E Commerce Is Org Bible (2009v2)

Singapore Institute of Management
University of London
London School of Economics & Political Science
Information Systems & Organization

(2790136)
“ISORG Bible”
examination questions w. solution guide
2009/10
The questions in this guide are derived from several sources: LSE SG samples, tutorials, past year exams
and questions generated by the author, co-lecturer Chan Veng Seng and their students.
This guide hopes to serve as a good reference. However, it should not be taken as the only source in
preparing for the ISORG examination.
This guide is privilege access to registered SIM students only.
(Apologies for some duplication of materials, if any. Indeed, material is far from perfect.)
isorgbible_ver5; copyrights reserved. For reprints, kindly seek permission from author: jackkoh20@gmail.com
Advices
1. Stay with the Question! For example, don’t write about data model when the Q
asks you to compare only TCM and DMM. You risk exposing yourself to
unnecessary errors or half-truth. And, if you try to explain further on data model,
you risk writing “out of context”. However, in the conclusion, it is ok to give a
mention on “out of context” elements … as you can demonstrate your wider
perspective and broader knowledge of related issues as a form on closing (BUT not
Be aware in the body) of the essay. Determine the number of parts in the Q. Plan and
that the use
of too
estimate the value % to each part before you start writing.
many 2. In the conclusion, make sure it is “conclusion”. Do not try to introduce new points
acronyms that are meant for the essay body and which you have inadvertently missed out in
may the earlier paragraphs. You’ll be accused of trying to rush, being disorganized, and
irritate the trying to show off all you know without any proper structures. It is better to arrow
examiners.
So, on the
them into the appropriate paragraphs of the essay body or index with guide e.g. see
safe side, “*”; see “**”, etc.
write in 3. Beating around the bush in your introduction gives a bad impression and an
full or use indication you are trying to buy time. An introduction is like a first impression
acronyms (which tends to be lasting). A good introduction provides a big picture of what to
minimally.
expect in the essay-body, somewhat like a concise content-page of a book. Use the
keywords/phrases found in the Q. Introductions should normally be short. Avoid
words like “e.g., etc, for example, i.e. such as, like . . .” and diagrams, examples
and details should be elaborated in the essay-body.
4. Keep all paragraphs should be short for effective read and not dull the examiners.
Bad layout can irk him and affects your marks. As a guide, try to keep to 4 or 5
statements or less per paragraph. Read any newspapers or online news to
understand what I meant.
Topics of high importance and likely targets in the May/June 2009/10 Examination
In this “bible, please understand well the first few questions and solutions in
each section. They represent he latest updates done to the “Bible”.
Please make you own extensions, arguments, views and/or reviews to the solutions here.
1. e-Commerce strategy, market & business process reengineering

2. Organization analysis and Information system designs theory
3. Data model
4. Decision making model
5. Transaction costs model
6. Information systems strategy & strategic information systems (competitive
advantage)
7. Operating systems, and connectivity
8. Information systems development: Make or buy
9. Professional roles & their impact on information strategies
Sit for the Prelim Test!!! It is the best preparation for the examination
isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from jackkoh20@gmail.com 1
Keywords and key topics
(Following is a review of keywords and the key topics “you should know” before
you walk into the ISORG examination room)
Why ICT?
The significance and role of technology in the economy and in society has become
extremely important over the last decade. People, organizations and governments
enthusiastically embrace all that technology has to offer, while others are more cautious or
even resistant. With the benefit of an historical perspective, and building on our
experience of earlier and highly significant constellations of technologies, people often
suggest that a small number of key technologies (e.g. the Internet, mobile
communications, e-Commerce) are shaping and changing our society and our lives. The
role of information and communication technologies in shaping human activity in our
private and professional lives has become more and more prominent.
Hence it is with concern how these information and communication technologies (ICT),
shedding light on how they are understood, designed, applied and used within
organizational settings, in particular in business organizations. The main focus is on how
we understand the potential of ICT to support organizational activities and hence how we
design these technologies to achieve these goals. It is important to understand how
different models used to analyze organizational activities affect the shape of ICT. Here we
argue that ICT designed to support organizational activities are differently shaped as a
consequence of the three analytical models (Data, transaction and decision making
models) we have used to analyze the organization.
Theories of information systems

Socio- The study of information systems is normally premised on the assumption that information
technical= systems are socio-technical systems that encompass both technical and social variables.
cognitive, Information systems are sets of interrelated components that collect, retrieve, process,
behavioral store and distribute information to support decision-making, co-ordination, control,
and
technical
analysis and organizational planning.
perspectives.
Although information systems are socio-technical systems, and should be designed with
an appropriate design model that covers all these aspects, sadly though, there is no such
model. Broadly speaking though, there are three different paradigms on information
systems, namely the technical, the cognitive and the behavioral perspectives.
Technical (computer science, OR, mgt science) – Data Model

Cognitive (psychology + sociology) – Decision making model
Behavioral (economics + sociology of group/ individual/ organizational behaviors) –
Transaction costs model
The technical perspective emphasizes mathematically based models to study information

systems, as well as the physical technology and formal capabilities of these systems. It
draws on management science, operation research and computer science.
The cognitive perspective draws on socio-psychological theories to study how decision-

makers perceive and use information.
Finally, the behavioral perspective draws on economics and sociology to study the
economics and behavioral issues that arise in the development and long-term maintenance
of information systems.
The three different perspectives of information system are addressed respectively by the
data, decision-making and transaction-cost models.
The Data Model

According to the data model, the design of an information system should be undertaken
mainly to capture the data and improve its flow-paths in the organization.
The systems analyst should only consider the data flows, documents, files and processes in
the organization, by examining all reports, files and other information sources used by
managers. By so doing, the analyst should obtain a stream of raw facts that needs to be
computerised and stored into a database in a form that people can understand and use.
Thus, designing an information system means designing and implementing functional
requirements and specifications that will lead to new ways to capture, produce,
exchange, and process data which are faster, more reliable and secure than previous
practices.
The analyst should look at the organization as a data flow machine and design the
tabula rasa information system so as to improve data flow paths with the ability of the organization to
raison d’etre
produce, exchange, manage and analyze data. Simple examples are the UOL examiner
lunch story, the SIM course evaluation story, SIM attendance clocking system, inventory
system, and ERP application.
The main weakness of data model is that it under-estimates the importance of the socio-
behavorial elements that define the characteristics of the organization and of the people
working there, hence the HDB upgrading story, Subprime mortgage story and the Judge
story.
The Decision-making model (readings: Laudon’s Chapters 1, 2, 3, 12 and 13)

The decision-making model attempts to ascertain the way information systems can support
individual and collective decision-making which comprises of 4 stages: intelligence
gathering, design, choice, and implementation.
The model examines how the organization can be conceptualized as a decision-making

system that scans the environment with the purpose of evaluating alternative solutions to a
specific problem.
In making decisions, decision makers, at some point in time, may be exposed or “wear”
(not intentionally) different decision “hats” models such as the rational model, bounded
rationality, muddling through, satisficing, and psychological. Decision makers are not
bounded by any specific cognitive decision model/s although we can say that the higher up
the hierarchy, the more active the decision makers the higher the exposure to more than
one decision models.
The lower hierarchical decision makers, bounded by standard operating procedures

(SOPs), standard guidelines and structured problems have less reason for bounded
rationality, and muddling through. After all, at this low level, decision-making falls into
the PK/SK quadrant (problem known/solution known).
Bounded rationality. March and Simon (1958) have proposed an insightful adjustment to
the rational model described above. Rather than optimizing, which presumes searching for
all the alternative courses of actions, the actor can satisfice; that is, choose a course of
action which is based on a sub-set of all the alternative courses of action. Actors who
satisfice are also said to be “muddling through” because they make successive limited
comparisons between alternative courses of action, thus incrementally building their
decision-making process (extract SG/pg 59).
This cognitive model is based on the assumption that people have bounded rationality
because they stick with tried-and-tested rules and procedures since they are not able to
take into account all the possible courses of action. Thus, bounded rationality refers to the
cognitive limitations that people face in terms of knowledge and cognitive capacity
because they can only choose a sub-set of all the alternative courses of action and
undertake a satisfying course of action. Generally, we can say that decision process is also
influenced by the nature of the organization that the decision-makers belong to.
The most influential parts of the model are based on the idea that decisions, irrespective of
the various decision models deployed, can be broadly categorized into three types of
programmed or structured decisions, semi-structured, and non-programmed or
unstructured ones.
Information systems can be conceived in line with the decision-making. It should show
how it support and harness effective decision-making. Managers use information systems
in order to reduce the uncertainty associated with decision-making. This is more so the
case with higher managers where they face unstructured, complex tasks and environments.
An organization is generally made up of three different broad layers of managers. They

have different responsibilities and made different type of decisions to support their
respective area of responsibilities. Their decision types can be classified into three
categories of structured, semi-structured and unstructured. This made for clear distinction
of mapping the correct types of information systems to its decision-making requirements.
The diagram below shows that information systems are categorized generally into three
levels to meet the information needs at the strategic, management & control, and
operational levels. This categorization aligns neatly with the decision-making model of
three types: unstructured, semi-structured and structured decision-making.
The information system types can be divided into three mainstream systems. They are:
• unstructured: executive support system (ESS). Information design to support for
unbounded rationality, exposure to “muddling through”, “satisficing” and
psychological intuitive decision models.
• semi-structured: Management information system (MIS). Support for
“optimizing” decision making. Some exposure to bounded rationality.
• structured: transaction processing system (TPS). Support “optimizing” decision
making. Achieving “rational decision” is probably highest at this level.
Unstructured Strategic: ESS/DSS
decisions
Mgt & Control:

DSS, MIS
Structured/programmable Operations:
decisions TPS
The transaction-cost model

The transaction-cost model views the organization as a contractual arrangement and
obligations to govern a set of transactions. Various types of cost are incurred in an
exchange, particularly in an imperfect market. A transaction involves the transfer of
property rights: use, alter, income, and transfer of ownership (UAIT).
Compared with the other models, the transaction-cost approach to information systems
acknowledges that individuals might distort the use of information to achieve their
individual goals. Thus, the transaction-cost approach takes into account the possibility that
individuals might act opportunistically to maximise their objectives so as to distort,
misrepresent or manipulate information to their own advantage.
Hence, in general, information systems will be more complicated in organizations where

the level of trust is low (i.e. market form of organizing) because opportunistic
information processing may occur.
Based on these insights, the model identifies the different information processing costs
that individuals face, namely search costs, contracting costs, regulation/control costs and
maintenance costs (SCRM).
In the transaction-cost model, we may conceive of information technology as a mediating

technology because it mediates the transactions or exchanges between the parties.
Information technology can reduce the costs of transacting (i.e. the information costs)
because it allows for more information to be communicated in the same amount of time.
Information technology can also contribute to better linkage between buyer and seller, as
well as more efficient and effective contracting processes between the parties through
brokerage effects.
In the transaction-cost model, information technology is further seen as increasing the

functioning of the market, leading to market-like forms of organization. The argument
is that the lower the transaction costs, the more suitable the market as a form of
organising. In other words, traditionally, markets, as opposed to hierarchies (i.e.
bureaucracies), entail transaction costs. On the other hand, bureaucracies replace
transactions with hierarchical decision-making entailing a higher amount of
managerial/supervisory costs (also known as agency cost) rather than transaction costs.
It has generally by seen that the more one uses information technology, the lower the
transaction costs and, therefore, the more efficient the market as an allocation mechanism.
However, the capital and acquisition costs of computers and its implementation (i.e.
processing and co-ordination cost) must be carefully evaluated to ensure they do not
outweigh the benefits of information technology.
Besides bounded rationality and opportunism, other factors like uncertainty, frequency,
asset specificity, small numbers (BOUFAS) will affect transaction costs in varying
degrees and efficiency of the market mechanism. Information technology and systems can
mediate in different ways with respects to the elements in SCRM and the effects of
BOUFAS.
Information Systems Strategy

An Information Systems Strategy may be viewed as a plan for the identification of ICT
information systems solutions towards some future vision of organization that meet the
overall business strategy. This means an information systems strategy does not just
contain strategic information systems but includes plan of all other necessary support-
level information systems and ICT infrastructure. There is no single all encompassing
strategy within the organization, but instead there are a number of systems that operate at
different levels of strategy. They are firm, the business and the industry level strategy.
At firm level, the organization strategies at maximizing its resources and processes –
synergizing all it functional units (departments or business units). At business level, the
organization strategies at value maximizing processes with its partners, suppliers,
customers and associates (upstream and downstream processes). At industry level, the
organization looks at strategies to compete or combine with competitors to leverage
competitive advantages against other industry competitors.
An information systems strategy also importantly must entail the identification of strategic
information systems and their strategic implications which provide the catalyst in strategic
transitions of the firm - demanding changes in the technical and social elements of the
organization. Thus, you may view strategic transitions as movements from one level of
socio-technical systems to another, since the adoption of the information systems strategy
requires changes that go well beyond the technical infrastructure to encompass improved
ways of conducting internal and external operations, new business goals, relationships
with customers, suppliers, business associates and even competitors.
What is strategic implication?

Strategic implication has got to do with a crucial target action, and what likely
consequences that may result from achieving that action. Going forward, the crucial action
could drastically change the way the organization or individual perform its work, compete
and plan (so as to maintain the advantage gained).
Strategic implications, when realized, lead to the achievement of the competitive

advantages. Hence, identifying strategic implications is a necessary action of all
businesses and the supporting information systems to achieve those implications.
Let us examine the strategic implications of some case studies. This exercise is ‘thinking
over an issue as deeply as possible’.
Firm: American Airlines.

a) Key business: Passenger Airlines – integrated global services
b) Strategic information system (SIS): Real-time Air-ticketing system (also linked to
partners: hotels, car rental firms)
c) Goal of SIS: Global coordination of seat-reservations. Optimal utilization of seating
capacity of all passenger planes.
d) Strategic implications of SIS: Service differentiation, Build technological barrier.
e) Competitive Advantage: Strengthen Customer loyalty, Increased market share, Lock-
out competitors (with mileage points)
Firm: Flextronics.
a) Key business: Electronics contract manufacturing on global basis
b) Strategic information system (SIS): Global SCM, Global ERP, Collaborative design
system
c) Goal of SIS: Logistics linkage with industry supply chains on a global basis. Integration
of business processes with customers and suppliers (extranets)
d) Strategic implications of SIS: Service and product differentiations – faster time to
market (integrated all processes from raw material to production to marketplace. Better
manufacturing processes, better product designs, build technological barrier.
e) Competitive Advantage: Lock-in customers, Lock-in suppliers, low price, increased
market share
E-commerce: a transaction-cost analysis

E-commerce is the process of buying and selling (include marketing and distribution) of
goods, services and information electronically over networking technologies, including the
Internet. These technologies increase the availability and total amount of information.
The upshot is market uncertainty and complexity are reduced (as market is interested
only in product price and product specifications), reduction in transaction costs, bounded
rationality, opportunism, and information asymmetry. E-commerce enables the exploit of
low frequency which otherwise would be too expensive in market places.
E-Commerce is fuelling the growth of electronic marketplaces by replacing manual and

paper-based procedures with electronic alternatives which foster information flows in new
and dynamic ways that link and form partnerships between suppliers, buyers and sellers –
thus, enabling a dynamic change from “flow of places” to “flow of spaces”.
e-Commerce facilitates market processes to open thorough the year round, shrink distance
and time, promote disintermediation, reduce “time to market” of products and services,
process complexity, extended channels and marketplace. In a traditional “bricks &
mortar” operation, handling market transactions is often time-consuming, complex, and
expensive. Processes are costly, difficult to control and re-engineer, as they are dictated by
market forces that outside the control of the organization.
e-Commerce makes market transactions more efficient than firm transactions –

purchasers have more choices and yet able to obtain equally good or better price and
quantity discount with low frequency (which traditionally is only possible with high
frequency and “hierarchies” form of organizing) – as seen in the examples of AsiaRooms,
Zuji, Ctrip, AsiaTravels, Flextronics, and Baxter Healthcare. eCommerce can be
conceptualized as market process re-engineering, a process aimed at decoupling product
flows (as in “hierarchy” form of organizing) with market transactions through online
trading. E-Commerce partners can concentrate on their core competencies, thus reducing
the overall cost of transaction.
The growth of e-commerce (and now extended to m-commerce) is probably unstoppable.

The high visibility of market processes (MPR) demands that proactive organizations
review their ecommerce strategy in order to stay relevant and competitive. Hence, the six
building blocks of e-commerce strategy, namely network communication technologies, e-
commerce platform, e-business models, e-commerce payment system, website design
considerations, problems/pitfall and success factors, would likely be on the talk of many
company executives.
BPR Vs MPR
Both deals in streamlining, improving, changing, removing business processes such as to
improve the competitiveness of the firm
Business process re-engineering = internal processes

Market process re-engineering = outside/ external processes.
BPR and value chain analysis are technique and strategies to reengineer internal
processes across the whole enterprise. E-Commerce, e-business, SCM and other
enterprise applications uses IT and network technologies to reengineer and streamline
market (outside) processes, which traditionally are difficult to control and cost
ineffective (and only possible through internalization, and “hierarchy’ form of
organizing).
B2B is more complicated than B2C, C2C?

Many B2B has provisions for database linkup to each other business partner’s enterprise
information systems. One could argue that here is a higher element of trust and contractual
obligations.
As B2B requires their business partners in “communicating” their database and application
systems, efficient network systems (e.g. intranet, extranet or private networks),
telecommunication, database systems, security, data protection and business enterprise
privacy are priorities. This has business impact on the organizational structure and the IT
strategies of partners in business partnerships.
Flextronics and Baxter Healthcare are such examples. Part of their application software
must be able to “talk” to one another automatically and update each other databases
instantaneously through efficient electronic networks. Both Zuji.com and AsiaRooms,com
(although a front-end B2C setup) has a back-end B2B business partnership with their
banks and/or hotels partners. Similarly arguments go for NETS and SAP. Electronic
network linkages with the business databases and applications are crucial and supported
by good network infrastructure.
What about Ali Baba - another B2B site? Is Ali Baba complex structure?
Not so. In this case, Ali Baba keeps a database of all interested business enquiries. This
database is opened to all its registered business suppliers who make offers and deals
through Ali Baba.
Outsourcing as a System Development strategy
Outsourcing is based on the similar concept of “sub-contracting”, specialization and
division of labor.
Today, there are many qualified outsourcing service providers with expert knowledge in
all aspects of specialized works, including information system development and operations.
Outsourcers have proven knowledge, wealth of experience, international connection and
networks, high reliability, and strong development skills. NCS, EDS, and Accenture are
examples of such international IT outsourcing provider companies.
Organizations have began to ask “why should we be involved in such non-core IT

development when it is actually more costly and time-consuming than to outsource them?”
Because of a combination of IT technological advances, availability of expertise and

cheaper labour in 3rd world countries, it is now attractive for companies to outsource their
non-core business activities. We see this in a lower cost operations call-centre servicing
Complexity, even local and global enquiries can be located in any part of the world. Application
core development can be carried out quickly and cheaply by IT experts in another country.
competency, Benefits: reduce bounded rationality, uncertainty, complexity, avoid low asset specificity
flexibility (machine & skills), build core competencies, low upfront ‘sunk” cost.
(speed),
lower cost ? Limitations: opportunism may increase, insecurity, loss of technical skill, and dependence
on external partners. Of course, outsourcing can be deployed in any aspect of the business,
such as electronic production and assembly activities.
Why Operating System?

