1 is about a single
theme or concept. It is about student grades only. The data in Figure 5-2 has multiple themes; it
shows student grades, student emails, and student office visits. We can make a general rule from
these examples: Lists of data involving a single theme can be stored in a spreadsheet; lists that
involve data with multiple themes require a database. We will say more about this general rule as
this chapter proceeds.
FIGURE 5-2
Student Data Shown in a
Form from a Database
Source: Access 2016, Windows 10,
Microsoft Corporation.
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Columns, also called fields
Student Number
Rows,
also called
records
FIGURE 5-3
Student Table (also called
a file)
Q5-2
Student Name
HW1 HW2 MidTerm
1325
BAKER, ANDREA
88
100
78
1644
LAU, SWEE
75
90
90
2881
NELSON, STUART
100
90
98
3007
FISCHER, MAYAN
95
100
74
3559
TAM, JEFFREY
100
88
4867
VERBERRA, ADAM
70
90
92
5265
VALDEZ, MARIE
80
90
85
8009
ROGERS, SHELLY
95
100
98
Characters, also called bytes
What Is a Database?
A database is a self-describing collection of integrated records. To understand the terms in this
definition, you first need to understand the terms illustrated in Figure 5-3. As you learned in
Chapter 3, a byte is a character of data. In databases, bytes are grouped into columns, such as
Student Number and Student Name. Columns are also called fields. Columns or fields, in turn, are
grouped into rows, which are also called records. In Figure 5-3, the collection of data for all
columns (Student Number, Student Name, HW1, HW2, and MidTerm) is called a row or a record.
Finally, a group of similar rows or records is called a table or a file. From these definitions, you can
see a hierarchy of data elements, as shown in Figure 5-4.
It is tempting to continue this grouping process by saying that a database is a group of tables
or files. This statement, although true, does not go far enough. As shown in Figure 5-5, a database
is a collection of tables plus relationships among the rows in those tables, plus special data, called
Table or File
Student Number Student Name HW1 …
Student Number Student Name HW1 …
Student Number Student Name HW1 …
Student Number Student Name HW1 …
Student Number Student Name HW1 …
Group of
Records or Rows
Student Number
Student Name
HW1
…
,…
Group of
Fields or Columns
Student Number
Student Name
HW1
,…
Group of
FIGURE 5-4
Hierarchy of Data Elements
Bytes or Characters
B
A
K
E
R ,…
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Tables or Files
Relationships
Among
Rows in Tables
FIGURE 5-5
Components of a Database
Database
Metadata
metadata, that describes the structure of the database. By the way, the cylindrical symbol labeled
“database” in Figure 5-5 represents a computer disk drive. It is used like this because databases are
most frequently stored on disks.
Relationships Among Rows
Consider the terms on the left-hand side of Figure 5-5. You know what tables are. To understand
what is meant by relationships among rows in tables, examine Figure 5-6. It shows sample data from
the three tables Email, Student, and Office_Visit. Notice the column named Student Number in the
Email table. That column indicates the row in Student to which a row of Email is connected. In the
first row of Email, the Student Number value is 1325. This indicates that this particular email was
received from the student whose Student Number is 1325. If you examine the Student table, you will
see that the row for Andrea Baker has this value. Thus, the first row of the Email table is related to
Andrea Baker.
FIGURE 5-6
Example of Relationships
Among Rows
Email Table
Message
EmailNum
Date
Student Number
1
2/1/2020
For homework 1, do you want us to provide notes on our references?
1325
2
3/15/2020
My group consists of Swee Lau and Stuart Nelson.
1325
3
3/15/2020
Could you please assign me to a group?
1644
Student Table
Student Number
Student Name
HW1 HW2 MidTerm
1325
BAKER, ANDREA
88
100
78
1644
LAU, SWEE
75
90
90
2881
NELSON, STUART
100
90
98
3007
FISCHER, MAYAN
95
100
74
3559
TAM, JEFFREY
100
88
4867
VERBERRA, ADAM
70
90
92
5265
VALDEZ, MARIE
80
90
85
8009
ROGERS, SHELLY
95
100
98
Office_Visit Table
Student Number
VisitID
Date
2
2/13/2020
Andrea had questions about using IS for raising barriers to entry.
1325
3
2/17/2020
Jeffrey is considering an IS major. Wanted to talk about career opportunities.
3559
4
2/17/2020
9KNNOKUUENCUU(TKFC[FWGVQLQDEQPƃKEV
4867
Notes
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Now consider the last row of the Office_Visit table at the bottom of the figure. The value of
Student Number in that row is 4867. This value indicates that the last row in Office_Visit belongs to
Adam Verberra.
From these examples, you can see that values in one table relate rows of that table to rows in
a second table. Several special terms are used to express these ideas. A key (also called a primary
key) is a column or group of columns that identifies a unique row in a table. Student Number is the
key of the Student table. Given a value of Student Number, you can determine one and only one row
in Student. Only one student has the number 1325, for example.
Every table must have a key. The key of the Email table is EmailNum, and the key of the Office_
Visit table is VisitID. Sometimes more than one column is needed to form a unique identifier. In a
table called City, for example, the key would consist of the combination of columns (City, State)
because a given city name can appear in more than one state.
Student Number is not the key of the Email or the Office_Visit tables. We know that about Email
because there are two rows in Email that have the Student Number value 1325. The value 1325 does
not identify a unique row; therefore, Student Number cannot be the key of Email.
Nor is Student Number a key of Office_Visit, although you cannot tell that from the data in Figure
5-6. If you think about it, however, there is nothing to prevent a student from visiting a professor
more than once. If that were to happen, there would be two rows in Office_Visit with the same value
of Student Number. It just happens that no student has visited twice in the limited data in Figure 5-6.
In both Email and Office_Visit, Student Number is a key, but it is a key of a different table, namely
Student. Hence, the columns that fulfill a role like that of Student Number in the Email and Office_Visit
tables are called foreign keys. This term is used because such columns are keys, but they are keys
of a different (foreign) table than the one in which they reside.
Before we go on, databases that carry their data in the form of tables and that represent relationships using foreign keys are called relational databases. (The term relational is used because
another, more formal name for a table like those we’re discussing is relation.) You’ll learn about
another kind of database, or data store, in Q5-8 and in Case Study 5.
Metadata
Databases and information systems
can be complex enough that only a
few internal employees know how to
operate them. What happens when
these employees use them for their
own gain? See the Ethics Guide on
pages 226–227 for an example
case.
Recall the definition of database: A database is a self-describing collection of integrated records.
The records are integrated because, as you just learned, rows can be linked together by their key/
foreign key relationship. Relationships among rows are represented in the database. But what does
self-describing mean?
It means that a database contains, within itself, a description of its contents. Think of a library.
A library is a self-describing collection of books and other materials. It is self-describing because
the library contains a catalog that describes the library’s contents. The same idea also pertains to
a database. Databases are self-describing because they contain not only data, but also data about
the data in the database.
Metadata is data that describes data. Figure 5-7 shows metadata for the Email table. The format of metadata depends on the software product that is processing the database. Figure 5-7 shows
the metadata as it appears in Microsoft Access. Each row of the top part of this form describes a
column of the Email table. The columns of these descriptions are Field Name, Data Type, and Description. Field Name contains the name of the column, Data Type shows the type of data the column
may hold, and Description contains notes that explain the source or use of the column. As you can
see, there is one row of metadata for each of the four columns of the Email table: EmailNum, Date,
Message, and Student Number.
The bottom part of this form provides more metadata, which Access calls Field Properties, for
each column. In Figure 5-7 , the focus is on the Date column (note the light rectangle drawn around
the Date row). Because the focus is on Date in the top pane, the details in the bottom pane pertain to
the Date column. The Field Properties describe formats, a default value for Access to supply when a
new row is created, and the constraint that a value is required for this column. It is not important
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ETHICS GUIDE
MINING AT WORK
Richard pulled into the employee lot and steered
his shiny new sedan into a front-row spot. The office looked
entirely different at night with the lot empty and only a handful of the offices illuminated. The new car was his first splurge
since graduating from a graduate program a few years earlier.
In spite of being in the field for a relatively short time, Richard
had already moved up in the technology group and was one
of two key system administrators at the company. He swiped
his badge at the side entrance and heard the familiar click as
the lock released. He worked his way up the dimly lit staircase
to the server room on the tenth floor. As he moved toward the
end of the hallway, Richard could smell the aroma of burgers and fries, his boss’ staple meal on these overnight systems
upgrade projects. He wasn’t sure which was harder for him to
tolerate—the greasy odor of the food or the presence of his
boss, Steve.
Crypto-holic
Steve had been working for the company for several decades.
The only thing rivaling his expertise was his propensity to
complain. Steve’s rants focused mainly on the incompetence
of company executives and the salary increase he thought
he deserved. When Richard
grudgingly joined him for
lunch a few times a week,
Steve tended to go on and
on about a variety of techrelated topics. However, lately
Steve seemed interested in the
surging popularity and value
of cryptocurrencies. Hackers, college students, and tech
startups were not only buying
cryptocurrencies like bitcoin,
but they were setting up computer “rigs” to mine them.
Richard didn’t quite
understand all of the technical nuances of Steve’s tirades,
but he surmised that cryptocurrency mining is based
on computers compiling the most recent transactions for
that type of cryptocurrency and performing complex mathematical calculations. When a “miner’s” system successfully
contributed to the update of this digital ledger, they received
payment in that type of cryptocurrency. As the value of
bitcoin increased, for example, more and more people were
investing in top-of-the-line computer hardware to increase
the odds that their mining system could successfully compete
against other miners, helping them accrue as much cryptocurrency as possible.
Richard was especially interested to learn that the demand
for these powerful mining rigs was dramatically increasing.
High-end graphics processing cards were becoming hard to
find, much to the chagrin of the gaming community.1 Even
more interesting was the pilgrimage of crypto-miners to
Iceland due to the naturally cold climate that made it easier to
keep their systems cool and the geothermal and hydroelectric
resources that kept electricity prices low.2 In fact, the power
consumed by mining rigs in Iceland was exceeding that used
by the country’s residents!
Source: Alexander Blinov/Alamy Stock Photo
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Richard exchanged pleasantries with Steve, received his
instructions for the night, and retreated to his office adjacent to the server room. They would begin rolling out a
number of system updates over the next several hours, but
Steve insisted on finishing his dinner before starting. Richard
opted to cut through the server room, even though it was not
the most direct route to his office. As he entered the room,
he noticed more activity and noise than usual. “Better check
on this,” he thought as he unlocked the door to his office.
He pulled up a couple monitoring tools he used to manage
the servers; everything seemed normal. He then ran a few
scripts he had developed on his own, and within a few minutes he found himself staring at his monitor in shock. He
slowly pushed back his keyboard and rolled his chair away
from the terminal.
Steve had taken his fixation with cryptocurrency mining to a new level. He was not just talking about it, he was
actually doing it—on the company’s machines! Richard had
discovered a rogue program that Steve had installed on all of
the servers. It was programmed to run only after hours when
employees were home and the processing capabilities of the
Database Processing
227
servers were largely underutilized. This explained the frenzy
of light and noise Richard had noticed in the server room—
the servers were running the mining program. Steve had
clearly underestimated Richard’s technical abilities because
he had done little to conceal his program.
Richard wasn’t sure what to do about his discovery. It
was not like Steve was overtly harming the company—the
systems were just sitting around idling at night anyway,
right? And even if running this program was putting wear
and tear on the servers, they were replaced regularly and
almost never failed before the replacement cycle began. The
only thing it might cost the company was some extra power,
but who would know or care about an uptick in the power
bill, especially when the company was rapidly growing and
regularly adding new staff and offices?
Beyond all of that, Steve was the last person Richard
wanted to confront or make angry. He could seriously affect
Richard’s long-term employment at the company and his job
prospects elsewhere. Steve was very well-connected in the
tech world. On the other hand, if someone else figured out
what was going on, would Richard be accused of complicity?
He let out a groan and kept pondering what to do.
DISCUSSION QUESTIONS
1. According to the definitions of the ethical principles previously defined in this book:
a. Do you think using company resources to mine cryptocurrency is ethical according to the categorical
imperative?
b. Do you think using company resources to mine cryptocurrency is ethical according to the utilitarian
perspective?
2. Richard is probably the only other person in the company
who could detect Steve’s mining scheme. How important
is it to have ethical employees in positions that can’t be
easily audited or checked? For these types of positions,
is it better to hire a person who behaves ethically but
has limited technical skills, or is it better to hire a highly
skilled person with moral flexibility?
3. It’s unlikely the company has a policy against using too much
CPU power; this wasn’t even an issue before crypto-mining
became popular. Even if Richard turned Steve in, could Steve
simply claim he wasn’t violating corporate policy? How might
Steve justify his mining activities and avoid being fired?
4. Suppose Steve goes to his boss and tells her about his idea.
He reminds her that the main corporate office pays all the
power bills, so they could just keep the profits within the IT
group. Essentially, they could increase their departmental
budget by “efficiently” using existing resources. Steve could
covertly skim a small percentage off the top for himself and
be protected from getting fired at the same time. He might
even get a raise. How would you feel if you were the CEO
of the company and found out about this sort of cryptomining activity? How would you respond to the IT group?
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FIGURE 5-7
Sample Metadata (in Access)
Source: Access 2016, Windows 10,
Microsoft Corporation.
for you to remember these details. Instead, just understand that metadata is data about data and
that such metadata is always a part of a database.
The presence of metadata makes databases much more useful. Because of metadata, no one
needs to guess, remember, or even record what is in the database. To find out what a database contains, we just look at the metadata inside the database.
Q5-3
What Is a Database Management System (DBMS)?
A database management system (DBMS) is a program used to create, process, and administer
a database. As with operating systems, almost no organization develops its own DBMS. Instead,
companies license DBMS products from vendors such as IBM, Microsoft, Oracle, and others. Popular
DBMS products are DB2 from IBM, Access and SQL Server from Microsoft, and Oracle Database
from the Oracle Corporation. Another popular DBMS is MySQL, an open source DBMS product that
is license-free for most applications.3 Other DBMS products are available, but these five process the
great bulk of databases today.
Note that a DBMS and a database are two different things. For some reason, the trade press
and even some books confuse the two. A DBMS is a software program; a database is a collection of
tables, relationships, and metadata. The two are very different concepts.
Creating the Database and Its Structures
Database developers use the DBMS to create tables, relationships, and other structures in the database. The form in Figure 5-7 can be used to define a new table or to modify an existing one. To create
a new table, the developer just fills the new table’s metadata into the form.
To modify an existing table—say, to add a new column—the developer opens the metadata
form for that table and adds a new row of metadata. For example, in Figure 5-8 the developer has
added a new column called Response?. This new column has the data type Yes/No, which means that
the column can contain only one value—Yes or No. The professor will use this column to indicate
whether he has responded to the student’s email. A column can be removed by deleting its row in
this table, though doing so will lose any existing data.
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FIGURE 5-8
Adding a New Column to a
Table (in Access)
Source: Access 2016, Windows 10,
Microsoft Corporation.
Processing the Database
Organizations are collecting
large amounts of data. Big data
becomes a big target for hackers as
described in the Security Guide on
pages 248–249.
The second function of the DBMS is to process the database. Such processing can be quite complex,
but, fundamentally, the DBMS provides applications for four processing operations: to read, insert,
modify, or delete data. These operations are requested in application calls upon the DBMS. From a
form, when the user enters new or changed data, a computer program behind the form calls the
DBMS to make the necessary database changes. From a Web application, a program on the client
or on the server calls the DBMS to make the change.
Structured Query Language (SQL) is an international standard language for processing a database. All five of the DBMS products mentioned earlier accept and process SQL (pronounced “see-quell”)
statements. As an example, the following SQL statement inserts a new row into the Student table:
INSERT INTO Student
([Student Number], [Student Name], HW1, HW2, MidTerm)
VALUES
(1000, ‘Franklin, Benjamin’, 90, 95, 100);
As stated, statements like this one are issued “behind the scenes” by programs that process
forms and reports. Alternatively, they can be issued directly to the DBMS by an application program.
You do not need to understand or remember SQL language syntax. Instead, just realize that
SQL is an international standard for processing a database. SQL can also be used to create databases
and database structures. You will learn more about SQL if you take a database management class.
Administering the Database
A third DBMS function is to provide tools to assist in the administration of the database. Database
administration involves a wide variety of activities. For example, the DBMS can be used to set up
a security system involving user accounts, passwords, permissions, and limits for processing the
database. To provide database security, a user must sign on using a valid user account before she
can process the database.
Permissions can be limited in very specific ways. In the Student database example, it is possible
to limit a particular user to reading only Student Name from the Student table. A different user could
be given permission to read the entire Student table, but limited to update only the HW1, HW2, and
MidTerm columns. Other users can be given still other permissions.
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SO WHAT?
SLICK ANALYTICS
Spreadsheet software designed for small businesses is often misused. For example, if you use spreadsheet software to manage a
dataset with several hundreds of thousands of rows of data, you
will find that simple operations like sorting and saving updates
to the data take several minutes. It is difficult to work effectively and efficiently when minutes are wasted on rudimentary
operations. As companies continue to collect larger and larger
datasets, there is demand for more robust and scalable data
management solutions. These solutions must facilitate rather
than hinder the rapid collection and analysis of important data.
Nowadays, a great deal of data collection, storage, and
analysis has moved to the cloud. You may not realize it, but
you are probably taking advantage of some sort of cloud-based
storage solution right now. If you use applications like Dropbox,
OneDrive, or Google Drive, you’re using the cloud. You no longer
need to transfer files from one device to the next using a flash
drive or other physical storage medium. You can access your
files on any device with Internet connectivity.
As a student, you’ve probably found cloud storage tremendously convenient (e.g., when sharing large files for a group project with peers). Businesses are harnessing the same power and
convenience offered by the cloud, but on a much larger scale.
Companies aren’t just looking for the convenient file access,
though; chief information officers (CIOs) are looking to merge
the storage and analysis of data into one synergistic operation.
Drilling for Answers
Laredo Petroleum is an example of a company that has recognized the benefits offered by cloud analytics.4 In a recent interview, the CIO described the cumbersome data analysis process
the company had been using to improve its drilling operations.
The company’s old approach entailed the use of numerous
spreadsheets and manual calculations that took a long time
to perform. By the time actionable insights had been extracted
from the data, the value of the information had already been
diminished due to old age.
One important question Laredo Petroleum must answer
is when it should clean chemical deposits in its wells. Cleaning
these deposits boosts the efficiency of wells, but sending maintenance teams to clean the wells is costly. Laredo Petroleum
transitioned from the antiquated spreadsheet-based approach
of analyzing this problem to using a cloud-based analytics
platform. This new approach made data management more
scalable, data analysis more robust, and data accessibility better.
Data could now be accessed on both traditional PCs and mobile
devices at any time and in any location.5
Source: Georgejmclittle/Fotolia
Cloud analytics provide a much nimbler information systems architecture. It can respond to changes in market conditions more easily (e.g., the dramatic drops in oil prices in 2008
and 2015 have affected how Laredo Petroleum does business).
Laredo Petroleum isn’t the only company that has identified
cloud analytics as a viable solution for surviving and thriving in
a world driven by Big Data. A recent study reported that global
cloud analytics would grow by 46 percent through 2020.6
The widespread interest in cloud analytics is likely driven by
improvements in data storage and analysis functionality like
enhanced scalability, parallelism across devices, resource pooling, and agile virtualization.7
Cloudburst?
It’s easy to tout the benefits of cloud services, but you may be
wondering if there are downsides. Think about your own use of
cloud services. Are there any aspects of storing your files in the
cloud that concern you? Some people are apprehensive about
storing their photos and financial data (e.g., tax returns) in the
cloud. Are their data being stored securely? Is it safe to allow your
personal data out in the “wild” where it is out of your control?
There are other risks too. Could your data be permanently
lost due to a system failure or a malicious insider at your cloud
service provider?8 Could a denial-of-service attack against your
cloud service provider render your data inaccessible for an
extended period of time?9 As with any system, security often
comes at the expense of convenience. As a business leader, you
must consider if the benefits of cloud-based services outweigh the
potential risks, which in some cases may turn into real losses.
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Questions
1. Have you chosen to store any of your personal data in the
cloud? If so, do you store all of your data or only certain types
of data? If not, what factors have inhibited you from putting
your data in the hands of a cloud provider? If you don’t use
cloud-based storage, how do you back up your data?
2. This article discussed the specific example of a petroleum
company using cloud-based data analytics to improve decision making. What other industries can you identify that
would benefit from the ability to capture large quantities of
data in real time, analyze the data, and then use the results
of those analyses to make better decisions?
3. This article mentions that some users may decide to manage
their data “in house” rather than use cloud-based services
and risk losing access to their data in the event of a denialof-service (DoS) attack. Take a few minutes to research what
a DoS attack is and how it could prevent users from accessing their data. Be prepared to explain this concept to another
classmate or the class.
4. In a business setting, what types of organizations would
place greater value on security rather than convenience?
What types of organizations would prioritize convenience
over security?
In addition to security, DBMS administrative functions include backing up database data, adding structures to improve the performance of database applications, removing data that are no
longer wanted or needed, and similar tasks.
For important databases, most organizations dedicate one or more employees to the role of
database administration. Figure 5-9 summarizes the major responsibilities for this function. You
will learn more about this topic if you take a database management course.
Category
Development
Operation
Backup and Recovery
FIGURE 5-9
Summary of Database
Administration (DBA)
Tasks
Adaptation
Database Administration Task
Description
Create and staff DBA function
Size of DBA group depends on size and complexity of
database. Groups range from one part-time person to
small group.
Form steering committee
Consists of representatives of all user groups. Forum for
community-wide discussions and decisions.
Specify requirements
Ensure that all appropriate user input is considered.
Validate data model
Check data model for accuracy and completeness.
Evaluate application design
Verify that all necessary forms, reports, queries, and
applications are developed. Validate design and usability of
application components.
Manage processing rights and
responsibilities
Determine processing rights/restrictions on each table
and column.
Manage security
Add and delete users and user groups as necessary;
ensure that security system works.
Track problems and manage
resolution
Develop system to record and manage resolution
of problems.
Monitor database performance
Provide expertise/solutions for performance improvements.
Manage DBMS
Evaluate new features and functions.
Monitor backup procedures
Verify that database backup procedures are followed.
Conduct training
Ensure that users and operations personnel know and
understand recovery procedures.
Manage recovery
Manage recovery process.
Set up request tracking system
Develop system to record and prioritize requests for change.
/CPCIGEQPƂIWTCVKQPEJCPIG
Manage impact of database structure changes on
applications and users.
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Q5-4
How Do Database Applications Make
Databases More Useful?
A set of database tables, by itself, is not very useful; the tables in Figure 5-6 contain the data the
professor wants, but the format is awkward at best. The data in database tables can be made more
useful, or more available for the conception of information, when it is placed into forms like that in
Figure 5-2 or other formats.
A database application is a collection of forms, reports, queries, and application programs10
that serves as an intermediary between users and database data. Database applications reformat
database table data to make it more informative and more easily updated. Application programs
also have features that provide security, maintain data consistency, and handle special cases.
The specific purposes of the four elements of a database application are:
Forms
View data; insert new, update existing, and delete existing data
Reports
Structured presentation of data using sorting, grouping, filtering, and
other operations
Queries
Search based on data values provided by the user
Application programs
Provide security, data consistency, and special purpose processing,
(e.g., handle out-of-stock situations)
Database applications came into prominence in the 1990s and were based on the technology
available at that time. Many existing systems today are long-lived extensions to those applications;
the ERP system SAP (discussed in Chapter 6) is a good example of this concept. You should expect
to see these kinds of applications during the early years of your career.
Today, however, many database applications are based on newer technology that employs
browsers, the Web, and related standards. These browser-based applications can do everything the
older ones do, but they are more dynamic and better suited to today’s world. To see why, consider
each type.
Traditional Forms, Queries, Reports, and Applications
FIGURE 5-10
Components of a Database
Application System
In most cases, a traditional database is shared among many users. In that case, the application
shown in Figure 5-10 resides on the users’ computers and the DBMS and database reside on a
server computer. A network, in most cases not the Internet, is used to transmit traffic back and forth
between the users’ computers and the DBMS server computer.
Organizational
Network
rForms
rReports
rQueries
rApplication
Programs
Database
Management
System
(DBMS)
r Tables
r Relationships
r Metadata
Database
Application
Users
Users’ Computers
Database Server
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FIGURE 5-11
Example of a Student Report
Single-user databases like those in Microsoft Access are an exception. With such databases, the
application, the DBMS, and the database all reside on the user’s computer.
Traditional forms appeared in window-like displays like that in Figure 5-2. They serve their
purpose; users can view, insert, modify, and delete data with them, but by today’s standards, they
look clunky.
Figure 5-11 shows a traditional report, which is a static display of data, placed into a format
that is meaningful to the user. In this report, each of the emails for a particular student is shown
after the student’s name and grade data. Figure 5-12 shows a traditional query. The user specifies
query criteria in a window-like box (Figure 5-12a), and the application responds with data that fit
those criteria (Figure 5-12b).
Traditional database application programs are written in object-oriented languages such as
C++ and VisualBasic (and even in earlier languages like COBOL). They are thick applications that
need to be installed on users’ computers. In some cases, all of the application logic is contained in
a program on users’ computers and the server does nothing except run the DBMS and serve up
data. In other cases, some application code is placed on both the users’ computers and the database
server computer.
As stated, in the early years of your career, you will still see traditional applications, especially
for enterprise-wide applications like ERP and CRM. Most likely, you will also be concerned, as a user
if not in a more involved way, with the transition from such traditional applications into browserbased applications.
FIGURE 5-12A
Sample Query Form Used to
Enter Phrase for Search
Source: Access 2016, Windows 10,
Microsoft Corporation.
FIGURE 5-12B
Sample Query Results of
Query Operation
Source: Access 2016, Windows 10,
Microsoft Corporation.
