C HAPTER 1 Accounting Information Systems: An Overview © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 85 INTRODUCTION • Questions to be addressed in this chapter include: – What is the meaning of system, data, and information? – What is an accounting information system (AIS)? – Why is the AIS an important topic to study? – What is the role of the AIS in the value chain? – How does the AIS provide information for decision making? – What are the basic strategies and strategic positions an organization can pursue? © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 2 of 85 SYSTEMS, DATA, AND INFORMATION • A system is: – A set of interrelated components – That interact – To achieve a goal © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 3 of 85 SYSTEMS, DATA, AND INFORMATION • Most systems are composed of smaller subsystems . . . • . . . and vice versa! © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 4 of 85 SYSTEMS, DATA, AND INFORMATION • Every organization has goals. – The subsystems should be designed to maximize achievement of the organization’s goals. – Even to the detriment of the subsystem itself. – EXAMPLE: The production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 5 of 85 SYSTEMS, DATA, AND INFORMATION • The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting, and processing). • Data are facts that are collected, recorded, stored, and processed by an information system. • Organizations collect data about: – Events that occur – Resources that are affected by those events – Agents who participate in the events © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 6 of 85 SYSTEMS, DATA, AND INFORMATION • Information is different from data. • Information is data that have been organized and processed to provide meaning to a user. • Usually, more information and better information translates into better decisions. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 7 of 85 SYSTEMS, DATA, AND INFORMATION • However, when you get more information than you can effectively assimilate, you suffer from information overload. – Example: Final exams week! • When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 8 of 85 SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Benefits of information may include: • Reduction of uncertainty • Improved decisions • Improved ability to plan and schedule activities © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 9 of 85 SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Costs may include time and resources spent: • Collecting data • Processing data • Storing data • Distributing information to users © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 10 of 85 SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Costs and benefits of information are often difficult to quantify, but you need to try when you’re making decisions about whether to provide information. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 11 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance It reduces uncertainty by helping you predict what will happen or confirm what already has happened. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 12 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability It’s dependable, i.e., free from error or bias and faithfully portrays events and activities. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 13 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness It doesn’t leave out anything that’s important. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 14 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness You get it in time to make your decision. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 15 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability It’s presented in a manner you can comprehend and use. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 16 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness A consensus notion—the nature of the – Timeliness information is such that different people would tend to produce the same result. – Understandability – Verifiability © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 17 of 85 SYSTEMS, DATA, AND INFORMATION • Characteristics that make information useful: – Relevance – Reliability – Completeness – Timeliness – Understandability You can get to it when you need it and in a format you can use. – Verifiability – Accessibility © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 18 of 85 SYSTEMS, DATA, AND INFORMATION • Information is provided to both: – External users – Internal users © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 19 of 85 SYSTEMS, DATA, AND INFORMATION • Information is provided to both: – External users – Internal users © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 20 of 85 SYSTEMS, DATA, AND INFORMATION • External users primarily use information that is either: – MANDATORY INFORMATION—required by a governmental entity, such as Form 10-K required by the SEC; or – ESSENTIAL INFORMATION—required to conduct business with external parties, such as purchase orders. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 21 of 85 SYSTEMS, DATA, AND INFORMATION • In providing mandatory or essential information, the focus should be on: – Minimizing costs. – Meeting regulatory requirements. – Meeting minimum standards of reliability and usefulness. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 22 of 85 SYSTEMS, DATA, AND INFORMATION • Information is provided to both: – External users – Internal users © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 23 of 85 SYSTEMS, DATA, AND INFORMATION • Internal users primarily use discretionary information. • The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the information has positive value. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 24 of 85 WHAT IS AN AIS? • An AIS is a system that collects, records, stores, and processes data to produce information for decision makers. • It can: – Use advanced technology; or – Be a simple paper-and-pencil system; or – Be something in between. • Technology is simply a tool to create, maintain, or improve a system. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 25 of 85 WHAT IS AN AIS? • The functions of an AIS are to: – Collect and store data about events, resources, and agents. – Transform that data into information that management can use to make decisions about events, resources, and agents. – Provide adequate controls to ensure that the entity’s resources (including data) are: • Available when needed • Accurate and reliable © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 26 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • Accounting is an information-providing activity, so accountants need to understand: – How the system that provides that information is designed, implemented, and used. – How financial information is reported. – How information is used to make decisions. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 27 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • Other accounting courses focus on how the information is provided and used. • An AIS course places greater emphasis on: – How the data is collected and transformed. – How the availability, reliability, and accuracy of the data is ensured. • AIS courses are not number-crunching courses. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 28 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • Auditors need to evaluate the accuracy and reliability of information produced by the AIS. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 29 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 30 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • In private industry and not-for-profit, systems work is considered the most important activity performed by accountants. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 31 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 32 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Other careers requiring AIS knowledge: • • • • • • • • • • IT Consultant Implementation Team Member Business Analyst Budget Analyst Financial Analyst Systems Analyst Controller Accounting Clerk CFO Others? © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 33 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • AIS topics are tested on the new CPA exam. • Makes up about 25% of the Business Environment & Concepts section of the CPA exam. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 34 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? • It’s fundamental to accounting. • The skills are critical to career success. • The AIS course complements other systems courses. • AIS topics are tested on the new CPA exam. • AIS topics impact corporate strategy and culture. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 35 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture AIS design is affected by information technology, the organization’s strategy, and the organization’s culture. © 2008 Prentice Hall Business Publishing Strategy AIS Information Technology Accounting Information Systems, 11/e Romney/Steinbart 36 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy. © 2008 Prentice Hall Business Publishing Strategy AIS Information Technology Accounting Information Systems, 11/e Romney/Steinbart 37 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Occupational Culture Although culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information. © 2008 Prentice Hall Business Publishing Strategy AIS Information Technology Accounting Information Systems, 11/e Romney/Steinbart 38 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • The objective of most organizations is to provide value to their customers. • What does it mean to deliver value? • Let’s peek in on a conversation at Joe’s pharmacy . . . © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 39 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 40 of 85 ROLE OF THE AIS IN THE VALUE CHAIN That’s true, but we’re comfortable with that because of the valueadded that we bring to this arrangement. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 41 of 85 ROLE OF THE AIS IN THE VALUE CHAIN What is that “value-added,” and how do you convert it into dollars? © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 42 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Blah—blah—blah– customer service– blah—blah—blah © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 43 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Although “adding value” is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts. • It may mean: – – – – Making it faster Making it more reliable Providing better service or advice Providing something in limited supply (like O-negative blood or rare gems) – Providing enhanced features – Customizing it © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 44 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: – Primary activities – Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 45 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: – Primary activities – Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 46 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics Receiving, storing, and distributing the materials that are inputs to the organization’s product or service. For a pharmaceutical company, this activity might involve handling incoming chemicals and elements that will be used to make their drugs. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 47 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations Transforming those inputs into products or services. For the pharmaceutical company, this step involves combining the raw chemicals and elements with the work of people and equipment to produce the finished drug product that will be sold to customers. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 48 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 49 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Primary activities include: – Inbound logistics – Operations – Outbound logistics – Marketing and sales © 2008 Prentice Hall Business Publishing Helping customers to buy the organization’s products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders. Accounting Information Systems, 11/e Romney/Steinbart 50 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Post-sale support provided to • Primary activities include: customers such as repair and – Inbound logistics maintenance function. – Operations A pharmaceutical firm will – Outbound logistics typically not be repairing it’s – Marketing andproduct sales (though the product may be periodically reformulated). – Service The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 51 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Value is provided by performing a series of activities referred to as the value chain. These include: – Primary activities – Support activities • These activities are sometimes referred to as “line” and “staff” activities respectively. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 52 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure Accountants, lawyers, and administration. Includes the company’s accounting information system. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 53 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 54 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Support activities include: – Firm infrastructure – Human resources – Technology Activities to improve the products or services (e.g., R&D, Web site development). For the pharmaceutical company, these activities would include research and development to create new drugs and modify existing ones. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 55 of 85 ROLE OF THE AIS IN THE VALUE CHAIN the resources (e.g., • Support activitiesBuying include: materials, inventory, fixed – Firm infrastructure assets) needed to carry out the – Human resources entity’s primary activities. – Technology – Purchasing © 2008 Prentice Hall Business Publishing In the pharmaceutical company, the purchasing folks are trying to get the best combination of cost and quality in buying chemicals, supplies, and other assets the company needs to run its operations. Accounting Information Systems, 11/e Romney/Steinbart 56 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • Information technology can significantly impact the efficiency and effectiveness • Good AIS value chain: • UPS spends over $1 activities billion a year on with which the preceding are information systems resulting in greater carried out. customer control over delivery, higher driver productivity, and lower • An organization’s value chain cancosts. be • Bad AIS value chain: connected with the value chains of its – Limited Brands tangled integration of over 60 incompatible information resulted in customers, suppliers, and systems distributors. 400 trailers trying to jam into a 150 trailer lot. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 57 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service © 2008 Prentice Hall Business Publishing For example, the inbound logistics of Pharmaceuticals, Inc., links to the outbound logistics of its suppliers. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Accounting Information Systems, 11/e Romney/Steinbart 58 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service © 2008 Prentice Hall Business Publishing And the outbound logistics of Pharmaceuticals, Inc., links to the inbound logistics of its customers. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Accounting Information Systems, 11/e Romney/Steinbart 59 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service © 2008 Prentice Hall Business Publishing The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Accounting Information Systems, 11/e Romney/Steinbart 60 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain. © 2008 Prentice Hall Business Publishing The linking of these separate value chains creates a larger system known as a supply chain. Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Accounting Information Systems, 11/e Romney/Steinbart 61 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions • Repetitive and routine. • Can be delegated to lower-level employees. • EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean driving history. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 62 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions – Semistructured decisions • Incomplete rules. • Require subjective assessments. • EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 63 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • There is variation in the degree of structure used to make decisions: – Structured decisions – Semistructured decisions – Structured decisions • Non-recurring and non-routine. • Require a great deal of subjective assessment. • EXAMPLE: Deciding whether to begin selling a new type of insurance policy. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 64 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions • Relate to performance of specific tasks • Often of a day-to-day nature. • EXAMPLE: Deciding whether to order inventory. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 65 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions – Management control decisions • Relate to utilizing resources to accomplish organizational objectives. • EXAMPLE: Budgeting. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 66 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • There is also variation in the scope of a decision’s effect: – Occupational control decisions – Management control decisions – Strategic planning decisions • The “what do we want to be when we grow up” types of questions. • Involves establishing: – Organizational objectives – Policies to achieve those objectives • EXAMPLE: Deciding whether to diversify the company into other product lines. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 67 of 85 ROLE OF THE AIS IN THE VALUE CHAIN • In general, the higher a manager is in the organization, the more likely he/she is to be engaging in: – Less structured decisions – Broader scope (i.e., strategic planning) decisions © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 68 of 85 THE AIS AND CORPORATE STRATEGY • Corporations have: – Unlimited opportunities to invest in technology. – Limited resources to invest in technology. • Consequently, they must identify the improvements likely to yield the highest return. • This decision requires an understanding of the entity’s overall business strategy. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 69 of 85 THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 70 of 85 THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 71 of 85 THE AIS AND CORPORATE STRATEGY • A product-differentiation strategy involves setting your product apart from those of your competitors, i.e., building a “better” mousetrap by offering one that’s faster, has enhanced features, etc. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 72 of 85 THE AIS AND CORPORATE STRATEGY • Michael Porter suggests that there are two basic business strategies companies can follow: – Product-differentiation strategy – Low-cost strategy © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 73 of 85 THE AIS AND CORPORATE STRATEGY • A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 74 of 85 THE AIS AND CORPORATE STRATEGY • Sometimes a company can do both, but they normally have to choose. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 75 of 85 THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position • Offer a subset of the industry’s products or services. • EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, propertycasualty, etc. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 76 of 85 THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position – Needs-based strategic position • Serve most or all of the needs of a particular group of customers in a target market. • EXAMPLE: The original Farm Bureau-based insurance companies provided a portfolio of insurance and financial services tailored to the specific needs of farmers. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 77 of 85 THE AIS AND CORPORATE STRATEGY • Porter also argues that companies • Serve a subset of customers who differmust from choose position among three othersainstrategic terms of factors such as geographic location or size. choices: • EXAMPLE: Satellite Internet services are – Variety-based strategic position intended primarily for customers in rural areas – Needs-based strategic position who cannot get DSL or cable services. – Access-based strategic position © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 78 of 85 THE AIS AND CORPORATE STRATEGY • Porter also argues that companies must choose a strategic position among three choices: – Variety-based strategic position – Needs-based strategic position – Access-based strategic position • These strategic positions are not mutually exclusive and can overlap. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 79 of 85 THE AIS AND CORPORATE STRATEGY • Choosing a strategic position is important because it helps a company focus its efforts as opposed to trying to be everything to everybody. – EXAMPLE: A radio station that tries to play all types of music will probably fail. • It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 80 of 85 THE AIS AND CORPORATE STRATEGY • The growth of the Internet has profoundly affected the way value chain activities are performed: – Inbound and outbound logistics can be streamlined for products that can be digitized, like books and music. – The Internet allows companies to cut costs, which impacts strategy and strategic position. – Because the Internet is available to everyone, intense price competition can result. The outcome may be that many companies shift from low-cost to productdifferentiation strategies. – The Internet may impede access-based strategic positions. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 81 of 85 THE AIS AND CORPORATE STRATEGY • The AIS should help a company adopt and • Predictive data analysis (data maintain its strategic adds position. warehousing/mining) to competitive advantage by data forecasting future events – Requires that be collected about based each on historical trends. activity. • EXAMPLE: You can view forecasts of airfares – Requires the collection and integration of trends both between major airports based on historical financial and nonfinancial data. at www.farecast.com. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 82 of 85 THE AIS AND CORPORATE STRATEGY • The authors believe: – Accounting and information systems should be closely integrated. – The AIS should be the primary information system to provide users with information they need to perform their jobs. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 83 of 85 SUMMARY • What we’ve learned so far: – – – – – – The meaning of system, data, and information. What an AIS is. Why it’s an important topic to study. What its role is in the value chain. How it provides information for decision making. What are the basic strategies and strategic positions an organization can pursue. • How these interact with the AIS. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 84 of 85