An operating system is a suite of software that resides in a computer RAM memory at all
times. The operating system is a type of system software. It can be liken to a firm’s
managing director (MD) and its board of directors (BOD). An OS (like the MD & BOD)
control, manage and allocate the resources and operations of a computer (firm), and its
linkages (relationships) to the outside world.
An OS suite of programs can be categorized into seven managerial software. They are
memory manager, secondary storage manager, I/O, user-interface, processor, etc .
Without them, the computer would be also impossible to use and at it’s best can only
manage one task or process at a time. The all importance aspect of multi-tasking and
resource sharing would not have been possible without an OS. The O/S facilitates
multitasking, multiprogramming, multiprocessing, networking, data management, security
and control. The user-interface manager reduces learning curve of users and increases
productivity of IT developers. The Network manager provides the connectivity to the
outside world and sharing of resources.
The relationship between BS, ISS and ISP (Flextronics as the example)
Objectives Take Flextronics, as the example
BS: Identify medium & BS: Global contract manufacturing with

BP BS
long term business service/product differentiation. ICT as
directions and goals at enterprise bridge + barrier to
firm, business, industry competitors.
levels
ITS ISS
ISS: Identify new IS, ISS: Build global enterprise information
ICT, SIS to support BS system to support diverse global
business. Build global network +
knowledge sharing.
Plan the new information ISP: Global ERP (FLS), Global SCM
ISP
systems, strategic (BLS), Collaborative systems for
information systems, designers (ILS) as their SIS (strategic
Planned
budget, schedule information systems)
organizational
change thru:
BPR FLS =firm level strategy
BLS = Business level
TQM ILS = industry level
EA
CSF
Devt Analyse, design, Fully working and networked ERP,

of the construct, implement the SCM, collaborative system for designers
new new information systems
IS (IS)
System Devt
Strategies thru:
SDLC
Outsourcing
Application
Packages
End-User
Computing
Prototyping
The next section examines the past examination questions, and simulated questions posted
by the author and students. These questions are categorized into following subsections.
Take the effort to understand at least the first 3 questions in each section.
Sections:
A. e-Commerce strategy, market & business process reengineering
B. Organization analysis and Information system designs theory
C. Data model
D. Decision making model
E. Transaction costs model
F. Information systems strategy & strategic information systems
G. Operating systems, and connectivity
H. Information Systems Development –Make or buy
I. (not use)
J. Professional roles & their impact on information strategies
A. ELECTRONIC COMMERCE STRATEGY
Question A1
What is e-commerce?
Discuss, with examples, the advantages, potentials, and limits of using e-commerce
strategies. [SG]
Solution guide (note that the Q has 4 parts):
E-commerce is the process of buying and selling (including marketing, negotiation, and
distribution) of goods, services and information electronically over network
communication technologies, including the Internet. These technologies increase the
availability and total amount of information. e-Commerce aims to make market
transactions as efficient or more efficient than firm transactions.
E-Commerce is fuelling the growth of electronic marketplaces by replacing manual and

paper-based procedures with electronic alternatives which foster information flows in new
and dynamic ways that link and form partnerships between suppliers, buyers and sellers –
thus, enabling a dynamic change from “flow of places” to “flow of spaces”.
How does e-Commerce makes market transactions as efficient or more efficient than
firm? e-Commerce facilitates market processes to open thorough the year round, shrink
distance and time, promote disintermediation, reduce “time to market” of products and
services, reduce process complexity, extended channels and marketplace.
Buyers have more choices and yet able to obtain equally good or better price and quantity
discount with low frequency (which traditionally is only possible with high frequency and
internalization through “hierarchy” form of organizing) – as seen in the examples of
AsiaRooms, Zuji, Ctrip, AsiaTravel, Flextronics, and Baxter Healthcare.
We can conceptualize the implementation of e-commerce as market process re-

engineering, a process aimed at decoupling product flows from market transactions
through online trading. In Flextronics, their customers (e.g. Ericsson, Cisco) decouple
their firm’s production and supply chain activities to Flextronics to concentrate on their
core skills in product design and marketing activities.
Be aware
that the use
of too
Baxter Healthcare provides an inventory-less infrastructure for 80% of the USA hospitals,
many allowing their hospital clients to concentrate on their core competencies of providing
acronyms quality medical aids. Asiarooms (and other similar sites like Expedia, Octopus,
may AsiaTravel, Zuji) provides professional online global search, secured contracting and
irritate the regulation services for the best hotel room rates at a minimal transaction brokering cost for
examiners.
So, on the
its clients.
safe side,
write in E-Commerce applications, SCM, IT and network technologies re-engineer, streamline
full or use and coordinate market (external) processes, which traditionally are difficult to control
acronyms and cost ineffective (and only possible through internalization, and “hierarchy’ form
minimally.
of organizing).
Other key ingredients of e-Commerce strategy include the suitability of product and
services, the nature of e-business models, choice of e-commerce payments, understanding
the target market, and design considerations.
The choice of suitable products and services is crucial to ensure an effective e-commerce
offensive. AsiaRooms.com specializes in providing worldwide transaction brokering
services in the booking of hotel rooms, Amazon.com in virtual shop-front selling books,
magazine and digital content, while ebay specializes on online auction or eMarketplace.
Not all products and services are suitable for e-Commerce, especially when it involves the
sense of taste or smell. Marketing food and spectacles over e-Commerce have lesser
economics appeal than digital products and on-line services.
Determining an appropriate strategy and e-business model platform for the products and
services is important. Not just any e-business model can be successful. Dell uses the B2C
virtual storefront model, eBay uses the C2C virtual online auction model, SAP.com uses
the B2B virtual storefront model, Asiarooms uses the B2C transaction broker model and
Google uses the B2C information portal model. The selection of a B2B, B2C or C2C
model is the result of identifying the final target audience.
An e-Commerce website often involved monetary transactions. An appropriate e-

commerce payment system is important to accompany the selected business model. A
local online brokerage house called iOCBC used the Electronic Billing Presentment &
Payment (like GIRO, in Singapore), digital cheque and the traditional “bricks & mortar”
cheque as their alternative payment system, Finatiq.com (a online financial advisor firm)
adopted the Stored Value Payment, while Asiarooms.com adopted the Credit Card system.
A major concern of e-commerce and consumers is to make digital payment secured, safe,
trustworthy and private.
Many e-Commerce users have only general IT knowledge, so the website designers must
ensure a design of high ease of use, friendly yet personal, attractive, organized,
informative, high availability, and a reasonable upload speed.
Examiner
A key spin-off of e-Commerce strategies lie in the fact that market transaction has become
expresses a more efficient than firm transactions! This creates a host of e-Commerce advantages.
need to
discuss As we have seen, e-Commerce has great potentials in reducing various stages of
advantages, transaction costs: search, contract, regulation and maintenance cost.
potentials,
limits in the
light of B2B, e-Commerce facilitates market processes to open thorough the year round, shrink distance
B2C, C2C and time, provide extended channels. The upshot in e-commerce is reduction in market
models too. uncertainty and complexity, reduction in transaction costs, bounded rationality, and
information asymmetry. E-commerce enables the exploit of low frequency which otherwise
would be too expensive to conduct businesses in market places.
In a traditional “bricks & mortar” transaction, the stages of search, contracting, regulation
and control, and maintenance are often shrouded with bounded rationality, uncertainty and
opportunism. They are time-consuming, complex, and expensive. Traditionally, external
market processes are costly, difficult to control and re-engineer, as they are dictated by
market forces that outside the control of the organization. This increases bounded
rationality, and opportunism promoted by information asymmetry between buyers and
sellers (besides market uncertainty, asset specificity, small numbers and frequency). All
these factors increase the overall transaction costs.
However, with the introduction of e-commerce, new IT advances and electronic

communication networks, the market processes are suddenly becoming more manageable
and streamlined. e-Commerce facilitates electronic automation of many of the market
processes, simplified complex tasks, and remove unnecessary intermediaries. New business
model provides for new way of doing business and new e-Commerce payment systems
increasing the convenience of e-commerce. This has resulted in reduction of transaction
costs and agency cost, at the same time, reducing delivery time of goods, services
and information.
Electronics networks and Internet remove the barriers associated with time and distance.
The promise of e-commerce is that transaction costs can be constrained to its minimum for
each type of transaction.
There is an abundance of easily accessible information reservoirs and information is

available at the finger time. This greatly improved information quality, as seen in the
diagram, and led to the reduction of market uncertainty.
The higher the uncertainty the impact of increasing
cost, particularly in search, contract and maintenance Info Quality
costs.
Just-in-time (JIT) information reduces information

asymmetry between buyers and sellers. Having piles
of preprinted information pages are things of the past, Uncertainty
although the excesses of worldwide information may
sometime leads to an information overload.
Dis-intermediation removes intermediate layers of transactions and streamline processes.

This provides for direct communication between trading partners facilitating faster market
transactions, decision-making and lowering overall cost.
E-Commerce rides on global computer networks. Today, such networks deploy

compatible, universal and easy-to-use set of technologies (e.g. web-based email, video
conferencing, tele-conferencing, file transfer, HTML, XML documents) and technology
standards (TCP/IP, HTTP) that can be easily adopted by any organization with disparate
systems. This implies the world is the stage for all kinds of business – large and small
alike are given the same opportunities of access and extended distribution channels.
With Internet, E-Commerce cater for a round-the-clock service. Business does not have to
sleep. The availability is 24/7 – 24hours, 7 days a week.
E-commerce supports advanced design and manufacturing concepts like zero-inventory,

and concurrent engineering. Concurrent engineering is a systematic approach to the
simultaneous, integrated design of products and their related processes, such as
manufacturing, testing and supporting. They are all oriented to co-ordination and
integration of various aspects of the production and distribution processes. It facilitates
new kind of on-demand marketing concepts throughout a wide range of production
services. This can be seen with Flextronics collaborative commerce network with Nokia,
Dell computers and Ericsson. Toyota and its key suppliers is another example.
E-Commerce generates transaction information immediately in the form that permits

subsequent processing. The transactions can be quickly uploaded to enterprise
applications for sophisticated processing and distribution. The data can be used to support
information system that is designed to increase the responsiveness, flexibility, efficiency
and accountability of business process.
The new kind of business models with E-Commerce provides opportunities for new
market relationships to evolve in the electronic marketplace. This has resulted in many
highly visible new markets for new products and services. These are created around
changing patterns of work & leisure - allowing consumers to access such services as
banking, insurance, and travel reservations directly from their homes and businesses, both
in and out of normal business hours.
E-Commerce has great potentials.
Riding on the popularity and power of Internet, the strong potentials of E-Commerce lies
in the media, entertainment and communication sector. E-Ccommerce can be increasing
developed as the interactive tool to develop world-wide audience. Interactive vLogging
and entertainment like YouTube.com, iTunes, and communication blogs like blogspot.com
are runaway successes within 3 years of their introductions and reaching critical mass
population around the world.
Internet TV has great potentials of reaching every household replacing the conventional
TV services. IP / Internet phones like Skype, are threatening normal landmine telephony
system. Skype allows users to make “telephone” digital calls from their computer to other
Skype users free of charge, or to landlines and cell phones for a fee. Additional features
include instant messaging, file transfer, short message service, video conferencing and its
ability to circumvent firewalls.
Education and Training is another fast growing important area where EC can build up the
infrastructure of skills upon which new educational electronic services can be developed.
In news reporting, EC has the potential of changing the way news are reported with better
speed and better accuracy. STOMP, LiveLeak, NowPublic, and TVblog are examples
where the future news will come not from the paid reporters but from the very people who
read the news. These people are ever so willing to immediately capture the latest events
occurring around them on video clips and 3G them over to the newspaper companies.
The significance and growth potential of E-Commerce is linked to the broader

socialization and opening up of the electronic networking environment. A phenomenon
that looks certain to proliferate the current atmosphere. The true market mass is yet to
come.
The view of major firms across the world is that the changes in access media would have
to be customer driven.
Customers will gravitate to the medium that is easiest, quickest, cost effective, and most
convenient to use. Customers prefer to stay with that medium until it is obvious to them
that a different medium is superior. For now, it is the Internet and e-Commerce is the
medium.
e-Commerce has great potentials in many areas of industries in making market

transactions as efficient or more efficient than firm.
Limitations. As in any technology, there are also limitations in using E-Commerce

strategies.
The creation of new customer database is multiplying and increasing at very fast pace
New security, privacy and legal issues will arise. For this purpose, business & government
co-operation and support is essential to work and produce new security solutions.
E-Commerce is not always suitable for all kinds of products and services. Some products
that involve taste and smell may not be suitable. For examples, selling cakes and
cantonese dishes over a virtual storefront would likely to be inappropriate and raise
transaction costs.
E-Commerce provides a global stage not just for business minded people but also a world
stage for cheats. It is borderless. Transacting parties are often faceless to one another. No
specific country laws can underscore a transaction done over international boundaries. It is
actually very difficult to identify fly-by-night operator. The company called SG-gadgets
(ST 20/10/06) “pulled off” $10 million from his customers across the United States,
Europe and Australia. EC actually augment asymmetry! EC removes the need of human
interaction, and as such, promotes faceless transaction partners – as we have witnessed in
the ebay transactions (the African story, where seller/buyer who are continent apart,
promote a situation of information asymmetry and cheating over one another) – an
unhealthy business environment and breeding ground for the undesirables and increased
costs of transacting.
E-Commerce business models largely operate out of websites. The website must be
constantly updated. The tedious effort of providing new information, new skin and look is
necessary. It is a limitation in itself and there is no fast easy turnaround to this activity.
Certainly, increasing the IT coordination cost.
Information societies have becoming increasing reliance on E-Commerce. A prolong

major electronic telecommunication network failure can trigger devastating, crippling
effects on organization and economies on a global basis.
In conclusion, E-Commerce is not merely for automation but also for creating new
business opportunities. The world has become smaller. Globalization and breaking down
of trade barriers becoming reality. It is now a standard business tool, moving beyond cost
saving and strategic objectives altogether. E-Commerce is now popular not just as B2C
models but also B2B and C2C, and beware, the playground for universal cheats and digital
criminals too!
Question A2
Discuss what an electronic market is and critically discuss whether it can reduce
transaction costs. [2007 ZA Exam]
and other similar type Qs:
Q. Discuss why electronic commerce can reduce transaction costs. Provide examples to
justify your answers. [2007 Prelim]
Q. Discuss what B2B marketplaces are and critically discuss whether they can reduce
transaction costs.[2007 ZB exam]
Q. Explain how the transaction costs model applies to the design of information systems.
Explain how e-Commerce helps in reducing such transaction costs (also classified as D6)
Solution guide:
Electronic market refers basically to commerce over electronic communication means,

Examiner
expresses a often called e-Commerce. Often, we see an e-Commerce site as a B2B, B2C or C2C.
need to
discuss E-Commerce is the process of buying and selling (including marketing, negotiation and
ecommerce distribution) of goods, services and information electronically over networking
in the light technologies, including the Internet. E-commerce facilitates market processes to open
of B2B, B2C, thorough the year round, shrink distance and time, and provides extended channels. E-
C2C models commerce increases the transaction availability, total amount of information, reduces
too. information asymmetry between transaction partners, reduces market uncertainty, and
reduces transaction complexity. E-commerce enables the exploit of low frequency which
otherwise would be too expensive to conduct businesses in market places.
E-commerce streamlines market processes, making market transactions as efficient or

more efficient than firm’s. Buyers have more choices and yet able to obtain equally good
or better price and quantity discount with low frequency which traditionally is only
possible with high frequency and internalization through “hierarchy” form of organizing
(i.e. firm).
E-commerce offers a myriad of new business models opening up opportunities for new
businesses and new ways of delivering product and services. While e-commerce lowers
costs in various stages of transacting (search, contract, regulation and maintenance), it also
provides ample opportunities to re-examine factors of cost (such as bounded rationality,
frequency, opportunism, uncertainty, asset specificity, and small number).
E-commerce comes in various forms of new business models, namely transaction broker
(e.g. TDS brokering house), information broker (e.g. Hardwarezone IT products), virtual
storefront (e.g. Amazon), online auction marketplace (e.g. ebay) and many others.
Often, an enterprise would have to ensure the suitability of the product or services for
ecommerce, together with an appropriate e-commerce payment system such a digital
wallet, credit card payment, stored value payments and electronic billing.
Can electronic market or e-Commerce reduce transaction costs?
A transaction involves costs and uses resources. A transaction goes through a cycle of
search, contract, regulation, and maintenance (SCRM) – and often may be seen as the
various costs incurred during the stages of a transaction. However, there are several key
factors in an imperfect market that impact and affect SCRM in varying ways. These
factors are bounded rationality, opportunism, uncertainty, frequency, asset specificity,
small numbers (as proposed by Williamson and A.Cordella).
In a traditional “bricks & mortar” transaction, the actors in the stages of transacting are
often shrouded with bounded rationality and opportunism. These cause the actors to be
suspicious resulting in more searches for information that are time-consuming and
expensive. This is particularly so in an imperfect market, as shown in the diagram below.
Actors or trading partners are bestowed with asymmetric information.
In a B2B,
would the
overlapping
A B Rectangle:
area of the 2 maximum information of a market
circles be
larger than
says C2C or
B2C? Why?
Actor B’s private information
B2B examples: (asymmetric information)
IBM & Cisco;
Oracles & Common information
IBM;
Flextronics &
Ericsson;
Hotelclub & its
Information not yet access by
associate both actors A & B
hoteliers.
External processes are difficult to control and costly to re-engineer (as they are dictated by
market forces that are outside the control of the organization). This is especially so when
the trading partners or actors are located far apart (thus increasing the difficulties in
communications). Factors of low frequency and small numbers contribute to increase costs.
We see these costs are consequences of market uncertainty and complexity of the
economic system. Uncertainty and complexity are related to environmental and
unpredictable events. We see these in the unpredictable raising commodity prices (e.g. oil,
rice, steel, raw materials), economics (e.g. Dubai economic fallout) and political instability
(e.g. Myammar, Iran)
A major reason for these factors of cost is caused by an unequal distribution of

information between the actors involved in the transaction.
A simple scenario below summarizes how some factors increase economic frictions and
raise transaction costs.
A supplier may successfully bid in a competitive environment (market) for a customer’s

tender on the building of a special widget. However, to make the widget, the supplier will
be required to build specialized machinery which cannot be easily redeployed to make
other products (high asset specificity and high sunk cost).
Now, once the contract is awarded to the supplier, the relationship between the customer
and supplier changes from a competitive environment to an opportunistic situation of
“monopolistic” relationship. Here, one party can subsequently dictate the terms of pricing.
In such in a situation, quite similar to small-numbers, it is futile to search for more
customers, the demand and price are inelastic.
The outcome of this scenario would be different had the supplier exploit e-commerce and
information technology to obtain more information on the factors of cost and stages of
transacting, understand market conditions, conduct due diligence to reduce market
uncertainty, bounded rationality and opportunism.
With the wide adoption of the Internet and other network technologies, many different
kinds of e-Commerce business models have been developed and blossomed. Virtual
storefronts, transaction brokers, information brokers, online auction houses, portals,
content providers and virtual communities are some examples. They provide global reach
and richness in information. These take various forms of B2B (business-to-business), B2C
(business-to-consumers) and C2C (consumer-to-consumer) forms of online business.
This explosive growth has contributed to availability of quality information, search

engines, and empowering the both actors in seeking out
information. This reduces information asymmetry between trading Info Quality
partners. The diagram, on the left, shows that quality information
reduces uncertainty. This is equally true for bounded rationality
and opportunism. This leads to reduced search cost, contract cost
and regulation costs.
Uncertainty
Today, electronic market facilitates an abundance of easily
accessible information reservoirs and information is available at the finger time leading to
a more intensive use of electronic markets rather than electronic hierarchies (i.e. firms)
We shall now look at some e-commerce examples to understand how transaction

costs are reduced and how market electronic processes may be more efficient than
firm’s.
Amazon.com, an online B2C book and magazine wholesaler, takes orders online and
automatically follow up with necessary processes to complete the delivery and handling
logistics to the transportation partners. Amazon also caters to the sales of e-books and e-
magazine that hardly requires any physical warehouse holding space. All orders are
accompanied by online payment schemes. Most of the processes are done with minimal
need for labor intervention. Buyers buy directly with Amazon. Amazon’s eCommerce
website has dis-intermediated and has removed several layers of intermediaries of dealers
and agents.
Telefonica in Spain operates a virtual storefront - content provider to sell music download,
video-on-demand and customer registrations without incurring cost in labor and office
space. As they are all in digital forms, theoretically there is no need for any warehouse
anymore and yes, thus lowering both transaction and agency costs too.
AsiaRooms.com and Zuji specialize in providing worldwide B2C services in the booking
of hotel rooms. They do not own any hotel but are brokers that provide a platform of
network of hotels across the world. They help to ‘sell’ the hotel rooms for a commission.
They are not virtual store-fronts as they do not hold any inventory. They deployed SCM
application and computer network systems so as to be confirmed within 24 hours the room
availability (they have a backend B2B computer network connection with all the hotels
and banking partners).
This is a case of e-commerce exploitation by intermediary brokers who have the volume
(high frequency) and economy of scale to “internalize” the business processes with
business partners using the means of electronic market. Then, they share the price/
quantity discount with end consumers (of low frequency demand). They lowered the
search, contract and regulation costs with the electronic online processing. In traditional
“hierarchy” transactions, an end consumer with infrequent need for hotel-room bookings
will incur high transaction costs of search, contract and regulation costs caused by factors
of uncertainty, frequency and small numbers.
Hardwarezone.com is a B2C information broker e-commerce business model. It provides