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Browser Forms, Reports, Queries,
and Applications
The databases in browser-based applications are nearly always shared among many users. As
shown in Figure 5-13, the users’ browsers connect over the Internet to a Web server computer,
which in turn connects to a database server computer (often many computers are involved on the
server side of the Internet).
Browser applications are thin-client applications that need not be preinstalled on the users’
computers. In most cases, all of the code for generating and processing the application elements
is shared between the users’ computers and the servers. JavaScript is the standard language for
user-side processing. Languages like C# and Java are used for server-side code, though JavaScript
is starting to be used on the server with an open source product named Node.js.
Browser database application forms, reports, and queries are displayed and processed using
html and, most recently, using html5, css3, and JavaScript as you learned in Chapter 3. Figure 5-14
shows a browser form that is used to create a new user account in Office 365. The form’s content
is dynamic; the user can click on the blue arrow next to Additional Details to see more data. Also,
notice the steps on the left-hand side that outline the process that the administrator will follow when
creating the new account. The current step is shown in color. Compare and contrast this form with
that in Figure 5-2 ; it is cleaner, with much less chrome.
Figure 5-15 illustrates a browser report that shows the content of a SharePoint site. The
content is dynamic; almost all of the items can be clicked to produce other reports or take other
actions. The user can search the report in the box in the upper-right-hand corner to find specific
items. Browser-based applications can support traditional queries, but more exciting are graphical
queries, in which query criteria are created when the user clicks on a graphic.
Security requirements are more stringent for browser-based Internet applications than for traditional ones. Most traditional applications run within a corporate network protected from threats
common on the Internet. Browser-based applications that are open to the public, over the Internet,
are far more vulnerable. Thus, protecting security is a major function for browser-based Internet
application programs. Like traditional database application programs, they need to provide for data
Applications with both
client- and server-side code
Browser
Application
Program A
Browser
Browser
Application
Program B
Internet
Application
Program C
Browser
Application
Program D
Browser
FIGURE 5-13
Four Application Programs
on a Web Server Computer
DBMS
DB
Database Server Computer
Web Server
Computer(s)
Applications coded in:
rhtml5
rcss3
rJavaScript
Applications coded in:
rC#
rJava
rNode.js JavaScript
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FIGURE 5-14
Account Creation Browser
Form
Source: Windows 10, Microsoft
Corporation.
consistency and to handle special conditions as well. As an example of the need for data consistency,
consider the problems introduced by multi-user processing.
Multi-user Processing
Most traditional and browser-based applications involve multiple users processing the same database. While such multi-user processing is common, it does pose unique problems that you, as
a future manager, should know about. To understand the nature of those problems, consider the
following scenario, which could occur on either a traditional or browser-based application.
At a ticket vendor’s Web site, two customers, Andrea and Jeffrey, are both attempting to buy
tickets to a popular event. Andrea uses her browser to access the site and finds that two tickets are
available. She places both of them in her shopping cart. She doesn’t know it, but when she opened
Search Report:
All Icons Clickable:
FIGURE 5-15
Browser Report
Source: Access 2016, Windows 10,
Microsoft Corporation.
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the order form, she invoked an application program on the vendor’s servers that read a database
to find that two tickets are available. Before she checks out, she takes a moment to verify with her
friend that they still want to go.
Meanwhile, Jeffrey uses his browser and also finds that two tickets are available because his
browser activates that same application that reads the database and finds (because Andrea has not
yet checked out) that two are available. He places both in his cart and checks out.
Meanwhile, Andrea and her friend decide to go, so she checks out. Clearly, we have a problem. Both Andrea and Jeffrey have purchased the same two tickets. One of them is going to be
disappointed.
This problem, known as the lost-update problem, exemplifies one of the special characteristics of multi-user database processing. To prevent this problem, some type of locking must be used
to coordinate the activities of users who know nothing about one another. Locking brings its own
set of problems, however, and those problems must be addressed as well. We will not delve further
into this topic here, however.
Be aware of possible data conflicts when you manage business activities that involve multi-user
processing. If you find inaccurate results that seem not to have a cause, you may be experiencing
multi-user data conflicts. Contact your IS department for assistance.
Q5-5
To learn more about a career as
a data engineer, see the Career
Guide on page 250.
How Are Data Models Used for Database
Development?
In Chapter 8, we will describe the process for developing information systems in detail. However,
business professionals have such a critical role in the development of database applications that
we need to anticipate part of that discussion here by introducing two topics—data modeling and
database design.
Because the design of the database depends entirely on how users view their business environment, user involvement is critical for database development. Think about the Student database. What data should it contain? Possibilities are: Students, Classes, Grades, Emails, Office_Visits,
Majors, Advisers, Student_Organizations—the list could go on and on. Further, how much detail
should be included in each? Should the database include campus addresses? Home addresses? Billing addresses?
In fact, there are unlimited possibilities, and the database developers do not and cannot know
what to include. They do know, however, that a database must include all the data necessary for
the users to perform their jobs. Ideally, it contains that amount of data and no more. So, during
database development, the developers must rely on the users to tell them what to include in the
database.
Database structures can be complex, in some cases very complex. So, before building the database the developers construct a logical representation of database data called a data model. It
describes the data and relationships that will be stored in the database. It is akin to a blueprint. Just
as building architects create a blueprint before they start building, so, too, database developers create a data model before they start designing the database.
Figure 5-16 summarizes the database development process. Interviews with users lead to database requirements, which are summarized in a data model. Once the users have approved (validated) the data model, it is transformed into a database design. That design is then implemented
into database structures. We will consider data modeling and database design briefly in the next
two sections. Again, your goal should be to learn the process so that you can be an effective user
representative for a development effort.
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Forms
Requirements
Reports
FIGURE 5-16
Database Development
Process
Create Data
Model
(Entities and
Relationships)
Data
Model
237
Database Processing
Create
Database
Design
(Tables with
Foreign Keys)
Database
Design
Create
Database
Queries
What Is the Entity-Relationship Data Model?
The entity-relationship (E-R) data model is a tool for constructing data models. Developers use
it to describe the content of a data model by defining the things (entities) that will be stored in the
database and the relationships among those entities. A second, less popular tool for data modeling
is the Unified Modeling Language (UML). We will not describe that tool here. However, if you
learn how to interpret E-R models, with a bit of study you will be able to understand UML models
as well.
Entities
An entity is some thing that the users want to track. Examples of entities are Order, Customer,
Salesperson, and Item. Some entities represent a physical object, such as Item or Salesperson; others
represent a logical construct or transaction, such as Order or Contract. For reasons beyond this discussion, entity names are always singular. We use Order, not Orders; Salesperson, not Salespersons.
Entities have attributes that describe characteristics of the entity. Example attributes of Order
are OrderNumber, OrderDate, SubTotal, Tax, Total, and so forth. Example attributes of Salesperson are
SalespersonName, Email, Phone, and so forth.
Entities have an identifier, which is an attribute (or group of attributes) whose value is associated with one and only one entity instance. For example, OrderNumber is an identifier of Order
because only one Order instance has a given value of OrderNumber. For the same reason, CustomerNumber is an identifier of Customer. If each member of the sales staff has a unique name, then
SalespersonName is an identifier of Salesperson.
Before we continue, consider that last sentence. Is the salesperson’s name unique among the
sales staff ? Both now and in the future? Who decides the answer to such a question? Only the
users know whether this is true; the database developers cannot know. This example underlines
why it is important for you to be able to interpret data models because only users like you will
know for sure.
Figure 5-17 shows examples of entities for the Student database. Each entity is shown in a
rectangle. The name of the entity is just above the rectangle, and the identifier is shown in a section
at the top of the entity. Entity attributes are shown in the remainder of the rectangle. In Figure 5-18,
the Adviser entity has an identifier called AdviserName and the attributes Phone, CampusAddress,
and EmailAddress.
Observe that the entities Email and Office_Visit do not have an identifier. Unlike Student or
Adviser, the users do not have an attribute that identifies a particular email. We could make one
up. For example, we could say that the identifier of Email is EmailNumber, but if we do so we
are not modeling how the users view their world. Instead, we are forcing something onto the
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Student
StudentNumber
StudentName
HW1
HW2
MidTerm
Adviser
FIGURE 5-17
Student Data Model Entities
Department
Email
Date
Message
DeptName
Admin
Phone
Email
Office_Visit
AdviserName
Phone
CampusAddress
EmailAddress
Date
Notes
users. Be aware of this possibility when you review data models about your business. Do not
allow the database developers to create something in the data model that is not part of your
business world.
Relationships
Entities have relationships to each other. An Order, for example, has a relationship to a Customer
entity and also to a Salesperson entity. In the Student database, a Student has a relationship to an
Adviser, and an Adviser has a relationship to a Department.
Figure 5-19 shows sample Department, Adviser, and Student entities and their relationships.
For simplicity, this figure shows just the identifier of the entities and not the other attributes. For
this sample data, Accounting has three professors—Jones, Wu, and Lopez—and Finance has two
professors—Smith and Greene.
The relationship between Advisers and Students is a bit more complicated because in this example, an adviser is allowed to advise many students and a student is allowed to have many advisers.
Perhaps this happens because students can have multiple majors. In any case, note that Professor
Jones advises students 100 and 400 and that student 100 is advised by both Professors Jones and
Smith.
100
200
Jones
300
Accounting
Wu
400
Smith
500
Finance
Department Entities
FIGURE 5-18
Example of Department,
Adviser, and Student Entities
and Relationships
Lopez
600
Greene
Adviser Entities
700
800
Student Entities
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Department
FIGURE 5-19
Sample Relationships
Version 1
DeptName
Admin
Phone
Email
Adviser
AdviserName
Phone
CampusAddress
EmailAddress
Database Processing
239
Student
StudentNumber
StudentName
HW1
HW2
MidTerm
Diagrams like the one in Figure 5-18 are too cumbersome for use in database design discussions. Instead, database designers use diagrams called entity-relationship (E-R) diagrams.
Figure 5-19 shows an E-R diagram for the data in Figure 5-18. In this figure, all of the entities of
one type are represented by a single rectangle. Thus, there are rectangles for the Department, Adviser,
and Student entities. Attributes are shown as before in Figure 5-17.
Additionally, a line is used to represent a relationship between two entities. Notice the
line between Department and Adviser, for example. The vertical bar on the left side of the relationship means that an adviser works in just one department. The forked lines on the right
side of that line signify that a department may have more than one adviser. The angled lines,
which are referred to as crow’s feet, are shorthand for the multiple lines between Department and Adviser in Figure 5-18. Relationships like this one are called 1:N, or one-to-many
relationships, because one department can have many advisers, but an adviser has at most
one department.
Now examine the line between Adviser and Student. Notice the crow’s feet that appear at each
end of the line. This notation signifies that an adviser can be related to many students and that a
student can be related to many advisers, which is the situation in Figure 5-18. Relationships like
this one are called N:M, or many-to-many relationships, because one adviser can have many
students and one student can have many advisers.
Students sometimes find the notation N:M confusing. Interpret the N and M to mean that a
variable number, greater than one, is allowed on each side of the relationship. Such a relationship
is not written N:N because that notation would imply that there are the same number of entities
on each side of the relationship, which is not necessarily true. N:M means that more than one
entity is allowed on each side of the relationship and that the number of entities on each side can
be different.
Figure 5-20 shows the same entities with different assumptions. Here, advisers may advise in
more than one department, but a student may have only one adviser, representing a policy that
students may not have multiple majors.
Which, if either, of these versions is correct? Only the users know. These alternatives illustrate
the kinds of questions you will need to answer when a database designer asks you to check a data
model for correctness.
Figures 5-19 and 5-20 are typical examples of an entity-relationship diagram. Unfortunately,
there are several different styles of entity-relationship diagrams. This one is called, not surprisingly,
a crow’s-foot diagram version. You may learn other versions if you take a database management
class.
Department
FIGURE 5-20
Sample Relationships
Version 2
DeptName
Admin
Phone
Email
Adviser
AdviserName
Phone
CampusAddress
EmailAddress
Student
StudentNumber
StudentName
HW1
HW2
MidTerm
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Department
FIGURE 5-21
Sample Relationships
Showing Both Maximum and
Minimum Cardinalities
DeptName
Admin
Phone
Email
Adviser
Student
AdviserName
Phone
CampusAddress
EmailAddress
StudentNumber
StudentName
HW1
HW2
MidTerm
The crow’s-foot notation shows the maximum number of entities that can be involved in a relationship. Accordingly, they are called the relationship’s maximum cardinality. Common examples
of maximum cardinality are 1:N, N:M, and 1:1 (not shown).
Another important question is “What is the minimum number of entities required in the relationship?” Must an adviser have a student to advise, and must a student have an adviser? Constraints on minimum requirements are called minimum cardinalities.
Figure 5-21 presents a third version of this E-R diagram that shows both maximum and minimum cardinalities. The second vertical bar on the lines means that at least one entity of that type is
required. The small oval means that the entity is optional; the relationship need not have an entity
of that type. Using this notation, if there are two vertical bars, both the minimum and maximum
cardinality are one. If there is a vertical bar with a crow’s foot, then the minimum cardinality is
one and the maximum is many.
Thus, in Figure 5-21 a department is not required to have a relationship to any adviser, but an
adviser is required to belong to a department. Similarly, an adviser is not required to have a relationship to a student, but a student is required to have a relationship to an adviser. Note, also, that the
maximum cardinalities in Figure 5-21 have been changed so that both are 1:N.
Is the model in Figure 5-21 a good one? It depends on the policy of the university. Again, only
the users know for sure.
Q5-6
How Is a Data Model Transformed into a
Database Design?
Database design is the process of converting a data model into tables, relationships, and data constraints. The database design team transforms entities into tables and expresses relationships by
defining foreign keys. Database design is a complicated subject; as with data modeling, it occupies
weeks in a database management class. In this section, however, we will introduce two important
database design concepts: normalization and the representation of two kinds of relationships. The
first concept is a foundation of database design, and the second will help you understand important
design considerations.
Normalization
Normalization is the process of converting a poorly structured table into two or more well-structured tables. A table is such a simple construct that you may wonder how one could possibly be
poorly structured. In truth, there are many ways that tables can be malformed—so many, in fact,
that researchers have published hundreds of papers on this topic alone.
Consider the Employee table in Figure 5-22a. It lists employee names, hire dates, email
addresses, and the name and number of the department in which the employee works. This table
seems innocent enough. But consider what happens when the Accounting department changes its
name to Accounting and Finance. Because department names are duplicated in this table, every
row that has a value of “Accounting” must be changed to “Accounting and Finance.”
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CHAPTER 5
FIGURE 5-22
A Poorly Designed
Employee Table
Database Processing
241
Employee
Name
HireDate
Email
DeptNo
DeptName
Jones
Feb 1, 2018
Jones@ourcompany.com
100
Accounting
Smith
Dec 3, 2020
Smith@ourcompany.com
200
Marketing
Chau
March 7, 2020
Chau@ourcompany.com
100
Accounting
Greene
July 17, 2019
Greene@ourcompany.com
100
Accounting
(a) Table Before Update
Employee
Name
HireDate
Email
DeptNo
DeptName
Jones
Feb 1, 2018
Jones@ourcompany.com
100
Accounting and Finance
Smith
Dec 3, 2020
Smith@ourcompany.com
200
Marketing
Chau
March 7, 2020
Chau@ourcompany.com
100
Accounting and Finance
Greene
July 17, 2019
Greene@ourcompany.com
100
Accounting
(b) Table with Incomplete Update
Data Integrity Problems
Suppose the Accounting name change is correctly made in two rows, but not in the third. The result
is shown in Figure 5-22b. This table has what is called a data integrity problem: Some rows indicate that the name of Department 100 is “Accounting and Finance,” and another row indicates
that the name of Department 100 is “Accounting.”
This problem is easy to spot in this small table. But consider a table like the Customer table
in the Amazon database or the eBay database. Those databases have millions of rows. Once a table
that large develops serious data integrity problems, months of labor will be required to remove
them.
Data integrity problems are serious. A table that has data integrity problems will produce incorrect and inconsistent results. Users will lose confidence in the data, and the system will develop a
poor reputation. Information systems with poor reputations become serious burdens to the organizations that use them.
Normalizing for Data Integrity
The data integrity problem can occur only if data are duplicated. Because of this, one easy way to
eliminate the problem is to eliminate the duplicated data. We can do this by transforming the table
design in Figure 5-22a into two tables, as shown in Figure 5-23. Here the name of the department
is stored just once; therefore, no data inconsistencies can occur.
Of course, to produce an employee report that includes the department name, the two tables
in Figure 5-23 will need to be joined back together. Because such joining of tables is common,
DBMS products have been programmed to perform it efficiently, but it still requires work. From this
example, you can see a trade-off in database design: Normalized tables eliminate data duplication,
but they can be slower to process. Dealing with such trade-offs is an important consideration in
database design.
The general goal of normalization is to construct tables such that every table has a single topic
or theme. In good writing, every paragraph should have a single theme. This is true of databases
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FIGURE 5-23
Two Normalized Tables
Employee
Name
HireDate
Email
DeptNo
Jones
Feb 1, 2018
Jones@ourcompany.com
100
Smith
Dec 3, 2020
Smith@ourcompany.com
200
Chau
March 7, 2020
Chau@ourcompany.com
100
Greene
July 17, 2019
Greene@ourcompany.com
100
Department
DeptNo
DeptName
100
Accounting
200
Marketing
300
Information Systems
as well; every table should have a single theme. The problem with the table design in Figure 5-22 is
that it has two independent themes: employees and departments. The way to correct the problem is
to split the table into two tables, each with its own theme. In this case, we create an Employee table
and a Department table, as shown in Figure 5-23.
As mentioned, there are dozens of ways that tables can be poorly formed. Database practitioners classify tables into various normal forms according to the kinds of problems they have.
Transforming a table into a normal form to remove duplicated data and other problems is called
normalizing the table.11 Thus, when you hear a database designer say, “Those tables are not normalized,” she does not mean that the tables have irregular, not-normal data. Instead, she means that
the tables have a format that could cause data integrity problems.
Summary of Normalization
As a future user of databases, you do not need to know the details of normalization. Instead, understand the general principle that every normalized (well-formed) table has one and only one theme.
Further, tables that are not normalized are subject to data integrity problems.
Be aware, too, that normalization is just one criterion for evaluating database designs. Because
normalized designs can be slower to process, database designers sometimes choose to accept nonnormalized tables. The best design depends on the users’ processing requirements.
Representing Relationships
Figure 5-24 shows the steps involved in transforming a data model into a relational database design.
First, the database designer creates a table for each entity. The identifier of the entity becomes the
key of the table. Each attribute of the entity becomes a column of the table. Next, the resulting
tables are normalized so that each table has a single theme. Once that has been done, the next step
is to represent the relationships among those tables.
FIGURE 5-24
Transforming a Data Model
into a Database Design
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CHAPTER 5
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243
For example, consider the E-R diagram in Figure 5-25a. The Adviser entity has a 1:N relationship to the Student entity. To create the database design, we construct a table for Adviser and a second
table for Student, as shown in Figure 5-25b. The key of the Adviser table is AdviserName, and the key
of the Student table is StudentNumber.
Further, the EmailAddress attribute of the Adviser entity becomes the EmailAddress column of
the Adviser table, and the StudentName and MidTerm attributes of the Student entity become the
StudentName and MidTerm columns of the Student table.
The next task is to represent the relationship. Because we are using the relational model, we
know that we must add a foreign key to one of the two tables. The possibilities are: (1) place the
foreign key StudentNumber in the Adviser table or (2) place the foreign key AdviserName in the Student table.
The correct choice is to place AdviserName in the Student table, as shown in Figure 5-25c. To
determine a student’s adviser, we just look into the AdviserName column of that student’s row. To
Student
Adviser
AdviserName
EmailAddress
StudentNumber
StudentName
MidTerm
(a) 1:N Relationship Between Adviser and Student Entities
Adviser Table—Key Is AdviserName
EmailAddress
AdviserName
Jones
Jones@myuniv.edu
Choi
Choi@myuniv.edu
Jackson
Jackson@myuniv.edu
Student Table—Key Is StudentNumber
StudentNumber StudentName MidTerm
100
Lisa
90
200
Jennie
85
300
Jason
82
400
Terry
95
(b) Creating a Table for Each Entity
Adviser Table—Key Is AdviserName
AdviserName
EmailAddress
Jones
Jones@myuniv.edu
Choi
Choi@myuniv.edu
Jackson
Jackson@myuniv.edu
Student—Key Is StudentNumber
Foreign key
column
represents
relationship
StudentNumber StudentName MidTerm AdviserName
FIGURE 5-25
Representing a 1:N
Relationship
100
Lisa
90
Jackson
200
Jennie
85
Jackson
300
Jason
82
Choi
400
Terry
95
Jackson
(c) Using the AdviserName Foreign Key to Represent the 1:N Relationship
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determine the adviser’s students, we search the AdviserName column in the Student table to determine which rows have that adviser’s name. If a student changes advisers, we simply change the
value in the AdviserName column. Changing Jackson to Jones in the first row, for example, will assign
student 100 to Professor Jones.
For this data model, placing StudentNumber in Adviser would be incorrect. If we were to do that,
we could assign only one student to an adviser. There is no place to assign a second adviser.
This strategy for placing foreign keys will not work for N:M relationships, however. Consider
the data model in Figure 5-26a; here advisers and students have a many-to-many relationship.
An adviser may have many students, and a student may have multiple advisers (for multiple
majors).
Adviser
Student
AdviserName
Email
Student Number
StudentName
MidTerm
(a) N:M Relationship Between Adviser and Student
Adviser—Key Is AdviserName
Email
AdviserName
Jones
Jones@myuniv.edu
Choi
Choi@myuniv.edu
Jackson
Jackson@myuniv.edu
No room to place
second or third
AdviserName
Student—Key Is StudentNumber
StudentName MidTerm AdviserName
dvise
StudentNumber
tNum
100
Lisa
90
Jackson
200
Jennie
85
Jackson
300
Jason
ason
82
Choi
400
Terry
95
Jackson
Jacks
(b) Incorrect Representation of N:M Relationship
Student—Key Is StudentNumber
Adviser—Key Is AdviserName
AdviserName
Email
StudentNumber StudentName MidTerm
Jones
Jones@myuniv.edu
100
Lisa
90
Choi
Choi@myuniv.edu
200
Jennie
85
Jackson
Jackson@myuniv.edu
300
Jason
82
400
Terry
95
Adviser_Student_Intersection
AdviserName StudentNumber
FIGURE 5-26
Representing an N:M
Relationship
Jackson
100
Jackson
200
Choi
300
Jackson
400
Choi
100
Jones
100
Student 100 has
three advisers
(c) Adviser_Student_Intersection Table Represents the N:M Relationship
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To see why the foreign key strategy we used for 1:N relationships will not work for N:M relationships, examine Figure 5-26b. If student 100 has more than one adviser, there is no place to record
second or subsequent advisers.
To represent an N:M relationship, we need to create a third table, as shown in Figure 5-26c.
The third table has two columns, AdviserName and StudentNumber. Each row of the table means
that the given adviser advises the student with the given number.
As you can imagine, there is a great deal more to database design than we have presented here.
Still, this section should give you an idea of the tasks that need to be accomplished to create a database. You should also realize that the database design is a direct consequence of decisions made in
the data model. If the data model is wrong, the database design will be wrong as well.
Users’ Role in the Development of Databases
As stated, a database is a model of how the users view their business world. This means that the
users are the final judges as to what data the database should contain and how the records in that
database should be related to one another.
The easiest time to change the database structure is during the data modeling stage. Changing
a relationship from one-to-many to many-to-many in a data model is simply a matter of changing
the 1:N notation to N:M. However, once the database has been constructed and loaded with data
and forms, reports, queries, and application programs have been created, changing a one-to-many
relationship to many-to-many means weeks of work.
You can glean some idea of why this might be true by contrasting Figure 5-25c with Figure 5-26c.
Suppose that instead of having just a few rows, each table has thousands of rows; in that case, transforming the database from one format to the other involves considerable work. Even worse, however, is that someone must change application components as well. For example, if students have
at most one adviser, then a single text box can be used to enter AdviserName. If students can have
multiple advisers, then a multiple-row table will need to be used to enter AdviserName and a program will need to be written to store the values of AdviserName into the Adviser_Student_Intersection
table. There are dozens of other consequences, consequences that will translate into wasted labor
and wasted expense.
Thus, user review of the data model is crucial. When a database is developed for your use, you
must carefully review the data model. If you do not understand any aspect of it, you should ask for
clarification until you do. Entities must contain all of the data you and your employees need to do your
jobs, and relationships must accurately reflect your view of the business. If the data model is wrong, the
database will be designed incorrectly, and the applications will be difficult to use, if not worthless.
Do not proceed unless the data model is accurate.
As a corollary, when asked to review a data model, take that review seriously. Devote the time
necessary to perform a thorough review. Any mistakes you miss will come back to haunt you,
and by then the cost of correction may be very high with regard to both time and expense. This
brief introduction to data modeling shows why databases can be more difficult to develop than
spreadsheets.
Q5-7
How Can eHermes Benefit from a
Database System?
eHermes wants to speed up the process of inventorying the new items it receives from sellers. Currently, sales associates have to wait for customers to enter lengthy product descriptions that are
often incomplete or incorrect. If associates can take a picture of the new item and use Google’s
image classifier to automatically recognize it, eHermes will be able to automatically fill in its database. The information would likely be more detailed and accurate than what eHermes is currently
getting, and items could be sold much more quickly.
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CHAPTER 5
Database Processing
This process would require a lot of data storage and multiple data flows. Images would be sent
from mobile storefronts and stored either locally or on the cloud. Then the images would be sent to
cloud services to be processed. Once an item is identified, eHermes would query additional sites for
product information, reviews, and past sales data. The entire process needs to be fast and scalable
as eHermes grows.
eHermes can choose one of two database architectures. For the first one, it can store the images
on a file server and keep metadata about each image in a relational database that it can query.
That metadata will include the address of the image on the file server. Alternatively, eHermes can
utilize one of the new NoSQL DBMS products like MongoDB—an open source document-oriented
DBMS—to store the images in the same database as the metadata. (See Q5-8.)