information services on IT product specifications, shop locations, and comparative prices.
It also provides product reviews. It is not an IT store and it does not sell any IT products.
Such information broker reduces the searching and contract cost of the buyers. It also
reduces information asymmetry.
eBay, the giant C2C online auction eMarketplace website is an example which lower search
and contract cost. Its business is based on networks of millions of global users
communicating with one another directly. eBay is an example of network externalities
which capitalize on the electronic market to build communities on its platform in
minimizing bounded rationality, high asset specificity, and the disadvantages associated
with low frequency. AliBaba, a B2B, operates on near similar lines but deals only with
business partners not end-consumers.
eCommerce is not always suitable for all kinds of products and services. Some products
that involve taste and smell may not be suitable. For examples, selling cakes and
Cantonese dishes over a virtual storefront would likely to be inappropriate and raise
transaction costs.
eCommerce provides a global stage not just for business minded people but also a world
stage for cheats. It is borderless. Transacting parties are often faceless to one another. No
specific country laws can underscore a transaction done over international boundaries. It is
actually very difficult to identify fly-by-night operator. The company called SG-gadgets
(ST 20/10/06) “pulled off” $10 million from his customers across the United States,
Europe and Australia. EC actually augment asymmetry! EC removes the need of human
interaction, and as such, promotes faceless transaction partners, as we have witnessed in
the ebay transactions (the African story, where seller/buyer who are continent apart,
promote a situation of information asymmetry and cheating over one another) – an
unhealthy business environment and breeding ground for the undesirables and increased
costs of transacting.
eCommerce business models largely operate out of websites. The website must be
constantly updated. The tedious effort of providing new information, new skin and look is
necessary. It is a limitation in itself and there is no fast easy turnaround to this activity.
Certainly, increasing the IT coordination cost.
We can conceptualize the implementations of various strategies (B2B, B2C, C2C) and
business models of e-commerce as market process re-engineering, that is, a process aimed
at decoupling product flows from market transactions through online trading. This
reduces transaction costs and coordination costs as seen with the traditional bricks-and-
mortar “hierarchy” (i.e. firm) operations. Obviously, there are still possibilities of
opportunistic behavior and bounded rationality that can result in higher transaction costs
with e-commerce. Nevertheless, we conclude that e-Commerce generally lower overall
transaction costs, make market transactions more efficient than firm transactions and a true
form of market-like form of organizing.
Question A3
What constitute a good e-commerce strategy?
Solution guide:
An e-commerce strategy is concerned with how network technologies and the Internet can
be exploited to improve the organization’s competitive edge, and overall value. It is a part
of the overall information systems strategy of an organization.
A good e-commerce strategy covers several key factors that include suitable choice of
product and services, identification of target markets, identification of suitable e-business
model platforms, identification of suitable e-commerce payment systems, marketing
strategy, considerations of key success factors, e-site designs, security, and data privacy.
The strategy is applicable B2B, B2C or C2C platform.
What is e-commerce?
E-commerce is the process of buying and selling (including marketing, negotiation, and
distribution) of goods, services and information electronically over networking
technologies, including the Internet. These technologies increase the availability and total
amount of information. The upshot is market uncertainty and complexity are reduced (as
market is interested only in product price and product specifications), reduction in
transaction costs (SCRM), bounded rationality, and information asymmetry. E-commerce
enables the exploit of low frequency which otherwise would be too expensive in market
places.
First, a good e-commerce strategy should be aligned with its overall mission statement,
business strategy, business plan, and information system strategy.
Examiner
expresses a The choice of suitable products and services is crucial. Not all products and services are
need to suitable for e-Commerce, especially when it involves the sense of taste or smell.
discuss AsiaRooms.com specializes in providing worldwide services in the booking of hotel
ecommerce in rooms, Amazon.com in selling of books, magazine and digital content, while ebay
the light of
B2B, B2C,
specializes on online auction (also known as eMarketplace).
C2C models
too. Determining an appropriate e-business model platform for the products and services is
important. Not just any e-business model can be successful. Dell uses the B2C virtual
storefront model, eBay uses the C2C virtual online auction model, SAP.com uses the B2B
virtual storefront model. Expedia and Asiarooms uses the B2C transaction broker model
and Google uses the B2C information portal model.
The selection of a B2B, B2C or C2C strategy is the result of identifying the final target
audience. In many of these models, the front-end maybe a B2C, like AsiaRooms.com and
Zuji.com, but in reality they may have a backend B2B too to provide linkages with its
business partners so as to complete the business transaction efficiently and in a transparent
fashion. BUT the front-end is the real and actual business model.
Once the business model is decided, the strategy must next identify the appropriate e-
commerce payment system or systems to accompany the business model. A local online
brokerage house called iOCBC used the Electronic Billing Presentment & Payment (like
GIRO, in Singapore), digital cheque and the traditional “bricks & mortar” cheque as their
various alternative payment systems, Finatiq.com (a online financial advisor firm) adopted
the Stored Value Payment, while Asiarooms.com adopted the Credit Card system.
A major concern of e-commerce and consumers is to make digital payment secured, safe,
trustworthy and private (briefly, go through the nature of all the e-commerce payment
systems and their merits).
How to FAIL quickly !
We are aware that a front-end B2C model like Hotelclub and AsiaRooms cannot really
suffice without a supporting backend B2B. BUT, do not say that such business is both a
B2C and a B2B in one breath. You will puzzle your readers.
Every business has a target audience, target products and will focus its business based on
these parameters. Its front-end main infrastructure setup is meant to meet their core
business objectives. Hence, Hotelclub, ctrip, and AsiaRooms are really a B2C business
not a B2B. (so, a fast way to score badly in the exam is to declare their business as a B2C
AND also a B2B!!). The B2B is the back-end to support to its main B2C business.
Marketing strategy is always important in any business strategy and this is no less the case
when planning an e-commerce strategy. Ability to attract customers to use their services,
competitive pricing, good personalized services, and effective product/services
communications are important areas. A successful e-commerce strategy is able to attract
customers and retain them to revisit and buy the firm’s products or services again and
again.
In order to be able to sell anything over electronic means, people must first be aware of the
company's e-commerce existence. So, there is a need to "market" the e-site. One
marketing mix for e-commerce is to register the site on suitable search engines like
google, yahoo, and MSN. Another, is to secure advertisement pop-ups with established
information portals. Other strategies of using cookies to collect marketing data, location-
based “push” advertisement, and banners should also be carefully considered. e-
Commerce is actually traditional commerce that has gone electronic. In traditional
commerce, part of the strategy would include how to market oneself i.e. to let customers
know about company existence and its products via TV ads, newspaper, magazine,
promotion, exhibition and holding competitions. With e-commerce, these marketing
strategies can also be relevant too.
Considerations of key success factors, e-site designs, and capabilities are the other major
areas an e-commerce strategy must look into. Many e-Commerce users have only general
IT knowledge, so the website designers must ensure a design of high ease of use, friendly
yet personal, attractive, organized, informative, availability, and a reasonable upload speed.
(expand on these areas, see ISORG notes)
A good e-commerce strategy must exploit the benefits of e-commerce and e-business. It
must avoid the weaknesses and limitations that come with the technologies.
Question A4
a. What is e-commerce? Describe the sort of IT infrastructure that you would expect
to be used to support large scale b2b e-commerce.
b. Suggest four key factors that might determine the success of a company's project to
implement a b2b service. [2004/Q3]
Solution guide:
a)
What is e-commerce? E-commerce is the process of buying and selling (including
marketing, negotiation, and distribution) of goods, services and information electronically
over networking technologies, including the Internet.
These technologies increase the availability and total amount of information. The upshot is
reduction in market uncertainty and complexity, reduction in transaction costs (SCRM),
bounded rationality, opportunism, and information asymmetry. E-commerce enables the
exploit of low frequency which otherwise would be too expensive in market places
e-Commerce (or EC) may be structured as a B2B, B2C or C2C setup. A discussion of e-
commerce would include topics like suitability of product & services to e-market, e-
business models, e-commerce payments, target market, and design considerations.
e-Commerce reduces information asymmetry, remove intermediary agents (dis-

intermediation), remove time and distance barriers, reduce agency and transaction costs.
Most e-Commerce sites provide some form of personalization, so that appropriate
information about the customer is kept.
e-Commerce has great potentials in reducing transaction costs such as in search cost,
negotiation of contract terms, selection of partners, writing of contract, monitoring and
enforcing the contract terms. e-Commerce facilitates market processes, make market
processes easier than firm’s, and are open thorough the year round, shrinks distance and
time, promote disintermediation, reduce “time to market” of products, services and
information, facilitates extended channels and marketplace.
In the traditional “bricks & mortar” operations, the handling of market transactions are
often complex, time-consuming and expensive. Processes are difficult to monitor, control
and re-engineer, as they are often dictated by market forces that outside the control of the
organization. Sometimes, firms internalized such market processes to take better control of
them. However, with the introduction of e-commerce and communication networks, the
market processes are suddenly becoming more manageable and streamlined. What was
earlier thought easier as internalized firm’s processes do not seem so anymore. E-
Commerce facilitates electronic automation of many of the market processes and
removable of intermediaries. New business model, and new e-commerce payment system
are examples. This has resulted in reduction of transaction costs and agency cost besides
effective logistics, reducing delivery time of goods, services and information.
e-Commerce applications include new e-business models, e-commerce payment systems,

search engine, shopping cart, email, and web-services. A shopping cart provides friendliness,
ease of use of web-site, product costing and it represents the sales order. An e-commerce
payment system - may it be digital payment (i.e credit card), digital wallet, stored payment,
peer-to-peer, digital cheque system – facilitates customers to pay online.
Powerful search engines - such as those seen with e-Bay, Amazon.com and
Hardwarezone.com - facilitates the search for product and pricing information – reducing
information asymmetry in the process. Most e-commerce websites facilitate further product
enquiries and open correspondence avenues with consumers with email and web-services
applications - providing “pull” and “push” information services.
What is a B2B? And what constitute a large-scale B2B service? B2B is conduct of e-
business between business entities. GeBIZ - a Singapore government procurement
extranet site that services all government bodies and ministries - is one example. Others
include SAP.Com -a B2B enterprise software virtual storefront, GoIndustry.com – a B2B
auction site. Others required backend B2B infrastructure to support their front-end B2C
services are Hotel club, AsiaRoom.Com and Zuji.com. With large-scale b2b, many
suppliers and businesses linkages with high data traffic are expected. Communication and
data traffic are expected to be regular and voluminous each day.
Processing would have to be reasonable speedy with high degree of availability and
accessibility. Ctrip, Hotelclub or Asiarooms.com has a B2B with its banking partners to
feedback on the credibility of Asiarooms.com’s customers. HotelClub, Ctrip, or
Asiarooms.com also has another B2B linkage to their hotel partners to confirm on room
availability and accounting records maintenance.
The payment credit terms between B2B partners are very different from c2c or b2c. B2B
accounting between partners can be very complicating especially when the partners have
regional and international exposures with varying accounting and legal implications across
different states and countries. Think about Asiarooms and its international business
partners, Baxter and their dispersed hospital business partners throughout America, and
outsourcing company like Flextronics with their worldwide outsourced international
business customers. They are expected to keep large amount of partner transactions,
maintain working data and proper accounting information.
B2B involves partner’s corporate sites. The data and application processes of each other
corporate customers are interlinked. This means they can “look” and “write” into each
other databases. A high degree of trust and contractual partnership would have to be
forged and maintained.
What would be the IT infrastructure for such large-scale B2B? Such B2B would require
large databases, efficient DBMS, and high-speed network infrastructure to support the
heavy data traffic, information upload demands, request for quotations, confirmations,
credit management, and the networked application processing between partners. It would
well be an extranet, or private networks where fast and secure business-to-business
linkages are critical.
eCommerce can benefit with the Internet technology, if use it as the backbone platform.
As the connection line has to support heavy 24/7 data traffic (24hours/7days), T1 or T2
broadband communication lines with capacity above 10 mbps are necessary. Routers,
firewall, power backup like an uninterrupted power supply (UPS) device would be
required. Besides the usual applications that e-commerce support, large b2b e-commerce
normally has enterprise applications such as ERP, and SCM to support too. A powerful
computer with fault tolerant and powerful processing capability, such as tandem or high-
end IBM computers, would be appropriate.
Large-scale infrastructure opens up other issues of security, privacy, training, and change
management. Hackers, IT criminals, opportunists, unhappy employees, workers resistant
to changes, increased effort to monitor changes would be part of the consideration when
designing the e-Commerce infrastructure.
In large-scale b2b e-commerce, a company must ensure the plans fit into the overall
business strategy. It often includes enterprise-wide, industry-wide requirements not just
at country-level but global context. Business drivers, global scale of economies, global
strategy, transborder political aspects on data collection and privacy, global
communication standards, multicultural context, enforcement of government regulatory,
global financial infrastructure, scalability. Selected IT solutions must fit into the
company overall information systems strategy, facilitate change management on global
basis and compatible integration of infrastructure.
Remember this:
e-Commerce has great potentials in reducing transaction costs in the areas of search cost (i.e.
collecting, collating, comparing information), contract cost (i.e. evaluation and selection of
partners, writing contract) and regulation cost (i.e. enforcing and follow through on the contract
terms). e-Commerce facilitates market processes to open thorough the year round, shrink distance
and time, promote disintermediation, reduce “time to market” of products and services, extended
channels and marketplace.
In a “bricks & mortar” situation, handling market transactions is often time-consuming, complex,
and expensive. Business processes are difficult to control and re-engineer, as they are dictated by
market forces that outside the control of the firm. However, with the introduction of e-commerce and
other advancement in IT, the market processes are suddenly becoming manageable, re-engineered,
and streamlined. E-Commerce facilitates electronic automation of many of the market processes,
removable of intermediaries, and the necessary of high frequency. New ways of doing business, new
business models, and new e-commerce payment system facilities the market processes. This has
resulted in the reduction of stages of transaction cost, coordination cost, processing cost and
agency cost (i.e. firm’s supervision).
b)
There are many factors, either internal or external, such as correct choice of ICT
infrastructure, choice of product and services to market, efficient enterprise information
systems such as SCM/ERP/CRM applications, technical know-how, friendliness of website
design, correct choice of e-commerce business model and payment system, communication
networks, regular maintenance, management support, support services, reachability &
richness, security, privacy, reliability, customer acceptability and managing change/
transition. [You may work on any four in greater detail]
Question A5
(a) What is a business process reengineering strategy (BPR)?
(b) What are the main challenges of this strategy? Why has BPR a reputation
for often failing to deliver real benefits?
c) What is the difference between business process re-engineering and
market process re-engineering? [2005]
Solution guide:
a) BPR is an analytical tool NOT an information system design model to design
information system. BPR involves detailed examination of existing “internal”
business processes related to a particular business activity, with the objective to
Be aware streamline, eradicate, improve or change the business processes. Such business
that the use
of too
processes related to processes within a firm, an enterprise.
many
acronyms The business processes are often under the control of the firm management. BPR
may is rather technical in nature and is seen from an economic point of view. Often,
irritate the BPR does not involved only one department but examination of processes
examiners.
So, on the
involving several departments and across the enterprise.
safe side,
write in Subsequent to the BPR exercise, organizational changes in both roles and
full or use responsibilities may take effect and affect the whole enterprise. Often the Data
acronyms Model takes over from here to design the new information system.
minimally.
Besides streamlining of processes, other key objectives of BPR are to reduce
coordination cost, processing cost, and agency cost (although technically, internal
processes increases agency cost – cost of supervision and managerial staff), gain
competitive advantages through innovative production and work processes.
Example: Ford invoice-less system and ERP, which are the results of using the
BPR and Data model approach
b) BPR radically may impact changes across-the-board in the whole enterprise. A

change in accounting processes for payables, has great impact on various
downstream processes such as QC, Receiving department, Inventory stores, logistic
department, purchasing and invoicing departments. BPR involves job changes, new
responsibilities, relocation, enlargement, and training.
Collaboration, cooperation, and coordination across various departments are often

not forth coming readily. Organizational resistance is understandable. Particularly
with large scale BPR involving subsidiaries across different countries affecting
different country laws, accounting rules, personnel expectation, and cultural aspects
– trigger point on socio-cultural and cognitive aspects.
Coordinated implementation and training are necessary. While streamlining and
transaction costs are key objectives, the end results could confusion and
disorientation on the ground and expectation of higher managers.
c) Business process = internal. Market process = outside external business processes
BPR is a strategy which look at reengineering of internal business processes

across whole enterprise. BPR streamline, eradicate, reorganize business processes
so that they are easier to control, modify and implement.
Market processes involved external parties like suppliers, business associates and
customers. Traditionally and technically, external market processes are much
harder to modify, control, coordinate and implement. They cooperation and
collaboration from external parties are not easy to administer and control.
But with the rapid technological advancements in the last two decades, computer
and communication networks, the Internet, e-commerce, collaborative commerce,
sophisticated enterprise applications (such as SCM, ERP, groupware) are well
accepted effective technologies. They promote the reengineering and streamlining
of market processes through online market processes – making market processes
easier to control and manage than firm’s. Firms need mostly have to commit to
strong contracts and regulating the external “market” parties with effective
enterprise application/ computer networks/ ecommerce and not be concerned with
the actual production, inventory, logistics processes.
[Give examples of the GM “internalization” of fisher so as to control and exploit

economy-of-scale benefits, and the “de-internalization” of Nokia & Ericsson to
Flextronics so as to concentrate on core competencies and lower transaction costs
using SCM and computer network technologies]
B. ORGANISATION ANALYSIS & INFORMATION SYSTEM DESIGNS
THEORY
Question-1
What do you understand by “information systems are viewed as socio-technical
systems”? Would the Data model approach suffice?
Solution guide:
The study of information systems is normally premised on the assumption that information
systems are socio-technical systems that encompass both technical and social variables.
In general, all information systems encompass some degree of various aspects of
sociology, psychology, economics, management science, operational research, and
computer science.
These socio-technical aspects can be broadly categorized into three different paradigms,
namely technical, cognitive, and behavioral.
The technical paradigm emphasizes mathematically based models to study information

systems, as well as the physical technology and formal capabilities of these systems. It
draws on management science, operation research and computer science.
The cognitive paradigm draws on socio-psychological theories to study how decision-

makers perceive, use information and make decisions.
Finally, the behavioral paradigm draws on the economics and sociology theories to study
the economics and behavioral issues that arise in the transacting processes - how, when
and why trading partners engage in the exchanges, the stages of cost and the factors
affecting these cost.
As seen in the diagram below, the three different paradigms are addressed respectively by
three different analytical design models called the data model, decision-making model and
transaction-cost model.
It is contended that in reality, there is no one single design model that is able to address all
the socio-technical aspects of an enterprise. The firm’s socio-technical aspect is always
larger than any single paradigm.
Each circle represents
the data, decision
making and transaction-
cost model respectively.
No single model can
cover all socio-technical
aspects.
Overall socio-technical
needs of an enterprise
comprise of technical,
behavioral, cognitive
perspectives
In practical sense, a specific organisational problem has the tendency to “lean” closer
Be aware
that the use towards one of the three paradigms.
of too
many Certain organizational problem may be bias towards the technical aspects rather than
acronyms behavioral or cognitive or vice versa. For example, the inventory control information
may system, SIM attendance clocking system, SIM course evaluation system, and even the
irritate the
examiners. enterprise application such as ERP system are considered to be bias towards the technical
So, on the perspective rather than cognitive or behavioral perspectives.
safe side,
write in However, SCM, collaborative commerce systems, and most of the e-Commerce
full or use applications, these are bias towards the behavioral perspectives (because of the market
acronyms
minimally.
processes and transaction cost). Here, the main concerns are reducing bounded rationality,
opportunism and market uncertainty.
Would the Data model approach suffice then? Although studies suggest that all
information systems are viewed as socio-technical systems, in practice, organizational
problems tend to “lean” toward one of the three possible paradigms.
Let take the simple “UOL lunch story” and the “SIM Course evaluation system” to under
why the data model approach would suffice in these cases.
Some The UOL lunch story is about the capture of UOL external examiners’ lunch-meal orders
students (data), at the time of request through an information system (rather than writing on pieces
may of paper). The data is retrieved and then subsequently make available to all related
venture to information processing and operational activities.
use the
SIM
attendance It is important that the same pieces of data are readily available to all the processes that
clocking produce information for the office, kitchen, restaurant and the receptionist. In this case, we
system, clearly see that the timeliness and accuracy of how the data is produced, captured,
Subprime exchanged and processed is of paramount importance.
mortgage
story or
“own” The SIM course evaluation system is about the capture of the course survey forms
researched completed by each individual SIM students. The data on the survey forms is processed to
stories provide information for SIM course coordinator, course managers and lecturers for their
necessary follow up actions.
Again, it is important that the same pieces of data are readily available to all the processes
producing the various set of information for the different end-users. Again, it is of
paramount importance, and perhaps the only one important requirement here, that the data
is accurately and timely produced, captured, exchanged and processed.
The organisational problem in both cases above are clearly technical in nature, requiring
information solutions of mathematical accuracy and precision (i.e. application of schools
of operational research, management science and computer science). We can see that both
examples require little or no need to analyse the cognitive aspects of decision making, and
behavioral aspects of stages of transaction cost and factors of cost. Doing so would indeed
be superfluous and confusing, in these technical cases.
We can see that for both cases above, the design begins with a “blank sheet” – a tabula
rasa approach. There is no need to establish where is the start or entry point to the design
of the new information system. There is also little or no necessity to examine existing
rules, procedures, norms or practices, and why certain things are presently done a certain
way – the raison d’etre need not be established. This means there is no existing baggage
to weigh down, delay, or complicate the design and development of the new information
system. The systems analyst need only have to ask about “what” data, and not “why”.
The data model has high transparency and the design is not affected by personal bias,
prejudices and opportunism. With the data model approach, new rules and procedures may
be set to ensure that the people and environment integrate efficiently with the new
information system.
In conclusion, we see that with the data model approach, the systems analyst can quickly
design and develop the new information system much faster than the decision and
transaction cost approaches. In fact, with the data model approach, the design and
development of the new information system is possible with minimal or even without
the help from the people (i.e. end-users) in the organization.
Question B2
Discuss the relationships between information systems design and organization analysis.
Critically analyze whether it is possible to design an information system around the needs
of an organization. Illustrate your answer with practical examples. [2007 ZB Exam]
Other similar Questions:

Q. Is the data model an organizational endeavour? And in what respect is the data model
a key managerial decision? (read tutorial discussion on same)
Q. What is the relationship between organizational analysis and information systems
design? Critically analyze whether it is possible to design an information system
around the needs of an organization. Illustrate your answer with practical examples
[2007 ZA Exam]
Q. How are the needs of an organisation identified to inform the IS design? Critically
discuss the relationships between organisation analysis and information systems
design. How and why do problems occur when information systems are implemented
in the organisation? [2008/May ZA exam]
Q. Information systems are designed to optimise organisation performances. Discuss,
supporting your argument with relevant examples, how and if this can be done.
[2009/March, Mock Exam]
Solution guide:
(Note that the essay below is lengthy as it attempts to cover all the above four questions in
one go. Kindly read UOL study guide’s chapter-1/page1 and Study Material on article by
Dr. Antonio Cordella)
Every organization has socio-technical information needs. In the most desirable situation, a
information systems design of a new information system should meet all the socio-
technical needs. In theory, an organization analysis should discover most, if not all, of the
organizational needs for a given specific problem. In reality though, the actual information
systems design, must adopt a specific design model that best fits the new information
system’s key requirements.
The relationships between information systems design and organization analysis are
intertwined. An organization analysis enables a review of the business processes and
information needs of the organization. An organization is a social arrangement comprises
of human beings who will set and purse the enterprise goals.
Information system design is the art and science of preparing information so that it can
be used by human beings with efficiency and effectiveness in relation to a specific
problem. Identify what role information technology can play in respect to the human
information processing and how to design information system that support the current or
desired ways to process information to resolve organisational problems. The activities of
human beings are themselves affected by various socio-technical elements of sociology,
psychology, economics, operations research, management sciences and computer sciences.
Organization analysis (sometimes referred to as “organizational endeavour”) is the

detailed examination of its organizational activities, both socio-technical complexities and
business processes. This includes an understanding of why and how people in
organizations use, produce and communicate information. Take note the same socio-
technical elements as referred in information system design.
In a market-oriented environment, an organization’s performance depend on how well it
manages its operations (e.g. sales order processing, purchase order processing, inventory
control, sales forecasting, budgeting) and interactions with its environments, e.g.
customers, suppliers, government, politics, and competitors. Market uncertainty and
complexities complicate organizational processes and activities. Still, an organization must
manage and solve complex problems and obstacles along the way so as to achieve their
enterprise goals.
One of the key support pillars in any organization is “information”. Hence, information
systems play vital roles in integrating and managing business processes, reducing bounded
rationality, opportunism, process complexities and market uncertainty.
The dynamic progress in information and communication technologies such as networks,

databases, e-commerce, and enterprise information systems impose compelling “pull” and
“push” factors on organization to digitize using market-like rather than hierarchy-like (i.e.
firm) of transacting. The role of information systems in shaping human and organisational
activity has become more and more prominent.
Hence, how the design of the new information system should be conceived and proved its
socio-technical values in respects to the organization’s operations and interactions with its
markets. However, while information systems are socio-technical systems, and should be
designed with an appropriate design model that covers all the needs of an organisation,
there is no such model.
While we respect that the needs of an organization, managed by human beings, are socio-
technical in nature, how are the needs of an organisation identified to inform the IS design
then?
The design of a new information system is often based on how a firm generally views its
problems and its organizational needs in relation to the new information system. The
problem can be broadly perceived as an organization viewing it as either as a bundle of
data, decisions or transactions. Hence, there are three main analytical design models to
organization analysis pertaining to the design of new information systems.
The three design models are Data, Decision-making and Transaction-cost models. This
three design models are like analytical “lenses”. They are used to perform the organization
analysis relating to the area of organizational concerns and determine the specifications
that form the designs of the new information system. The paradigm will influences the
ways in which information processing systems are conceived, designed and used.
Quickly, the data model is rather technical bias and approach from the study of
management sciences, operational research and computer science. The decision-making
model approach is more intense with the cognitive aspects of the study of psychology, and
sociology; while the transaction-cost model covers largely the behavioral field of
sociology and economics studies.
Although, it is well known that information systems are socio-technical system,

organization must choose the design model, an appropriate “lense”, that best “fit” the
organization analysis for that specific new information system.
So, is it possible to design an information system around all the needs of an organization?
Yes, in theory. Can we use all the three design models to design the new information
system? No, it is not possible.
Dr. Antonio Cordella has stressed that it is not possible to use all three design-models as
the Systems analyst and his team will lose focus. It is an impossible task to accomplish
and will end up with a poorly designed product. The development will be over elaborative
covering all aspects of socio-technical elements and will take extended duration to develop.
As the System Analysts, Designers and other members in the development teams are
human beings, they themselves will suffer from bounded rationality. The results of the
final information system design will be disastrous.
Be aware
that the use So, an organization and the Systems Analyst would have to choose the most appropriate
of too design model that best suit the problem. Of course, the design and characteristics of the
many new information system will be impacted by the design model chosen, which will be the
acronyms
may “analytical lense” deployed.
irritate the
examiners. The diagram below shows that no one specific design model covers all aspects and
So, on the informational needs of an organization to allow a complete organization analysis. The
safe side, organization is represented by the broken-lines, while each circle represents one specific
write in
full or use design model. Each design model analyses and critically covers specific aspects of
acronyms technical, behavioral or cognitive of an organization. The final shape of the information
minimally. system will be influenced by the chosen design model!
Hence, it is a key managerial decision to carefully deliberate on the most appropriate

design model to adopt for that organizational problem.
Each circle represents
the DM, DMM and
TCM model. No single
model can cover all
socio-technical aspects.
Overall socio-
technical needs of an
enterprise comprise of
technical, behavioral,
cognitive perspectives
With the Data model, the information system is principally viewed as bundle of data, data
flows, and network of processes. Information systems designed with the data model
approach are largely concerned with how the data is captured, produced, exchanged
and processed. The data model is indifferent to opportunism, bounded rationality and
other factors of cost.
The data model approach aims to improve the data flow (while not so much the process
flow) through automation and ‘centralized’ database processing (optimization of the
process flow is the objective of another technique called Business process engineering.
(BPR)).
The Systems Analyst performs detailed analysis of an organization’s documents and files
to understand the content (attributes) and how they flow and are processed through the
organization. The analyst does not question why actions were carried out and who should
do it. Rather they are interested in what these documents and files are and whether they are
efficiently flowing from one actor (process) to the next actor (process) in an automated
environment.
Automation is seen as a new way to produce, store and communicate data in a better way -
faster, more reliable and secure. Implementation is about building the new system and
introducing it into the organization, thus substituting the old way of handling data with a
new, computer-based information system.
With data model, the data and its data flows are redesigned from scratch irrespective of the
existing organizational structures, norms, and practices. Existing formalized routines may
be overwritten with new ones. Roles and responsibilities may be reorganized and
restructured to suit the new information system, without the need to take into
consideration current social, cultural or other staff implications.
For example, the Data Model would be the design choice if the new information system is
required to accurately capture, store, and process the organisational data, its data flows,
and how the data is exchanged, consumed and processed. This would be the case of the
Keppel Sailing Club, where the organization has to capture its member details, member’s
boat details, processing of berthing charges and monthly billing.
The highly technical, tabula rasa, raison d’etre approach of the data model, with focused
interest in the way the data are produced, exchanged and processed, without questioning
the implications and rationales, can drastically change the way the firm operates
tomorrow.
The implicit assumption is that the old organization should adopt and adapt to the superior
new data model design. Any resistance would be considered as an irrational behavior to be
curbed and eliminated.
This can constitute to serious and costly affair during the implementation stage - the
example of the judge story where the new computerized judicial system breaks down
because the judges refused and failed to communicate with each other. Nevertheless,
indeed, a truly organizational endeavor and a crucial key managerial decision whether to
use the data model to analyze the organization needs, rather than the other two models
discussed below. Let’s take a look at them. But do remember this, that irrespective of the
chosen design model, each model has its limitations and strength. Again, there is no perfect
design model. All models have certain disadvantages. (Note: Our study is not to try and
create a revolutionary new design model!)
The decision-making model views the organization as a network of decisions and

decision-making activities. It is a specific way of analyzing the organization whereby the
systems analyst attempts to ascertain the way the new information systems can support
individual and collective decision-making processes on the basis of their structural
features. It is in relation to decision-making that information systems should be conceived
and should prove their value to support and assist effective decision-making.
The model assumes decision makers will attempt to make rational decisions and will not
act opportunistically. But, in reality, individuals might act opportunistically to distort,
misrepresent or manipulate information to their own advantage (Shelling).
For example, mid-level manager’s responsibilities are “control and monitoring” to ensure
production and sales forecasts of the organisation are met. The Decision making model is
likely to be the “analytical lense” deployed. They would need information systems that
could provide information to help them to make decisions on how to solve problems like
“How do I balance actual sales versus forecast? What action/s do I take to balance the
budget imbalance?
Quality information is a key input to decision-making, and can contribute significantly to

decision-making processes moving towards rational decisions. Information technology is
seen as a key design tool to provide the needed quality information.
Where the problem is repetitive in nature and highly structured, the chance of producing
quality information to achieve rational decisions increased. Such is the case where the
processes in decision-making are easily identifiable and well structured, and automation
through information system can be easily programmed along the lines of the rational
decision model.
Where problems are unstructured, making rational decisions become increasingly difficult.
Often bounded rationality and improvisations begin to take roots here. The required
information is highly unstructured and may come from various known, trusted, and “word
of mouth” sources. Uncertainty reigns. This is the case where decision makers, at the mid
and higher hierarchy levels, may lapse in making decision involving the muddling-through,
satisficing and psychological decision-making models. We must note that nobody like to
use such models in their decision-making processes.
Generally, the Decision making model broadly classified problems into three levels of
structured, semi-structured and unstructured. Decision making model attempts to design
information along this line of reasoning. Hence, Information systems are characterized to
meet and support decision-making at operational, control and strategic level decision
makers. The practical examples of information system supporting these three broad levels
are transaction processing systems, management information systems and executive
support systems.
The third design model, on the other hand, views the organization as a contractual
arrangement to govern sets of transactions and a network of exchanges & contracts. The
design views contracts as binding instrument between individuals and recognize that
individuals (and organizations) might distort the use of information to achieve their
individual goals. Such is often the situation where market (i.e. external) processes are
involved.
With Transaction cost model (TCM), information technology and information system
are seen as a “mediating technology” affecting the pattern of exchanges between
Be aware
that the use contracting parties, where trust, market uncertainty and other market factors are major
of too many concerns.
acronyms
may irritate Transaction cost model entails an examination of the stages (search, contract, regulation
the
and maintenance) of transaction costs and how they are impacted by various sources
examiners.
So, on the (factors) of transaction costs in an imperfect market. Such sources include bounded
safe side, rationality, small numbers, uncertainty, complexity, opportunism, asset specificity and
write in full frequency.
or use
acronyms
Transaction cost model also analyzes how the firm can use ICT to foster a more intensive
minimally.
use of markets and market-like organizational forms. This can actually result in managing
market processes (MPR) more efficiently than internal business processes (BPR).
Transaction cost model would likely be the most appropriate design model when external
trading partners are involved. Examples would include electronic commerce applications
(like Expedia, Asiaroom, Ebay) and Supply Chain management systems (used by
Flextronics, Dell, Nokia, Baxter healthcare), which examine the cost of the four stages of
transaction and other factors of cost (such as bounded rationality, opportunism, uncertainty,
small numbers, asset specificity). Here, the organization analyses market processes and
how they could made as efficient or more efficient than firm’s.
We now see that all the three design models perform organizational endeavors and analysis
from three specific, different angles. The decision-making and transaction-cost are more
complicated and involved cognitive and behavioral analysis respectively. They are useful to
analyze the information needs from these other angles.
Irrespective of the design model chosen, an organization must perceive that problems will
occur when information systems are implemented in the organization. The resistance to
change from the people (most internal staff) is real. It always occurred. Change
Management is a must in all cases.
Change management can be achieved with several approaches. Critical Success Factors
analysis, Enterprise analysis, Business process engineering and Total quality management.
All these methods attempt to involve the staff members in an organization early up, well
even before the development is started by the team of developers. They are invited to
participate in recommending process changes. Staff, being the change agents would be the
best way forward.
We can conclude that it is not possible to design an information system around all the
socio-technical needs of an organization. As one has to choose (as in all real world
situations), the limitations of the chosen design model will have a certain limiting effect.
However, a carefully selected design model would suffice and often meet the key issues
and needs of the organization for the area of analysis. The systems analyst will be able to
focus on the correct issues, specific organizational needs, and produce a robust, well-
analyzed new information system - thus, a rational organizational endeavor.
Question-B3
Why are information systems crucial for large organizations with many operational
branches around the world today? Discuss.
Similar question.
Q. Why is the decision to invest in information systems not always successful? What are
the conditions that make it successful? Justify your answer using relevant theories [2009
May, ZoneB].
Solution for this Q may follow along the line given below or discuss along the line of
socio-technical systems and show reasons why NOT choosing the appropriate design
models may led to unsuccessful outcome. The conditions that make it successful may
include internal and external factors of acceptance.
Solution guide.
A good
introduction
With globalization and advancement in technology, information system is increasing
provides a big becoming a crucial resource in the operations of many organizations. This is particularly
picture of what
to expect in the
more so for large organizations with many operational branches around the world and
essay-body, facing problems of global dimensions.
somewhat like a
concise content-
page of a book.
Use the
keywords found
Over the last decades, the technological progresses made in systems software, computers,
in the Q. Avoid communication networks, database systems, and particularly information systems have
words like “e.g.,
etc, for example,
facilitated many organizations to effectively globalize their businesses and operations.
i.e. such as, Business processes can now be seamlessly integrated in friendly, efficient and cost-
like . . .” and
diagrams,
effective ways over large distributed environment. This effect of globalization has
examples and “forced” many large organizations (especially those with many operational branches
details be
elaborated in
around the world) to rethink their overall strategy and becoming digital firms.
the essay-body.
Physical infrastructures, “bricks and mortar” and face-to-face meetings (“flow of places”)
were once necessary pre-requisites in conducting any meaningful business dealings and
developments.
Today, integrated global sales transactions (case of American Airlines), design

engineering (case of Toyota), integrated manufacturing/ production - SCM (case of
Flextronics), stockless inventory control (case of Baxter) conducted most of the key
business processes through digital means (“flow of spaces”). Global competitions are
forcing organizations to focus on speed to market, better customer service, availability,
and quality execution. Today, relying their key global business processes mainly on
“bricks and mortar” operations would be disastrous.
Obviously, well-designed information systems is the driving force on how the various
underlying technologies could be jelled together to form an effective, cost-efficiency
whole.
The need to create competitive yet effective information system has now become even
more critical for large organizations with many branches around the world, i.e. large
global organizations. Why?
Information system serving large global organizations is crucial in eliminating the

problems caused by distance, language, different time zones, high agency and operation
cost for global business processes. With efficient information system to assist digital
global communications (e.g. email, blackberry, VoIP) and digital face-to-face meetings
(e.g. MSN, Skype, video conferencing, group decision support system), a large part of the
difficulties associated with “flow of places” communications is eradicated.
The information system used by such large global organizations has a higher and critical
dependency on modern technologies, i.e. computer networks (the Internet, extranet,
intranet), database mirroring technology, information processing (distributed, centralized,
decentralized), computer servers, and communication technology.
Besides competitive reasons, their information system must be carefully designed to

exploit and capitalize on these technologies so as to ensure proper coordination and
processing of their business processes across all their branches around the world.
Enterprise information system is seen as a key infrastructure to seamlessly integrate
business processes within or beyond the boundary of such large global organizations.
It is crucial that large global organizations exploit the functionalities of information

system such as Enterprise Resource Planning system (ERP), Supplier Chain Management
system (SCM), Customer Relationship Management system (CRM), Knowledge
Management System (KMS) and collaborative commerce system (CCS) in their strategies.
We shall see why some of these applications are pivotal in the operations of large global
organizations through the “lenses” of American Airlines, Toyota, AOL, and Baxter
Healthcare.
American Airlines was the first international airline to exploit enterprise information
system to coordinate online air-ticketing sales processing, accounting and resources
allocation across all their branches around the world. The enterprise information system,
which eventually evolved into an ERP system, immediately resolved the problems of seat
over-booking or under-booking that has plagued the airline industry for many years.
The successful implementation resulted in an exodus of passengers migrating to American