Seth Wilson, director of IT services, investigates these two alternatives and discusses his
findings with Kamala Patel, an automation expert. They are both intrigued by the possible use of
MongoDB, but they know that their interest is, in part, a desire to learn something new. They don’t
really know how well that product works, nor do they know how robust the MongoDB query facility
will be.
On the other hand, they can readily modify their existing Microsoft SQL Server database to
store the metadata. In the metadata, they can store the URL of the file server location that has the
images (for example, https://abc.ehermes.com/image1). In this way, they can use the Microsoft SQL
Server to store the data and then query it using the graphical query designer. Because Microsoft
SQL Server can also process native SQL, they can use it for the most sophisticated query operations if needed.
Seth and Kamala discuss these alternatives and decide to use Microsoft SQL Server to store the
metadata. They know this approach is less risky because it uses known technology. Also, both of
them are skilled at using Microsoft SQL Server, and they can develop the database and application
quickly with less risk. Seth and Kamala create a short presentation of this recommendation and
present it to Jessica Ramma, eHermes’ CEO, who approves it.
After the approval, Seth creates the E-R diagram shown in Figure 5-27 and discusses it
with Kamala. She thinks that they might want to add an Employee entity rather than just the
employee’s name in the Analysis entity. They decide, however, that they don’t yet have that
many employees and that adding the extra entity might make the application too hard to use, at
least at present. So, with that decision, they proceed to create the database and related applications. You’ll have an opportunity to do the same with a team of your colleagues in Collaboration
Exercise 5, page 253.
Customer
CustomerID
First_Name
Last_Name
Phone
Email
Item
PK
ItemID
/QDKNG5VQTG
PK
/QDKNGID
PK
YearBuilt
MaxWeight
&CVG5GTXKEGF
'HHGEVKXG4CPIG
%QPFKVKQP
&CVG4GEGKXGF
.KUV2TKEG
5GNNGT6[RG
%NCUUKƂGF2TQFWEVU
%NCUUKƂGF2TQFWEVID
FIGURE 5-27
E-R Diagram for eHermes’
Database
PK
/CPWHCEVWTGT
&GUETKRVKQP
Size
/QFGN0WODGT
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 5
Q5-8
Database Processing
247
2029?
With ever-cheaper data storage and data communications, we can be sure that the volume of database data will continue to grow, probably exponentially, through 2029. All that data contains patterns that can be used to conceive information to help businesses and organizations achieve their
strategies. That will make business intelligence, even more important. Furthermore, as databases
become bigger and bigger, they’re more attractive as targets for theft or mischief, as we saw in recent
attacks at Yahoo (3 billion accounts), Twitter (330 million accounts), Under Armour (150 million
accounts), and Equifax (145 million accounts). Those risks will make database security even more
important.
Additionally, the DBMS landscape is changing. While for years relational DBMS products
were the only game in town, the Internet changed that by posing new processing requirements.
As compared to traditional database applications, some Internet applications process many,
many more transactions against much simpler data. A tweet has a much simpler data structure
than the configuration of a Kenworth truck, but there are so many more tweets than truck
configurations!
Also, traditional relational DBMS products devote considerable code and processing power to
support what are termed ACID (atomic, consistent, isolated, durable) transactions. In essence, this
acronym means that either all of a transaction is processed or none of it is (atomic), that transactions are processed in the same manner (consistent) whether processed alone or in the presence of
millions of other transactions (isolated), and that once a transaction is stored it never goes away—
even in the presence of failure (durable).
ACID transactions are critical to traditional commercial applications. Even in the presence of
machine failure, Vanguard must process both the sell and the buy sides of a transaction; it cannot
process part of a transaction. Also, what it stores today must be stored tomorrow. But many new
Internet applications don’t need ACID. Who cares if, one time out of 1 million, only half of your
tweet is stored? Or if it’s stored today and disappears tomorrow?
These new requirements have led to three new categories of DBMS:
1. NoSQL DBMS. This acronym is misleading. It really should be non-relational DBMS. It refers
to new DBMS products that support very high transaction rates processing relatively simple
data structures, replicated on many servers in the cloud, without ACID transaction support.
MongoDB, Cassandra, Bigtable, and Dynamo are NoSQL products.
2. NewSQL DBMS. These DBMS products process very high levels of transactions, like the
NoSQL DBMS, but provide ACID support. They may or may not support the relational model.
Such products are a hotbed of development with new vendors popping up nearly every day.
Leading products are yet unknown.
3. In-memory DBMS. This category consists of DBMS products that process databases in main
memory. This technique has become possible because today’s computer memories can be
enormous and can hold an entire database at one time, or at least very large chunks of it. Usually these products support or extend the relational model. SAP HANA is a computer with an
in-memory DBMS that provides high volume ACID transaction support simultaneously with
complex relational query processing. Tableau Software’s reporting products are supported
by a proprietary in-memory DBMS using an extension to SQL.
Does the emergence of these new products mean the death knell for relational databases? It
seems unlikely because organizations have created thousands of traditional relational databases
with millions of lines of application code that process SQL statements against relational data structures. No organization wants to endure the expense and effort of converting those databases and
code to something else. There is also a strong social trend among older technologists to hang onto
the relational model. However, these new products are loosening the stronghold that relational
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
SECURITY GUIDE
BIG DATA . . . LOSSES
Do you enjoy trivia games? If so, you have probably
flipped through the channels on a weeknight and stopped
on the trivia game show Jeopardy! Successful contestants
can quickly answer questions across a range of categories.
Winners often repeat their success over several episodes.
Long winning streaks are fairly uncommon, however,
because they require mastery of an extensive set of topics. Viewers at home often resort to using their phones or
computers to look up answers. If you have ever resorted
to such tactics, you may have wondered how a computer
would fare on Jeopardy!
Researchers at IBM had the same question in 2011. They
had developed Watson, a supercomputer with advanced functionality that includes natural language processing and data
mining. The data accessed by Watson when it competed on
Jeopardy! included 500 gigabytes worth of dictionaries, encyclopedias, and other reference materials.12 Since Watson’s
stunning defeat of two former Jeopardy! champions, IBM has
been working to leverage Watson for a number of Big Data
applications, including health
care and marketing analytics.
Other companies witnessed
the impressive performance of
Watson on Jeopardy! and scrambled to develop their own Big
Data analytics tools. However,
some companies are still trying
to figure out how Big Data applications can be used effectively.
Furthermore, when focusing
on perfecting powerful Big Data
tools, some companies consider
securing the data collected as an
afterthought, if they consider it
at all.
through decades of technological advancement. For example, many car manufacturers now boast Internet connectivity in their advertisements but have done little to ensure the
security and privacy of vehicles connected to the Internet.
Technology-focused trade shows focus on the Internet of
Things and feature home automation gadgets like Internetconnected lights, thermostats, door locks, and toasters.
Unfortunately, the security features in these devices are often
lacking or nonexistent.
The Big Data movement is another victim of the march
toward technological advancement without thought of
security ramifications. Many companies lack the ability to
effectively use Big Data tools. As a result, their ability to
secure these tools and the data that accompanies them is a
grave concern.13 Based on a recent scan of Big Data apps, a
security audit conducted by a Swiss security company confirmed this suspicion. The company’s analysis revealed that
data on more than 39,000 NoSQL databases are exposed
and 1.1 petabytes of this data were also available online.14
Security Loses, Again
Neglecting security for the sake
of functionality and convenience
is a common thread that runs
Source: Christian Charisius/Dpa Picture Alliance/Alamy Stock Photo
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CHAPTER 5
But what leads to poor security protocols for these Big Data
applications?
Rich in Data, Poor in Security
It turns out that security shortcomings in Big Data practices are not isolated. In fact, it is likely that poor database
management practices translate into larger and more specialized Big Data “transfers.” A recent survey conducted by
InformationWeek reveals some troubling findings concerning
the security issues plaguing Big Data. The survey identified
poor database security practices in roughly 20 percent of
survey respondents. They found that (1) databases containing sensitive information are not secured, (2) data breaches
have occurred or it cannot be confirmed breaches have not
Database Processing
249
occurred, and (3) security evaluations are not regularly conducted on respondents’ databases.15 These factors are driven
by the larger problem of Big Data tools prioritizing security
below other objectives like functionality, flexible access, and
convenience.
In light of these security deficiencies, a number of best
practices have been recommended to improve the state of Big
Data security. These include logging and auditing all activity
to permit the identification of unauthorized access, implementing strict access management protocols, and using better
encryption to safeguard sensitive data.16 Ultimately, securing
the data generated and used by data-driven applications is as
important as the accuracy and reporting capabilities of the
applications themselves!
DISCUSSION QUESTIONS
1. Think about how the trend of capturing and storing data
has affected you. What types of data have been generated
about you, and where are these data located? What data
have you generated yourself? Can you do anything to manage access to or the security of these data?
2. Search the Web to identify a new data-driven application being used by IBM’s Watson. Describe how this new
application might provide a competitive advantage for the
adopting organization.
3. The feature mentions the continuing technological tension
between security and convenience. How has this tension
affected your own interactions with computers? Do you err
on the side of security or convenience when creating and
managing your own security “policies”?
4. Have you or anyone you know purchased home-automation
devices? Based on a lack of security found in many of these
devices, are you willing to accept the risk that comes with
these devices in exchange for the convenience they provide?
technology has enjoyed for decades, and it is likely that by 2029 many NoSQL, NewSQL, and inmemory databases will exist in commerce.
Furthermore, existing DBMS vendors like Oracle, Microsoft, and IBM will not sit still. With
substantial cash and highly skilled developers, they will likely incorporate features of these new
categories of DBMS into their existing or new products. Acquisitions of some of the NewSQL startups, in particular, are likely.
What does that mean to you as a business professional? First, such knowledge is useful; stay
abreast of developments in this area. When you are given a problem, you might choose to utilize
one of these new types of database. Unless you are an IT professional, however, you won’t work
with them directly. It will be to your advantage to know about them, however, and to suggest their
use to the IS personnel who support your requirements.
Also, watch these developments from an investor’s perspective. Not all such products will be
open source; even if they are, there will be companies that integrate them into their product or
service offerings, and those companies may well be good investment opportunities.
If you’re interested in IS as a discipline or as a second major, pay attention to these products.
You still need to learn the relational model and the processing of relational databases; they will
be the bread-and-butter of the industry, even in 2029. But exciting new opportunities and career
paths will also develop around these new DBMS products. Learn about them as well, and use that
knowledge to separate yourself from the competition when it comes to job interviews.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CAREER GUIDE
Name: Kailey Smith
Company: Artemis Health
Job Title: Director of Data Engineering
Education: University of Utah
Source: Kailey Smith, Artemis Health,
Director of Data Engineering
1
How did you get this type of job?
5
I started at Artemis Health as a senior data quality
engineer after being recruited by one of the cofounders on LinkedIn due to my experience with
healthcare data. Because we’re a startup, everyone is required to wear a lot of hats, and because
of my eagerness to get things done and follow up
with the people I was working with, they asked
me to manage the team.
2
What attracted you to this field?
Working with data really takes someone who is
analytical and has an eye for detail. Patience is also
important. You can spend a whole day going down
the wrong path and start over the next day and
find the answer within an hour. As far as technical skills, you need to understand data modeling,
SQL, and data analysis.
6
I’ve always enjoyed working with computers and
figuring things out, but after taking my first information systems course at the University of Utah,
I was sold. This is a field that will be growing and
expanding with new and exciting opportunities.
There are so many different areas to explore, and
you can definitely be paid pretty well!
3
4
7
What advice would you give to someone
who is considering working in your field?
Keep an open mind. Try out new things. When
I was in school, I was focused on the security
side of things because it sounded more exciting,
but I ended up working more on the data side.
Figure out what really excites you, but the more
you learn, the more opportunities will open up
to you.
What do you like most about your job?
I like that there are a variety of things for me to do
on a daily basis, and I love solving problems! My
company is helping our clients find different ways
they can save money on their employee benefits,
and a lot of that has to do with the healthcare
industry. We have been able to uncover some very
interesting things that our customers haven’t even
thought of.
Are education or certifications important in
your field? Why?
Continually educating yourself on new technology is important for anyone going into the information systems world. If you can show that
you’re willing to learn on your own as well as on
the job, employers will be far more willing to hire
you. Microsoft certifications are only really useful if the company you are going to work for uses
those applications.
What does a typical workday look like for
you (duties, decisions, problems)?
I manage the data team of ETL and SQL engineers,
so we work very closely with our customers’ data.
I work with our COO to find different ways to
improve our existing processes, making high-level
decisions about how we can migrate to a different
system or how we can better implement our next
client, but I also jump in on client issues to determine where the bad data is coming from.
What skills would someone need to do well
at your job?
8
What do you think will be hot tech jobs in
10 years?
Big Data is definitely the “next big thing,” but as
technology becomes increasingly used in different ways, security is going to be more and more
important. It’s really so hard to predict because
things are changing so rapidly!
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251
ACTIVE REVIEW
Use this Active Review to verify that you understand the ideas and
concepts that answer the chapter’s study questions.
Q5-6 How is a data model transformed
into a database design?
Define the term database. Explain the hierarchy of data and name
three elements of a database. Define metadata. Using the example
of Student and Office_Visit tables, show how relationships among
rows are represented in a database. Define the terms primary key,
foreign key, and relational database.
Name the three components of a database design. Define normalization and explain why it is important. Define data integrity
problem and describe its consequences. Give an example of a table
with data integrity problems and show how it can be normalized
into two or more tables that do not have such problems. Describe
two steps in transforming a data model into a database design.
Using an example not in this chapter, show how 1:N and N:M
relationships are represented in a relational database. Describe
the users’ role in the database development. Explain why it is
easier and cheaper to change a data model than to change an
existing database. Use the examples of Figures 5-25c and 5-26c
in your answer.
Q5-3
What is a database management
system (DBMS)?
Q5-7 How can eHermes benefit from a
database system?
Explain the acronym DBMS and name its functions. List five
popular DBMS products. Explain the difference between a DBMS
and a database. Summarize the functions of a DBMS. Define SQL.
Describe the major functions of database administration.
Summarize the two database architectures that eHermes could
use for its image database. Describe the architecture it used and
explain the rationale for that choice.
Q5-1
What is the purpose of a database?
State the purpose of a database. Explain the circumstances in
which a database is preferred to a spreadsheet. Describe the key
difference between Figures 5-1 and 5-2.
Q5-2
What is a database?
Q5-8
How do database applications make
databases more useful?
Q5-4
Explain why database tables, by themselves, are not very useful to
buiness users. Name the four elements of a database application
and describe the purpose of each. Explain the difference between
a database application and a database application program.
Describe the nature of traditional database applications. Explain
why browser-based applications are better than traditional ones.
Name the primary technologies used to support browser-based
applications.
How are data models used for database development?
Q5-5
Explain why user involvement is critical during database development. Describe the function of a data model. Sketch the database development process. Define E-R model, entity, relationship,
attribute, and identifier. Give an example, other than one in this
text, of an E-R diagram. Define maximum cardinality and minimum cardinality. Give an example of three maximum cardinalities
and two minimum cardinalities. Explain the notation in Figures
5-20 and 5-21.
2029?
Explain how an increase in database data in the next decade will
affect business intelligence and security. Summarize two major
requirements that some Internet database applications created.
Explain the characteristics of the ACID processing of a transaction. Briefly describe the characteristics of NoSQL, NewSQL, and
in-memory DBMS products. Summarize how you should respond
to these developments.
Using Your Knowledge
with eHermes
You can readily understand why the knowledge of this chapter
would be useful to you if you have a job like Seth or Kamala. But
what if you are Jessica (the CEO) or Victor (the COO)? The knowledge in this chapter will prepare you to make better decisions like
the one that Jessica made in Q5-7. It will also help Victor understand the level of budget required to fund this project. Even if
you never create a single query during your career, you will make
many decisions that involve the use, creation, and maintenance
of databases.
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KEY TERMS AND CONCEPTS
Access 228
ACID 247
Attributes 237
Byte 223
Columns 223
Crow’s feet 239
Crow’s-foot diagram 239
Data integrity
problem 241
Data model 236
Database 223
Database administration 229
Database application 232
Database management system
(DBMS) 228
DB2 228
Entity 237
Entity-relationship (E-R)
data model 237
Entity-relationship (E-R)
diagrams 239
Fields 223
File 223
Foreign keys 225
Graphical queries 234
Identifier 237
In-memory DBMS 247
Key 225
Lost-update
problem 236
Many-to-many (N:M)
relationships 239
Maximum cardinality 240
Metadata 225
Minimum cardinality 240
MongoDB 246
Multi-user processing 235
MySQL 228
NewSQL DBMS 247
Normal forms 242
Normalization 240
NoSQL DBMS 247
One-to-many (1:N)
relationships 239
Oracle Database 228
Primary key 225
Records 223
Relation 225
Relational databases 225
Relationships 238
Rows 223
SQL server 228
Structured Query Language
(SQL) 229
Table 223
Unified Modeling Language
(UML) 237
MyLab MIS
To complete the problems with MyLab MIS, go to EOC Discussion Questions in the MyLab.
USING YOUR KNOWLEDGE
5-1. Draw an entity-relationship diagram that shows the relaMyLab MIS
tionships among a database, database applications, and
users.
5-2. Consider the relationship between Adviser and Student in
MyLab MIS
Figure 5-21. Explain what it means if the maximum cardinality of this relationship is:
a. N:1
b. 1:1
c. 5:1
d. 1:5
5-3. Identify two entities in the data entry form in Figure 5-28.
MyLab MIS
What attributes are shown for each? What do you think are
the identifiers?
5-4. Visit www.acxiom.com. Navigate the site to answer the following questions.
a. According to the Web site, what is Acxiom’s privacy
policy? Are you reassured by its policy? Why or why not?
b. Make a list of 10 different products that Acxiom
provides.
c. Describe Acxiom’s top customers.
d. Examine your answers in parts b and c and describe, in
general terms, the kinds of data that Acxiom must be
collecting to be able to provide those products to those
customers.
e. What is the function of InfoBase?
f. What is the function of PersonicX?
g. In what ways might companies like Acxiom need to
limit their marketing so as to avoid a privacy outcry
from the public?
h. Should there be laws that govern companies like Acxiom? Why or why not?
i. Should there be laws that govern the types of data services that governmental agencies can buy from companies like Acxiom? Why or why not?
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
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Database Processing
253
FIGURE 5-28
Sample Data Entry Form
COLLABORATION EXERCISE 5
Using the collaboration IS you built, collaborate with a group of
students to answer the following questions.
The eHermes problem is an excellent example of the use of
databases in business. It is also within reach for you to develop as
a practice exercise. To do so, work with your team to answer the
following questions:
5-5. Study Figure 5-27 to understand the entities and their relationships. Justify each of the cardinalities in this model.
5-6. Working with your team, develop a list of seven queries
that together use all of the entities in Figure 5-27.
5-7. Modify the E-R model in Figure 5-27 to include a Manufacturer entity that is related to the ClassifiedProducts entity.
Create the relationship, and specify and justify the relationship’s cardinalities.
5-8. Discuss the advantages and disadvantages of the
model you created in your answer to question 5-7 and
the model in Figure 5-27.
5-9. Transform the data model in Figure 5-27 into a relational database design. Hint: Create a table for each
entity and relate those tables as shown in question 5-6.
5-10. Create an Access database for your design in
question 5-9.
5-11. Fill your database with sample data. Because you do not
have files on a server, leave the URL column blank.
5-12. Using the Access query facility, process each of the
seven queries that you created in your answer to
question 5-6.
CASE STUDY 5
Searching for Pianos . . .
Dean Petrich is a certified piano tuner and technician who has
been repairing and restoring pianos since 1973. He also has a
career as Deano the Clown, a clown entertainer who performs at
children’s parties in the Seattle, WA, metro area. (See Figure 5-29,
http://deanotheclown.com.) The schedule of his two businesses balance each other: He’s busy as a clown in the late spring, summer,
and fall, and during the rest of year, he repairs and restores pianos.
Over the past 20 years, the demand for pianos has dramatically
declined. When Grandma dies or the kids move out or some other
life change occurs, families have no further use for their piano, and
when they find there is no market for it, they call Dean, who picks
up that piano for a modest fee. For a number of years, Dean restored
those pianos and either resold or rented them. Since the turn of the
century, however, the decreasing demand for pianos has affected
him as well, and over time, he’s accumulated far too many pianos.
Even discarding the worst of them, he has, today, nearly 100.
As you can imagine, 100 pianos consume considerable storage. At first, Dean stored them in his workshop. When he ran
out of room in his workshop, he built and stored them in a large
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FIGURE 5-29
Deano the Clown
Source: Dean Petrich
metal shed (Figure 5-30). When the shed overflowed with pianos, he moved them to plastic tents in a meadow on his property
(Figure 5-31). Unfortunately, the plastic tents are prone to rips
and tears, and because Dean lives in the Pacific Northwest, many
pianos have been ruined by rain, even when he covers them with
plastic tarps inside the plastic tents.
Two years ago, sinking in his steadily increasing piano
inventory, Dean began to offer pianos for free. Not the very
best pianos—those he hopes to sell—but he offers many quality pianos for free. However, Dean has two problems. First, he
doesn’t know which pianos are best and where they are located
in the shop, shed, or tents. Second, few people are willing to
crawl over the tops of the pianos in the large shed and tents
(through refuse of squirrels, rats, and mice) looking for their
perfect piano.
To resolve this issue, Dean created a Microsoft Access database with only one table: Piano. To fill the database with data,
Dean had to first take an inventory of all the pianos and record
the data shown in the columns of Figure 5-32.
As you know, a one-table database could just as easily have
been stored in Excel, but Dean used Access because he wants to
query his data in a variety of ways. He wants to know, for example, all of the pianos located in a tent that have a sound quality
of 4 or higher. And he wants to know which pianos have a sound
quality of 1 or less so he can dispose of them. Further, customers have particular needs. One might, for example, want a Baldwin spinet (a type of piano); without a database he has no idea
whether he has one or where. Or, when he needs a replacement
key top, he might want to know the location of all the pianos in
the workshop that have ivory keys and a sound quality of 2 or
less, and so on.
Because of the dynamic nature of his needs, Dean uses the
Access query facility. Figure 5-33 shows an example query that
returns all of the pianos of a sound quality higher than 4 that are
located in a tent and Figure 5-34 shows the result of that query.
Dean also suspects that the quality deteriorates faster in the tents
than in the shed or the shop. To determine if this is the case, he
created the report shown in Figure 5-35.
FIGURE 5-30
Pianos in Storage
FIGURE 5-31
Pianos in Tent
Source: David Kroenke
Source: David Kroenke
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Database Processing
FIGURE 5-32
Columns in the Piano Table
Source: Microsoft Access, Microsoft
Corporation.
FIGURE 5-33
Example Query
Source: Microsoft Access, Microsoft
Corporation.
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FIGURE 5-34
Results from Query in
Figure 5-33
Source: Microsoft Access, Microsoft
Corporation.
FIGURE 5-35
Piano Sound Quality by
Building
Source: Microsoft Access, Microsoft
Corporation.
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257
QUESTIONS
5-13. Explain why a one-table database could be stored just
as readily in Excel as in Access.
5-14. Justify the decision to use Access to store the piano
database.
5-15. Examine the columns in Figure 5-32. Name three
characteristics of pianos that are not represented in
this table.
a. If you were a consultant advising Dean, what criteria should you and he use in deciding whether to
include that additional data?
b. Is this database a model of an inventory of pianos,
or is it a model of Dean’s model of an inventory of
pianos? Explain the difference.
5-16. Suppose, in addition to the data about pianos, Dean
wants to store data about the manufacturer such as its
address (or last known address), its years of operation,
and general comments about that manufacturer.
a. Design a Manufacturer table.
b. Alter the design of the Piano table (Figure 5-32)
to represent the relationship between Piano and
Manufacturer. State and justify any assumptions.
5-17. Using the data in Figure 5-35, draw conclusions about
the effect of location on piano sound quality. Justify
your statements using this data.
5-18. Explain the statement “A database is an abstraction
of some aspect of a business.” Using this example,
explain the ways that processing an abstraction is
more effective than examining pianos. Explain the
ways that processing an abstraction is more efficient
that examining pianos. Generalize your observation to
databases for business in general.
5-19. This database will soon become useless if it is not kept
up to date. List procedures that Dean needs to create
and follow to keep his database current.
Complete the following writing exercises.
5-20. Go to http://aws.amazon.com and search for AWS database offerings.
Explain the differences among Amazon’s RDS, DynamoDB, ElastiCache,
and Redshift services. Which of these would you recommend for storing
eHermes’ data? (By the way, whenever you query the Internet for any AWS
product, be sure to include the keyword “AWS” in your search. Otherwise,
your search will result in Amazon’s lists of books about the item you’re
searching for.)
5-21. Suppose you are the accounts manager at a wholesale auto parts distributor. You use spreadsheets to keep track of just about everything.
So do your employees. You have hundreds of different spreadsheets to
update, back up, and share. Some of them are getting extremely large and
unwieldy. You’re worried about losing track of them or, worse, having a
malicious employee permanently destroy them. A new hire fresh out of
college says building a database would solve most of your problems. How
would you determine if a database would really solve your problems? If
you chose to develop a centralized database, how would you choose the
employees to create the database? What criteria would you use to select
those employees? How would you justify allocating people and money to
developing this database?
ENDNOTES
1. Sarah Needleman, “The Computer Part People Are Hoarding: ‘I Felt
Like I Was Buying Drugs,’” The Wall Street Journal, March 27, 2018,
www.wsj.com/articles/the-computer-part-people-are-hoarding-i-felt-like-iwas-buying-drugs-1518195876.
2. William Alden, “The Bitcoin Mines of Iceland,” The New York Times,
March 27, 2018, https://dealbook.nytimes.com/2013/12/23/
morning-agenda-the-bitcoin-mines-of-iceland/.
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3. MySQL was supported by the MySQL Company. In 2008, that company
was acquired by Sun Microsystems, which was, in turn, acquired by
Oracle later that year. However, because MySQL is open source, Oracle
does not own the source code.