Airlines. This caused many of their competitor airlines to lose their market shares. Their
competitors failed to anticipate the strategic competitive advantages of information system
which American Airlines foresaw. They exploited the outreach of the information system,
new computer technology and the benefits of globalization. Many of their competitors, not
being able to compete, eventually fall into bankruptcies.
Toyota’s supply chain management (SCM) and collaborative commerce system (CCS)
integrated its 56 plants in 25 countries, 1000-odd suppliers, and distributors. It is crucial
for Toyota that design engineers, suppliers and distributors, from various locations around
the world, collaborate together during the design, production, manufacturing and
distribution processes. Toyota is able achieve their design-to-production-to-market
strategy in record time (less than 10 months).
The information system plays the crucial role in achieving proactive product designs,
effective process integration, resources maximization and supply chain management. It is
crucial that large global organizations exploit current technological advancements, and
Toyota continues to do so and this helps them to achieve the world number-1 motor
vehicle manufacturer.
America OnLine (AOL), the world’s largest internet service provider had to turn to CRM
software to help it manages its increasingly complex sales and marketing processes which
involved multiple external partners and the information across multiple groups and
contacts. Through successful application of CRM software, AOL is able to direct its
customers and employees (located throughout various parts of the world) through the
fastest and most efficient channels when seeking information or solutions, thereby
increasing customer satisfaction and employee efficiency. Retention of valued customers
is especially crucial for large global organizations as these customers have great impact on
the bottom line and marketing effectiveness.
Baxter Healthcare’s stockless inventory system (part of the overall SCM) for its hospital
clients, located all over USA and Canada, has proved to be superior over JIT supply
system and traditional inventory practices. It enables customers to eliminate inventory
A good holding cost entirely and the risk of hospitals carrying expired or damage inventory during
conclusion
provides a storage. The information system has thus reduces labor, inventory and agency cost
concise summary significantly, improves turnaround time, giving Baxter a competitive advantage over
of whats been
discussed and not competitors.
try to introduce
new topic/s.
However, a American Airlines, Toyota, AOL, and Baxter are just a few examples of large
conclusion can organizations with global operations that must made effective uses of information system
urge the readers
to think about the to stay competitive and effective. It is crucial for large global organizations to develop
“other side of the innovative information system to help them stayed operationally effective and stay ahead
coin”, even
stimulating a of the competitive curve.
controversy.
In conclusion, information system (either developed in-house or software packages) is a
key component in the business operations, whether small and large organizations.
However, we see that the larger the enterprise, the more globalize they would become, the
more crucial and more dependant they the have become on information system and
technology.
The digital age and the drive towards harnessing of knowledge have expanded the roles of
information system. Indeed, without effective information system, large organisations with
many operational branches around the world will have great difficulties managing their
global business processes efficiently and effectively. Having said, the implications of
failed information system and computers can be unimaginably damaging for these large
organizations too.
C. DATA MODEL
Question-C1
a. Explain the principal features of a data model and show how they can represent or
reflect the environment in which an information system will operate.
b. Explain the limitations or constraints of this approach [2003/Q5].
“Explain” is
as good as a Other similar Q:
“what is” Q. Q. The data model is often used to inform information systems design. Discuss, with
examples, the main limitations of this model both from the design and the implementation
You can also
include viewpoints.[2009 May Zone-A Exam]
discussion
on
advantages Solution guide
and
weaknesses a.
of data The principal features of a data model are technically bias in nature and largely
model, if not
asked for in concerned with what data is captured, produced, exchanged and processed. The data
the 2nd half model views the organizational problem as a bundle of data and network of processes.
of the Q. Hence, the data model approach entails comprehensive data analysis, data capturing, data
storing, and representation of the processes that consume the data. Data flow-path is
optimized.
The data model approach is data centric and technically driven. It is aligned to the
mathematical model’s principles based on the studies of operation research, management
science, and computer sciences. It adopts a tabula rasa mentality, i.e. starts from a “blank
sheet” with disregard to any need for any formal starting point to the data analysis. The
System Analyst is free to choose any entry point and in this respect, there is no need to
consult the end-users about this too.
The data model disregards the sedimentation of practices, minimal or zero concerns of
any behavioral socio-cultural elements of the organization and the human aspects or
organizational arrangements that have emerged over time. This raison d’etre approach
actually ignores any rationales behind existing practices, norms and procedures.
With the data model approach to designing new information system, where the systems
analyst has a completely “free hand” in carrying out his responsibility (including writing
new rules and guidelines), it would appear that uncooperative and reluctant people in the
organization would not pose a real threat to the successful design or development of
the new information system. In fact, the Systems analyst has the mandate to look into any
files of document in the organization to design and develop the new information system
and can do so without any assistance from the people working there.
The data model’s concentration of the technical aspects and disregards of the implications
and rationales can drastically change the way the firm operates tomorrow. The implicit
assumption is that the old organization should adopt and adapt to the superior new data
model design. Any resistance would be considered as an irrational behavior to be curbed
and eliminated.
This weakness can, sometimes, become costly during the implementation stage (of the
new information system).
This is reflected in the examples of the subprime mortgage incident (where the underlying
information system merely discharged the housing loan amount and computed the monthly
loan repayments irregardless whether the principal borrower was borrowing beyond his
ability to repay the principal sum) and the Singapore HDB upgrading program (where the
underlying information system merely compute the sum each household will equally share
to repay for the upgrading programme of the common facilities and buildings, irregardless
whether the house owners have the financial means or not).
The data model shows high transparency and the design is not affected by personal bias,
prejudices of bounded rationality and opportunism. The absence of other factors such as
market uncertainty and small numbers make the data model approach the right design
choice.
With the data model approach, new rules and procedures may be created during the
implementation stage to ensure that the people and environment integrate efficiently with
the new information system.
To show how the data model can represent or reflect the environment in which an
information system will operate, let us illustrate with the examples of the simple “UOL
lunch story” and the “SIM Course evaluation system”.
Some The UOL lunch story is about the capture of UOL external examiners’ lunch-meal orders
students (data), at the time of request through an information system (rather than writing on pieces
may of paper). The data is retrieved and then subsequently make available to all related
venture to information processing and operational activities.
use the
SIM
attendance It is important that the same pieces of data are readily available to all the processes that
clocking produce information for the office, kitchen, restaurant and the receptionist. In this case, we
system, or clearly see that the timeliness and accuracy of how the data is produced, captured,
“own” exchanged and processed is of paramount importance.
researched
stories
The SIM course evaluation system is about the capture of the course survey forms
completed by each individual SIM students. The data on the survey forms is processed to
provide information for SIM course coordinator, course managers and lecturers for their
necessary follow up actions.
Again, it is important that the same pieces of data are readily available to all the processes
producing the various set of information for the different end-users. Again, it is of
paramount importance, and perhaps the only one important requirement here, that the data
is accurately and timely produced, captured, exchanged and processed.
The organisational problems in both cases above are clearly technical in nature, requiring
information solutions of mathematical accuracy and precision (i.e. application of schools
of operational research, management science and computer science).
We can see that both examples require little or no need to analyse the cognitive aspects of
decision making, and behavioral aspects of stages of transaction cost and factors of cost.
Doing so would indeed be superfluous and confusing, for these technical cases.
Hence, we can conclude that the data model approach of tabula rasa, rasion d’etre, detailed
analysis in the data capture, data flow, what/how data is processed, exchanged and
produced sufficiently reflect the environment of the two case examples in which the
information system will operate.
b. Explain the advantages, limitations or constraints of this approach
The advantages or strength of data model lie in its technical and data-centric approach.
The data model is an abstraction of the real world of the system. It provides a
representative “picture” and clear representation of the environment in which the new
information system will operate to guide the development of the new information system.
We see this in examples such as the SIM course evaluation and SIM student
attendance clocking system which clearly represent the affairs of the environment
that they operate in.
The systems analyst need just only concentrate on which data (and their data flow paths)
are produced, captured, exchanged and processed without the need to question the reasons
why this is happening.
The data model promotes full transparency. Being technical and data-centric in approach,
the design model neither dependent on human perceptions or interactions (of the current
system), nor is concerned with the norms and cultures inherent in the workplace. Hence, a
tabula rasa approach is possible to designing the new information system. There is
minimal chance of influence by opportunistic behavior and bounded rationality.
The Systems analyst can redesign data flows and files from scratch irrespective of existing
organizational structures, procedures, and practices. No need to inquire further about their
raison d’etre. In other words, data model does not bother with existing “baggage” of the
current system (i.e. existing practices, rules or norms. This is a clear winner as the new
information system can be quickly designed and develop in a short space of time involving
minimal resources.
The data model is effective. It is technically accurate, reliable, economical and durable so
that the system does not need constant reconstruction as compare to building
information system based cognitive and behavioural perspectives whose factors are
dynamic in nature.
As new rules and procedures with new data and flow paths can be introduced without
concern of current procedures or ruling, the development and implementation of the new
information system encounter minimal “construction” frictions.
The data model complements the business process re-engineering (BPR) technique by
providing the design model for the design of the new information system to represent the
new ways of organizing, exchanging and producing new information.
The technical representations of the analytical model provides benefits of minimal data
redundancy, data flow efficiency, accessibility, security, data independence, program
independence, scalability, shareability, adaptability and data transparency.
As with any design model, the data model has its disadvantages or limitations.
The data model underestimates the importance of the socio-behavioral elements that
define the characteristics of the organization and of the people working there. The data
model approach disregards the sedimentation of practices, ergonomics, human factors, and
organizational arrangements that have emerged over time. Data model is not interested
why certain agents are involved in the flow paths and there is no need to inquire further
about their raison d’etre.
The drastic changes, caused by the data model design approach, during the later
implementation stage may create severe implementation problems. The new information
system may faced resistance and non-acceptances by the people and refused to
cooperation causing the new information system to fail (explain the Hdb upgrading story,
subprime mortgage story or the judge story here, or your own story)
The organization assumed the new information system designed by the data model is
superior to the old organization. Any resistance forthcoming should be considered
irrational and be curbed.
The design approach captures the data, data flow paths, processes, how they are produced,
exchanged and processed over a defined period of time – i.e. a “static view” approach.
This may limit its abilities to experience and handle exceptional and irregular
circumstances.
Data model is based on a high level of abstraction since it does not “bother” with current
practices and norms. This leaves rooms for many open questions and debate among the
people. Insufficient depth of critical analysis raise questions that the solution may not be
fully representative.
In conclusion, the data model is a technical approach to design of information systems.

Being technical, it is more structured, methodical, and straight-forward as compare to the
other two design models of transaction-cost and decision making. Hence being so, it has its
strength and limitations.
Question C2
What is a data model? Why and when would you recommend the Data model
approach to design of information systems?
Similar question:
Q. Suppose that you are a consultant whose job is to design a new information system in
an organization where people behave in an un-cooperative fashion. Which approach
to information systems would be more viable in this situation? Why? [2009]
Solution guide: (also read SM/pg-7 Article by Dr. Antonio Cordella)
In a “what” Q,
you are free to What is a data model?
discuss on any “What” question = characteristics (mainly). Depending of other part of question, you may
of the 5W1H discuss strength, advantages and disadvantages too
“why, when,
how, who,
which, where” The data model approach is an information-system design-model that provides a specific
as long as not technical framework to guide the analysis and design of a new information system solution
asked for in the
next half of the for a specific organizational problem. Data model views the organizational problem as a
Q. bundle of data and network of processes. Data model centers organization’s data, data-flow
paths, processes and files.
You can also
include
discussion on The data model is just interested in the way the data are captured, produced, exchanged
advantages and and processed, without questioning the implications and rationales why this is happening.
weaknesses of
data model Hence, the data model approach entails comprehensive data analysis, data capturing, data
storing, and representation of the processes that consume the data. Data flow-path is
optimized.
The data model approach is data centric and technically driven. It is aligned to the
mathematical model’s principles based on the studies of operation research, management
science, and computer sciences. It adopts a tabula rasa mentality, i.e. starts from a clean
sheet with disregard to any need for any formal starting point to the data analysis. The
System Analyst is free to choose any entry point and in this respect, there is no need to
consult the end-users about this too.
The data model disregards the sedimentation of practices, minimal or zero concerns of
any behavioral socio-cultural elements of the organization and the human aspects or
organizational arrangements that have emerged over time. This raison d’etre approach
actually ignores any rationales behind existing practices, norms and procedures.
With the data model approach to designing new information system, where the Systems
Analyst has a completely “free hand” in carrying out his responsibility (including writing
new rules and guidelines), it would appear that uncooperative and reluctant people in the
organization would not pose a real threat to the successful design or development of
the new information system. In fact, the Systems analyst has the mandate to look into any
files of document in the organization to design and develop the new information system
and can do so without any assistance from the people working there.
The data model’s concentration of the technical aspects and disregards of the implications
and rationales can become a weakness. Sometimes, this can become costly during the
implementation stage (of the new information system).
This is reflected in the examples of the subprime mortgage incident (where the underlying
information system merely discharged the housing loan amount and computed the monthly
loan repayments irregardless whether the principal borrower was borrowing beyond his
ability to repay the principal sum) and the Singapore HDB upgrading program (where the
underlying information system merely compute the sum each household will equally share
to repay for the upgrading programme of the common facilities and buildings, irregardless
whether the house owners have the financial means or not).
However, the choice of data model as the design model for information system such as the
inventory control system, enterprise resource planning system, Keppel club boating club,
and even UOL lunch scheduling system is likely to be an appropriate and suitable one.
The absence of factors such as bounded rationality, opportunism and market uncertainty,
make the data model approach the right design choice.
Why would the data model be recommended?

(“Why”? is somewhat like asking Why go by taxi or train? May include a “helicopter
view” comparison with other models as in: why not other models.
Exploit DM characteristics and strength).
Some reasons why the data model is recommended include the new information system is
urgently required, the current processes and policies are badly organized and need to be
reorganized quickly, the other two design models (decision-making and the transaction-
cost models) are not appropriate design models for the organizational problems on hand.
The firm embraces a “tabula rasa” and “raison d’etre” approach for a fast development of
the new information system.
Data model leads to fast development through the system development life cycle (i.e.
seven stages). The design model provides for a fast product uptime, involves much lesser
resources (as compared to the other two design models), is easier to manage, plan and
budget. Designing and implementing functional requirements and specifications lead to
new ways to produce, store and manage the data and processes.
Data model is the less complex of the three design-models. It’s technically and
mathematically driven model. Here, the cognitive and behavioral aspects are not important
considerations unlike the situation of the decision-making and transaction-cost models.
Decision-making model assumes the organization as a bundle of decision and decision
makers and characterizes on cognitive aspects, whereas the transaction-cost model is
complex model, being more concerned with the stages of transaction cost, contractual
obligations property rights, and factors of cost such as opportunism, bounded rationality,
market uncertainty and asset specificity (which are particularly important only when
involving external trading partners).
When would the data model be recommended?
(“When” and “why” questions appear very close relatives like “Why or when taxi?”
“When” = advantages, strength, and when to avoid (i.e. major disadvantages are evident))
Data model is recommended when the organization views the firm as a bundle of data and
network of processes rather than a network of employees, relationships, environmental
factors, decision-makers, transactions and contractual obligations involving external
trading partners. Data and processes are internal to the organization, follow standard
procedures, industry practices and not deviate very far from the norm of practices.
Often with the building of new information systems - which imply impending changes to
the organizational processes, roles, and structure – staff’s resistance and non-cooperation
will increase. Many staff is skeptical of the new information system. Often firm’s experts
and qualified professionals will excuse with not having the time to formally sit down to
detailed discussions or be interviewed. The nature of the data model approach allows the
staff interaction to be “relegated” to the background.
With the data model approach, the new information system is highly dependent on
accurate capturing and representation of the data, data flow-paths and processes. The
social, behavioral, and cognitive aspects are key considerations of the design. The design
is largely technically and mathematically bias. It is concerned with the accurate building a
database, optimization and efficient processing of data, so as to cater to secure, coordinated,
yet easy accessibility for the coordination of structured functional processes, and
production of reports and statistics.
In conclusion, that data model can be used successfully as the basis of the design of a new
information system, even with minimal or no co-operation from the people in the
organisation. This holds true as long as the Systems analyst has unrestricted access to the
organisation’s data (documents, files), know where and how the data is consumed by the
business processes. As in all models, the data model approach has it weaknesses too.
Question C3
Inform = Discuss the data model and, with examples, explain the advantages and
influence disadvantages of this approach to inform information system design [SG]
Other similar question:

Q. Describe the data model and explain, with examples, why it is useful to guide the design
of information systems. [2007 Prelim]
Solution guide:
The data model is a technical approach to the design of information systems to meet
processing requirements for a specific organizational problem. The data model views the
organization as a bundle of data and network of processes.
The data model centers on detailed data analysis, capturing, exchanging, processing and
representation of the organization’s data, documents and files that represent the enterprise
operations. Data model examines and optimizes the data flow-path. A normalized data
model is the resulted of the technical analysis of data model and forms the basis for the
creation of the physical database that supports the information system.
Many other authors see the data model in slightly different ways: “The Data model
describes in abstract way how data are represented in an information system and the
enterprise”. “Data modeling is the process of defining what data is used in an information
system or organization and how that data is organized”. “Data model summarizes the
business view of the data to be stored in the database and how they are accessed”. “The
Data model provides the conceptual design of the database of the information system”.
The data model approach assumes the organization is data centric and technically driven.
Although it is well-known that information systems are socio-technical systems, the data
model does not take into consideration socio-cultural, behavioral, and cognitive aspects that
the transaction-cost and decision-making models embrace respectively.
Data model, being a technical model draws on technical perspective emphasizing

mathematically based models to study information system using techniques of
management science, operation research and computer science.
The Data model analyses the organization’s data, business processes, files and how the
data (documents) flows through various departments and people using them.
Data is stream of raw, unprocessed facts, representing events that occur within the
organization or the environment. Disorganised. Once organized and arranged into
meaningful information lead to relevant, accurate and timely information that help the
organization perform their obligations to the customers and partners.
With Data model, the design of an information system is concerned mainly to optimize the
data flow in the organization. Hence, as a systems analyst, you should only consider the
data and files in the organization as a data flow machine.
In other words, the system analyst should ascertain the management information
requirements by examining all reports, files and other information sources used by
managers. By so doing, the analyst should obtain a stream of raw facts that needs to be
computerized and stored into a database in a form that people can understand and use.
The new design the information system should improve data flow paths with the ability of
the organization to produce, manage and analyze data.
The diagrams below provide a pictorial representation of “before” and “after” the
application of Data model to solving the informational needs of an organizational problem.
The flow-paths are optimized and streamlined, all necessary data, documents, business
processes, and files are captured into a database for information processing.
Before DM: Documents/

Be aware Data/Files flow by/through
that the use many various processes
of too many
acronyms
may irritate
the Data, documents
examiners. After DM: Streamline data in
So, on the
safe side, centralized database. Optimize
write in full with most efficient data flow
or use path. Improve data handling.
acronyms
minimally.
database
Typical examples of application software modeled with data model approach are the SIM
course evaluation system, Keppel Boat club system, and UOL lunch story (see B1).
Thus, designing an information system means designing and implementing functional

requirements and specifications that will lead to new ways to produce, store, process and
exchange data faster, more reliable and secure than previous practices.
The systems analyst should look at the organization as a data flow machine and design the
information system so as to improve the ability of the organization to produce, manage
and analyze data. Basically, the systems analyst should look at data flows with two
assumptions in mind:
• First, that individual and organizational knowledge are fully accessible to the analyst
so that the analyst can resort to a structured method to capture and include them in
formalized (computerized) routines.
• Second, that the analyst can redesign data flows and files from scratch irrespective of
existing organizational structures, procedures, and practices in accordance with what
data are required to perform the new functions - a tabula rasa (“blank sheet”) approach.
In other words,
• Data model is largely concerned with “WHAT” data is captured, produced,
exchanged, and processed without questioning WHY this is happening.
• Data model does not consider organizational norms, existing practices, and culture -
raison d’etre approach. A technically accurate design is foremost.
The data model can be technically represented and hence this is how the data model
informs the design of information system. The exercise involves the identification of all
the entities, their relationships and their data items associated with the problem. Entities
are objects, things, document, people, anything that has data values. Each group is
collectively called “entity type”.
The basic tool for data modeling is called an entity-relationship diagram or ER-Diagram
(ERD). The ERD provides a critical analysis of the data in the organization. Data
modeling is a technical approach in determining the design of information systems.
The first step to data modeling is to identify all the entity types that would represent the
business operations and information needs of the new information system. The ER-
Diagram is prepared with its cardinality between entity types clearly defined. Once
completed, this is followed by the identifications of their attributes and keys (primary and
foreign keys). A normalization process to remove all anomalies is performed before the
database schema and database is created. The diagram below gives an overview of the
ERD and the final database.
Information
systems
DataModel (via Normalisation

ER Diagram (1NF to 5NF) Database
The advantages or strength of data model lie in its technical and data centric approach.
The data model is an abstraction of the real world of the system. It provides a
representative “picture” and clear representation of the environment in which the new
information system will operate to guide the development of the new information system.
We see this in examples such as the SIM course evaluation and SIM student
attendance clocking system which clearly represent the affairs of the environment that
they operate in.
The systems analyst need just only concentrate on which data (and their data flow paths)
are produced, captured, exchanged and processed without the need to question the reasons
why this is happening.
The data model promotes full transparency. Being technical and data-centric in approach,
the design model neither dependent on human perceptions or interactions (of the current
system), nor is concerned with the norms and cultures inherent in the workplace. Hence, a
tabula rasa approach is possible to designing the new information system. There is
minimal chance of influence by opportunistic behavior and bounded rationality.
The Systems analyst can redesign data flows and files from scratch irrespective of existing
organizational structures, procedures, and practices. No need to inquire further about their
raison d’etre. In other words, data model does not bother with existing “baggage” of the
current system (i.e existing practices, rules or norms. This is a clear winner as the new
information system can be quickly designed and develop in a short space of time involving
minimal resources.
The data model is effective. It is technically accurate, reliable, economical and durable so
that the system does not need constant reconstruction as compare to building
information system based cognitive and behavioural perspectives whose factors are
dynamic in nature.
As new rules and procedures with new data and flow paths can be introduced without
concern of current procedures or ruling, the development and implementation of the new
information system encounter minimal “construction” frictions.
The data model complements the business process re-engineering (BPR) technique by
providing the design model for the design of the new information system to represent the
new ways of organizing, exchanging and producing new information.
The technical representations of the analytical model provides benefits of minimal data
redundancy, data flow efficiency, accessibility, security, data independence, program
independence, scalability, shareability, adaptability and data transparency.
As with any design model, the data model has its disadvantages or limitations.
The data model underestimates the importance of the socio-behavioral elements that
define the characteristics of the organization and of the people working there. The data
model approach disregards the sedimentation of practices, ergonomics, human factors, and
organizational arrangements that have emerged over time. Data model is not interested
why certain agents are involved in the flow paths and there is no need to inquire further
about their raison d’etre.
The drastic changes, caused by the data model design approach, during the later
implementation stage may create severe implementation problems. The new information
system may faced resistance and non-acceptances by the people and refused to
cooperation causing the new information system to fail (explain the Hdb upgrading story,
subprime mortgage story or the judge story here, or your own story)
The organization assumed the new information system designed by the data model is
superior to the old organization. Any resistance forthcoming should be considered
irrational and be curbed.
The design approach captures the data, data flow paths, processes, how they are produced,
exchanged and processed over a defined period of time – i.e. a “static view” approach.
This may limit its abilities to experience and handle exceptional and irregular
circumstances.
Data model is based on a high level of abstraction since it does not “bother” with current
practices and norms. This leaves rooms for many open questions and debate among the
people. Insufficient depth of critical analysis raise questions that the solution may not be
fully representative.
In conclusion, the data model is a technical approach to design of information systems.