4. Clint Boulton, “Oil Company Hopes to Strike Efficiency with Cloud
Analytics,” CIO.com, November 10, 2015, accessed June 2, 2018,
www.cio.com/article/3003498/cloud-computing/oil-company-hopes-tostrike-efficiency-with-cloud-analytics.html.
5. Ibid.
6. James Kobielus, “The All-Consuming Future of Cloud Analytics,”
InfoWorld.com, March 20, 2015, accessed June 2, 2018, www
.infoworld.com/article/2899662/big-data/the-all-consuming-futureofcloud-analytics.html.
7. Ibid.
8. Ibid.
9. Fahmida Y. Rashid, “The Dirty Dozen: 12 Cloud Security Threats,”
InfoWorld.com, March 11, 2016, accessed June 2, 2018, www
.infoworld.com/article/3041078/security/the-dirty-dozen-12cloudsecurity-threats.html.
10. Watch out for confusion between a database application and a database
application program. A database application includes forms, reports,
queries, and database application programs.
11. See David Kroenke and David Auer, Database Concepts, 8th ed.,
pp. 81–86 (Upper Saddle River, NJ: Pearson Education, 2017) for
more information.
12. Elizabeth Dwoskin, “IBM to Sell Watson as a Big-Data Tool,” Digits: Tech
Tools & Analysis from the WSJ, March 6, 2016, http://blogs.wsj.com/
digits/2014/09/16/ibms-watson-computer-now-has-analytics.
13. John Jordan, “The Risks of Big Data for Companies,” The Wall Street
Journal, March 6, 2016, www.wsj.com/articles/SB10001424052702
304526204579102941708296708.
14. John Leyden, “Misconfigured Big Data Apps Are Leaking Data
Like Sieves,” The Register, March 6, 2016, www.theregister
.co.uk/2015/08/13/big_data_apps_expose_data.
15. Lorna Garey, “Big Data Brings Big Security Problems,”
InformationWeek, March 6, 2016, www.informationweek.com/big-data/
big-data-analytics/big-data-brings-big-security-problems/d/d-id/1252747.
16. Ibid.
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CHAPTER
6
Processes,
Organizations, and
Information Systems
“No, Felix! Not again! Over and over and over! We decide something one
MyLab MIS
Using Your Knowledge
Questions 6-1, 6-2, 6-3
meeting and then go over it again the next meeting and again the next. What a
waste!”
“What do you mean, Raj?” asks Felix, ARES’ customer service manager.
“I think it’s important we get this right.”
“Well, Felix, if that’s the case, why don’t you come to the meetings?”
“I just missed a couple.”
“Right. Last week we met here for, oh, two, maybe three, hours, and we
decided to meet with a spinning instructor Cassie knows. She teaches spinning
classes at a local university and was open to the idea of leading the virtual classes.”
259
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CHAPTER 6 Processes, Organizations, and Information Systems
“I got the email, but
I couldn’t download
the attachment.”
Source: Haiyin Wang/Alamy Stock Photo
“But, Raj, we don’t even know if we’ll have the bandwidth to handle the virtual
classes or if anyone will actually sign up. What difference does it make if we offer spinning classes if no one signs up?”
“Felix! We discussed that last week. The university has an excellent high-speed
Internet connection, and we share the same ISP. So, bandwidth won’t be an issue at
all. And users won’t be a problem either. The spinning instructor has a class full of students who are more than willing to try the new virtual classes as long as we supply
the headsets.”
“Look, Raj, Henri just wants something reasonable to tell Ashley. If we tell him
these new virtual spinning classes aren’t going to fly, which they probably won’t, Ashley will cancel this project and we can get back to work . . . focusing on home users
and corporate clients!”
“Felix, you’re driving me nuts. We discussed this ad nauseam last week. Let’s
make some progress. Cassie, what do you think?”
“Felix, Raj is right,” Cassie chimes in. “We did have a long discussion on how to
go about this—and we did agree to focus first on setting up this test class. This could
be an important new revenue source. Yes, we’d have to change some of our internal
processes, but it could be very profitable.”
“Well, Cassie, I think it’s a mistake. Why didn’t anyone tell me? I put in a lot of time
looking into selling ARES directly to corporate clients for their wellness programs.”
“Did you read the email?” Cassie asks tentatively.
“What email?”
“The meeting summary email that I send out each week,” Cassie says with a sigh.
“I got the email, but I couldn’t download the attachment. Something weird about a
virus checker couldn’t access a gizmo or something
like that . . .” Felix trails off.
Raj can’t stand that excuse. “Here, Felix, take a
look at mine. I’ll underline the part where we concluded
that we’d focus on testing the virtual spinning class.”
“Raj, there’s no reason to get snippy about this. I
thought I had a good idea,” Felix says, sounding hurt.
“OK, so we’re agreed—again this week—that
we’re going to focus on testing the virtual spinning
class at the university. Now, we’ve wasted enough
time covering old ground. Let’s get some new thinking on how we’re going to do that.”
Felix slumps back into his chair and looks down
at his cell phone.
“Oh, no, I missed a call from Mapplethorpe.
Ahhhh.”
“Felix, what are you talking about?” Raj asks.
“Mapplethorpe, my human resource contact at
GenTech. He wants to know what kind of data we can share with them for their wellness program. I’m sorry, but I’ve got to call him. I’ll be back in a few minutes.”
Felix leaves the room.
Raj looks at Cassie.
“Now what?” he asks. “If we go forward, we’ll have to rediscuss everything when
Felix comes back. Maybe we should just take a break?”
Cassie shakes her head. “Raj, let’s not. It’s tough for me to get to these meetings.
I don’t have to work until tonight, so I drove down here just for this. I’ve got to pick up
Simone from day care. We haven’t done anything yet. Let’s just ignore Felix.”
“OK, Cassie, but it isn’t easy to ignore Felix. There’s got to be a better way to get
this done.”
The door opens, and Henri walks in.
“Hi everyone! How’s it going?” he asks brightly. “Is it OK if I sit in on your
meeting?”
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CHAPTER 6
Study
QUESTIONS
Chapter
PREVIEW
Q6-1
Processes, Organizations, and Information Systems
261
Q6-1
What are the basic types of processes?
Q6-2
How can information systems improve process quality?
Q6-3
How do information systems eliminate the problems of information
silos?
Q6-4
How do CRM, ERP, and EAI support enterprise processes?
Q6-5
What are the elements of an ERP system?
Q6-6
What are the challenges of implementing and upgrading enterprise
information systems?
Q6-7
How do inter-enterprise IS solve the problems of enterprise silos?
Q6-8
2029?
This chapter explores processes and their supporting information systems within levels of an organization. We will extend the business process discussion to investigate
three types of processes and the scope of information systems they use. We will also
investigate the concept of process quality and explain how information systems can
be used to increase it. Then we will discuss how the use of information systems at
one level of organization leads to information silos, explain the problems of such silos,
and then show how those problems can be solved by information systems at the
next level of organization. In particular, we’ll discuss how enterprise systems such as
CRM, ERP, and EAI (you’ll learn the meaning of those terms) solve problems caused
by workgroup information silos. ERP systems play a particularly important role, and
we’ll discuss their purpose and components and the major ERP vendors. Then we’ll
survey the major challenges that occur when implementing enterprise systems. We’ll
wrap up the chapter by showing how inter-enterprise IS can solve the problems of
enterprise-level silos and finally, in 2029, discuss the implications of mobility and the
cloud on future enterprise and inter-enterprise IS.
What Are the Basic Types of Processes?
A business process is a network of activities that generate value by transforming inputs into
outputs. Activities are subparts of processes that receive inputs and produce outputs. Activities
can be performed by humans only, by humans augmented by computer systems, and by computer
systems only.
Figure 6-1 shows a simplified view of a three-activity process for approving customer orders.
Each of these activities is, itself, a subprocess of this overall process. You can see that each
step—check inventory, check customer credit, and approve special terms—receives inputs and
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CHAPTER 6 Processes, Organizations, and Information Systems
Customer
Order
Check
Inventory
Out of Stock
Order in Stock
Credit Rejected
Check Customer
Credit
Order in Stock
Credit Approved
Special Terms
Rejected
Or
FIGURE 6-1
Business Process with Three
Activities
Approved Order
Approve Special
Terms
To Order Fulfillment Process
transforms them into outputs. You will learn how to better diagram such processes in Chapter 8;
for now, just view Figure 6-1 as showing the gist of a typical business process.
How Do Structured Processes Differ from
Dynamic Processes?
Businesses have dozens, hundreds, even thousands of different processes. Some processes are stable,
almost fixed sequences of activities and data flows. For example, the process of a salesclerk accepting a return at Nordstrom, or other quality retail stores, is fixed. If the customer has a receipt,
take these steps . . . if the customer has no receipt, take these other steps. That process needs to be
standardized so that customers are treated consistently and correctly, so that returned goods are
accounted for appropriately, and so that sales commissions are reduced in a way that is fair to the
sales staff.
Other processes are less structured, less rigid, and often creative. For example, how does Nordstrom’s management decide what women’s clothes to carry next spring? Managers can look at past
sales, consider current economic conditions, and make assessments about women’s acceptance of
new styles at recent fashion shows, but the process for combining all those factors into orders of
specific garments in specific quantities and colors is not nearly as structured as that for accepting
returns.
In this text, we divide processes into two broad categories. Structured processes are formally
defined, standardized processes that involve day-to-day operations: accepting a return, placing an
order, purchasing raw materials, and so forth. They have the characteristics summarized in the
left-hand column of Figure 6-2.
Dynamic processes are flexible, informal, and adaptive processes that normally involve
strategic and less structured managerial decisions and activities. Deciding whether to open a new
store location and how best to solve the problem of excessive product returns are examples, as
is using Twitter to generate buzz about next season’s product line. Dynamic processes usually
require human judgment. The right-hand column of Figure 6-2 shows characteristics of dynamic
processes.
We will discuss structured processes and information systems that support them in this chapter.
For the balance of this chapter, we will use the term process to mean structured process.
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Processes, Organizations, and Information Systems
Structured
FIGURE 6-2
Structured Versus Dynamic
Processes
263
Dynamic
Support operational and structured
managerial decisions and activities
Support strategic and less structured
managerial decision and activities
Standardized
Less specific, fluid
Usually formally defined and documented
Usually informal
Exceptions rare and not (well) tolerated
Exceptions frequent and expected
Process structure changes slowly and
with organizational agony
Adaptive processes that change structure
rapidly and readily
Example: Customer returns, order entry,
purchasing, payroll, etc.
Example: Collaboration; social networking;
ill-defined, ambiguous situations
How Do Processes Vary by Organizational Scope?
Processes are used at three levels of organizational scope: workgroup, enterprise, and inter-enterprise.
In general, the wider the scope of the process, the more challenging the process is to manage. For
example, processes that support a single workgroup function, say, accounts payable, are simpler and
easier to manage than those that support a network of independent organizations, such as a supply
chain. Consider processes at each of these three organizational scopes.
Workgroup Processes
A workgroup process exists to enable workgroups to fulfill the charter, purpose, and goals of a
particular group or department. A physicians’ partnership is a workgroup that follows processes
to manage patient records, issue and update prescriptions, provide standardized postsurgery care,
and so forth.
Figure 6-3 lists common workgroup processes. Notice that each of these processes is largely
contained within a given department. These processes may receive inputs from other departments,
and they may produce outputs used by other departments, but all, or at least the bulk of, the processes’ activities lay within a single department.
A workgroup information system exists to support one or more processes within the
workgroup. For example, an Operations department could implement an IS to support all three
of the operations processes shown in Figure 6-3. Or an Accounting department might implement two or three different IS to support the accounting processes shown. Sometimes, workgroup information systems are called functional information systems. Thus, an operations
management system is a functional information system, as are a general ledger system and a
cost accounting system. The program component of a functional information system is called a
functional application.
General characteristics of workgroup information systems are summarized in the top row of
Figure 6-4. Typical workgroup information systems support 10 to 100 users. Because the procedures for using them must be understood by all members of the group, those procedures are often
formalized in documentation. Users generally receive formal training in the use of those procedures
as well.
When problems occur, they almost always can be solved within the group. If accounts payable
duplicates the record for a particular supplier, the accounts payable group can make the fix. If the
Web storefront has the wrong number of items in the inventory database, that count can be fixed
within the storefront group.
(Notice, by the way, that the consequences of a problem are not isolated to the group. Because
the workgroup information system exists to provide a service to the rest of the organization, its
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Workgroup Example Processes
Workgroup
Sales and marketing
•
•
•
•
•
Operations
• Order entry
• Order management
• Finished goods inventory management
Manufacturing
•
•
•
•
Customer service
• Order tracking
• Account tracking
• Customer support
Human resources
•
•
•
•
Recruiting
Compensation
Assessment
HR planning
Accounting
•
•
•
•
•
•
•
•
General ledger
Financial reporting
Cost accounting
Accounts receivable
Accounts payable
Cash management
Budgeting
Treasury management
FIGURE 6-3
Common Workgroup
Processes
Lead generation
Lead tracking
Customer management
Sales forecasting
Product and brand management
Inventory (raw materials, goods-in-process)
Planning
Scheduling
Operations
problems have consequences throughout the organization. The fix to the problem can usually be
obtained within the group, however.)
Two or more departments within an organization can duplicate data, and such duplication
can be very problematic to the organization, as we discuss in Q6-3. Finally, because workgroup
information systems involve multiple users, changing them can be problematic. But, again, when
problems do occur, they can be resolved within the workgroup.
FIGURE 6-4
Characteristics of Information
Systems
Scope
Example
Characteristics
Workgroup
Doctor's office/
medical practice
Support one or more workgroup processes.
10–100 users; procedures often formalized;
problem solutions within group;
workgroups can duplicate data;
somewhat difficult to change
Enterprise
Hospital
Support one or more enterprise processes.
100–1,000+ users; procedures formalized;
problem solutions affect enterprise;
eliminate workgroup data duplication;
difficult to change
Inter-enterprise
Healthcare exchange
Support one or more inter-enterprise
processes. 1,000+ users; systems
procedures formalized; problem
solutions affect multiple organizations;
can resolve problems of duplicated
enterprise data; very difficult to change
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265
Enterprise Processes
The Ethics Guide on pages 276–
277 demonstrates how one person’s
actions can affect an entire company
Enterprise processes span an organization and support activities in multiple departments. At a
hospital, the process for discharging a patient supports activities in housekeeping, the pharmacy,
the kitchen, nurses’ stations, and other hospital departments.
Enterprise information systems support one or more enterprise processes. As shown in
the second row of Figure 6-4, they typically have hundreds to thousands of users. Procedures are
formalized and extensively documented; users always undergo formal procedure training. Sometimes enterprise systems include categories of procedures, and users are defined according to levels
of expertise with the system as well as by level of authority.
The solutions to problems in an enterprise system involve more than one workgroup or department. As you will learn in this chapter, a major advantage of enterprise systems is that data duplication within the enterprise is either eliminated altogether or, if it is allowed to exist, changes to
duplicated data are carefully managed to maintain consistency.
Because enterprise systems span many departments and involve potentially thousands of
users, they are difficult to change. Changes must be carefully planned and cautiously implemented
and users given considerable training. Sometimes users are given cash incentives and other inducements to motivate them to change.
CRM, ERP, and EAI are three enterprise information systems that we will define and discuss
in Q6-4.
Inter-enterprise Processes
Inter-enterprise processes span two or more independent organizations. For example, the process of buying a healthcare insurance policy via a healthcare exchange (see Case Study 6, pages
296–298) involves many insurance companies and governmental agencies. Each of these organizations has activities to fulfill, all of which are affected by laws, governmental policy, and competitive
concerns of the insurance companies.
Inter-enterprise information systems support one or more inter-enterprise processes. Such
systems typically involve thousands of users, and solutions to problems require cooperation among
different, usually independently owned, organizations. Problems are resolved by meeting, by contract, and sometimes by litigation.
Data are often duplicated among organizations; such duplication is either eliminated or carefully managed. Because of their wide span, complexity, and use by multiple companies, such systems can be exceedingly difficult to change. Supply chain management is the classic example of
an inter-enterprise information system. We will study inter-enterprise ARES examples throughout the remaining chapters of this text.
Q6-2
How Can Information Systems Improve
Process Quality?
Processes are the fabric of organizations; they are the means by which people organize their activities to achieve the organization’s goals. As such, process quality is an important, possibly the most
important, determinant of organizational success.1
The two dimensions of process quality are efficiency and effectiveness. Process efficiency is
a measure of the ratio of process outputs to inputs. If an alternative to the process in Figure 6-1
can produce the same order approvals/rejections (output) for less cost or produce more approvals/
rejections for the same cost, it is more efficient.
Process effectiveness is a measure of how well a process achieves organizational strategy. If an organization differentiates itself on quality customer service and if the process in
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Figure 6-1 requires 5 days to respond to an order request, then that process is ineffective.
Companies that provide customized manufacturing might make their processes more effective
by using 3D printing.
How Can Processes Be Improved?
Organizations can improve the quality (efficiency and/or effectiveness) of a process in one of three
ways:
• Change the process structure.
• Change the process resources.
• Change both process structure and resources.
Change the Process Structure
In some cases, process quality can be changed just by reorganizing the process. The order approval
process in Figure 6-1 might be made more efficient if customer credit was done first and inventory
was checked second. This change might be more efficient because it would save the cost of checking
inventory for customers whose credit will be denied. However, that change would also mean that
the organization would pay for a credit check on customers for which it did not have appropriate
inventory. We will investigate such changes further in Chapter 8. For now, just note that process
structure has a strong bearing on process efficiency.
Changing process structure can also increase process effectiveness. If an organization
chooses a cost-leader strategy, then that strategy might mean that no special terms should ever
be approved. If the process in Figure 6-1 results in the authorization of orders with special terms,
then eliminating the third activity will make it more effective (most likely it will save on operational costs as well).
Change Process Resources
Business process activities are accomplished by humans and information systems. One way to
improve process quality is to change the allocation of those resources. For example, if the process
in Figure 6-1 is not effective because it takes too long, one way to make it more effective is to identify
the source of delays and then to add more resources. If delays are caused by the check customer
credit activity, one way to increase process effectiveness is to add more people to that activity. Adding people should decrease delays, but it will also add cost, so the organization needs to find the
appropriate balance between effectiveness and efficiency.
Another way to shorten the credit check process would be to use an information system to
perform the customer credit checks. Depending on the development and operational costs of the
new system, that change might also be less costly and therefore more efficient.
Change Both Process Structure and Process Resources
Of course, it is possible to improve process quality by changing both the process’s structure and
resources. In fact, unless a structure change is only a simple reordering of tasks, changing the
structure of a process almost always involves a change in resources as well.
How Can Information Systems Improve Process Quality?
Information systems can be used to improve process quality by:
• Performing an activity.
• Augmenting a human who is performing an activity.
• Controlling data quality and process flow.
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Performing an Activity
Information systems can perform the entirety of a process activity. In Figure 6-1, for example,
the check credit activity could be entirely automated. When you purchase from Amazon or
another major online retailer, information systems check your credit while your transaction
is being processed. Reserving a seat on an airline is done automatically; all of the reservation
activity is done by an information system. (Except, of course, the passenger’s activities: When
making a reservation, you must choose the seat from available locations, but your time is free
to the airline.)
Augmenting a Human Performing an Activity
A second way that information systems can improve process quality is by augmenting the actions of
a human who is performing that activity. Consider the process of managing patient appointments.
To schedule an appointment, patients call the doctor’s office and talk with a receptionist who uses
an appointment information system. That information system augments the appointment creation
activity.
Controlling Data Quality Process Flow
A third way that information systems can improve process quality is by controlling data quality
and process flow.
One of the major benefits of information systems is to control data quality. The IS can not only
ensure that correct data values are being input, it can also ensure that data are complete before
continuing process activities. The cheapest way to correct for data errors is at the source, and it
avoids the problems that develop when process activities are begun with incomplete data.
Information systems also have a role in controlling process flow. Consider the order approval
process in Figure 6-1. If this process is controlled manually, then someone, say, a salesperson, will
obtain the order data from the customer and take whatever actions are needed to push that order
through the three steps in the order process. If the salesperson gets busy or is distracted or away
from work for a few days, or if there are unexpected delays in one of the activities, it is possible for
an order to be lost or the approval unnecessarily delayed.
If, however, an information system is controlling the order approval process, then it can
ensure that steps are performed in accordance with an established schedule. The information
system can also be relied upon to make correct process-routing decisions for processes that are
more complicated than that in Figure 6-1. SharePoint workflows, can be used to automate structured processes.
Q6-3
How Do Information Systems Eliminate the
Problems of Information Silos?
An information silo is the condition that exists when data are isolated in separated information systems. For example, consider the six workgroups and their information systems in Figure
6-3. Reflect on these information systems for a moment, and you’ll realize that each one processes customer, sales, product, and other data, but each uses that data for its own purposes and
will likely store slightly different data. Sales, for example, will store contact data for customers’
purchasing agents, while Accounting will store contact data for customers’ accounts payable
personnel.
It’s completely natural for workgroups to develop information systems solely for their own
needs, but, over time, the existence of these separate systems will result in information silos that
cause numerous problems.
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What Are the Problems of Information Silos?
Figure 6-5 lists the major problems caused by information silos at the workgroup level, in this case,
between the Sales and Marketing department and the Accounting department. First, data are duplicated. Sales and Marketing and Accounting applications maintain separate databases that store
some of the same customer data. As you know, data storage is cheap, so the problem with duplication is not wasted disk storage. Rather, the problem is data inconsistency. Changes to customer data
made in the Sales and Marketing application may take days or weeks to be made to the Accounting
application’s database. During that period, shipments will reach the customer without delay, but
invoices will be sent to the wrong address. When an organization has inconsistent duplicated data,
it is said to have a data integrity problem.
Additionally, when applications are isolated, business processes are disjointed. Suppose a business has a rule that credit orders over $15,000 must be preapproved by the Accounts Receivable
department. If the supporting applications are separated, it will be difficult for the two activities to
reconcile their data, and the approval will be slow to grant and possibly erroneous.
In the second row of Figure 6-5, Sales and Marketing wants to approve a $20,000 order with
Ajax. According to the Sales and Marketing database, Ajax has a current balance of $17,800,
so Sales and Marketing requests a total credit amount of $37,800. The Accounting database,
however, shows Ajax with a balance of only $12,300 because the accounts receivable application has credited Ajax for a return of $5,500. According to Accounting’s records, a total credit
authorization of only $32,300 is needed in order to approve the $20,000 order, so that is all the
department grants.
FIGURE 6-5
Problems Created by Information Silos
Problem
Sales and Marketing
Accounting
Ajax Construction
Ship to: Reno, NV
Bill to: Reno, NV
Ajax Construction
Ship to: Reno, NV
Bill to: Buffalo, NY
Data duplication, data inconsistency
Disjointed processes
Limited information and lack of
integrated information
Request $37,800
Get Credit Approval
Approve $32,300
Order
Data
??
Approve Customer
Credit
Payment
Data
Is IndyMac a preferred customer?
Isolated decisions lead to
organizational inefficiencies
Increased expense
Order
Data
Payment
Data
Redouble sales efforts at IndyMac.
OneWest has been slow to pay.
Sum of problems above.
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Sales and Marketing doesn’t understand what to do with a credit approval of $32,300. According to its database, Ajax already owes $17,800, so if the total credit authorization is only $32,300,
did Accounting approve only $14,500 of the new order? And why that amount? Both departments
want to approve the order. It will take numerous emails and phone calls, however, to sort this out.
These interacting business processes are disjointed.
A consequence of such disjointed activities is the lack of integrated enterprise information.
For example, suppose Sales and Marketing wants to know if IndyMac is still a preferred customer.
Assume that determining whether this is so requires a comparison of order history and payment
history data. With information silos, that data will reside in two different databases and, in one of
them, IndyMac is known by the name of the company that acquired it, OneWest Bank. Data integration will be difficult. Making the determination will require manual processes and days, when
it should be readily answered in seconds.
This leads to the fourth consequence: inefficiency. When using isolated functional applications,
decisions are made in isolation. As shown in the fourth row of Figure 6-5, Sales and Marketing
decided to redouble its sales effort with IndyMac. However, Accounting knows that IndyMac was
foreclosed by the FDIC and sold to OneWest and has been slow to pay. There are far better prospects
for increased sales attention. Without integration, the left hand of the organization doesn’t know
what the right hand of the organization is doing.
Finally, information silos can result in increased cost for the organization. Duplicated data,
disjointed systems, limited information, and inefficiencies all mean higher costs.
How Do Organizations Solve the Problems
of Information Silos?
As defined, an information silo occurs when data is stored in isolated systems. The obvious way to
fix such a silo is to integrate the data into a single database and revise applications (and business
processes) to use that database. If that is not possible or practical, another remedy is to allow the
isolation, but to manage it to avoid problems.
The arrows in Figure 6-6 show this resolution at two levels of organization. First, isolated
data created by workgroup information systems are integrated using enterprise-wide applications.
Scope
Example
Example Information Silo
Enabling Technology
Workgroup
Doctor's
office/
medical
practice
Physicians and hospitals store
separated data about patients.
Unnecessarily duplicate tests
and procedures.
Functional applications.
Enterprise applications (CRM,
ERP, EAI) on enterprise networks.
Enterprise
Hospital
Hospital and local drug store
pharmacy have different
prescription data for the same
patient.
Distributed systems using
Web service technologies in
the cloud.
Interenterprise
FIGURE 6-6
Information Silos as Drivers
Inter-agency
prescription
application
No silo: Doctors, hospitals,
pharmacies share patients’
prescription and other data.
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CHAPTER 6 Processes, Organizations, and Information Systems
Doctors
Issue
Discharge
Patient
Order
Nurses
Pharmacy
Kitchen
Housekeeping
Family
Enterprise
Applications
Stop Food
Prepare
Discharge
Discharge
Patient
Enterprise
Information
System
Schedule
Pickup
Prepare Takehome Meds
Deliver Meds
Prepare Room
Arrive
Hospital
Enterprise
Database
“OK, you’re ready
FIGURE 6-7
Example Enterprise Process
and Information System
to go home!”