Being technical, it is more structured, methodical, and straight-forward as compare to the
other two design models of transaction-cost and decision making. Hence being so, it has its
strength and limitations.
D. DECISION-MAKING MODEL
Question D1
What is the difference between structured and unstructured decision making?

Explain with examples the design of information systems that supports structured
decision making.
Similar questions, i.e. parts of solution are relevant to these Q:

Q. The decision making model is often used to inform information systems design.
Discuss, with examples, the main limitations of this model both from the design and
the implementation viewpoints [2009 May Zone-B]
Q. What is decision making? Explain with examples the design of information systems
that supports unstructured decision making. Critically discuss the limitations of this
approach to IS design.[2007 ZB exam]
Q. What is decision making? Explain with examples the design of information systems that
supports structured decision making. Critically discuss the limitations of this approach
to IS design [2007 ZA Exam]
Solution guide:
Structured and unstructured decision-making are design issues of the decision-making

model, which draws on socio-psychological theories to study how decision-makers
perceive and use information. Both the structured and unstructured decision-making
viewed an organization as a bundle of decisions and network of decision-makers.
Structured decision-making refers to the decisions and frequent problems faced by the
lowest level executives in an organization. The unstructured decision-making refers to the
novel difficult decisions and problems faced by the top executives. An understanding of
their characteristics, strength and weaknesses will lead to better designs of the relevant
information system in supporting the decision-making processes of the different type of
decision-makers in an organization.
The decision making model generally categorized all decision-making into three types.
They are structured, semi-structured, and unstructured.
Each type is aligned to a specific group of decision makers bearing certain unique
characteristics. The diagram below further depicts how structured decision-making relates
to the problems at the operational level while unstructured decision-making, at the other
end of the pole, deals with strategic level decision-makers.
Difficult, unprecedented,
Unstructured complex, novel,
decisions Un-programmable
Semi-structured
Guidelines, experiences, semi-
decisions
programmable
Structured Frequent, daily, fixed

decisions procedures, programmable
The differences, as shown in the diagram, between structured and semi-structured
decision-making can be further explained thus.
Structured decision-making is associated with decision makers at the operational level

in an organization involving structured “organized” problems. They have short term
impact and often are recurring problems – relating to the firm’s daily operational
transaction problems.
Because of its high frequency and recurrent nature, after a period of time, the problems
have been “broken down” and become well defined. The sequence in deriving all the
necessary information (often available internally within the firm) of all possible
alternative solutions to support decision making can be elicited, leading to the
development of predefined guidelines and standard operating procedures (SOPs).
Being the case, the use of automation in facilitating the decision process became possible
– resulting in programmed decision-making.
Structured decision-makings are made by lower level decision-makers such as factory

floor supervisors, sales clerk and supervisors, inventory control clerks, shipping officer
and procurement officers and other operational workers. These structured decisions keep
the “factory” running and firm’s resources operating at optimal performance levels.
Decisions taken at the operational level have low risk of errors.
Unstructured decision-making, unlike structured decision, relates to strategic decisions.

Strategic decisions have long term impact, and affect the future directions of firm - firm’s
resources and future viability. Unstructured decision-making are associated with the
highest-level executives in the organizational hierarchy such as the managing director,
CEO, CIO, CFO, and other chieftains in an organization
Unstructured decision-making happens infrequently, are complex, difficult, and novel.
Unstructured decision-makings are subjected to many changing dynamic factors

(parameters) both externally and internally. Market is nearly always imperfect.
Information asymmetry, opportunism, uncertainties and complexities exist. Information
sources are subjected to uncertainty and complexity of politic, economics, competitions,
and many other market environmental factors, thus affecting accuracy and completeness
of input data.
Because unstructured decision-making is non-routine and almost always a case of a new

problem without any past references, the decision maker is involved in making intuition,
judgment and improvisation (based on his personal knowledge, past experience, and
exposure) to derive a “rational” decision.
Theorists argued such unstructured decision-making is often affected by the executive’s
bounded rationality and external market forces. A diagram of bounded rationality and
rational decision can be represented thus:
unstructured Decision is increasingly Decreasing chance of

affected by “bounded effective rational decision,
rationality” of decision- owing to many dynamic
maker external factors
structured chance of making “ rational decision” by decision -maker is highest here

owing to “problem-known/solution-known” type. The decision-maker
seldom has to engage in “bounded rationality”.
Unstructured decision is affected by today’s globalization, and advanced technological

progress. Market competition is very keen and identifying strategic implications are
increasingly complex and sophisticated. Sustaining competitive advantages are key
responsibilities of top executives.
Top executives cannot follow what other competitors are doing in making strategic
decisions and hope to be different, and then generate competitive advantages.
They have to differentiate themselves by exposing themselves to new information sources

- unlimited, unbounded approach is necessary to gain new information and knowledge -
both externally and internally. Only then can he improvises effectively and hope to make
better decisions through intuition, and judgment (i.e. an indication of importance of top
executive’s experiences and knowledge).
Comprehensive rationality (i.e. detailed and accurate rationalization) and unbounded

rationality (i.e. openness to new information, including untapped sources, to derive
optimal rationality, and ability to evaluate/rank accurately) are indeed impossible to attain
at this level. Because of the uncertainty and other factors that they face, it is observed the
top executives and higher managers often increasingly expose to improvisation, bounded
rationality, “muddling through”, and “satisficing” in their decision-making processes.
(BUT remember, no executives will purposely choose to a decision model to make lesser
sub-normal or irrational decisions).
Because of the criticality and nature of unstructured decision, top executives are expected
to be exposed many socio-technical knowledge and skills so as to identify and to rank, as
accurately as possible, all available alternative decisions by their contributions and
consequences to the desired goals.
Hence, unstructured decisions are strategic and of high-risk nature. A poor decision has a
disastrous strategic long-term effect and may cause serious set-back or obliterate the
whole enterprise. One such deliberating example is wrongly investing and expanding into
new markets and new factories in a foreign country. Unstructured decisions often tread on
many unknown circumstances, unknown problems, and unknown solutions (PU/SU).
So, how are the designs of information systems different for structured and un-
structured decision making?
The decision-making model is a design model in analyzing the organization and to

ascertain the specific type of information (i.e. information systems) to support the
different layers of individual and collective decision-making processes within an
organization. It is in relation to decision making that information systems should be
conceived and should prove their value because, according to this perspective, information
systems should support and harness effective decision-making.
Managers use information systems in order to reduce the uncertainty associated with
decision-making.
Structured decision: to understand the design of required information for structured

decision, we’ll take a look at some of the problems associated with structured decision. “Is
this customer sales order valid?” “Which customer orders should be delivered
tomorrow?” “What is the replenishment quantity for item abc?”
As an example, the information needed to help make an appropriate and effective decision
to the first problem would entail knowing what is the credit limit of the specific customer,
what is the dollar value of the existing orders that are still opened and have yet to be
delivered, what is the dollar values of existing open invoices which have not yet been paid,
what is the customer rating, in term of order value, frequency and debt rating (paying on
time)? Such information can be easily structured for extraction to support decision-making
i.e. programmed.
We can deduced that structured decisions are associated with repetitive known problems
that occur frequently even on daily basis, and of low complexity.
The design of information systems for structured decision-making takes into consideration
the high data frequency and volume, available of standard guidelines and standard
operating procedures. Data are largely available internally, narrow in scope, and easily
captured. The information has low aggregation and often required detailed reporting.
These are operational data, necessary to “keep the factory running daily and as efficiently
as possible”.
The information solutions to these structured problems are well known belonging to the
quadrant PK/SK (problem known, solution known). Structured decision-making often
require almost no improvisation and intuition. The design is not concern with bounded
rationality and cognitive limitations of the decision-maker. High market uncertainty is
not a factor of the design here.
This type of information system falls into the category called “Transaction processing
systems”, which bears all the above characteristics.
In conclusion, structured decisions have high degree of programmability. The

processes to derive the all the necessary information to support-decision making are well
defined and well-tested standard operating procedures. The reverse is the case of
unstructured decision-making. Hence, the design of information systems for unstructured
decision-making will be more complicated as the phenomena of bounded rationality
and opportunistic information processing is likely to occur, given the wide scope and
varied kind of market information needed to counter market uncertainty and complexity.
Question D2
“What do you understand by decision-making?" How do information systems assist

decision makers in unstructured problems”
Solution guide:
Decision-making is a cognitive process. Decision-making becomes increasing complex

with difficult unstructured problems. Decision-makers may have to “wear” different hats
of decision models in seeking the solutions. The goal is making rational decisions.
Decision makers will need quality information from well-designed, reliable, robust
information systems to do so.
What is decision-making process? Decision is the selection of a course of action among

alternative solutions. Decision-making is related to sense-making, evaluation and
reasoning. The decision path taken is often affected by one’s past experiences, bounded
rationality, and psychological exposures. Theoretically, the decision-making process goes
through four different stages of intelligence, design, choice and implementation.
But, why is there a need to make decision? We make decisions all the time. Some
decisions are “easy” while others are “difficult”. When we referred to it as “easy”, we
refer to the problems being simplistic, structured, and uncomplicated. When faced with
simplistic problems - like choosing between taking a bus or taxi, which customer sales
orders are due today - many individuals would have little difficulties making a rational
decision.
What is rational decision? Is rational decision possible, all the time?
Rational decision is defined as selecting the accurate solution to a problem. To make

rational decision, the decision makers identify all possible alternatives, their consequences,
and rank them accurately in the correct order of economic values – there are many variable
factors to capture and examine. We see that difficult complex problems - like deciding
how to prevent declining confidence in company’s milk powder product, rebuilt the
insurance business (AIG), or prevent collapse of the financial system - there are many
factors, often very dynamic and complex, to consider. Deriving value maximizing
decision, rational decision for complex problems would surely not be possible all the time,
if not, most of the time.
A decision-maker is often influenced by “bounded rationality” which is his past personal

exposure, good and bad experiences, encountered with “tried and tested” approaches. He
may also be affected by the changing environment factors and conflicting goals, and
attempt to make a “best fit” decision though not necessary the best rational one, called
“muddling-through decision”. He may be forced into a trial and error, intuitive situation,
or apply formal methods to approach the problem, called “psychological types”. Yet again,
rather than optimizing, he decides to choose the first solution that relates to the ultimate
goal, called “satisficing decision”. Bounded rationality, muddling-through, satisficing,
psychological, and rational – hence, make up the various types of decision models.
As observed, problems may be simple or complex. Simple problem can be systematically

broken down, elicit alternative solutions, and derive the best alternative, a rational
solution. We say such simple problems are structured problems requiring structured
decisions, whereas the complex problems as unstructured problems requiring unstructured
decision.
The diagram below summarizes the decision complexities faced by decision-makers and
their application of decision models. It depicts that decision makers with structured
problems have a better chance of making effective rational decisions, whereas
unstructured (or semi-structured) problems tend to expose the decision-makers to bounded
rationality decision models.
Unstructured Decision
“Muddling Through”
“Satisficing”
“Psychological”
Semi-Structured
“Bounded Rationality”
Structured Decision “Rational” decision
Well, in order to make good decisions, decision makers require information – relevant,
accurate, timely information. Information reduces uncertainty and task complexity
associated with market and environmental factors. Information is produced by information
systems. Information systems are application software like customer relationship
management, enterprise resource planning system, market competitiveness analysis
system, and research reports.
To design information system to assist decision makers with unstructured problem,

the systems analyst must first understand the characteristics of unstructured problems and
the processes of decision-making by top-level decision maker.
Besides being complex, unstructured problems bear the characteristics of being

unprecedented, novel, infrequency, and difficult to define. We saw the unstructured
problem examples of AIG rebuilding its insurance business (Is selling of the Asian
businesses the rational solution?), USA Govt on rescue of Wall Street (Is selective bailout
or aggressive lowering of currency inter-bank rate the rational solution?). Such problem
and solution are often unknown (PU/SU) being unprecedented and novel.
Here, unlike structured problems where the problems are known (PK) and even solutions
are known (SK), eliciting all the necessary information to derive the rational decision for
unstructured problem is almost impossible. Hence, identifying and automating all the
required information is way out of the question with unstructured problems (i.e.
unstructured decision-making is non-programmed).
Looking at the PU/PK-SU/SK matrix below, we see unstructured problems fall in the
quadrants of PU/SU and PK/SU. This means, the decision makers need a lot more
information, both in term of information complexity and wider scope of market/
environmental cross information (both from internal and external sources).
Of course, the external information is always difficult to collect and produce and their
100% accuracy is questionable. But still they form one avenue of information source.
SU SK
PU X = unstructured problem/decision.
X
PK X
The design of information system for top-level executives acknowledges that exposure to
bounded rationality, muddling through and satisficing decision-models are inevitable in
their decision-making processes. Unstructured decision-making requires information
systems that are designed to give decision maker some rooms to intuition, judgment and
improvisation.
Top executives are very busy people and have many strategic issues to handle
concurrently. They have very little time to attend computer classes to learn how to use
information systems.
Hence, design of information systems for top executives must take into consideration all
the above design factors. This type of information system, which support decision-making
of the top executives, is called “Executive support system”. Such systems are complex,
costly and difficult to build. But they are important tools of the top executives.
The executive support system, therefore, are designed bearing in mind the needs of top
executives in achieving effective decision-making and their decision processes.
In order that executive support systems are easy to use, they must be graphical (i.e. pie
chart, bar chart, graphs, diagrams, with very friendly easy-to- use touch-screen computer-
user interfaces. They must offer high aggregation of data with drill-down capabilities, so
that the top executives could “drill down” for next many levels of details with the click of
the mouse.
In order to provide for a selection of wide range of information, the system has easy
linkages and inclusion of references to internal and external databases such as Dun &
Bradstreets, Forester Research and other professional and government research bodies.
The design should support the ability to produce selective and exception reporting with
market information segmentation. This includes the use of colour codes to facilities
understanding, visual impact on areas of attention and importance.
In fact, deriving the effective decision with unstructured problem is often difficult for top
executives. We see this in the unstructured decision of financial bailout by the US
Treasury Paulson. Despite the availability of vast reservoirs of information sources and
consultants, the final solution did not calm the global financial market that continues to
reel in fear.
In conclusion, unstructured problems can be extremely complex to elicit an effective

rational decision. Sophisticated executive support information can assist unstructured
problems/decisions, to a certain extent. But all said and done, the knowledge, experience,
exposure, risk appetite, and business connections of the top executive may well make a
difference to the eventual effective solution to an unstructured problem.
WHAT are the design considerations of information system for top-level executives?
The design has to take into consideration the characteristics and nature of the problems faced by top executives,
and the decision processes they went through.
The kind of problems faced by top executives are PK/SU – problem known, solution unknown (e.g. What solution/s
to resolve the falling demands although total local market in local market has increased steadily over the years?)
and PU/SU - problem unknown/solution unknown (e.g. What strategy to ensure firm’s survival in Myammar’s
market). It is very difficult to produce all the necessary information to solve such unstructured problems.
Unstructured problems are non-routine, complex, novel, rare, unprecedented, and very difficult to resolve. The top
executives would require varied kind of information from many different internal and external sources. The
information required to support decision- making is wide, ranging from sales performances to consumer behaviors
to government policies (include foreign countries) to availability of technology and human resources.
We could deduce that it would be impossible to capture all the necessary information. In this respect, unstructured
decision is said to entail a low degree of programmability.
The design of information system for top-level executives acknowledges that exposure to bounded rationality,
muddling through and satisficing decision-models are inevitable in their decision-making processes. Unstructured
decision-making requires information systems that are designed to give decision maker some rooms to intuition,
judgment and improvisation.
Top executives are very busy people and have many strategic issues to handle concurrently. They have very little
time to attend computer classes to learn how to use information systems.
Hence, design of information systems for top executives must take into consideration all the above design factors.
This type of information system, which support decision-making of the top executives, is called “Executive support
system”. Such systems are complex, costly and difficult to build. But they are important tools of the top executives.
The executive support system, therefore, are designed bearing in mind the needs of top executives in achieving
effective decision-making and their decision processes.
In order that executive support systems are easy to use, they must be graphical (i.e. pie chart, bar chart, graphs,
diagrams, with very friendly easy-to- use touch-screen computer-user interfaces. They must offer high aggregation
of data with drill-down capabilities, so that the top executives could “drill down” for next many levels of details
with the click of the mouse.
In order to provide for a selection of wide range of information, the system has easy linkages and inclusion of
references to internal and external databases such as Dun & Bradstreets, Forester Research and other
professional and government research bodies.
The design should support the ability to produce selective and exception reporting with market information
segmentation. This includes the use of colour codes to facilities understanding, visual impact on areas of attention
and importance.
Other information system classes:
Decision support system (DSS) is used in supporting semi-structured to unstructured problems. Sometimes, DSS
may be used by lower-level managers and supervisors to assist in their decision-makings.
DSS can be useful to both mid-level and top managers in semi-structured decision making such as seeking
decisions in “What is the correct pricing?” “What impact with the new advertisement?” There are two
variations of DSS. Data-driven and model-driven modeling. The former provides decisional support with data-
mining and OLAP analysis while the latter in sensitivity and optimization modeling.
MIS caters to the decisional needs of the mid-level managers. The mid-level managers primarily duties are
making tactical semi-structured decisions that will ensure everything is working to plans, budgets and contract
terms. They ensure that the strategic business plans are closely adhered to.
The mid-level managers’ responsibilities are to control, monitor and rectify situation before they get badly out
of control such as “What can be done to correct this month’s budget variances?” “Why are sales for Region-X
doing badly over the last three months?” To do this, they need informational support such as MIS summary
statistics include sales comparison by salesmen, regions, budget expenditure variances, inventory level, damage
report. Exception reports include assembly line stoppage and slow moving inventory items.
Unlike the operational level, the mid-level managers will not have the luxuries of SOPs or standard operating
procedure guidelines to guide the handling semi-structured problems. But they also do not face the level of
difficulties and uncertainty associated with unstructured problems faced by the top-level managers. Often
accurate decision-making is still possible, given good information supports to preempt and rectify “out of
control” situations. Sure, certain degree of the bounded rationality, and satisficing models may be adopted in
their decision making at this level.
Another two types of information systems, which are not main-stream information systems but nonetheless
support decision-making are office automation system (OAS) and knowledge work systems (KWS). OAS is
structured while KWS tends to support unstructured forms.
OAS is a general information system that caters to all data workers at all level of the hierarchy. OAS is
designed as a productivity and efficiency tool suitable for all employees in the organization.
KWS is a specialized information system and designed to cater to the experts and knowledge workers. These
experts often work better and produce revolutionary results in new designs and innovations under “unbounded”
conditions not unduly “bounded” by fixed routines, rules and procedures.
Question D3
Discuss the decision making model and, with examples, explain the advantages and
disadvantages of using this approach to inform information system design. [SG]