Second, today, isolated data created by information systems at the enterprise level are being
integrated into inter-enterprise systems using distributed applications (such as ARES). These applications process data in a single cloud database or connect disparate, independent databases so that
those databases appear to be one database. We will discuss inter-enterprise systems further in Q6-7.
For now, to better understand how isolated data problems can be resolved, consider an enterprise system at a hospital.
An Enterprise System for Patient Discharge
Figure 6-7 shows some of the hospital departments and a portion of the patient discharge process.
A doctor initiates the process by issuing a discharge patient order. That order is delivered to the
appropriate nursing staff, who initiates activities at the pharmacy, the patient’s family, and the
kitchen. Some of those activities initiate activities back at the nursing staff. In Figure 6-7, the
enterprise process (supported by the IS) is represented by a dotted blue line.
Prior to the enterprise system, the hospital had developed procedures for using a paper-based
system and informal messaging via the telephone. Each department kept its own records. When
the new enterprise information system was implemented, not only was the data integrated into
a database, but new computer-based forms and reports were created. The staff needed to transition from the paper-based system to the computer-based system. They also needed to stop making
phone calls and let the new information system make notifications across departments. These
measures involved substantial change, and most organizations experience considerable anguish
when undergoing such transitions.
Q6-4
How Do CRM, ERP, and EAI Support Enterprise
Processes?
Enterprise systems like the one in Figure 6-7 were not feasible until network, data communication,
and database technologies reached a sufficient level of capability and maturity in the late 1980s
and early 1990s. At that point, many organizations began to develop enterprise systems.
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The Need for Business Process Engineering
As they did so, organizations realized that their existing business processes needed to change. In
part, they needed to change to use the shared databases and to use new computer-based forms
and reports. However, an even more important reason for changing business processes was that
integrated data and enterprise systems offered the potential of substantial improvements in process
quality. It became possible to do things that had been impossible before. Using Porter’s language,
enterprise systems enabled the creation of stronger, faster, more effective linkages among value
chains.
For example, when the hospital used a paper-based system, the kitchen would prepare meals
for everyone who was a patient at the hospital as of midnight the night before. It was not possible to
obtain data about discharges until the next midnight. Consequently, considerable food was wasted
at substantial cost.
With the enterprise system, the kitchen can be notified about patient discharges as they occur
throughout the day, resulting in substantial reductions in wasted food. But when should the kitchen
be notified? Immediately? And what if the discharge is cancelled before completion? Notify the
kitchen of the cancelled discharge? Many possibilities and alternatives exist. So, to design its new
enterprise system, the hospital needed to determine how best to change its processes to take advantage of the new capability. Such projects came to be known as business process reengineering,
which is the activity of altering existing and designing new business processes to take advantage
of new information systems.
Unfortunately, business process reengineering is difficult, slow, and exceedingly expensive.
Business analysts need to interview key personnel throughout the organization to determine how
best to use the new technology. Because of the complexity involved, such projects require highlevel, expensive skills and considerable time. Many early projects stalled when the enormity of the
project became apparent. This left some organizations with partially implemented systems, which
had disastrous consequences. Personnel didn’t know if they were using the new system, the old
system, or some hacked-up version of both.
The stage was set for the emergence of enterprise application solutions, which we discuss next.
Emergence of Enterprise Application Solutions
See the Career Guide on pages 290–
291 to learn more about careers in
managing the development of largescale applications.
When the process quality benefits of enterprise-wide systems became apparent, most organizations
were still developing their applications in-house. At the time, organizations perceived their needs
as being “too unique” to be satisfied by off-the-shelf or altered applications. However, as applications became more and more complex, in-house development costs became infeasible. As stated in
Chapter 3, systems built in-house are expensive not only because of their high initial development
costs, but also because of the continuing need to adapt those systems to changing requirements.
In the early 1990s, as the costs of business process reengineering were coupled to the costs of
in-house development, organizations began to look more favorably on the idea of licensing preexisting applications. “Maybe we’re not so unique, after all.”
Some of the vendors who took advantage of this change in attitude were PeopleSoft, which
licensed payroll and limited-capability human resources systems; Siebel, which licensed a sales
lead tracking and management system; and SAP, which licensed something new, a system called
enterprise resource management.
These three companies, and ultimately dozens of others like them, offered not just software and
database designs. They also offered standardized business processes. These inherent processes,
which are predesigned procedures for using the software products, saved organizations from the
expense, delays, and risks of business process reengineering. Instead, organizations could license
the software and obtain, as part of the deal, prebuilt processes that the vendors assured them were
based on “industry best practices.”
Some parts of that deal were too good to be true because, as you’ll learn in Q6-5, inherent
processes are almost never a perfect fit. But the offer was too much for many organizations to resist.
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Marketing
Customer acquisition
Relationship management
Loss/Churn
Attract
Sell
Support
and resell
Categorize
Low-value
customers
Sell more
Target
Prospect
Customer
High-value
customers
Win back
FIGURE 6-8
The Customer Life Cycle
Source: The Customer Life Cycle. Used
with permission from Professor Douglas
MacLachlan, Foster School of Business,
University of Washington.
Solicitation
Processes
Lead-Tracking
Processes
Relationship Management
Processes
Over time, three categories of enterprise applications emerged: customer relationship management,
enterprise resource planning, and enterprise application integration. Consider each.
Customer Relationship Management (CRM)
A customer relationship management (CRM) system is a suite of applications, a database,
and a set of inherent processes for managing all the interactions with the customer, from lead
generation to customer service. Every contact and transaction with the customer is recorded in the
CRM database. Vendors of CRM systems claim that using their products makes the organization
customer-centric. Though that term reeks of sales hyperbole, it does indicate the nature and intent
of CRM packages.
Figure 6-8 shows four phases of the customer life cycle: marketing, customer acquisition,
relationship management, and loss/churn. Marketing sends messages to the target market to attract
customer prospects. When prospects order, they become customers who need to be supported. Additionally, relationship management processes increase the value of existing customers by selling them
more product. Inevitably, over time the organization loses customers. When this occurs, win-back
processes categorize customers according to value and attempt to win back high-value customers.
Figure 6-9 illustrates the major components of a CRM application. Notice that components
exist for each stage of the customer life cycle. As shown, all applications process a common customer
database. This design eliminates duplicated customer data and removes the possibility of inconsistent data. It also means that each department knows what has been happening with the customer
at other departments. Customer support, for example, will know not to provide $1,000 worth of
support labor to a customer that has generated $300 worth of business over time. However, it will
know to bend over backward for customers that have generated hundreds of thousands of dollars of
business. The result to the customers is that they feel like they are dealing with one entity, not many.
CRM systems vary in the degree of functionality they provide. One of the primary tasks when
selecting a CRM package is to determine the features you need and to find a package that meets that
set of needs. You might be involved in just such a project during your career.
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Relationship
Management
Applications
Sales
Applications
Solicitation and
Lead
Management
Applications
Customer
Support
Applications
CRM
Database
FIGURE 6-9
CRM Applications
Enterprise Resource Planning (ERP)
Large centralized databases can be
attractive targets for disgruntled
employees. For more information,
see the Security Guide on pages
288–289.
Enterprise resource planning (ERP) is a suite of applications called modules, a database, and
a set of inherent processes for consolidating business operations into a single, consistent, computing platform. An ERP system is an information system based on ERP technology. As shown in
Figure 6-10, ERP systems include the functions of CRM systems but also incorporate accounting,
manufacturing, inventory, and human resources applications.
The primary purpose of an ERP system is integration; an ERP system allows the left hand of
the organization to know what the right hand is doing. This integration allows real-time updates
globally, whenever and wherever a transaction takes place. Critical business decisions can then be
made on a timely basis using the latest data.
To understand the utility of this integration, consider the pre-ERP systems shown in Figure
6-11. This diagram represents the processes used by a bicycle manufacturer. It includes five different databases, one each for vendors, raw materials, finished goods, manufacturing plan, and CRM.
Consider the problems that appear with such separated data when the Sales department closes a
large order, say, for 1,000 bicycles.
First, should the company take the order? Can it meet the schedule requirements for such a
large order? Suppose one of the primary parts vendors recently lost capacity due to an earthquake,
Relationship
Management
Applications
Sales
Applications
Solicitation and
Lead
Management
Applications
Customer
Support
Applications
ERP
Database
Human
Resources
Applications
FIGURE 6-10
ERP Applications
Accounting
Applications
Inventory
Applications
Manufacturing
Applications
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CHAPTER 6 Processes, Organizations, and Information Systems
SO WHAT?
DIGITAL DINING
Have you ever stopped to think about all of the complex processes that take place around you on a daily basis that you can’t
see? For example, ordering something online requires only a few
keystrokes and mouse clicks. Before long, your order is delivered
to your front door. However, this delivery is likely the result of
countless business processes spanning multiple organizations—
perhaps even in a global supply chain—and they all had to be
conducted with precision for your package to arrive with the
correct items, at the correct location, and at the indicated time.
We attribute the ease with which many processes seem
to operate today to advancements in technology. For example,
online retailers can track inventory levels and shipments in real
time using RFID tags. Global supply chains leverage complex
enterprise resource planning (ERP) systems to integrate
operations and promote information sharing. And fulfillment
centers now use robots to bring products to employees who
pack shipments (instead of sending people to pick products from
storage locations in massive warehouses). It feels as though most
processes around us are being reevaluated and reengineered to
promote efficiency and effectiveness, all using technology. No
process is safe—not even at your local fast-food joint!
A Burger-Flipping Robot?
CaliBurger, a fast-food chain, recently started testing a burgerflipping robot named Flippy in its Pasadena restaurant. The
robot is bolted to the floor in close proximity to the grill and
can be fitted with a number of different tools that enable it
to interact with the grill (e.g., a spatula and a scraper). The
company that developed Flippy stated that the robot is a “costeffective and highly efficient solution” that will not replace
kitchen workers but augment them and allow them to focus
on direct customer service (like asking customers about their
food and experience at the restaurant).2 Flippy uses a variety
of sensors and cameras to monitor the environment and guide
its movements around the grill. It can manage the cooking
process for about 150 burgers per hour. CaliBurger plans to
deploy Flippy robots in 50 of its locations in the near future. In
light of the potential for competitors to invest in this technology,
CaliBurger has exclusive rights to Flippy for the first 6months.3
Task Workers Are Flipping Out
While watching a robot make your next meal is an intriguing
prospect, have you thought about what happens to the
person who used to be paid to cook that burger? The reality
of innovation and the transformation of processes mean that
some people will inevitably lose their jobs to machines (even
if companies state that machines will not replace human
Source: Kittipong Jirasukhanont/Alamy Stock Photo
workers). The greatest risk of job loss is for workers who perform
mundane and routine operations.
The real question becomes will these workers stay
unemployed, or will they be able to retrain and transition into
new jobs? Will younger workers choose to avoid jobs that can be
easily automated? Consider that many of the best jobs available
today didn’t exist 50 years ago. In fact, current stock prices are
reaching record highs, and unemployment rates are reaching
near record lows in spite of the proliferation of automation and
digitization in our lives. Nevertheless, some economists believe
that this time it will be different and that the potential for mass
unemployment is increasingly high.
Part of the driving force to automate many restaurant
and hotel jobs is the plummeting cost of robots. One consulting
company estimated that the cost of machines has dropped
by about 40 percent since 2005.4 Machines like Flippy are
calculated to pay for themselves within a few years due in
large part to the fact that they can run around the clock; do
not take personal days or vacation time; and do not require
extensive onboarding, training, or management. Consider the
robotic barista from Café X. It costs $25,000, can make 150
cups of custom coffee per hour, and doesn’t need to be tipped.
The payback period is about 2 years, and then profits increase
dramatically. How many baristas will need to be retrained
after a major coffee shop chain sees the financial benefits of
automation? Can they afford to stick with human labor if their
competitors buy the Café X baristas?
Advocates for this type of automation also point out that
the creation and use of machines add numerous jobs back into
the economy. For example, the company developing these robots
employs a lot of well-paid people. There are also people needed
to sell, maintain, and replace these machines with newer models
once they become antiquated. In fact, many argue that these new
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CHAPTER 6
jobs provide better career opportunities than the jobs that are
lost to automation. For you as a student, it has never been more
important to choose the right college major—the first time around.
Questions
1. Take a few minutes to reflect on the nature of the work your
friends do for a living. How many of those jobs could be outsourced to robots? What jobs wouldn’t be outsourced?
2. When was the last time you interacted with a process that
had been automated? What role did human workers previously fill? What roles are now carried out by machines? Is
275
Processes, Organizations, and Information Systems
this automated process more efficient/effective now that it is
automated? Are there ways in which humans were actually
better at executing this process?
3. Flippy the burger-flipping robot has undergone rigorous testing before being deployed in restaurants. However, would you
have any reservations about eating food prepared by a robot?
Are there other applications of robots in which you would be
uncomfortable with them replacing human workers?
4. The debate over promoting innovation/automation versus
endangering jobs is a common theme in the news. Do you agree
that workers and the overall economy will be able to adapt over
time and replace as many jobs as are taken via automation?
and the manufacturer cannot obtain parts for the order in time. If so, the order schedule ought not
to be approved. However, with such separated systems this situation is unknown.
Even if parts can be obtained, until the order is entered into the finished goods database, purchasing
is unaware of the need to buy new parts. The same comment applies to manufacturing. Until the new
order is entered into the manufacturing plan, the Production department doesn’t know that it needs
to increase manufacturing. And, as with parts, does the company have sufficient machine and floor
capacity to fill the order on a timely basis? Does it have sufficient personnel with the correct skill sets?
Should it be hiring? Can production meet the order schedule? No one knows before the order is approved.
Inbound
Logistics
Outbound
Logistics
Manufacturing
Sales and
Marketing
Customer
Service
Purchase Bicycle Parts
Vendor
Database
Customer Demand
Query
Vendor Query
Vendor
Name
Raw Materials Order
Cash
Parts Query
Raw
Materials
Database
Update with
Parts Received
Vendor
Finished
Goods
Database
Update with
Finished Bicycle
Update with
Shipped Bicycles
Bicycle
Query
Update with
Parts Used
Raw Materials
Finished Goods
Inventory
Receiving
Accepted
Materials
Raw Materials
Inventory
Sales
Prospects
Components
Production
Schedule
Bicycles
Approved
Order
Shipping
Customer
Sales Pitch
Customer Order
Cash
Finished
Bicycle
Make Bicycle
CRM
Database
Salesperson
Boxed Bicycles
Manufacturing
Plan
FIGURE 6-11
Pre-ERP Information Systems
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ETHICS GUIDE
PAID DELETION
Robin wound her way up to the third floor of the
parking garage. As she began backing up into her assigned spot,
she noticed that the car she expected to see in her side mirror
was not there. Rather, a shiny new luxury car was parked in
that spot. The space occupied by the car belonged to Eric Pittman, a colleague on their employer’s search engine optimization team. Robin and Eric had both worked for the company—a
leading Web search provider—for about 5 years. Based on conversations they’d had while out for drinks after work, they had
comparable salaries, too. Robin wondered how Eric could afford
such a nice car considering they were both struggling to afford
basic living expenses in such an expensive city.
Robin’s thoughts turned to the meetings she had lined
up all morning—she probably wouldn’t be able to check her
email until after lunch. With a grimace, she descended to the
first floor in the elevator. She counted the number of days
until the weekend and let out a groan.
Eraser for Hire
Eric and Robin burst out of the conference room as quickly
as they could. It was almost 6 o’clock and they had just left
their last meeting of the day. “Do you want to grab a bite to eat
at that Greek place?” Eric asked. “Sure,” Robin replied. “I am
happy to go anywhere that’s at least a mile from this office!”
They jumped into their cars and met up at the restaurant.
They gossiped about some of their colleagues and poked fun
at their bosses while they waited for the food to arrive. Once it
arrived and Eric picked up his gyro to take a bite, Robin noticed
his brand-new luxury watch.
“Time out!” Robin exclaimed. “You need to tell me what
is going on! I parked my car next to your brand-new set of
wheels this morning. I didn’t want to say anything, but I just
noticed that you have a brand-new watch, too. Did you get
some sort of bonus that I don’t know about?” she asked, halfkidding and half-worried. She wondered why she wouldn’t
Source: Ian Dagnall/Alamy Stock Photo
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CHAPTER 6
have received a bonus, too. Eric immediately had a concerned
look on his face. “Can you keep a secret?” he asked.
Eric described an unraveling chain of events in which a
number of companies operating in the area had approached
him about the possibility of providing “reputation management” services. Each company had recently had some form
of negative press, though each form was different. One large
manufacturing company was dealing with environmental
protection violations. A large retailer had to explain why it
provided inadequate health benefits to its employees. A popular chain of restaurants had recently had a long list of healthcode violations. The companies had come to Eric because his
dad was a well-known consultant to many large companies
in the area.
Each company had offered Eric a substantial financial
incentive to tweak the results of Web searches using key terms
relevant to these negative incidents. Eric had used his access to
the search algorithms to make sure any negative press about
these incidents showed up several pages deep in the search
results, thus minimizing the likelihood that anyone would see
Processes, Organizations, and Information Systems
277
them. In some cases, Eric even had the content completely
removed from the search index.
Thanks to Eric, the negative stories had very little impact
on the companies. His work limited the availability of information about these events via the search engine. “With what
they paid me, I paid off my student loans, prepaid the lease on
my apartment for a whole year, and still had some left over to
treat myself a bit,” he said with pride. “Are you interested in
being a part of this?”
Robin was astounded. She couldn’t imagine what would
happen to Eric if someone found out what he had done. She
also couldn’t bring herself to think about what would happen to
their employer if someone found out its search results had been
manipulated. Not only could Eric be in trouble, but the company
could be severely damaged. She could lose her job, too.
But now that she knew about Eric’s actions, she worried
that she might be considered an accessory to search engine
manipulation if she didn’t report his behavior. Robin took
another bite of her gyro; it didn’t taste nearly as good as it
had about 20 minutes before.
DISCUSSION QUESTIONS
1. According to the definitions of the ethical principles previously defined in this book:
a. Do you think that removing content on the Internet and
manipulating search engine results for money is ethical
according to the categorical imperative?
b. Do you think that removing content on the Internet and
manipulating search engine results for money is ethical
according to the utilitarian perspective?
2. How might have Eric rationalized his fraudulent behavior?
3. How could an employer prevent this type of manipulation?
What types of policies or procedures could be implemented
to prevent this type of fraud?
4. Even if Eric were caught, would he be guilty of a crime?
Which laws govern search engine management?
5. Would his employer be motivated to report this fraudulent
behavior? Why or why not?
Figure 6-11 does not show accounting. We can assume, however, that the company has a
separate accounting system that is similarly isolated. Eventually, records of business activity find
their way to the Accounting department and will be posted into the general ledger. With such a
pre-ERP system, financial statements are always outdated, available several weeks after the close
of the quarter or other accounting period.
Contrast this situation with the ERP system in Figure 6-12. Here, all activity is processed by
ERP application programs (called modules), and consolidated data are stored in a centralized ERP
database. When Sales is confronted with the opportunity to sell 1,000 bicycles, the information
it needs to confirm that the order, schedule, and terms are possible can be obtained from the ERP
system immediately. Once the order is accepted, all departments, including purchasing, manufacturing, human resources, and accounting, are notified. Further, transactions are posted to the ERP
database as they occur; the result is that financial statements are available quickly. In most cases,
correct financial statements can be produced in real time. With such integration, ERP systems can
display the current status of critical business factors to managers and executives, as shown in the
sales dashboard in Figure 6-13.
Of course, the devil is in the details. It’s one thing to draw a rectangle on a chart, label it “ERP
Applications,” and assume that data integration takes all the problems away. It is far more difficult
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Inbound
Logistics
ERP
Database
Outbound
Logistics
Manufacturing
Materials
Management
Module
Purchasing
Module
Production &
Manufacturing
Module
Vendor
Query
Purchase Bicycle Parts
Vendor
Customer Demand
Name
Query
Parts
Query
Sales &
Distribution
Module
Update with
Parts Used
Customer
Relationship
Module
Update with
Shipped Bicycles
Raw Materials
Finished Goods
Inventory
Vendor
Components
Make Bicycle
Sales
Prospects
Customer
Sales Pitch
Customer Order
Cash
Bicycles
Approved
Order
Raw Materials
Inventory
ERP
Applications
Bicycle
Query
Finished Bicycle
Accepted
Materials
Financial &
Cost Module
Update
with
Sale
Production
Schedule
Receiving
Customer
Service
Update with
Finished Bicycle
Update with
Parts Received
Raw Materials Order
Cash
Sales and
Marketing
Shipping
Salesperson
Boxed Bicycles
FIGURE 6-12
ERP Information Systems
to write those application programs and to design the database to store that integrated data. Even
more problematic, what procedures should employees and others use to process those application
programs? Specifically, for example, what actions should salespeople take before they approve a large
order? Here are some of the questions that need to be answered or resolved:
• How does the Sales department determine that an order is considered large? By dollars?
By volume?
• Who approves customer credit (and how)?
• Who approves production capacity (and how)?
• Who approves schedule and terms (and how)?
• What actions need to be taken if the customer modifies the order?
• How does management obtain oversight on sales activity?
As you can imagine, many other questions must be answered as well. Because of its importance
to organizations today, we will discuss ERP in further detail in Q6-5. Before we do so, however, consider the third type of enterprise system: EAI.
Enterprise Application Integration (EAI)
ERP systems are not for every organization. For example, some nonmanufacturing companies find
the manufacturing orientation of ERP inappropriate. Even for manufacturing companies, some
find the process of converting from their current system to an ERP system too daunting. Others
are quite satisfied with their manufacturing application systems and do not wish to change them.
Companies for which ERP is inappropriate still have the problems associated with information
silos, however, and some choose to use enterprise application integration (EAI) to solve those
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FIGURE 6-13
Sales Dashboard
Source: Windows 10, Microsoft
Corporation.
problems. EAI is a suite of software applications that integrates existing systems by providing layers
of software that connect applications together. EAI does the following:
•
•
•
•
It connects system “islands” via a new layer of software/system.
It enables existing applications to communicate and share data.
It provides integrated information.
It leverages existing systems—leaving functional applications as is but providing an integration layer over the top.
• It enables a gradual move to ERP.
The layers of EAI software shown in Figure 6-14 enable existing applications to communicate
with each other and to share data. For example, EAI software can be configured to automatically
carry out the data conversion required to make data compatible among different systems. When
the CRM applications send data to the manufacturing application system, for example, the CRM
system sends its data to an EAI software program. That EAI program makes the conversion and
then sends the converted data to the ERP system. The reverse action is taken to send data back from
the ERP to the CRM.
CRM sends request to
manufacturing systems
via EAI Server
FIGURE 6-14
Design and Implementation
for the Five Components
EAI
Metadata
EAI Server
EAI Interface
EAI Interface
EAI Interface
EAI Interface
CRM
Manufacturing
systems
Accounting
systems
Human
resources
systems
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Although there is no centralized EAI database, the EAI software keeps files of metadata that
describe data formats and locations. Users can access the EAI system to find the data they need. In some
cases, the EAI system provides services that provide a “virtual integrated database” for the user to process.
The major benefit of EAI is that it enables organizations to use existing applications while
eliminating many of the serious problems of isolated systems. Converting to an EAI system is not
nearly as disruptive as converting to an ERP system, and it provides many of the benefits of ERP.
Some organizations develop EAI applications as a stepping stone to complete ERP systems. Today,
many EAI systems use Web services standards to define the interactions among EAI components.
Some or all of the processing for those components can be moved to the cloud as well.
Q6-5
What Are the Elements of an ERP System?
Because of its importance to organizations today, we will consider ERP in more depth than CRM
or EAI. To begin, the term ERP has been applied to a wide array of application solutions, in some
cases erroneously. Some vendors attempted to catch the buzz for ERP by misapplying the term to
applications that provided only one or two integrated functional applications.
The organization ERPsoftware360 publishes a wealth of information about ERP vendors, products, solutions, and applications. According to its Web site (www.erpsoftware360.com/erp-101.htm),
for a product to be considered a true ERP product, it must include applications that integrate:
• Supply chain (procurement, sales order processing, inventory management, supplier management, and related activities)
• Manufacturing (scheduling, capacity planning, quality control, bill of materials, and related
activities)
• CRM (sales prospecting, customer management, marketing, customer support, call center support)
• Human resources (payroll, time and attendance, HR management, commission calculations, benefits administration, and related activities)
• Accounting (general ledger, accounts receivable, accounts payable, cash management, fixed
asset accounting)
An ERP solution is an information system and, as such, has all five components. We consider
each in turn.
Hardware
Traditionally, organizations hosted ERP solutions on their own in-house, networked server computers. Such hosting is still the case for many large ERP applications, as well as for those ERP applications
that were installed years ago and for which the hardware infrastructure is stable and well managed.
Increasingly, however, organizations are turning to cloud-based hosting in one of two modes:
• PaaS: Replace an organization’s existing hardware infrastructure with hardware in the
cloud. Install ERP software and databases on that cloud hardware. The using organization
then manages the ERP software on the cloud hardware.
• SaaS: Acquire a cloud-based ERP solution. SAP, Oracle, Microsoft, and the other major ERP
vendors offer their ERP software as a service. The vendor manages the ERP software and
offers it to customers as a service.
During your career, existing in-house ERP solutions are likely to migrate to one of these two modes.
Larger installations will likely move to PaaS; smaller and new ERP systems are likely to use SaaS.
ERP Application Programs
ERP vendors design application programs to be configurable so that development teams can alter
them to meet an organization’s requirements without changing program code. Accordingly, during
the ERP development process, the development team sets configuration parameters that specify how
ERP application programs will operate. For example, an hourly payroll application is configured to
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specify the number of hours in the standard workweek, hourly wages for different job categories,
wage adjustments for overtime and holiday work, and so forth. Deciding on the initial configuration
values and adapting them to new requirements is a challenging collaboration activity. It is also one
that you might be involved in as a business professional.
Of course, there are limits to how much configuration can be done. If a new ERP customer has
requirements that cannot be met via program configuration, then it needs to either adapt its business to what the software can do or write (or pay another vendor to write) application code to meet
its requirements. As stated in Chapter 3, such custom programming is expensive, both initially and
in long-term maintenance costs. Thus, choosing an ERP solution with applications that function
close to the organization’s requirements is critical to its successful implementation.
ERP Databases
An ERP solution includes a database design as well as initial configuration data. It does not, of
course, contain the company’s operational data. During development, the team must enter the
initial values for that data as part of the development effort.
If your only experience with databases is creating a few tables in Microsoft Access, then you
probably underestimate the value and importance of ERP database designs. SAP, the leading vendor of ERP solutions, provides ERP databases that contain more than 15,000 tables. The design
includes the metadata for those tables, as well as their relationships to each other, and rules and
constraints about how the data in some tables must relate to data in other tables. The ERP solution
also contains tables filled with initial configuration data.
Reflect on the difficulty of creating and validating data models (as discussed in Chapter 5),
and you will have some idea of the amount of intellectual capital invested in a database design of
15,000 tables. Also, consider the magnitude of the task of filling such a database with users’ data!
Although we did not discuss this database feature in Chapter 5, large organizational databases
contain two types of program code. The first, called a trigger, is a computer program stored within
the database that runs to keep the database consistent when certain conditions arise. The second,
called a stored procedure, is a computer program stored in the database that is used to enforce
business rules. An example of such a rule would be never to sell certain items at a discount. Triggers and stored procedures are also part of the ERP solution. Developers and business users need
to configure the operation of such code during the ERP implementation as well.
Business Process Procedures
Another component of an ERP solution is a set of inherent procedures that implement standard
business processes. ERP vendors develop hundreds, or even thousands, of procedures that enable
the ERP customer organization to accomplish its work using the applications provided by the vendor. Figure 6-15 shows a part of the SAP ordering business process; this process implements a
portion of the inbound logistics activities. Some ERP vendors call the inherent processes that are
defined in the ERP solution process blueprints.
Without delving into the details, you should be able to understand the flow of work outlined
in this process. Every function (rounded rectangles in Figure 6-15) consists of a set of procedures
for accomplishing that function. Typically, these procedures require an ERP user to use application
menus, screens, and reports to accomplish the activity.
As with application programs, ERP users must either adapt to the predefined, inherent processes and procedures or design new ones. In the latter case, the design of new procedures may
necessitate changes to application programs and to database structures as well. Perhaps you can
begin to understand why organizations attempt to conform to vendor standards.
Training and Consulting
Because of the complexity and difficulty of implementing and using ERP solutions, ERP vendors
have developed training curricula and numerous classes. SAP operates universities, in which customers and potential customers receive training both before and after the ERP implementation. In
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Purchase
requisition
does not exist
Symbol Key
RFQ
to be created
Event
V
Function
Processing
of RFQ
issued to vendor
RFQs
transmitted
to vendors
Purchasing
department
Organizational Unit
V
xor
AND
Only 1 of several
Quotation
is received
V
Processing
of RFQ
issued to vendor
Purchasing
department
xor
Rejection
is transmitted
Quotation
is selected
P.O. processing
for stock
material
Material with
P.O. ref. has
arrived
Purchasing
department
P.O. is
transmitted
V
Goods rec. proc.
with P.O. ref. for
stock material
Goods
receiving
department
xor
Goods
to be
returned
Goods receipt
cannot
be posted
Stock is
placed
V
Billing docum.
with ref.
received
Invoice
processing
with reference
Vendor
processing
xor
Bill. docum.
cannot be
posted
FIGURE 6-15
SAP Ordering Process
Source: Based on Thomas A. Curran,
Andrew Ladd, and Dennis Ladd, SAP
R/3 Reporting Business and Intelligence,
1st ed. copyright 2000.
Bill. docum.
posted and
released for
payment
Vendor
processing
addition, ERP vendors typically conduct classes on site. To reduce expenses, the vendors sometimes
train the organization’s employees, called Super Users, to become in-house trainers in training sessions called train the trainer.
ERP training falls into two broad categories. The first category is training about how to implement the ERP solution. This training includes topics such as obtaining top-level management support, preparing the organization for change, and dealing with the inevitable resistance that develops
when people are asked to perform work in new ways. The second category is training on how to use
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the ERP application software; this training includes specific steps for using the ERP applications to
accomplish the activities in processes such as those in Figure 6-15.
ERP vendors also provide on-site consulting for implementing and using the ERP system. Additionally, an industry of third-party ERP consultants has developed to support new ERP customers
and implementations. These consultants provide knowledge gained through numerous ERP implementations. Such knowledge is valued because most organizations go through an ERP conversion
only once. Ironically, having done so, they now know how to do it. Consequently, some employees,
seasoned by an ERP conversion with their employer, leave that company to become ERP consultants.
Industry-Specific Solutions
As you can tell, considerable work needs to be done to customize an ERP application to a particular customer. To reduce that work, ERP vendors provide starter kits for specific industries called
industry-specific solutions. These solutions contain program and database configuration files as
well as process blueprints that apply to ERP implementations in specific industries. Over time, SAP,
which first provided such solutions, and other ERP vendors created dozens of such starter kits for
manufacturing, sales and distribution, healthcare, and other major industries.
Which Companies Are the Major ERP Vendors?
Although more than 100 different companies advertise ERP products, not all of those products
meet the minimal ERP criteria. Of those that do, the bulk of the market is held by the five vendors
shown in Figure 6-16.5 SAP and Oracle serve the largest organizations. Microsoft, Infor ERP, and
Epicor products primarily serve midsize to small companies.
The ERP market is mature and facing stiff competition from SaaS competitors. According to
Forbes, four of 10 large organizations will have at least 60 percent of their ERP applications in the
Company
Market Share
SAP
21 percent
Market leader in client-server
implementations. Expensive. Many
consider it to be the gold standard
of ERP.
Microsoft
16 percent
Microsoft AX, which is popular
in Europe, is primarily used in
manufacturing. Other products have
smaller revenue. Dynamics CRM
is offered as SaaS, but no full ERP
solution is offered in the cloud.
Oracle
13 percent
Intensely competitive company
with strong technology base.
Large customer base. Flexible SOA
architecture. Will leverage strong
technology base into innovative
and effective cloud-based solutions.
Strong challenge to SAP market
leadership.
Infor ERP
13 percent
Many solutions, not integrated,
particularly specialized for
manufacturing and supply chain
management. Evolving with
revolution in 3D printing practices.
Epicor
4 percent
Leading ERP provider for midsize
companies. Many applications
to provide clients with custom
solutions.
FIGURE 6-16
Characteristics of Top ERP
Vendors
Source: Based on Panorama Consulting
Solutions, “Clash of the Titans 2017,”
Panorama-consulting.com, November
2015, http://go.panorama-consulting.
com/rs/603-UJX-107/images/Clash-ofthe-Titans-2017.pdf.
Remarks
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cloud by 2020.6 The $43 billion cloud ERP market will continue to mature, consolidation of vendors is likely, and smaller vendors will fall out entirely. In fact, the top 10 vendors own 64 percent
of the market share, and the top five, listed in Figure 6-16, own 55 percent.7
The cloud is having a major impact on ERP vendors. Those with substantial resources (SAP)
and deep technical talent (Oracle) are moving their product suites into some version of SaaS, PaaS,
or IaaS. Others are unable to convert to the new technology and are gradually losing their customers to those who have converted or to new companies that have only ever offered cloud-based ERP
solutions. Among organizations that use ERP, the movement from classical client/server ERP to the
cloud will likely be a major business challenge during the early years of your career.
Q6-6
What Are the Challenges of Implementing and
Upgrading Enterprise Information Systems?
Implementing new enterprise systems, whether CRM, ERP, or EAI, is challenging, difficult, expensive, and risky. It is not unusual for enterprise system projects to be well over budget and a year or
more late. In addition to new ERP implementations, numerous organizations implemented ERP 15
or 20 years ago and now need to upgrade their ERP installation to meet new requirements. If you
work in an organization that is already using enterprise systems, you may find yourself engaged
in a significant upgrade effort. Whether from a new implementation or an upgrade, expense and
risks arise from five primary factors (see Figure 6-17).
Collaborative Management
Unlike departmental systems in which a single department manager is in charge, enterprise systems
have no clear boss. Examine the discharge process in Figure 6-7; there is no manager of discharge.
The discharge process is a collaborative effort among many departments (and customers).
With no single manager, who resolves the disputes that inevitably arise? All of these departments ultimately report to the CEO, so there is a single boss over all of them, but employees can’t
go to the CEO with a problem about, say, coordinating discharge activities between nursing and
housekeeping. The CEO would throw them out of his or her office. Instead, the organization needs
to develop some sort of collaborative management for resolving process issues.
Usually this means that the enterprise develops committees and steering groups for providing
enterprise process management. Although this can be an effective solution, and in fact may be the
only solution, the work of such groups is both slow and expensive.
Requirements Gaps
As stated in Q6-4, few organizations today create their own enterprise systems from scratch.
Instead, they license an enterprise product that provides specific functions and features and that
includes inherent procedures. But such licensed products are never a perfect fit. Almost always there
are gaps between the organization’s requirements and the application’s capabilities.
Collaborative management
Requirements gaps
Transition problems
Employee resistance
FIGURE 6-17
Five Primary Factors
New technology
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The first challenge is identifying the gaps. To specify a gap, an organization must know both
what it needs and what the new product does. However, it can be very difficult for an organization
to determine what it needs; that difficulty is one reason organizations choose to license rather than
to build. Further, the features and functions of complex products like CRM or ERP are not easy to
identify. Thus, gap identification is a major task when implementing enterprise systems.
The second challenge is deciding what to do with gaps, once they are identified. Either the organization needs to change the way it does things to adapt to the new application, or the application
must be altered to match what the organization does. Either choice is problematic. Employees will
resist change, but paying for alterations is expensive, and, as noted in Chapter 3, the organization
is committing to maintaining those alterations as the application is changed over time. Here, organizations fill gaps by choosing their lesser regret.
Transition Problems
Transitioning to a new enterprise system is also difficult. The organization must somehow change
from using isolated departmental systems to using the new enterprise system, while continuing to
run the business. It’s like having heart surgery while running a 100-yard dash.
Such transitions require careful planning and substantial training. Inevitably, problems will
develop. Knowing this will occur, senior management needs to communicate the need for the
change to the employees and then stand behind the new system as the kinks are worked out. It is
an incredibly stressful time for all involved.
Employee Resistance
People resist change. Change requires effort and engenders fear. Considerable research and literature exist about the reasons for change resistance and how organizations can deal with it. Here we
will summarize the major principles.
First, senior-level management needs to communicate the need for the change to the organization and reiterate this, as necessary, throughout the transition process. Second, employees fear
change because it threatens self-efficacy, which is a person’s belief that he or she can be successful
at his or her job. To enhance confidence, employees need to be trained and coached on the successful use of the new system. Word-of-mouth is a very powerful factor, and in some cases key users
are trained ahead of time to create positive buzz about the new system. Video demonstrations of
employees successfully using the new system are also effective.
Third, in many ways, the primary benefits of a new ERP system are felt by the accounting and
finance departments and the senior management. Many of the employees who are asked to change
their activities to implement ERP will not receive any direct benefit from it. Therefore, employees
may need to be given extra inducement to change to the new system. As one experienced change
consultant said, “Nothing succeeds like praise or cash, especially cash.” Straight-out pay for change
is bribery, but contests with cash prizes among employees or groups can be very effective at inducing change.
Implementing new enterprise systems can solve many problems and bring great efficiency and
cost savings to an organization, but it is not for the faint of heart.
New Technology
Emerging, new technology affects all information systems, but it affects enterprise systems particularly because of their importance and their value. Consider, for example, the cloud. Because of the
cost savings of cloud-based computing, organizations would like to move their enterprise systems
to the cloud. But legal, risk, and business policy factors may make such a move infeasible. The organization may be required to keep physical control over its data. When moving it to the cloud, the
cloud vendor controls the physical location of the data, and that location might not even be in the
same country as the organization. So, some sort of hybrid model may need to be devised (see Q6-8).
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Similar comments pertain to mobile technology. Employees want to use mobile devices to access
and even modify enterprise system data. But mobile devices are just that—mobile. The enterprise
system may be exposed to considerable risk while outside the control of the organization. And ERP
data is a juicy target for crime. These factors don’t mean organizations cannot use new technology
with enterprise systems, but they do add challenges.
Q6-7
How Do Inter-Enterprise IS Solve the Problems of
Enterprise Silos?
The discussion in Q6-4 illustrates the primary ways in which enterprise systems solve the problems
of workgroup information silos. In this question, we will use the ARES example to show you how
inter-enterprise systems can accomplish the same for enterprise silos. (The transition is shown by
the lower arrow leading to the bottom row in Figure 6-6, page 269.)
Figure 6-18 shows the information silos that exist among employers, health clubs, and principal ARES home users. Employers may maintain records of exercise programs, diet, weight, lab
test results (e.g., cholesterol, blood sugar, etc.), and biometric readings from wearables (e.g., steps
taken, heart rate, sleep patterns, etc.). Health clubs store membership, class, personal trainer, and
exercise performance data in a club database. Data is gathered automatically from virtual cycling
classes or from on-premises exercise equipment and member heart monitors. At home, individuals
generate exercise data on heart monitors and equipment; that data is recorded on mobile devices
via wearable exercise devices.
The isolation of this exercise data causes problems. For example, employers would like to have
reports on exercise data stored in user devices and in health clubs. Users would like to have data like
lab test results from their employer, as well as exercise data from their time at health clubs. Health
clubs would like to have lab results and home workout data to integrate with the data they have.
All three entities would like to produce reports from the integrated data.
Figure 6-19 shows the structure of an inter-enterprise system that meets the goals of the three
types of participants. In this figure, the labeled rectangles inside the cloud represent mobile applications that could be native, thin-client, or both. Some of the application processing might be done
on cloud servers as well as on the mobile devices. Those design decisions are not shown. As illustrated, this system assumes that all users receive reports on mobile devices, but because of the large
amount of keying involved, employers submit and manage lab results using a personal computer.
Employers
Exercise records
Diet
Weight
Lab test results
cholesterol
blood sugar
Biometric readings
steps taken
heart rate
sleep patterns
FIGURE 6-18
Information Silos Without
ARES
Health Clubs
Membership data
Class data
Personal trainer data
Exercise
performance data
Home Users
Heart monitor data
Stationary bike
exercise data
Watch data recorded
in mobile devices
Information Silos
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Processes, Organizations, and Information Systems
M
ac
Ma
chi
neg
Da ener
at
ta
Users
at Home
ed
Health Club
hin
eDa gen
ta era
ted
Rep
ort
s
Report
Personal
Progress
Store
Lab Results
Lab Results
orts
Store
Exercise
Data
Report
Member
Progress
Report
Patient
Exercise
…
FIGURE 6-19
Inter-Enterprise ARES System
Q6-8
Reports
ARES
Database
Employer
Rep
Personal
Trainer
= Native or thin-client
mobile application
As you can see, lab results and exercise data are integrated in the ARES database; that
integrated data is processed by a reporting application to create and distribute the reports as
shown.
Systems like that shown in Figure 6-19 are referred to as distributed systems because applications processing is distributed across multiple computing devices. Standards such as http, https,
html5, css3, JavaScript, and SOA using Web services enable programs to receive data from and
display data to a variety of mobile and desktop devices.
ARES data is requested and delivered using JSON.
2029?
Within the next 10 years, ERP vendors and customers will have sorted out the problems of cloudbased ERP. In what is coming to be known as the hybrid model, ERP customers will store most of
their data on cloud servers managed by cloud vendors and store sensitive data on servers that they
manage themselves. Governmental agencies, financial analysts, and accountants will have defined
standards against which organizations can be monitored for appropriate compliance. By the way,
if you graduate as an accountant or financial analyst, this is interesting work in which you could
be involved early in your career.
Mobility, however, will still present problems in 2029. Workers in the warehouse, loading dock,
and shipping department will all carry mobile devices that enable them to process ERP and other
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SECURITY GUIDE
IT’S NOT ME . . . IT’S YOU
If you have ever been asked to leave a job, then you
understand how difficult it is. Learning that your services are
no longer needed is stressful. Compounding the stresses are
tense moments with managers and awkward interactions
with coworkers. However, the realization that you now need
to secure some other means of employment is often the most
discouraging part. You may be surprised to learn that these
factors commonly lead exiting employees to take advantage
of their last moments with their employers.
A survey of 945 adults who had been laid off, been fired,
or changed jobs in the past year revealed some startling statistics. Sixty percent reported stealing data from their employer
before their employment ended. Seventy-nine percent admitted to knowing that taking company data with them was not
permitted. They reported taking email lists, customers contact
lists, employee records, and financial information.8 It has been
estimated that the financial damages inflicted by these types
of incidents range from $5,000 to $3 million per incident.9
White Collar . . . Dark Deeds
You may be wondering what factors contribute to the widespread theft of company data. To get “inside the minds” of
data-stealing employees, we must look at the “fraud triangle.”
The fraud triangle contends that pressure, opportunity, and
rationalization are the three key factors that govern an individual’s propensity to commit white-collar crime.10 In this
context, employees in the process of leaving a company are
pressured to find a job. They often think that they can increase
the chances of finding a new position if they bring data assets
with them. This is especially true if they are targeting a position at their employer’s key competitor. What many employees
fail to realize is that confidential customer lists and intellectual
Source: Putilov_Denis/Fotolia
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CHAPTER 6
property are considered proprietary and are often governed by
nondisclosure agreements. Giving this information to a new
employer will likely harm them, not help them.
Factor two—opportunity—has continually increased
over the past decade as interactions among employees,
systems, and data have drastically changed. The rise of
telecommuting—employees working from home—and the ability of employees to access their employer’s data in the cloud
have opened up countless opportunities for theft of data and
intellectual assets. Shockingly, the employee survey also
revealed that almost a quarter of employees said they still had
the ability to connect to their employer’s network after their
employment had ended.11 That’s an opportunity!
Finally, rationalization is an element of data theft because
employees have often created the data that they are attempting to take with them. They feel a sense of justification for taking the data because they created it.
I’m Not Disgruntled . . . Are You?
In light of the ample opportunities for employees to take
data from their companies and the feelings of pressure and
Processes, Organizations, and Information Systems
289
rationalization for doing so, organizations are working to
develop predictive tools that will help identify employees
who may be preparing to steal data. A data loss prevention
expert commented on the inadequacy of existing theftprevention solutions by saying that most organizations fail
to have the technological infrastructure in place to identify
accidental employee dissemination of sensitive information.
Identification of intentional, malicious incidents is even
more difficult.12
The tools that are being developed to identify potential
data theft search, monitor, analyze, and visualize the data
originating from Web sites, applications, servers, networks,
sensors, and mobile devices.13 Encryption and continual
monitoring of stored data are other tactics that can be used
to thwart data theft. This includes encrypting and monitoring
data stored within the organization and with third parties like
the cloud vendors.
Most importantly, companies need to ensure that HR departments and technology groups are collaborating in real time to
ensure that employee access to internal systems is revoked when
an employee’s time with the company has come to an end.
DISCUSSION QUESTIONS
1. Have you ever witnessed someone stealing something at
work? If so, it was probably apparent to both you and the
perpetrator that he or she was doing something wrong.
Why do you think employees are so willing to steal data but
might be hesitant to steal tangible items like cash, laptops,
or other expensive organizational assets?
2. Take a moment to search the Internet for cases of
white-collar crime. Find a specific example and see if
you can identify the three elements of the fraud triangle
as being factors that contributed to that crime being
committed.
3. How do you feel about the fact that many companies are
investing in tools to monitor employee behavior? Would you
want to work for a company that regularly audits your emails
and analyzes your activity on the company’s network?
4. The article mentions that encryption can be a tactic used
to thwart employees from taking data with them. Explain
how encryption can be used effectively in this context.
enterprise applications from wherever they happen to be. Managers, decision makers, and other
knowledge workers will have similar applications on their own phones or other mobile devices,
devices that they can access from work, other offices, the street, or home.
However—and it’s an enormous however—mobile devices are subject to severe security threats.
Putting data online does make it easier to access. That’s true for the good guys, but it’s also true for
the bad guys. In 2015 Anthem Inc., the largest for-profit healthcare company in the United States,
lost healthcare records for 80 million people. Consider the enormity of that single data breach. There
are only 320 million people in the United States. That means a single company lost records for one
out of every four people you know—including the author of your textbook! Even worse, in 2017
Yahoo! lost all of its 3 billion user accounts. That’s nearly half the people on the planet.
Consider what would happen if some criminal, perhaps a malicious insider, were to infiltrate
an ERP system. It would be possible to wreak havoc in, say, supply chain orders and inventories or
in the operation of machinery on the factory floor. The hacked organization would have to shut
down its ERP system, and thus its company, to sort out the mess. But allowing users mobile access
to the ERP system will enable organizations to make significant improvements in process quality.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CAREER GUIDE
Source: Ben Peters, Anaconda, Inc,
Software/Platform Engineer
1
Name: Ben Peters
Company: Anaconda, Inc.
Job Title: Software/Platform Engineer
Education: Carnegie Mellon University, Longwood University
I had been working in the industry for about 2
years after graduate school and was passively
exploring new opportunities. An HR representative from Anaconda reached out to me about a
job opening via LinkedIn, and it sounded exactly
like what I was looking for. I spoke with the VP
of engineering about the role and was given an
interview assignment to complete over the weekend. I really wanted the job, so I spent a considerable amount of time working on the coding
assignment. I went in for an onsite interview the
following week where they asked me technical
questions about data structures, cloud computing,
and infrastructure tooling. We also went over the
coding assignment. My hard work paid off, and I
was given an offer later that week.
2
4
What does a typical workday look like for
you (duties, decisions, problems)?
We practice Agile software development at Anaconda, so each morning the team meets for a
standup to discuss what each member is working
on and whether there are any roadblocks. The rest
of the day is spent coding and working through
technical problems with other team members. As
part of the Agile method, we commit to delivering
new product features at the end of every 2-week
What do you like most about your job?
Anaconda is a young and fairly small company, so
I feel a great sense of ownership over the product. Before coming here, I was working for large
Fortune 100 companies where I did not have that
feeling. I get to work with and learn from some
of the best talent in the field, and the company is
highly respected among the open source and data
science communities. It feels good to always get
a positive reaction from other software engineers
when I tell them where I work.
5
What skills would someone need to do well
at your job?
Software engineers today need to be versatile.
Technology is always changing, so you need to
be willing to constantly learn and adapt. It’s good
to be fluent in multiple programming languages
and frameworks and have a solid understanding
of databases, Linux, and cloud computing. Modern software engineers should be knowledgable
about DevOps and infrastructure automation tools
as well.
What attracted you to this field?
Big Data and machine learning are two of the hottest technology trends today, and Anaconda is an
integral part of those communities. I love working to solve the challenges the industry faces and
having the potential to change the world. When I
was exploring majors in college, I looked at factors
like job demand outlook and salary potential, too.
I wanted to be a part of a growing industry with
lots of potential.
3
period. This can be intense but is also enjoyable
and rewarding.
How did you get this type of job?
6
Are education or certifications important in
your field? Why?
Education and certifications are important
because they give you a competitive advantage in
the field. It’s equivalent to having a trusted third
party who can vouch for the skills you claim to
have. Even though good software engineers are in
high demand, the field is still very competitive for
the positions that you likely want. There are many
online courses and certifications you can pursue
after graduating to help you stay on top and give
you an edge.
290
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CHAPTER 6
7
What advice would you give to someone
who is considering working in your field?
Practice, practice, and more practice! Try to get
as much hands-on experience as you can while
you are in school so you will stand out to future
employers. Focus on grasping the fundamentals
of software development, design, and architecture, and you will have a great career.
8
Processes, Organizations, and Information Systems
291
What do you think will be hot tech jobs in
10 years?
Internet of Things (IoT), virtual and augmented reality (VR/AR), machine learning and deep learning
(ML/DL), artificial intelligence (AI), and quantum
computing will all likely be hot engineering jobs in
the near future. Some of these are already in high
demand today, but I believe they will be a much
bigger part of our daily life 10 years from now.
So, in the next 10 years, organizations must engage in a delicate balancing act between risk of loss
and improvement to processes.
Consider also the effect of the Internet of Things. Future users of ERP systems will be not just
people but also devices and machines. ERP vendors are adapting their software to the particular
requirements of 3D printing. In the future, when a salesperson enters an order, he or she may be
starting a machine to make that part on demand. In addition, factory automation will also add to
process quality improvements. Inventory-picking robots are one example, but self-driving cars and
trucks are likely to have an even larger effect. And within the next 10 years, machines will be able
to employ the ERP system to schedule their own maintenance. For example, on the factory floor
a milling machine will be able to order a replacement for a dull cutter, one possibly made by a 3D
printer. Machines will schedule both routine and emergency maintenance for themselves, thus
carrying factory automation to a new level.
As we have stated many times so far, the future belongs not to those who specialize in existing methods, technology, and processes but rather to those who can find and implement innovative applications of emerging trends. Technology’s effect on enterprise systems will be widespread
because enterprise systems are widespread. Many opportunities will occur in the early years of
your career.
FIGURE 6-20
Designing a Future ERP
System
Source: Tom Wang/Fotolia
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CHAPTER 6 Processes, Organizations, and Information Systems
ACTIVE REVIEW
Use this Active Review to verify that you understand the ideas and
concepts that answer the chapter’s study questions.
What are the basic types of
processes?
Q6-1
Define structured and dynamic processes and compare and contrast
them. Define workgroup processes, enterprise processes, and interenterprise processes and explain their differences and challenges.
Define those same levels of information systems. Define functional
systems and functional applications.
How can information systems
improve process quality?
Q6-2
Name, define, and give an example of two dimensions of process quality. Name and describe three ways that organizations
can improve process quality. Name and describe three ways that
information systems can be used to improve process quality.