Q. What is decision making? Explain how it support unstructured decision making.
Critically discuss the limitations of this approach to IS design.
Solution guide:
The decision-making model assumed that an organization comprises of a bundle of
decisions and decision-makers. The idea is decisions can be broadly categorized into
structured decisions, semi-structured, and unstructured ones.
The decision-making model is a specific way of analyzing the organization whereby the
systems analyst attempts to ascertain the way information systems can support individual
and collective value-maximizing decision-making processes on the basis of their
hierarchical features.
Decision making is the reasoning process comprising of four different stages: intelligence,
design, choice, and implementation (iDCI). The decision making model assumes that the
decision maker has the ability to accurately rank all possible alternative actions by their
contributions to the desired goals (the rational model). However, where the actor has
comprehensive rationality and can rank and perceive all possible alternatives, and their
consequences accurately, an unbounded rationality model surfaces – which is nearly
impossible yet is expected of executives in their decision making. Decision-making is
related to sense-making – a cognitive process – and it affected by bounded rationality, and
psychological aspects. The higher and top executives are often confronted with the
prospect of unconsciously engaging in muddling through, and saticficing in their decision
making processes.
Information systems can be conceived in line to assist decision-making at the three broad
category of decision-making: strategic, management & control, and operational levels. The
diagram below shows how they support, promote and harness effective decision-making at
the three levels with executive support system, management information system and
transaction processing system respectively.
Strategic level: ESS (Executive support system)
Mgt & Control level: MIS (Management Information system)
Operational level: TPS (Transaction Processing system)
The above three categories of information systems can be aligned to provide information
to help the different kinds of problem solving. These problems and be divided into four
quadrants: PK/SK - problem known/solution known (i.e. Which orders should be delivered
tomorrow?); problem know/solution unknown (i.e. What could be done to resolve falling
sales in the west district?); PU/SK - problem unknown, solution known (i.e. Worker’s
productivity in east building is high, but west building is very low); PU/SU - problem
unknown/solution unknown (i.e. What approach to ensure firm’s survival in Myammar’s
local market)
There are advantages and disadvantages to using the decision-making model as the model
in the design of information systems.
The advantages lie in the fact that an organization is generally made up of three broad
layers of decision-makers. Each layer of decision makers need different type of
information to support their decision making processes, and their information
characteristics can be fairly easy to identify.
The diagram below shows how their decision types can be classified broadly into three
categories: structured (programmable), semi-structured and unstructured (non-
programmable). This made for clear distinction of corresponding mapping to the correct
types of information systems to its decision-making requirements. Information systems are
also classifiable into three broad categories.
Operational Management Strategic level
Unstructured ESS
DSS
Semi-structured MIS
Structured TPS / OA
Information Systems is the academic discipline covering the application of information

technology to business and organizational problems. Information systems support decision
makers by reducing uncertainty, complexity and bounded rationality with relevant,
accurate, and timely information to reduce decision errors. This is more so the case with
higher managers where they face unstructured, complex tasks and dynamic changing
environments.
The diagram below shows that information systems can be broadly categorized generally
into 3 levels, similar to decision making. They are strategic, management & control, and
unstructured, semi-structured and structured decision-making, as follows:
Strategic: ESS/DSS
• unstructured: executive support system (ESS).

Mgt & Control: DSS,
• semi-structured: decision support system (DSS) MIS
and management information system (MIS)
• structured: transaction processing system (TPS) Operations:
TPS
Structured decisions are based on well-known routines, fixed procedures, rules and
guidelines. Standard operating procedure is an example. Hence, such decision processes
are easier to program. In an organization hierarchy, structured decision is often associated
with the operational level – i.e. the lowest level in the organizational hierarchy.
Unstructured decisions are non-routine, involves intuition, judgment and improvisation.

The solution to a given problem is hence not fix and subject to many changing factors.
Unstructured decision entails a low degree of programmability. In an organization
hierarchy, unstructured decision is often associated with the strategic level - the highest
level in the hierarchy.
Decision support system (DSS) is sometimes considered semi-structured to unstructured,

depending on the nature of the problem it is trying to resolve. DSS may also be used by
operational level’s decision-makers.
TPS is designed to cater to the information needs of the operational managers. TPS
handled high daily volume of transactions and requires interactive processing. The
operational staff and operational managers are responsible in making decisions that “keep
the factory running optimally everyday”.
The designs of TPS application software support decision-making of structured, frequent

and low-risk nature. This is often the case with operational activities such as the handling
of sales orders, tenders, purchase orders, production work-orders, invoices, and inventory
transactions.
MIS caters to the decisional needs of the mid-level managers. The mid-level managers
primarily duties are making tactical decisions that will ensure everything is working to
plans, budgets and contract terms. They ensure that the strategic business plans are closely
adhered to.
Their responsibilities are to control, monitor and rectify situation before they get badly out
of control such as “What can be done to correct this month’s budget variances?” “Why are
sales for Region-X doing badly over the last 3 months?” To do this, they need
informational support such as MIS summary statistics include sales comparison by
salesmen, regions, budget expenditure variances, inventory level, damage report.
Exception reports include assembly line stoppage and slow moving inventory items.
Unlike the operational level, the mid-level managers will not have the luxuries of SOPs or
structuredness in handling problems, but they do not face the level of difficulties and
uncertainty associated with problems of the top level managers. Often “rational” decision-
making is still possible, given good information supports to preempt and counter “out of
control” situations. Sure, bounded rationality, and saticficing may be the models to the
decision making at this point.
ESS is designed to support unstructured decision-makings by the top executives. Such

unstructured decisions are often strategic in nature and have great impact on the direction
and future of the enterprise. “Should the product line-x be terminated?” “Will a new
30,000sf factory in ShenZhen be the solution? are examples.
Another two types of information systems, which are not main-stream information
systems but nonetheless support decision-making in an organization are office automation
system (OAS) and knowledge work systems (KWS). OAS is structured while KWS tends
to support unstructured forms.
We can summarize the discussion of the advantages of DMM with the “alignment”
diagram below. Decision types are shown on the 1st triangle. It is aligned neatly with the
2nd triangle of type of decision-makers. The 3rd triangle shows the characteristics of both
decision types and decision-makers being aligned as one same characteristic-set. The last
triangle shows the information system type useful to each level of decision-makers.
Strategic Difficult,
Unstructured unprecedented, ESS,DSS
Mgt
decisions complex, novel,
unprogrammable
Semi- Guidelines,
Mgt & experiences, semi-
structured Control DSS, MIS
programmable
decisions
Frequent, daily,
Structured
fixed procedures,
decisions Operations
programmable
TPS
There are some disadvantages using DMM to information systems.
Decisions are make by human beings based on maximizing values. They are often
bounded by limited knowledge and experience of “tried and tested” methods. This is
bounded rationality of decision-making. The model assumes that information systems can
be designed to fully provide rational decision-making to all decision makers in the firm.
Bounded rationality refers to the cognitive limitations that people face in terms of
knowledge and cognitive capacity because they can only choose a sub-set of all the
alternative courses of action and undertake a satisfying course of action that they are
familiar with. Human tends to have their own belief and limited by their inability to see
beyond the horizons.
Top executive informational needs entail a lower degree of programmability because of its
unstructuredness. Owing to the difficult, novel and unprecedented problem, as such, even
with ESS, top executives are said to be involved in muddling-through and satisficing,
whenever they are making their “unstructured” decisions.
They require information systems that facilitate rooms for intuition, judgment and
improvisation – designed with “unbounded rationality” (i.e. not to “bind” the top
executives to the limited information provided by the ESS or DSS information system, but
to encourage and facilitate further query and clarifications for rationality and other
alternatives).
Such design approach is difficult to conceive and build. Hence, often top executives
cannot just rely fully on their internal and external information sources (provided via ESS,
DSS, or GDSS) but also have to be receptive to many other formal and informal sources
including hearsay, and “words of mouth”.
The DMM leaves rooms for information suppression, misuse and misrepresentation
especially when the information sources are from external parties. As information system
acts only as decision supporting role, managers can actually distort information and
decision. This provides opportunity for individual to behave opportunistically that DMM
assumed will not happen and do not support in its design.
Information systems build with DMM has the disadvantages that certain decisional
support may be overlooked or incompetent by bounded rationality and limited experience
of the development team.
DMM is failing in certain areas where these represent the strength of the other two design
models, i.e. transaction costs model (TCM) and data model (DM). The TCM model is
controlled by the actual requirements to meet consumer’s needs (behavioral, socio-cultural
aspects) and assumed presences of opportunistic behavior.
Besides opportunism, the TCM designs take into consideration other factors such as
bounded rationality, asset specificity, small numbers, frequency, uncertainty affecting
different the type of transaction costs. DM is simple, and does not get bogged down with
“baggages” of current norms and procedures. Unlike DM, a tabula rasa approach with
DMM is not possible.
In conclusion, the decision-making model provides useful understanding of decision

model “hats” that decision makers are exposed to them at different times and situation.
The broad classification of decisions into three broad categories of decision types provide
useful guidelines to inform the design of appropriate information systems for each level of
decision-makers. As with all design models, decision-making model has its limitations and
it is with this understanding that the design of information systems be proceeded with.
Question D4
“How do information systems assist decision makers? Discuss”
Similar questions:
Q. Discuss with examples the links decision making and ICT. [2007 Prelim]
Q. What do you understand by “information systems are viewed as socio-technical
systems”? Would the Decision-making model approach suffice?
Q. What is a decision-making model? Why and when would you recommend the model
approach to design of information systems?
Solution guide:
While understandably information systems are socio-technical systems, the design of a

specific information system may be more cognitive rather than technical, behavioral or
vice versa. This is especially the case when we look at the essential responsibilities of the
decision-makers in the organizations.
Decision makers use information systems to reduce the uncertainty and bounded
rationality, as they face complex tasks and an increasingly imperfect market conditions.
We recognized that decision-making is the cognitive process leading to the selection of a
course of action among several alternatives.
Decision-making takes place at all levels of the hierarchy of management. A discussion of

the decision models is hence in order, so as to understand how best information systems be
conceived and prove their values to decision makers.
Decision-making is a reasoning process. There are 4 stages - intelligence, design, choice

and implementation (iDCi). Intelligence consists of collecting information and identifying
the problems occurring in the organization. Intelligence indicates why, where, and with
what effects a situation occurs. During design, the second stage of decision-making, the
decision maker designs possible solutions to the problems. Choice stage consists of choosing
among alternatives. The last stage is where the choice is implemented. At each stage,
information systems may be useful to assist in the process.
In order to understand how decision makers make decisions, we’ll briefly examine a
number of decision models that attempt to describe how individuals and organization
make decisions. They are the rational model, bounded rationality, satisficing, muddling-
through, and the psychological models.
The rational decision-making model is a process model for making logically accurate
decisions. The rational model of human behavior is built on consistent, value
maximization within constraints. The ability to accurately identify, list and rank all
alternatives in their correct order of maximum value returns.
Decisions are affected by bounded rationality which refers to a person’s cognitive style,
limited knowledge and preferences. Decision makers, at all level in an organization, are
subjected to the limitations of bounded rationality, and thus leads to satisficing, and
muddling through - a situation more evidently so higher up the decision hierarchy. The
various models do not take into consideration that decisions may be influenced by
opportunistic behaviors.
The satisficing model suggests that a few alternatives are examined and the first available
alternative that moves people toward their ultimate goal is chosen.
The muddling-through model describes the conflict of goals among individual and
organization. People have to choose among policies that contain various mixes of
conflicting goals. This happens especially in the control and strategic level.
The psychological model has a cognitive style that describes the underlying personality
dispositions toward the treatment of information and the selection processes and the
evaluation of consequences. There are the systematic and intuitive types of cognitive
styles. Systematic decision makers approach a problem by structuring it in terms of some
formal method and evaluate and gather information in terms of their structured method.
Intuitive decision makers approach a problem with multiple methods, using trial and error
to find a solution, and tend to not structure information gathering or evaluation. Neither
type is superior to the other, but some types of thinking are more appropriate for certain
tasks and roles in the organization.
Generally, the various decision models may be broadly applicable to three broad
categories of decision types – namely, strategic, tactical and operational. The diagram
below shows that no specific decision model can be linked directly to a decision type. In
real life, decision makers are exposed to different “decision models” hats at different times
depending on the problem at hand. These decision types can be further classified as
unstructured, semi, and structured decisions. Why?
Decision models Decision Types Main Characteristic
Rational model
Strategic decisions Unstructured
Satisficing model
Tactical decisions Semi-Structured

Muddling-Through
Bounded rational Operational decisions Structured
Psychological
Strategic decision has long term impact on the firm’s future directions and overall
resources. Such critical decisions are make by top decision-makers. “Should the firm
venture into China?” Such decisions are difficult to make. They are complex, novel,
complicated, and unprecedented. Information sources are often dynamic, combination of
external and internal, and often partially complete.
To determine the sequence to derive a complete rational strategic decision would be nearly
impossible. We can conclude that strategic decision-making is unstructured and the
processes to produce all the necessary information to support a comprehensive rational
strategic decision-making are non-programmable.
Tactical decision has medium term impact on the firm’s future directions and resources.
Tactical decisions are related to the execution, control, monitoring of the strategic business
plans e.g. budgeting, resources allocations, variances control and enforcement of policies.
Tactical decisions are make by experienced mid-level decision-makers. Unlike strategic

decisions, the degree of uncertainties and business complexities are not so onerous. We
can conclude that the processes to making tactical decisions are semi-structured and can be
partially programmed.
Operational decision has short-term, immediate impact on the firm’s resources. Such
decisions are make to satisfy daily recurring problems. “Which customers are entitled to
discount?” Such decisions enable the execution of the firm’s daily transactions. Rules and
guidelines are abide closely to “tried and tested” procedures (SOPs – standard operating
procedures).
Operational decisions incur lower risk and small margin of errors. We can derive that the
structured processes to arrive a rational decision are hence easily automated and
programmable.
Can information systems be designed to assist these 3 broad categories of decision-

makers? Yes.
In the diagram, we see that within an organization,

different types of decision are made on the basis of Difficult, unprecedented,
complex, novel,
their structural features. We can model information Un-programmable
systems based on the idea that decisions can be split
into programmed decisions and non-programmed
ones. Guidelines, experiences, semi-
programmable
While programmed or structured decisions are related
to highly repetitive, routine problems, the non- Frequent, daily, fixed
programmed decisions are more intuitive in nature procedures, programmable
and requiring improvisation, knowledge, and critical
judgment entailing a lower degree of programmability
The next diagram layered programmed or structured decisions as Transaction processing

systems (TPS), semi-programmed decisions into Management information systems (MIS),
and non-programmed or unstructured decisions as Executive support systems (ESS).
Unstructured decisions are associated with higher- level

Unstructured.
executives who require information systems that give Strategic: ESS
them more rooms for intuition, judgment and
improvisation. Mgt & Control: DSS,
MIS
We can said ESS facilitates “muddling through” and
“satisficing” decision process in highly unstructured and
varied goals situation. “What product strategy? Global or Structured.
regional?” Such decision is subjected to unbounded Operational:TPS
rationality, changing economic and externalities factors.
Often, there are many alternative solutions requiring
extensive analysis and rationalization.
On the other end of the scale is structured decision refers to making decision based on
well-known routines, fixed procedures, standard rules, and step-by-step guidelines to
routine problems.
In between the structured and unstructured lies the semi-structured decision. “What
actions are needed to correct the variances in the budget and actual expenditure?” While
the decisions undertaken to resolve such semi-structured problems are not overwhelmingly
difficult, they are neither simplistic nor straight-forward like the operational decisions.
MIS provides the facts and simulations that are necessary to assist such semi-structured
decision-making.
We can now look at information systems as 3 broad categories: strategic, management &
control, operational. This categorization aligns neatly with the decision-making model’s
three levels of unstructured, semi-structured and structured decision-making. This is a key
positive advantage of the decision-making model.
The information system are explained thus:

• executive support system (ESS) that supports unstructured decisions
• management information system (MIS) that supports semi-structured decisions
• transaction processing system (TPS) that supports structured decisions.
Executive Support System (ESS). Strategic decisions and related activities are
performed by the senior and top decision-makers. To make effective strategic decisions,
these decision makers will often have to scan external information and knowledge from
untested, unknown from unlimited sources. Often a situation of information overload may
exist, and senior executives need effective executive support information systems to help
them evaluate the complexity and uncertainty of market conditions.
Top executives are required to employ effective judgment, intuition and improvisation and
must open themselves to all known and unknown (including risky) sources of information.
At the top level, decision-making is seldom discrete. Decision is based on many known
and unknown factors – combination of facts, experiences, knowledge - rationally,
“irrationally”, bounded and unbounded rationality. They have to be receptive to all
possible alternatives, wide array of parameters and variables.
An ESS provides easy access to both internal and external data relevant to meeting the
business strategies of the organization. One major characteristic of ESS is its ability to
assist top decision-makers filter out extraneous details with graphical, pictorial
representations (pie chart, bar chart, graphs) or drill down to a very detailed transaction
level. Often, an ESS would involve sophisticated database system and network
infrastructure.
Management information system (MIS). The mid-level decision-makers are charged

with main responsibilities of “monitoring, control, organizing and planning”. Tactical
decisions ensure everything is working to plans, and budgets. The main purpose of MIS is
to help the mid-level decision-makers perform these tasks effectively, rather than just
efficiently.
Problems at this level do not followed fixed SOPs to derive their solutions and depend on
correct reading of several dynamic variables. Such semi-structured decisions depend on
MIS to provide accurate statistics, summary, comparative reports, latest order and stock
positions, exception reports on resources and facilities to make informed decisions.
MIS information such as sales comparison by salesmen, regions, budget expenditure

variances, replenishment inventory level, lost and damage report, financial reports, supply
logistics, assembly line stoppage warning reports, and slow moving inventory items are
examples. Often, such management information is extracted from existing ERP, SCM,
CRM and KMS application system.
Transaction Processing System (TPS). TPS is designed to cater to the day-to-day

information needs of the operational decision-makers. Efficient decisions are make to
“keep the factory running” as smoothly as possible everyday and to use resources
optimally. TPS caters to routine problems and track the flow of business activities
through the organization. Decision-making processes are highly structured and organized
around SOPs.
The main design of TPS applications include the ability to support decision support of
transaction with high daily volume, high frequency, routine, low-risk nature, interactive
and online processing. This is often the case with daily business functions such as the
processing of sales orders, purchase orders, request for quotations, inventory movements,
production, assembly, payroll processing, billing, and QC rejects. Typically these daily
functions are part of the larger enterprise application of ERP and SCM. Many
organizations such as Flextronics, Toyota, Dell, Walmart and Baxter use these TPS.
TPS is important and at times critical for most organizations, but not necessarily strategic
in nature. Without TPS, there will be no MIS and higher-level ESS.
There are other categories of information systems such as knowledge

management systems (KMS), office automation sytems (OAS), decision support
systems (DSS) and group decision support systems (GDSS). They complement
the 3 main categories of TPS, MIS, and ESS and provide the complete set of
information systems assisting decision makers. Together, these systems cater to the
decisional support for structured, semi-structured and unstructured decisions.
Decision makers need the various different types of information systems to harness
decision making, simplify processes, improve accuracy, speed, accessibility, lower
transaction costs, and availability. More importantly, they improve the decision-makers’
decisional processes, efficiency and effectiveness, reduce complexity and uncertainty
associated with decision making.
Question D5
Why is an understanding of decision-making model important to the design of an

information system? Is it useful to also include aspects of the other models in the design?
Solution guide.
An understanding of the decision-making model help the systems analyst to ascertain the
way information systems can support individual and collective decision-making during
the four states of decision making process of intelligence gathering, design, choice, and
implementation.
The model examines how the organization can be conceptualized as a decision-making

system that scans the environment with the purpose of evaluating alternative solutions to a
specific problem.
In making decisions, decision makers, at some point in time, may be exposed or “wear”
(not intentionally) different decision “hats” models such as the rational model, bounded
rationality, muddling through, satisficing, and psychological. Decision makers are not
bounded by any specific cognitive decision model/s although we can say that the higher up
the hierarchy, the more active the decision makers the higher the exposure to more than
one decision models.
The lower hierarchical decision makers, bounded by standard operating procedures