How do information systems eliminate the problems of information silos?
Q6-3
Define information silo and explain how such silos come into existence. When do such silos become a problem? Describe the two
types of silos in Figure 6-6 and explain the meaning implied by
the two arrows.
How do CRM, ERP, and EAI support
enterprise processes?
Q6-4
Define business process reengineering and explain why it is difficult and expensive. Explain two major reasons why developing
enterprise information systems in-house is expensive. Explain the
advantages of inherent processes. Define and differentiate among
CRM, ERP, and EAI. Explain how the nature of CRM and ERP is
more similar to each other than that of EAI.
What are the elements of an ERP
system?
Q6-5
Describe the minimum capability of a true ERP product. Explain
the nature of each of the following ERP solution components:
programs, data, procedures, and training and consulting. For
each, summarize the work that customers must perform. List the
top five ERP vendors in decreasing order of market share.
Q6-6 What are the challenges of
implementing and upgrading enterprise
information systems?
Name and describe five sources of challenges when implementing enterprise systems. Describe why enterprise systems management must be collaborative. Explain two major tasks required to
identify requirements gaps. Summarize the challenges of transitioning to an enterprise system. Explain why employees resist
change and describe three ways of responding to that resistance.
Discuss the challenges that new technology poses for enterprise
systems.
How do inter-enterprise IS solve the
problems of enterprise silos?
Q6-7
Describe information silos that exist among employers health
clubs, and individuals with regard to exercise data. Describe problems that those silos create. Explain how the system shown in
Figure 6-19 will solve the problems caused by those silos. Define
distributed systems and explain the benefits of SOA using Web services when implementing such systems.
Q6-8
2029?
Describe how the cloud, mobility, and the Internet of Things
will affect enterprise systems in the next 10 years. Explain how
these factors will create opportunities for business professionals.
Explain how they will create opportunities for you!
Using Your Knowledge with ARES
Knowledge of this chapter will help you understand the fundamental value offered by solutions like ARES, namely the
elimination of the problems of enterprise-level information
silos. As you now know, silos caused by workgroup processes
can be eliminated (or managed, in the case of EAI) with enterprise systems. Similarly, silos caused by enterprise processes
can be eliminated with inter-enterprise systems like ARES
Also, the knowledge of this chapter prepares you to understand the difficulty of adapting and of managing inter-enterprise systems. Finally, Figure 6-19 helps you understand how
mobile devices and a cloud database can be used to implement
an inter-enterprise system.
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293
KEY TERMS AND CONCEPTS
Business process reengineering 271
Customer life cycle 272
Customer relationship management
(CRM) system 272
Data integrity 268
Distributed systems 287
Dynamic processes 262
Enterprise application integration
(EAI) 278
Enterprise information system 265
Enterprise processes 265
Enterprise resource planning (ERP) 273
ERP system 273
Functional application 263
Functional information systems 263
Hybrid model 287
Industry-specific solutions 283
Information silo 267
Inherent processes 271
Inter-enterprise information
systems 265
Inter-enterprise processes 265
Modules 273
Process blueprints 281
Process effectiveness 265
Process efficiency 265
Self-efficacy 285
Stored procedure 281
Structured processes 262
Train the trainer 282
Trigger 281
Workgroup information system 263
Workgroup process 263
MyLab MIS
To complete the problems with MyLab MIS, go to EOC Discussion Questions in the MyLab.
USING YOUR KNOWLEDGE
6-1. Using the example of your university, give examples of
6-4. Google or Bing each of the top five ERP vendors discussed in
information systems for each of the three levels of scope
(workgroup, enterprise, and inter-enterprise) discussed in
Q6-1. Describe three departmental information systems
likely to duplicate data. Explain how the characteristics of
these systems relate to your examples.
Q6-5. In what ways have their product offerings changed
since this text was written? Do these vendors have new
products? Have they made important acquisitions? Have
they been acquired? Have any new companies made important inroads into their market share?
6-2. In your answer to question 6-1, explain how the three
6-5. Using the knowledge you gained from Chapters 3 and 4
workgroup information systems create information silos.
Describe the kinds of problems these silos are likely to
cause. Refer to the discussion in Q6-3 as a guide.
how do you think mobile systems and the cloud will affect
ERP solutions? Explain how mobile ERP might benefit the
types of personnel discussed in the bicycle manufacturing
example from Q6-4.
MyLab MIS
MyLab MIS
6-3. Using your answer to question 6-2, describe an enterprise
MyLab MIS
information system that will eliminate the silos. Would the
implementation of your system require business process
reengineering? Explain why or why not.
COLLABORATION EXERCISE 6
Using the collaboration IS you built, collaborate with a group of students to answer the following questions.
The county planning office issues building permits, septic
system permits, and county road access permits for all building
projects in a county in an eastern state. The planning office issues
permits to homeowners and builders for the construction of new
homes and buildings and for any remodeling projects that involve
electrical, gas, plumbing, and other utilities, as well as the conversion of unoccupied spaces, such as garages, into living or working
space. The office also issues permits for new or upgraded septic systems and permits to provide driveway entrances to county roads.
Figure 6-21 shows the permit process that the county used for
many years. Contractors and homeowners found this process slow
and very frustrating. For one, they did not like its sequential nature.
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CHAPTER 6 Processes, Organizations, and Information Systems
Receive Permit Application
Complete?
Reject Permit
No
Yes
No
Engineering Review
Approved?
No
Yes
No
Need
Septic or
Water Review?
Yes
Health Department Review
No
Need
Highway
Dept. Review?
Approved?
Yes
Yes
No
FIGURE 6-21
Building Permit Process, Old
Version
Only after a permit had been approved or rejected by the engineering review process would they find out that a health or highway
review was also needed. Because each of these reviews could take
3 or 4 weeks, applicants requesting permits wanted the review
processes to be concurrent rather than serial. Also, both the permit applicants and county personnel were frustrated because they
never knew where a particular application was in the permit process. A contractor would call to ask how much longer, and it might
take an hour or longer just to find which desk the permits were on.
Accordingly, the county changed the permit process to that
shown in Figure 6-22. In this second process, the permit office
made three copies of the permit and distributed one to each
Approved?
Highway Department Review
No
Yes
Approve Permit
department. The departments reviewed the permits in parallel; a
clerk would analyze the results and, if there were no rejections,
approve the permit.
Unfortunately, this process had a number of problems,
too. For one, some of the permit applications were lengthy;
some included as many as 40 to 50 pages of large architectural drawings. The labor and copy expense to the county was
considerable.
Second, in some cases departments reviewed documents
unnecessarily. If, for example, the highway department rejected
an application, then neither the engineering nor health departments needed to continue their reviews. At first, the county
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295
Make Permit Copies
Receive Permit Application
Engineering
Copy
Health
Department
Copy
Highway
Department
Copy
Engineering
Review
Health Department
Review
Highway Department
Review
Approved or
Rejected Permit
Approved or
Rejected Permit
Approved or
Rejected Permit
Analyze Results
Approved?
No
FIGURE 6-22
Building Permit Process,
Revised Version
Reject Permit
responded to this problem by having the clerk who analyzed
results cancel the reviews of other departments when a rejection
was received. However, that policy was exceedingly unpopular
with the permit applicants, because once the problem in a rejected
application was corrected, the permit had to go back through the
other departments. The permit would go to the end of the line
and work its way back into the departments from which it had
been pulled. Sometimes this resulted in a delay of 5 or 6 weeks.
Cancelling reviews was unpopular with the departments as
well, because permit-review work had to be repeated. An application might have been nearly completed when it was cancelled due
to a rejection in another department. When the application came
through again, the partial work results from the earlier review
were lost.
6-6. Explain why the processes in Figures 6-21 and 6-22 are
classified as enterprise processes rather than departmental
processes. Why are these processes not interorganizational
processes?
Yes
Approve Permit
6-7. Using Figure 6-8 as an example, redraw Figure 6-21
using an enterprise information system that processes a
shared database. Explain the advantages of this system
over the paper-based system in Figure 6-21.
6-8. Using Figure 6-10 as an example, redraw Figure 6-22
using an enterprise information system that processes a
shared database. Explain the advantages of this system
over the paper-based system in Figure 6-22.
6-9. Assuming that the county has just changed from the
system in Figure 6-21 to the one in Figure 6-22, which
of your answers in questions 6-7 and 6-8 do you think is
better? Justify your answer.
6-10. Assume your team is in charge of the implementation of
the system you recommend in your answer to question
6-9. Describe how each of the five challenges discussed
in Q6-6 pertain to this implementation. Explain how
your team will deal with those challenges.
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CHAPTER 6 Processes, Organizations, and Information Systems
CASE STUDY 6
A Tale of Two Interorganizational IS
The Affordable Care Act (also known as Obamacare) requires
the creation of healthcare exchanges that necessitate the development of interorganizational information systems. States
were encouraged to set up exchanges for their own residents,
but if they elected not to do so, the states’ residents could use
an exchange developed by the federal government. About half
of the states decided to use the federal exchange. The remainder
developed their own exchanges (and supporting information systems). These many parallel development projects give us a unique
opportunity to learn from the experience of similar projects that
had, in some cases, very different outcomes.
Consider, for example, Connecticut and Oregon. The state
of Connecticut created an exchange named Access CT. It was
delivered on time and on budget and has been such a success
that the state of Maryland stopped developing its own system
and licensed the Access CT solution instead.14 Other states are
considering licensing Access CT as well. On the other hand, the
state of Oregon created an exchange named Cover Oregon that
was a complete and utter failure. Cover Oregon was never operable despite costing more than $248 million in U.S. and Oregon
tax dollars. In May 2014, the U.S. attorney’s office in Portland
opened a grand jury investigation into the project.15
Why were there such different outcomes? The two states
started their projects about the same time, they had the same
scope and goals, they began with about the same funding (Cover
Oregon eventually spent nearly twice as much as Access CT), and
they had the same required finish date. There is no substantial
difference in the population of the two states; Connecticut has
about 3.5 million people and Oregon about 3.9 million. What
caused the different outcomes?
What Is a Healthcare Exchange?
To begin, a healthcare exchange is an online store that offers
health insurance products to individuals and small businesses.
Choosing medical insurance is a complex process with many different levels of coverage and costs, and selecting the right policy
is difficult and confusing for most people. Exchanges are thus
created not only to offer medical insurance policies, but also to
simplify and partially automate the selection process. Exchanges
also promote fair competition among health insurers.
Besides simplifying the selection of health insurance,
another goal for exchanges is to help consumers navigate the
complex array of governmental assistance options and possibilities. Depending on income, family size, and other circumstances,
some consumers are entitled to Medicare and a variety of other
governmental programs. Thus, when using an exchange, a consumer provides personal data about income and family situation,
and the exchange uses automation to contact various governmental agencies to determine that consumer’s eligibility. Given
this determination, the exchange then offers insurance products
appropriate to that particular consumer’s situation. Exchanges
are supposed to pay for themselves by charging a modest fee to
insurers.
Figure 6-23 shows some of the organizations involved in a
healthcare exchange. Clearly, an interorganizational information
system is needed. As you know from this chapter, such projects
are difficult to develop and manage, and it is not surprising that
some states failed.
Access CT
Access CT is a quasi-public corporation. The chairman of the
board is Connecticut’s Lieutenant Governor, Nancy Wyman,
who set out in the summer of 2012 to find an appropriate CEO.
A nationwide search identified 74 candidates, and in July 2012,
the Connecticut governor hired Kevin Counihan.
Counihan had more than 30 years of experience working in
the insurance industry and had been a key player in the development of the Massachusetts healthcare system (widely regarded as
the model for Obamacare). Most recently, he had been the president of a private health exchange in California.16
Counihan holds a master’s degree in marketing, and it
shows. As soon as he was hired, he began a series of press conferences to explain the nature and goals of the project to the public. Within a few months, Counihan hired senior staff with deep
experience in insurance, including Jim Wadleigh, Chief Information Officer. Wadleigh had been director of application development for CIGNA, a health services organization.17 Wadleigh’s
primary assignment was to hire and manage an outside contractor to develop the exchange Web site and supporting backend code and to manage the implementation of the exchange
information system.
By June 2012, Access CT had created a project plan and
begun a search for the contractor to develop the site. By September 2012, it selected Deloitte Consulting LLP. At the time, Wadleigh stated, “With only 12 months until the Exchange goes live, we
look forward to beginning our work with them immediately.”18
That summer, in an interview on July 13, a local press
reporter asked CEO Counihan, “Can you get it done on time?”
His response: “This state’s going to get it done in time.”19
And it did. By the end of the federally mandated deadline,
Access CT had enrolled 208,301 Connecticut residents,20 and
Connecticut had become a model for state-run exchanges.
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297
Health
Health
Insurance
Health
Insurance
Company
Health
Insurance
Company
Insurance
Company
Company
State
Agency
State
Agency
State
Book
Store
Web Site
Agency
State
Agency
Back-End
Analysis
Processes
Individuals and
Small Businesses
FIGURE 6-23
Healthcare Exchange
Interorganizational IS
Cover Oregon
The outcome was not so positive in Oregon. After spending
nearly $250 million, the exchange was clearly inoperable, and
the exchange’s board of directors decided to stop development
and utilize the federal exchange instead.21 After this decision, the
Oregon legislature hired an independent company, First Data Corporation, to investigate the causes of this debacle.22
Unlike in Connecticut, neither Oregon’s governor nor any
other elected official was directly involved in the project. In fact,
in January 2014, the governor stated that he’d only become
aware of the failure in “late October.”23 The site was to have gone
operational on October 1, and it strains credulity to believe that it
took 3 weeks for the news of the failure to reach him. In any case,
it is safe to assume the governor was not a “hands-on manager”
of the project, nor did he delegate any senior elected official to
take that role.
According to First Data,24 from the onset, the project suffered from divided direction. Cover Oregon is a quasi-independent
corporation as is Access CT, but the exchange information system
was to be developed by a different governmental agency, Oregon
Health Authority (OHA). Personnel in the two agencies engaged
in turf battles and held deep differences about project requirements. These differences resulted in always-changing, inconsistent direction to software developers.25
Further, unlike Access CT, OHA did not hire a supervising
contractor for the project, but instead decided itself to take an
Federal
Agency
Federal
Agency
Federal
Agency
Federal
Agency
Federal
Agency
active role in the software’s development. Unfortunately, the
agency suffered high employee turnover and had difficulty hiring
and keeping qualified personnel. OHA did hire the services of a
professional software development company to create major software components. However, of the three finalists for this work,
two dropped out at the last minute, and the winner by default,
Oracle Corporation, became in essence a sole source vendor.
Consequently, Oracle was able to negotiate time and materials
contracts rather than contracts for specific deliverables at specific
prices. Later, when problems developed, Oracle was paid tens of
millions of additional money for change orders on that same time
and materials basis. OHA also attempted to do much of its own
programming, but the team had no experience with Oracle and
lacked both developers and managers.26
Ironically, because of prior problems with technology projects, the Oregon legislature required the state to hire a quality
assurance contractor, Maximus Corporation, to oversee the
project. From the project’s start, Maximus reported significant
problems involving divided control, lack of clear requirements,
inappropriate contracting methodology, lack of project planning,
and lack of progress. It is unclear to whom those reports were
delivered or what was done with them. In January 2013, when
the head of the OHA project received another negative report in
a long string of such negative reports, she threatened to withhold
Maximus’ payment.27
Alas, when, in January 2013, The Oregonian asked Rocky
King, the director of Cover Oregon, whether the system would
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CHAPTER 6 Processes, Organizations, and Information Systems
work, he responded, “I haven’t the foggiest idea.”28 Sadly, when
the fog cleared, the exchange failed. In March 2015, Cover Oregon was shuttered.
QUESTIONS
6-14. Healthcare exchanges must utilize personal and confidential data about their users. Write a one-paragraph
policy that stipulates responsible processing and storage of this data.
6-15. Explain what you believe are the reasons for the Access
6-11. Summarize the purpose and intended benefits of a
healthcare exchange.
CT success.
6-16. Read the Executive Summary of the First Data report
6-12. Explain why a healthcare exchange requires an interorganizational information system.
located at https://digital.osl.state.or.us/islandora/object/
osl:16687. Summarize the report’s findings.
6-13. Using knowledge from this chapter, summarize the
6-17. Using the facts described in this case and your answer
difficulties and challenges of developing interorganizational information systems.
to question 6-16, list five key learnings you can take
from the Access CT and Cover Oregon projects.
Complete the following writing exercises.
6-18. Using the patient discharge process in Q6-3, explain how the hospital ben-
efits from an ERP solution. Describe why integration of patient records has
advantages over separated databases. Explain the value of an industryspecific ERP solution to the hospital.
6-19. Go to www.microsoft.com and search for Microsoft Dynamics. Ignore
Dynamics CRM. Have any important changes occurred in Microsoft’s ERP
product offerings since this edition was written? Has Microsoft brought
a cloud-based ERP solution to market? Have any of the four ERP systems
described in the chapter been better integrated with Office or the Microsoft Developer’s platform? Using your knowledge guided by experience,
what do you think are Microsoft’s intentions with regard to ERP?
ENDNOTES
1. The subject of this chapter is structured processes, and we will discuss
process quality in terms of them. Note, however, that all of the
concepts in this question pertain equally well to dynamic processes.
2. Scott Neuman, “‘Flippy’ the Fast Food Robot (Sort Of) Mans
the Grill at Caliburger,” NPR, March 29, 2018, www
.npr.org/sections/thetwo-way/2018/03/05/590884388/
flippy-the-fast-food-robot-sort-of-mans-the-grill-at-caliburger.
3. Brian Heater, “Flippy, the Hamburger Cooking Robot,
Gets Its First Restaurant Gig,” TechCrunch, March
29, 2018, https://techcrunch.com/2017/09/19/
flippy-the-hamburger-cooking-robot-gets-its-first-restaurant-gig/.
4. Alana Semuels, “Robots Will Transform Fast Food,” The Atlantic, March 29,
2018, www.theatlantic.com/magazine/archive/2018/01/iron-chefs/546581/.
5. Panorama Consulting Solutions, “Clash of the Titans 2017,”Panoramaconsulting.com, November 2015, http://go.panorama-consulting.com/
rs/603-UJX-107/images/Clash-of-the-Titans-2017.pdf.
6. Paul Taylor, “Tipping Point for Cloud-ERP and Big Companies,” Forbes,
February 6, 2017, accessed June 12, 2018, www.forbes.com/sites/
sap/2017/02/06/tipping-point-for-cloud-erp-and-big-companies.
7. Panorama Consulting Solutions, “Only the Best Will Rise to the Top,”
Panorama-consulting.com, February 2016, http://go.panorama-consulting
.com/rs/603-UJX-107/images/Top-10-ERP-Systems-Report.pdf.
8. Brian Krebs, “Data Theft Common by Departing
Employees,”TheWashington Post, March 7, 2016, www
.washingtonpost.com/wp-dyn/content/article/2009/02/26/
AR2009022601821.html.
9. Devlin Barrett, “FBI Warns of Rise in Disgruntled
Employees Stealing Data,” TheWall Street
Journal, March 7, 2016, www.wsj.com/articles/
fbi-warns-of-rise-in-disgruntled-employees-stealing-data-1411516389.
10. Bill Barrett, “Inside the Mind of the White-Collar Criminal,”
Accounting Web, March 7, 2016, www.accountingweb.com/technology/
trends/inside-the-mind-of-the-white-collar-criminal.
11. Krebs, “Data Theft Common by Departing Employees.”
12. Ibid.
13. Stacy Collett, “5 Signs an Employee Plans to Leave with
Your Company’s Data,” CIO, March 7, 2016, www.cio.com/
article/2975774/data-protection/5-signs-an-employee-plans-to-leavewith-your-companysdata.html.
14. Andrea Walker, Meredith Cohn, and Erin Cox, “Md. Votes to Adopt
Health Exchange Software Used in Connecticut,” Baltimore Sun,
April 2, 2014, accessed June 11, 2018, http://articles.baltimoresun
.com/2014-04-02/health/bs-hs-exchange-board-vote-20140401_1_
isabel-fitzgerald-new-website-federal-exchange.
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
CHAPTER 6
15. Maeve Reston, “U.S. Prosecutors Investigate Oregon’s Failed
Health Insurance Exchange,” Los Angeles Times, May 21, 2014,
accessed June 11, 2018, www.latimes.com/nation/nationnow/la-na-usattorneys-officeprobes-oregons-health-insurance-exchange-20140521story.html.
16. Matthew Sturdevant, “CT Health Exchange Has a New Chief
Executive,” Hartford Courant, June 21, 2012, accessed June 11,
2018, http://articles.courant.com/2012-06-21/health/hc-healthexchangeceo-20120621_1_health-insurance-exchange-health-carevictoria-veltri
17. Healthcare IT Connect, “Jim Wadleigh,” accessed June 11, 2018, www
.healthcareitconnect.com/jim-wadleigh/.
18. Office of Lieutenant Governor Nancy Wyman, “Health Insurance
Exchange Hires Key Technical Consultant,” September 27,
2012, accessed June 11, 2018, http://ct.gov/hix/lib/hix/HIXDELOITTERELEASE.pdf.
19. Matthew Sturdevant, “Health Exchange Chief Explains How
It Will Work,” Hartford Courant, July 13,2012, accessed
June 11, 2018, www.courant.com/health/connecticut/
hc-healthexchange-20120712,0,4877364.story.
20. Arielle Levin Becker, “Obamacare Exchange’s Final Tally:
208,301 People Signed Up,” The CT Mirror, April 17, 2014,
accessed June 11, 2018, http://ctmirror.org/2014/04/17/
obamacare-exchanges-final-tally-208301-people-signed-up/.
Processes, Organizations, and Information Systems
299
21. Jeff Manning, “Cover Oregon: State Moves to Federal Exchange, but
Oracle Technology Lives On,” The Oregonian, May 6, 2014, accessed
June 11, 2018, www.oregonlive.com/health/index.ssf/2014/05/
cover_oregon_state_moves_to_fe.html.
22. “Cover Oregon Website Implementation Assessment,” April 23,
2014, accessed June 11, 2018, http://portlandtribune.com/documents/
artdocs/00003481205618.pdf.
23. Dusty Lane, “‘We Look Like Fools:’ A History of Cover Oregon’s
Failure,” Katu.com, January 10, 2014, accessed June 11,
2018, www.althycommunitiesoregon.com/lanecounty/2014/01/
we-look-like-fools-a-history-of-cover-oregons-failure/.
24. “Cover Oregon Website Implementation Assessment.”
25. Nick Budnick, “Cover Oregon: Health Exchange Failure Predicted,
but Tech Watchdogs’ Warnings Fell on Deaf Ears,” The Oregonian,
January18, 2014, accessed June 11, 2018, www.oregonlive.com/health/
index.ssf/2014/01/cover_oregon_health_exchange_f.html.
26. Nick Budnick, “Oregon Health Exchange Technology Troubles
Run Deep due to Mismanagement, Early Decisions,” The
Oregonian, December 14, 2013, accessed June 11, 2018, www
.oregonlive.com/health/index.ssf/2013/12/oregon_health_exchange_
technol.html.
27. Budnick, “Cover Oregon: Health Exchange Failure Predicted.”
28. Ibid.
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CHAP TER
7
Managing Knowledge and
Artificial Intelligence
LEARNING OBJECTIVES
CHAPTER CASES
After reading this chapter, you will be able to
answer the following questions:
Machine Learning Helps Akershus University
Hospital Make Better Treatment
Decisions
Sargent & Lundy Learns to Manage
Employee Knowledge
The Reality of Virtual Reality
Can Cars Drive Themselves—And Should
They?
7-1 What is the role of knowledge
management systems in business?
7-2 What are artificial intelligence (AI) and
machine learning? How do businesses
use AI?
7-3 What types of systems are used
for enterprise-wide knowledge
management, and how do they provide
value for businesses?
7-4 What are the major types of knowledge
work systems, and how do they provide
value for firms?
VIDEO CASES
How IBM’s Watson Became a Jeopardy
Champion
Alfresco: Open Source Document
Management and Collaboration
7-5 How will MIS help my career?
MyLab MIS
Discussion Questions: 7-5, 7-6, 7-7; Hands-on MIS Projects: 7-8, 7-9, 7-10, 7-11;
eText with Conceptual Animations
300
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Machine Learning Helps Akershus University
Hospital Make Better Treatment Decisions
T
he healthcare industry is deluged with big data, including patient histories, clinical records, charts, and test results. Medical information is now
doubling every 3 years and will be doubling every 73 days by 2020. How
can healthcare professionals keep up with the knowledge in their field, and
how can they use this knowledge to make more informed decisions about treatment options and managing healthcare costs when there is way too much data
for humans to easily analyze and absorb?
One of the many health care organizations struggling with this problem is
Akershus University Hospital (Ahus), a Norwegian public university hospital
serving approximately 500,000 inhabitants around Oslo, Norway, and employing 9,500 people. Ahus had amassed huge volumes of data on patients and treatments, but much of this information was in unstructured, textual reports that
made it extremely difficult and time-consuming
to extract meaningful information. Combing
through thousands of complex clinical documents was impossible to complete manually.
Working with Capgemini consultants, Ahus
is trying to solve this problem by using artificial intelligence technology in IBM Watson
Explorer. IBM Watson Explorer is a cognitive
computing platform that can analyze structured and unstructured data to uncover trends
and patterns that would be difficult, if not impossible, for humans to discern. It uses natural
language processing to search data expressed
in everyday language like ordinary speech
and machine learning algorithms to improve
search results. Natural language processing
technology makes it possible for a machine
to understand, analyze, and derive meaning from human language. Machine
learning software can identify patterns in very large databases without explicit programming, although with significant human training. IBM Watson
Explorer is able to rapidly mine large volumes of data, interpret speech and
text, pick up on nuances of meaning and context, answer questions, draw
conclusions, and learn from its experience. It can make inferences and correlations about the content it ingests and rank potential responses for a user
to select.
The hospital’s image diagnostic department wanted to improve the use of CT
examinations in emergencies. Ahus used IBM Watson Explorer to analyze when
its CT scans performed on pediatric patients in emergency situations fell within
recommended guidelines. CT scans can be life-saving in critical circumstances,
© Panchenko Vladimir/Shutterstock
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302 Chapter 7 Managing Knowledge and Artificial Intelligence
but the radiation can also be potentially harmful, so CT scans should not be
overused. A large amount of Ahus’s CT scan data was in text format. Ahus used
Watson Explorer to gather unstructured data from more than 5,000 anonymous
CT examination reports and apply machine learning and natural language processing techniques to learn how often CT scans were undertaken and the findings of those scans.
Ahus and Capgemini implemented the project over a period of seven weeks
during the summer of 2016. Watson had to learn the language used in medicine and understand the context of how that language is used. Capgemini
adapted the technology to the Norwegian language, and Ahus trained Watson
to understand medical words and phrases. The project also created a classification schema, teaching Watson to distinguish files that reported positive
scan results and those that reported negative results, and categorize the data
accordingly.
After several tests, Watson Explorer attained an accuracy level of 99 percent
for content classification. The final analysis confirmed that frequency of CT
scanning at Ahus was at an acceptable level, and that the hospital was striking
the right balance between the probability of positive gains in relation to the
potential harmful effects. It would have taken a team of people months and
perhaps years to analyze the same amount of data that Watson could process in
minutes.
Sources: IBM Corporation. “Akershus University Hospital,” and “IBM Watson Explorer,”
www.ibm.com, accessed May 17, 2018; and “Akershus University Hospital Optimizes the Use
of CT Examinations,” www.capgemini.com, accessed May 18, 2018.
A
kershus University Hospital’s use of artificial intelligence techniques
such as machine learning and natural language processing to determine
whether its CT scans fell within recommended guidelines shows how organizational performance can benefit by using technology to facilitate the acquisition
and application of knowledge. Facilitating access to knowledge, using knowledge tools to create and utilize new knowledge, and using that knowledge to
improve business processes are vital to success and survival for both private
business firms and public organizations.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Like other medical facilities, Akershus University
Hospital was what is termed “data rich but knowledge poor.” It had vast quantities of patient and treatment data, but they were largely unstructured and
very difficult to analyze for information and insights. AI techniques such
as machine learning and natural language processing helped Ahus obtain
new insights and knowledge from thousands of CT scan records so that it
could optimize treatments and ensure doctors and staff were following best
practices.
Here are some questions to think about: How did using IBM Watson Explorer
help Akershus University Hospital improve its knowledge? What was the impact on the hospital’s business processes?
IS 223 Introduction to Information Systems, Custom Edition for Boston University. Published by Pearson. Copyright © 2021 by Pearson Education, Inc.
Chapter 7 Managing Knowledge and Artificial Intelligence
Business
Challenges
• Monitor safety and
Management
costs
• Unstructured data
• Very large volume of data
• Opportunities from new technology
• Collect patient data
• Collect procedure
and test data
• Implement CT scan
Organization
Information
System
Business
Solutions
process
• Train Watson
Explorer
• IBM Watson Explorer
• Machine learning
• Natural language
processing
Technology
CT Scan Analysis System
• Optimize treatments
• Improve safety
• Mine large databases
• Categorize scan results
• Classify content
• Evaluate conformity with best
practices
7-1 What is the role of knowledge
management systems in business?
Knowledge management and collaboration systems are among the fastestgrowing areas of corporate and government software investment. The past
decade has shown an explosive growth in research on knowledge and knowledge management in the economics, management, and information systems
fields.
Knowledge management and collaboration are closely related. Knowledge
that cannot be communicated and shared with others is nearly useless.
Knowledge becomes useful and actionable when shared throughout the firm.
In this chapter, we will focus on knowledge management systems and be mindful that communicating and sharing knowledge are becoming increasingly
important.
We live in an information economy in which the major source of wealth
and prosperity is the production and distribution of information and
knowledge. At least 20 percent of the total economic output of the United
States, $4 trillion, derives from the output of the information and knowledge
sectors of the economy, which employs an estimated minimum of 30 million people (U.S. Department of Labor, 2017; Bureau of Economic Analysis,
2018).
Knowledge management has become an important theme at many large
business firms as managers realize that much of their firm’s value depends on
the firm’s ability to create and manage knowledge. Studies have found that a
substantial part of a firm’s stock market value is related to its intangible assets,
of which knowledge is one important component, along with brands, reputations, and unique business processes. Well-executed knowledge-based projects
have been known to produce extraordinary returns on investment, although
the impacts of knowledge-based investments are difficult to measure (Gu and
Lev, 2001).
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Important Dimensions of Knowledge
There is an important distinction between data, information, knowledge, and
wisdom. Chapter 1 defines data as flows of events or transactions captured by
an organization’s systems that are useful for transacting but little else. To turn
data into useful information, a firm must expend resources to organize data into
categories of understanding, such as monthly, daily, regional, or store-based
reports of total sales. To transform information into knowledge, a firm must
expend additional resources to discover patterns, rules, and contexts where the
knowledge works. Finally, wisdom is thought to be the collective and individual experience of applying knowledge to the solution of problems. Wisdom
involves where, when, and how to apply knowledge.
Knowledge is both an individual attribute and a collective attribute of the
firm. Knowledge is a cognitive, even a physiological, event that takes place inside people’s heads. It is also stored in libraries and records, shared in lectures,
and stored by firms in the form of business processes and employee know-how.
Knowledge residing in the minds of employees that has not been documented
is called tacit knowledge, whereas knowledge that has been documented is
called explicit knowledge. Knowledge can reside in email, voice mail, graphics, and unstructured documents as well as structured documents. Knowledge
is generally believed to have a location, either in the minds of humans or in
specific business processes. Knowledge is “sticky” and not universally applicable or easily moved. Finally, knowledge is thought to be situational and contextual. For example, you must know when to perform a procedure as well as
how to perform it. Table 7.1 reviews these dimensions of knowledge.
We can see that knowledge is a different kind of firm asset from, say, buildings and financial assets; that knowledge is a complex phenomenon; and that
there are many aspects to the process of managing knowledge. We can also
TABLE 7. 1 IMPORTANT DIMENSIONS OF KNOWLEDGE
KNOWLEDGE IS A FIRM ASSET
Knowledge is an intangible asset.
The transformation of data into useful information and knowledge requires organizational
resources.
Knowledge is not subject to the law of diminishing returns as are physical assets but instead
experiences network effects because its value increases as more people share it.
KNOWLEDGE HAS DIFFERENT FORMS
Knowledge can be either tacit or explicit (codified).
Knowledge involves know-how, craft, and skill.
Knowledge involves knowing how to follow procedures.
Knowledge involves knowing why, not simply when, things happen (causality).
KNOWLEDGE HAS A LOCATION
Knowledge is a cognitive event involving mental models and maps of individuals.
There is both a social and an individual basis of knowledge.
Knowledge is “sticky” (hard to move), situated (enmeshed in a firm’s culture), and contextual
(works only in certain situations).
KNOWLEDGE IS SITUATIONAL
Knowledge is conditional; knowing when to apply a procedure is just as important as knowing
the procedure (conditional).
Knowledge is related to context; you must know how to use a certain tool and under what
circumstances.
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Chapter 7 Managing Knowledge and Artificial Intelligence
recognize that knowledge-based core competencies of firms—the two or three
things that an organization does best—are key organizational assets. Knowing
how to do things effectively and efficiently in ways that other organizations
cannot duplicate is a primary source of profit and competitive advantage that
cannot be purchased easily by competitors in the marketplace.
For instance, having a unique build-to-order production system constitutes
a form of knowledge and perhaps a unique asset that other firms cannot copy
easily. With knowledge, firms become more efficient and effective in their use
of scarce resources. Without knowledge, firms become less efficient and less effective in their use of resources and ultimately fail.
Organizational Learning and Knowledge Management
Like humans, organizations create and gather knowledge using a variety of
organizational learning mechanisms. Through collection of data, careful measurement of planned activities, trial and error (experimentation), and feedback
from customers and the environment in general, organizations gain experience.
Organizations that learn adjust their behavior to reflect that learning by creating new business processes and by changing patterns of management decision
making. This process of change is called organizational learning. Arguably,
organizations that can sense and respond to their environments rapidly will
survive longer than organizations that have poor learning mechanisms.
The Knowledge Management Value Chain
Knowledge management refers to the set of business processes developed
in an organization to create, store, transfer, and apply knowledge. Knowledge
management increases the ability of the organization to learn from its environment and to incorporate knowledge into its business processes. Figure 7.1
illustrates the value-adding steps in the knowledge management value chain.
Each stage in the value chain adds value to raw data and information as they
are transformed into usable knowledge.
In Figure 7.1, information systems activities are separated from related management and organizational activities, with information systems activities on
the top of the graphic and organizational and management activities below.
One apt slogan of the knowledge management field is “Effective knowledge
management is 80 percent managerial and organizational and 20 percent
technological.”
In Chapter 1, we define organizational and management capital as the set of
business processes, culture, and behavior required to obtain value from investments in information systems. In the case of knowledge management, as with
other information systems investments, supportive values, structures, and behavior patterns must be built to maximize the return on investment in knowledge management projects. In Figure 7.1, the management and organizational
activities in the lower half of the diagram represent the investment in organizational capital required to obtain substantial returns on the information technology (IT) investments and systems shown in the top half of the diagram.
Knowledge Acquisition
Organizations acquire knowledge in a number of ways, depending on the type
of knowledge they seek. The first knowledge management systems sought
to build corporate repositories of documents, reports, presentations, and best
practices. These efforts have been extended to include unstructured documents
(such as email). In other cases, organizations acquire knowledge by developing
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FIGURE 7. 1
THE KNOWLEDGE MANAGEMENT VALUE CHAIN
Knowledge management today involves both information systems activities and a host of enabling
management and organizational activities.
Knowledge Business Value Chain
Knowledge Management Systems
Data and
Information
Acquisition
Collecting
Storing
Disseminating
Information System
Acquire
Store
Business analytics
Content management
Data mining
systems
Neural networks
Knowledge databases
Machine learning
Expert systems
Knowledge workstations
Expert knowledge
networks
Feedback
Knowledge culture
Communities of
practice
Social networks
Activities
Disseminate
Portals
Search engines
Collaboration and
social business tools
Apply
Decision support
systems
Enterprise
applications
Robotics
Management and Organizational Activities
Organizational routines
Organizational culture
Training
Collaboration
New IT-based business
processes
New products and
services
New markets
online expert networks so that employees can “find the expert” in the company
who is personally knowledgeable.
In still other cases, firms must acquire new knowledge by discovering patterns in corporate data via machine learning (including neural networks, genenetic algorithms, natural language processing, and other AI techniques), or by
using knowledge workstations where engineers can discover new knowledge.
These various efforts are described throughout this chapter. A coherent and organized knowledge system also requires business analytics using data from the
firm’s transaction processing systems that track sales, payments, inventory,
customers, and other vital areas as well as data from external sources such as
news feeds, industry reports, legal opinions, scientific research, and government statistics.
Knowledge Storage
Once they are discovered, documents, patterns, and expert rules must be stored
so they can be retrieved and used by employees. Knowledge storage generally involves the creation of a database. Document management systems that
digitize, index, and tag documents according to a coherent framework are large
databases adept at storing collections of documents. Expert systems also help
corporations preserve the knowledge that is acquired by incorporating that
knowledge into organizational processes and culture. Each of these is discussed
later in this chapter and in the following chapter.
Management must support the development of planned knowledge storage
systems, encourage the development of corporate-wide schemas for indexing
documents, and reward employees for taking the time to update and store documents properly. For instance, it would reward the sales force for submitting
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Chapter 7 Managing Knowledge and Artificial Intelligence
names of prospects to a shared corporate database of prospects where all sales
personnel can identify each prospect and review the stored knowledge.
Knowledge Dissemination
Portals, email, instant messaging, wikis, social business tools, and search engine technology have added to an existing array of collaboration tools for
sharing calendars, documents, data, and graphics. Contemporary technology
has created a deluge of information and knowledge. How can managers and
employees discover, in a sea of information and knowledge, that which is really important for their decisions and their work? Here, training programs,
informal networks, and shared management experience communicated
through a supportive culture help managers focus their attention on what is
important.
Knowledge Application
Regardless of what type of knowledge management system is involved,
knowledge that is not shared and applied to the practical problems facing
firms and managers does not add business value. To provide a return on
investment, organizational knowledge must become a systematic part of
management decision making and become situated in systems for decision
support. Ultimately, new knowledge must be built into a firm’s business
processes and key application systems, including enterprise applications for
managing crucial internal business processes and relationships with customers and suppliers. Management supports this process by creating—based on
new knowledge—new business practices, new products and services, and new
markets for the firm.
Building Organizational and Management Capital:
Collaboration, Communities of Practice, and Office
Environments
In addition to the activities we have just described, managers can help by
developing new organizational roles and responsibilities for the acquisition of
knowledge, including the creation of chief knowledge officer executive positions, dedicated staff positions (knowledge managers), and communities of
practice. Communities of practice (COPs) are informal social networks
of professionals and employees within and outside the firm who have similar work-related activities and interests. The activities of these communities
include self-education and group education, conferences, online newsletters, and day-to-day sharing of experiences and techniques to solve specific
work problems. Many organizations, such as IBM, the U.S. Federal Highway
Administration, and the World Bank, have encouraged the development of
thousands of online communities of practice. These communities of practice depend greatly on software environments that enable collaboration and
communication.
COPs can make it easier for people to reuse knowledge by pointing community members to useful documents, creating document repositories, and
filtering information for newcomers. COPs’ members act as facilitators, encouraging contributions and discussion. COPs can also reduce the learning
curve for new employees by providing contacts with subject matter experts
and access to a community’s established methods and tools. Finally, COPs
can act as a spawning ground for new ideas, techniques, and decision-making
behavior.
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FIGURE 7. 2
MAJOR TYPES OF KNOWLEDGE MANAGEMENT SYSTEMS
There are three major categories of knowledge management systems, and each can be broken down further into
more specialized types of knowledge management systems.
Enterprise-Wide
Knowledge Management
Systems
General-purpose, integrated,
firmwide efforts to collect, store,
disseminate, and use digital
content and knowledge
Enterprise content management systems
Collaboration and social tools
Learning management systems
Knowledge Work Systems
“Intelligent” Techniques
Specialized workstations and
systems that enable scientists,
engineers, and other knowledge
workers to create and discover
new knowledge
Tools for discovering patterns
and applying knowledge to
discrete decisions and knowledge
domains
Computer-aided design (CAD)
Virtual reality
Data mining
Neural networks
Expert systems
Machine learning
Natural language processing
Computer vision systems
Robotics
Genetic algorithms
Intelligent agents
Types of Knowledge Management Systems
There are essentially three major types of knowledge management systems:
enterprise-wide knowledge management systems, knowledge work systems,
and “intelligent” techniques. Figure 7.2 shows the knowledge management systems applications for each of these major categories.
Enterprise-wide knowledge management systems are general-purpose
firmwide efforts to collect, store, distribute, and apply digital content and
knowledge. These systems include capabilities for searching for information,
storing both structured and unstructured data, and locating employee expertise within the firm. They also include supporting technologies such as portals,
search engines, collaboration and social business tools, and learning management systems.
The development of powerful networked workstations and software for assisting engineers and scientists in the discovery of new knowledge has led to the
creation of knowledge work systems such as computer-aided design (CAD), visualization, simulation, and virtual reality systems. Knowledge work systems
(KWS) are specialized systems built for engineers, scientists, and other knowledge workers charged with discovering and creating new knowledge for a company. We discuss knowledge work applications in detail in Section 7-4.
Knowledge management also includes a diverse group of “intelligent”
techniques, such as data mining, expert systems, machine learning, neural networks, natural language processing, computer vision systems, robotics, genetic
algorithms, and intelligent agents. These techniques have different objectives,
from a focus on discovering knowledge (data mining and neural networks) to distilling knowledge in the form of rules for a computer program (expert systems)
to discovering optimal solutions for problems (genetic algorithms). Section 7-2
provides more detail about these “intelligent” techniques.
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Chapter 7 Managing Knowledge and Artificial Intelligence
7-2 What are artificial intelligence (AI) and machine
learning? How do businesses use AI?
“Intelligent” techniques are often described as artificial intelligence (AI).
There are many definitions of artificial intelligence. In the most ambitious vision, AI involves the attempt to build computer systems that think and act like
humans. Humans see, hear, and communicate with natural languages, make
decisions, plan for the future, achieve goals, perceive patterns in their environments, and learn, among many other capabilities. Humans also love, hate, and
choose what objectives they want to pursue. These are the foundations of what
is called “human intelligence” and what is called “common sense” or generalized intelligence.
So far the “Grand Vision” of AI remains a distant dream: there are no computer programs that have demonstrated generalized human intelligence or
common sense. Human intelligence is vastly more complex than the most sophisticated computer programs and covers a broader range of activities than is
currently possible with “intelligent” computer systems and devices.
A narrow definition of artificial intelligence is far more realistic and useful.
Stripped of all the hyperbole, artificial intelligence programs are like all computer programs: They take data input from the environment, process that data,
and produce outputs. AI programs differ from traditional software programs in
the techniques and technologies they use to input and process data. AI systems
today can perform many tasks that would be impossible for humans to accomplish, and can equal or come close to humans in tasks such as interpreting CT
scans, recognizing faces and voices, playing games like chess or Go, or besting
human experts in certain well-defined tasks. In many industries they are transforming how business is done, where people are employed, and how they do
their jobs.
Evolution of AI
In the last decade, significant progress has been made within this limited vision
of AI. The major forces driving the rapid evolution of AI are the development
of Big Data databases generated by the Internet, e-commerce, the Internet of
Things, and social media. Secondary drivers include the drastic reduction in
the cost of computer processing and the growth in the power of processors. And
finally, the growth of AI has relied on the refinement of algorithms by tens of
thousands of AI software engineers and university AI research centers, along
with significant investment from business and governments. There have been
few fundamental conceptual breakthroughs in AI in this period, or in understanding how humans think. Many of the algorithms and statistical techniques
were developed decades earlier but could not be implemented and refined on
such a large scale as is currently possible.
Progress has been significant: Image recognition programs have gone from
25 percent error rates down to less than 3 percent in 2018; natural language
speech recognition errors have dropped from 15 percent to 6 percent; and in
translation among common languages, Google’s Translate program achieves
about 85 percent accuracy compared to humans (Technology Quarterly, 2017;
Hirschberg and Manning, 2016). These advances have made possible personal
assistants like Siri (Apple), Alexa (Amazon), Cortana (Microsoft), and Now
(Google), as well as speech-activated systems in automobiles.
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In a famous 1950 paper, computer scientist Alan Turing defined an artificially intelligent computer program as one that a human could have a conversation with and not be able to tell it was a computer (Turing, 1950). We still
cannot have a genuine conversation with a computer AI system because it has
no genuine understanding of the world, no common sense, and does not truly
understand humans. Nevertheless, AI systems can be enormously helpful to
humans and business firms.
Major Types of AI
Artificial intelligence is a family of programming techniques and technologies,
each of which has advantages in select applications. Table 7.2 describes the
major types of AI: expert systems, machine learning, neural networks, deep
learning, genetic algorithms, natural language processing, computer vision systems, robotics, and intelligent agents. Let’s take a look at each type of AI and
understand how it is used by businesses and other organizations.
Expert Systems
Expert systems were developed in the 1970s and were the first large-scale
applications of AI in business and other organizations. They account for an estimated 20 percent of all AI systems today. Expert systems capture the knowledge of individual experts in an organization through in-depth interviews, and
represent that knowledge as sets of rules. These rules are then converted into
computer code in the form of IF-THEN rules. Such programs are often used to
develop apps that walk users through a process of decision making.
Expert systems provide benefits such as improved decisions, reduced errors, reduced costs, reduced training time, and better quality and service. They
have been used in applications for making decisions about granting credit and
for diagnosing equipment problems, as well as in medical diagnostics, legal
research, civil engineering, building maintenance, drawing up building plans,
and educational technology (personalized learning and responsive testing)
TABLE 7. 2 MAJOR TYPES OF AI TECHNIQUES
Expert systems
Represent the knowledge of experts as a set of rules that can be
programmed so that a computer can assist human decision makers.
Machine learning
Software that can identify patterns in very large databases without explicit
programming although with significant human training.
Neural networks and deep learning
Loosely based on human neurons, algorithms that can be trained to classify
objects into known categories based on data inputs. Deep learning uses
multiple layers of neural networks to reveal the underlying patterns in data,
and in some limited cases identify patterns without human training.
Genetic algorithms
Algorithms based loosely on evolutionary natural selection and mutation,
commonly used to generate high-quality solutions to optimization and
search problems.
Natural language processing
Algorithms that make it possible for a computer to understand and analyze
natural human language.
Computer vision systems
Systems that can view and extract information from real-world images.
Robotics
Use of machines that can substitute for human movements as well as
computer systems for their control and information processing.
Intelligent agents
Software agents that use built-in or learned knowledge to perform specific
tasks or services for an individual.
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Chapter 7 Managing Knowledge and Artificial Intelligence
FIGURE 7. 3
RULES IN AN EXPERT SYSTEM
An expert system contains a number of rules to be followed. The rules are
interconnected, the number of outcomes is known in advance and is limited, there
are multiple paths to the same outcome, and the system can consider multiple rules
at a single time. The rules illustrated are for simple credit-granting expert systems.
A --> B
If INC > 50,000
Ask about car
payments
Else EXIT
B --> C
If car payment < 10% of income
Ask about mortgage payment
Else EXIT
C --> D
If mortgage payment < 20% of
income
Grant credit
Else EXIT
D
Grant credit line
D --> E
If D, ask about
years employed
E --> F
If years > = 4
Grant 10,000 line
Else do G
F
Limit 10,000
G --> H
If years < 4
Ask about
other debt
H --> F
If other debt < 5% of income
Do F
Else do I
I
Limit 3,000
(Maor, 2003; Mishra, 2016). For instance, if you were the project manager of a
14-story office building and were given the task of configuring the building’s air
conditioning system, which has hundreds of parts and subassemblies, an expert
system could walk you through the process by asking a series of questions,
producing an order to suppliers, and providing an overall cost estimate for the
project, all in a matter of hours rather than weeks. See Figure 7.3 for an expert
system for credit granting.
How Expert Systems Work
Expert systems model human knowledge as a set of rules that collectively are
called the knowledge base. Expert systems can have from a handful to many
thousands of rules, depending on the complexity of the decision-making problem. The strategy used to search through the collection of rules and formulate
conclusions is called the inference engine. The inference engine works by
searching through the rules and firing those rules that are triggered by facts the
user gathers and enters.
Expert systems have a number of limitations, the most important of which
is that even experts can’t explain how they make decisions: they know more
than they can say. People drive cars, for instance, but are challenged to say
how they do it. The knowledge base can become chaotic as the number of
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rules can reach into the thousands. In rapidly changing environments, say
medical diagnosis, the rules change and need to be continually updated.
Expert systems are not useful for dealing with unstructured problems that
managers and employees typically encounter, and do not use real-time data
to guide their decisions. Expert systems do not scale well to the kinds of very
large data sets produced by the Internet and the Internet of Things (IoT), and
they are expensive to build. For these reasons, expert system development
has slowed in the last decade to small domains of expert knowledge such as
automobile diagnosis.
Machine Learning
More than 75 percent of AI development today involves some kind of machine
learning (ML) accomplished by neural networks, genetic algorithms, and
deep learning networks, with the main focus on finding patterns in data, and
classifying data inputs into known (and unknown) outputs. Machine learning
is based on an entirely different AI paradigm than expert systems. In machine
learning there are no experts, and there is no effort to write computer code for
rules reflecting an expert’s understanding. Instead, ML begins with very large
data sets with tens to hundreds of millions of data points and automatically
finds patterns and relationships by analyzing a large set of examples and making a statistical inference. Table 7.3 provides some examples of how leading
business firms are using various types of machine learning.
Facebook has over 200 million monthly users in the United States who spend
an average of 35 minutes on site daily. The firm displays an estimated 1 billion ads monthly to this audience, and it decides which ads to show each person in less than one second. For each person, Facebook bases this decision on
the prior behavior of its users, including information shared (posts, comments,
Likes), the activity of their social network friends, background information
supplied to Facebook (age, gender, location, devices used), information supplied by advertisers (email address, prior purchases), and user activity on apps
and other websites that Facebook can track. Facebook uses ML to identify patterns in the dataset, and to estimate the probability that any specific user will
click on a particular ad based on the patterns of behavior they have identified.
TABLE 7. 3 EXAMPLES OF MACHINE LEARNING
WellsFargo
Aiera system reads and analyzes a half-million documents daily for 1,600
stocks, and produces buy and sell calls for 550 stocks followed by their
wealth management unit.
Allstate Insurance
Amelia system uses deep learning and natural language processing to
assist call center employees in handling customer queries. Trained on 40
insurance topics, it understands context, and learns from experience.
Netflix
Recommender system based on video similarity algorithm uses statistical
and machine learning to develop a personalized selection of videos for
each of its 125 million subscribers worldwide.
Amazon
Alexa uses machine learning and speech recognition for its intelligent
voice-controlled personal assistant.
Schindler Group
Monitors over one million elevators and walkways using GE’s Predix
operating system and machine learning to make predictions about
needed maintenance.
PayPal
Uses machine learning algorithms to identify patterns of fraud for
170 million customers who generate four billion transactions annually.
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Chapter 7 Managing Knowledge and Artificial Intelligence
Analysts estimate that Facebook uses at least 100,000 servers located in several
very large-scale “hyper datacenters” to perform this task. At the end of this process is a simple show ad/no show ad result.
The current response rate (click rate) to Facebook ads is about 0.1 percent,
roughly four times that of an untargeted display ad although not as good as
targeted email campaigns (about 3 percent), or Google Search ads (about 2
percent). All of the very large Internet consumer firms, including Amazon,
Alphabet’s Google, Microsoft, Alibaba, Tencent, Netflix, and Baidu, use similar
ML algorithms. Obviously, no human or group