(SOPs), standard guidelines and structured problems have less reason for bounded
rationality, and muddling through. After all, at this low level, decision-making falls into
the PK/SK quadrant (problem known/solution known). Rational decision is highly
possible.
Bounded rationality. March and Simon (1958) have proposed an insightful adjustment to
the rational model. Rather than optimizing, which presumes searching for all the
alternative courses of actions, the actor can satisfice; that is, choose a course of action
which is based on a sub-set of all the alternative courses of action. Actors who satisfice are
also said to be “muddling through” because they make successive limited comparisons
between alternative courses of action, thus incrementally building their decision-making
process (extract SG/pg 59).
This cognitive model is based on the assumption that people have bounded rationality
because they stick with tried-and-tested rules and procedures since they are not able to
take into account all the possible courses of action. Thus, bounded rationality refers to the
cognitive limitations that people face in terms of knowledge and cognitive capacity
because they can only choose a sub-set of all the alternative courses of action and
undertake a satisfying course of action. Generally, we can say that decision process is also
influenced by the nature of the organization that the decision-makers belong to.
The most influential parts of the model are based on the idea that decisions, irrespective of
the various decision models deployed, can be broadly categorized into three types of
programmed or structured decisions, semi-structured, and non-programmed or
unstructured ones.
Information systems can be conceived in line with the decision-making. It should show
how it support and harness effective decision-making. Managers use information systems
in order to reduce the uncertainty associated with decision-making. This is more so the
case with higher managers where they face unstructured, complex tasks and environments.
An organization is generally made up of three different broad layers of managers. They

have different responsibilities and made different type of decisions to support their
respective area of responsibilities. Their decision types can be classified into three
categories of structured, semi-structured and unstructured. This made for clear distinction
of mapping the correct types of information systems to its decision-making requirements.
The diagram below shows that information systems are categorized generally into three
levels to meet the information needs at the strategic, management & control, and
three types: unstructured, semi-structured and structured decision-making.
The information system types can be divided into three mainstream systems. They are:
• unstructured: executive support system (ESS). Information design to support for
unbounded rationality, exposure to “muddling through”, “satisficing” and
psychological intuitive decision models.
• semi-structured: Management information system (MIS). Support for
“optimizing” decision making. Some exposure to bounded rationality.
• structured: transaction processing system (TPS). Support “optimizing” decision
making. Achieving “rational decision” is probably highest at this level.
Unstructured Strategic: ESS/DSS

decisions
Mgt & Control:

DSS, MIS
Structured/programmable Operations:
decisions TPS
Is it useful to also include aspects of the other models in the design?
In theory, all information systems are socio-technical system.
(provide your discussion from a socio-technical standpoint, provide a brief comparison

with the other 2 models, Transaction cost model and Data model.
The main basis of comparison should be that Decision making model is cognitive centric,
Transaction cost model is socio-behavioral centric while Data model is technical data-
centric in their approach to design of information systems. Although it is true all
information systems are socio-technical in nature and they reflected the way the
organizations carry themselves. In reality, the design of any information systems must
adopt one main model for its design. As with everything, there are limitations, and this
applies to design of information system too).
So, in this respect, in real practical sense, it is not useful to try to include other aspects of
other models in the design.
E. TRANSACTION COSTS MODEL
Question E1
Discuss with examples the reasons of transaction costs and explain why information
technologies can help in reducing them. [SG]
Similar questions:
Q. Describe the four phases of the transaction lifecycle. Critically analyze, using example,
how ICT can reduce the transaction costs associated to two of these phases [2007 ZB
exam]
Q. Describe the communication and brokerage effects of ICT. Explain how and why they
reduce transaction costs [2009 March Mock]
[communication and brokerage effects refer to buyers and sellers improved
communication link, information asymmetry, and intermediary cost with ICT]
Q. Information systems can reduce transaction costs. Explain how and when this can
happen. Critically discuss with examples [2009 May Zone-B]
Q. The transaction-cost model sees information technology as a factor that can decrease
the costs of transacting, thus improving the functioning of the market or leading to
market- like forms of organization. Critically discuss this statement providing
examples to support your arguments.[2007 ZA Exam]
Solution guide:
The exchange of goods and services between trading partners entail transaction costs. The
smoothness of the various stages of cost depends on factors or frictions encounter during
the stages. These factors are the reasons of transaction cost and generally information
technologies can help in reducing the effects caused by these factors.
A transaction involves costs and the uses of resources. A transaction goes through a
lifecycle comprising of four stages of search, contract, regulation, and maintenance
(SCRM) – and often are seen as the various costs incurred during an exchange or
transaction.
An exchange of goods, services or information takes place in a transaction. Certain

exchanges are simplistic, straightforward transactions while some can be very complex in
nature. The property rights of non-digital objects (such as a table, chair, audio player) are
evidently less complex as compared to digital objects (such as audio CD, textbook, printed
material).
A reason of cost transaction cost called asset specificity factor is behind this exchange.
The asset specificity of the digital objects is much more fluid and complex. Its form and
content could easily be manipulated, duplicated and transformed.
The possibility of opportunistic behavior arising out of such transactions of digitized

objects is hence very real. Because of the increased uncertainty associated with such
transactions, the UAIT (use, alter, income, transfer) elements deservedly attract closer
examination and scrutiny during the negotiation/contract stage, increasing the contract cost,
of the transaction cycle.
The diagram below reveals that there are several key factors that impact and affect SCRM
in varying ways. These factors are bounded rationality, opportunism, uncertainty,
frequency, asset specificity, small numbers (BOUFAS) as proposed by Williamson and
A.Cordella.
These factors are indeed the main reasons and sources that determine the shapes and
sizes of the transaction costs (SRCM).
Uncertainty/
Opportunism Complexity
Small Numbers
Bounded
Rationality Transaction cost
Asset Specificity
Frequency
Search – Contract – Regulation - Maintenance
How does each BOUFAS-factors impacts the stages of transaction cost (SCRM)? The
diagram below provides a graphic illustration of a transaction involving two actors – buyer
and seller and where the sources occurred. The arrow between the two actors represents
the transaction. Bounded rationality and opportunism are factors of the actors. The other
sources are factors of the transaction itself.
- Asset specificity
- bounded - Uncertainty - bounded
rationality - Frequency rationality
- opportunism - Small numbers - opportunism
Transaction Transaction
Actor A Actor B
Use, alter, income, transfer (UAIT)
Search cost - Contract cost - Regulation Cost - Maintenance Cost (SCRM)
Bounded rationality. The capacity of the human mind for formulating and solving
complex problems is very small compared with the size of the problems whose solution is
required for objectively rational behavior in the real world -- or even for a reasonable
approximation to such objective rationality. Hence, individual turns to their past
experiences, exposures, tried & tested methods and this has a limiting effect on getting the
best value from the transaction.
Bounded rationality is a source of transaction costs, particularly in the area of search,

contract, and monitoring & regulation costs.
How is this so? Take “search cost”. Individual, limited by bounded rationality and being
unfamiliar with the market or not knowing what to look for, may be actually conduct
excessive searches and be overwhelmed with information. This information overload can
lead to increased uncertainty, augment information asymmetry, and confusion. The
diagram below shows that this is particularly so in a capitalist economy where the market
is imperfect.
A B Rectangle:
complete information
B’s private information

(asymmetric information)
Common information
Information not access by

both A & B
The same bounded rationality limits the individual ability to negotiate effectively and draft
an incomprehensive contract that may result in higher cost eventually. Thus, humans are
inclined to make erroneous decisions. Errors constitutes increase contract and regulation
costs.
The Sim-Lim story gives an idea why IT can help mediate bounded rationality. The
scenario involved the shopping for the best priced and quality hard-disk at Sim Lim
Electronic Complex [Anthony Cordella, 2007]. Sim Lim has hundreds of IT shops.
Bounded rationality will set in after going around half the shops, as the individuals will
rely on past experiences and limited knowledge to retain the information in his brain. This
will cause him to lose information that he is not familiar with. This increases the search
and contract costs, as the optimal results cannot be attained at the end of his search. But IT
can reduce this cost.
A simple exploit of Excel spreadsheet on a handheld would have greatly improved the
data management, and hence reduced the transaction costs!
IT can mediate bounded rationality further with the development of search engines,
information portals, and connectivity to public and private information databases.
Frequency. Frequency describes how often a specific transaction takes place. Frequency
is the measurement of the number of occurrences of a repeated event per unit of time. The
frequency of a particular type of transaction impacts transaction costs particularly in the
area of search, contract, or regulation cost.
The general guidelines for frequency and why IT can mediate to lower certain type of cost
in SCRM are as follow:
o Low frequency – Low frequency of a transaction type increases search and contract
cost for buying parties as the processes to look for a contracting partner get restarted
each time the need to conduct an exchange. With low frequency, the buying parties
will experience lower agency cost (in-house supervision and managerial cost), but
traditionally, does not enjoy low cost associated with high frequency of volume
purchases), increased transaction costs in searching (for reliable intermediaries),
contracting (negotiation, contract terms), and subsequently, maintenance/ review cost.
With the advancement in IT, network communication systems, SCM, and ecommerce,
this is not exactly the truth anymore. Two scenarios have resulted regarding the
frequency factor:
Intermediaries such as e-commerce transaction brokers (e.g. Accomline, Asiarooms,

and Expedia) have blossomed. They are able to exploit IT network communication
systems to harness volume transactions (i.e. high frequency) as intermediate brokers
between buyers and sellers (globally). Because these brokers are able to attract and
accumulate volume sales (electronically, on a global scale), they are able to get a
competitive price/quantity discount (in the market place) similar to distributor status
from the sellers and pass the benefits to their buyers (of low frequency). Traditionally,
getting a good price/quantity discount not possible without high frequency of the
buyers. Market-like form of organizing persists.
Another development is for firm to “transfer” part of their internal business processes
(often non-core competencies) to external market processes. This has the key
advantage of utilizing the specialist knowledge of professional intermediaries
(brokerage) and lowering of sunk cost. Ericsson/Nokia/Dell and Flextronics
International, Baxter Healthcare and its hospital clients, DBS and outsourced
telephone-pool are examples. This form of de-internalization reverses the traditional
internalization strategy to enjoy economy of scale. Again, market-like form of
organizing persists here.
o High frequency – High frequency of a transaction type lowers transaction costs and
permits exploit of economies of scale - processing in-house with own development
team and resources.
This can result in lower search and contract cost, but higher contract cost in
employment contract and regulation cost (agency cost of supervision, control, and
monitoring). Traditionally, high frequency provides opportunity for better control,
coordination, and security. Traditionally, this lead to hierarchy form of organizing
(such as the case of Fisher and GM).
With industry strategy, high frequency provides the opportunity for development of
network externalities where an increase in the number of transactions has very little
or marginal increase in the overall cost, similar to the telephone network and cable
services of Singtel and Starhub, where any increase in numbers of subscribers will
have little or no impact in increased cost on running the telephone network.
Opportunism. (you have to discuss about opportunistic behaviours and how IT
effectiveness in reducing transaction costs depending on forms of organizing and how
trust affect opportunism. Cases of SG gadget and Africian story of IT increasing
information asymmetry).
Uncertainty. (you have to discuss about market processes and globalization increase
uncertainty through bounded rationality and complexity. Uncertainty leads to information
asymmetry, opportunism and higher transaction costs. The type of asset and its asset
specificity can contribute to uncertainty where the physical specificity is fluid and forms
can change easily. IT through electronics networks, e-commerce, ebusiness and enterprise
systems can reduce SCRM selectively).
Asset Specificity: (you have to discuss different type of assets – content type affect value
of asset. Specialist skill or facility in contract binding to only one party. Digital content
and UAIT in particular and where IT can reduce cost).
Small numbers. (you have to discuss monopolistic situation where contract cost is higher
to prevent opportunistic behavior of unreasonable, frequent price increases. Cases of
Starhub and Singtel on business cables & network lines)
In conclusion, IT can mediate in lowering of transaction costs is applicable in any situation,

irrespective of the type of reasons or sources. The actual cost benefits with IT will differ
from case to case, nature and type of transactions, organizational form of organizing, the
degree of frictions, the extensiveness and scope of the implementation of the information
systems and technology.
Question E2
Explain, with examples, how transaction costs are incurred? Does IT always reduce
transaction costs?
Similar questions:
Q. Describe the four phases of the transaction lifecycle. Critically analyze, using example,
how ICT can reduce the transaction costs associated to two of these phases.
Solution guide:
Transaction costs are cost incurred in making an economic exchange. An exchange

involved various stages of cost in searching, contracting, regulation, and maintenance.
These stages are complicated by various reasons of bounded rationality, opportunism,
uncertainty, frequency, asset specificity and small numbers.
Let us look at an example: buying bananas from my goreng-pisang store. The Transaction
costs = price of banana + effort to find out which of the various bananas make the
specifications + where to get them + negotiate for the best price + transportation cost + QC
cost + time and energy to coordinate and acquire the bananas.
Thus, when rationally evaluating a potential transaction, it is important to consider

transaction costs that might prove significant. Hence, the stages of a transaction and their
cost be carefully examined.
1) Search and information costs (stage-1). They are costs such as those incurred to
determine information of the required goods available on the market, which suppliers,
their reputations, who has the lowest price and best quality, etc.
Bounded rationality often cause one to feel inadequate to search for “more” information
leading to a situation of information overload and increased coordination cost. It is also
true that bounded rationality often cause one to look only at known sources and hence
missed out on new information resulting in an inadequate search. In an imperfect market
condition, the buyers and sellers will act opportunistically and will try to “hide”
information from one another causing market disparity and increased market uncertainty.
2) Bargaining costs (and contract cost) (stage-2). Costs are incurred in effort in working
out an acceptable agreement with the supplier on the transaction, drawing up an
appropriate contract, evaluating the terms, etc. Bounded rationality, insufficient
information, market uncertainty, small numbers, frequency, nature of asset specificity can
negatively impact negotiation and contractual terms.
3) Policy and enforcement costs (also known as “regulation & control cost”) – stage-3
Costs that are incurred in supervising, monitoring and ensuring that the supplier sticks to
the terms of the contract, and taking appropriate action (often through the legal system) if
this turns out not to the case. Where trust is high, such cost may be lowered. In cases of
poorly negotiated contractual terms, the cost of enforcement can be very high.
4) Maintenance cost ….. bla bla bla…
These costs are consequences of complexity and uncertainty of the economic system.
Uncertainty and complexity are related to either human behavior or environmental and
unpredictable events. They are both the outcome of an unequal distribution of information
between the actors involved in the transaction.
Today, we have a largely imperfect global market. Competition is the order of the day. We
cannot expect all transactions to work out smoothly. As we have seen, many factors such
as opportunistic behaviors, bounded rationality, market uncertainty can disrupt orderly
transactions. The scenario below summarizes how various factors can impede and raise
transaction costs.
A supplier may successfully bid in a competitive environment (market) for a customer’s

tender on the building of a special widget. However, to make the widget, the supplier will
be required to build specialized machinery which cannot be easily redeployed to make
other products (high asset specificity).
Now, once the contract is awarded to the supplier, the relationship between the customer
and supplier changes from a competitive environment to an opportunistic situation of
monopoly relationship. Here, one party can subsequently dictate the terms of pricing. In
such in a “monopoly” quite situation similar to small-numbers, where it is futile to search
for more customers, the demand and price are inelastic.
This means that the customer has greater leverage over the supplier such as price cut with
subsequent orders. To avoid these potential costs for the supplier, "hostages" may be
swapped to avoid this event. "Hostages" could include partial ownership in the widget
factory – where costs are shared between customer and supplier. Revenue sharing might
be another way.
Automobile companies and their suppliers often fit into this category - as seen in the case
of GM and Fishers. GM forced Fishers to relocate its factory next to GM (asset
specificity) as the transportation cost was too high for GM. As nearly the whole
production of Fishers (frequency factor) was meant only for one customer (GM), Fishers
has no choice but to let GM dictate terms.
So, does IT always reduce transaction costs?

Yes, in most cases as in eCommerce, and SCM. Often resulting in reduce search ,
Be aware
that the contract, regulation costs.
use of too
many Indeed, implementing a new information technology is generally seen as a means for
acronyms reducing the transaction costs of an organisation. Some reasons being higher availability,
may increased information, increased accessibility, 24/7, efficient network linkages between
irritate the
examiners. sellers and buyers.
So, on the
safe side, However, in practice, implementing new informational technology may often result in
write in higher transaction costs. This is because of the amount of information that needs to be
full or use processed by the organization increases. Organizations are overly bounded to provide
acronyms
minimally. highly precise information. Organizations are not able to efficiently differentiate the useful
information to collect. Poorly coordinated data warehousing and archival system can
aggravate further the processing problems.
This can result in information overload. The cost of handling this information is
coordination cost. The overall processing cost increases leading to a situation where the
cost of the new information technology exceeding the saving in the transaction cost.
IT may increase information asymmetry and opportunism, hence increasing

transaction costs too. How? (African Story, SG gadget)
If these costs exceed the benefits of IT, then the implementation of IT becomes something
negative and expensive.
To reduce coordination costs, organizations can do following:
1) Improve information processing capabilities. This can be done through implementing

new information systems. Technologies like SCM, e-commerce and ERP can provide
technical support for the strategies, rather than piece-meal developments.
2) Use IT to reduce the need for coordination through increased slack resources, i.e.
reduces the need for extreme precision e.g. “over” or excessive search owing to
unnecessary feeling of uncertainty.
3) The decreased amount of information to process = lower coordination cost, which in
turns leads to lower transaction costs e.g. summary, links.
An understanding of the transaction costs and its reasons can lead to better and effective
use of IT and the design of information systems. Today, information is the all important
factor to cost management. Understandable, IT should increase the amount of relevant
information to facilitate efficient search, contract, regulation and maintenance activities.
We dare venture that effective management of transaction costs can be equated to effective
use of IT.
Question E3
What is transaction costs model? How are they incurred? Can IT mediate to
lower overall cost?
Solution guide:
The transaction-cost model (TCM) views the organization as a contractual arrangement to

govern sets of transactions and a network of exchanges & contracts. The contracts are
binding instruments between individuals and organizations. TCM recognizes that
individuals might distort the use of information to achieve their individual goals and
generate strategic misrepresentation. TCM recognizes that IT can mediate transactions &
exchanges between parties to lower transaction costs. At the same time, TCM can use IT
to foster a more intensive use of markets and market-like organizational forms.
A transaction goes through a series of stages (lifecycle) from search to contracting and
review. These stages incur various kind of cost. These are called transaction costs.
Transaction costs are incurred during of searching for buyers and sellers (vendors),
selection of partners, negotiations, and writing the contract terms, and regulating,
monitoring and enforcing the contracts, and maintenance and review of the contracts
(SCRM). These various type of transaction costs can be explained in details as follows:
Cost of searching for buyers and sellers (vendors)

• Searching, collecting, collating product information during procurement
• Comparing prices of product and services during the procurement process
• Marketing of services and products
Cost of selection of partner and writing the contract
• Research the background, reliability, dependability and tenure of partners
• Evaluation of reputation of partner
• Selection of partner
• Drafting the terms of contract
• Negotiate terms of contract
• Securing and writing the contract
Cost of monitoring and enforcing the contract
• Sales order processing: capturing, monitor, supervising and allocating
• Delivery and transportation of goods
• Customer services
• Monitoring and enforcing contract. Control and regulation costs - costs relate to the
implementation of the contract under conditions of uncertainty, the policing of
deviations from the contract terms and the enforcement of penalty to restore
conditions suitable to the terms agreed upon
Cost of maintaining and reviewing the contracts
• Cost of review of partnership
• Costs of resources incurred in all the stages (in looking for new partner or updates
on existing partner)
• New information about existing and new partners
The actual degree of involvement of each type of transaction costs will further
depend on the reasons or sources of the cost, namely BOUFAS (bounded rationality,
opportunism, uncertainty, frequency, asset specificity and small numbers).
Technically speaking, reaching out to the market places is expensive.
Can information technology mediate and reduce transaction costs? Over the last decade,
information technology has made tremendous progress. It improves the enterprise’s
operations, access to markets, decision-making capabilities, and communication – and
improving the overall enterprise value chain leading to lower transaction costs.
From an economic standpoint, information system technology can be viewed as a

factor of production that can be freely substituted for capital and labor. As the cost of
information system technology falls, it is substituted for labor. Historically, labor has been
a rising cost.
Now with lowering cost of IT, firms are experiencing lower cost of market participation (i.e.
the transaction costs incurred in external market processes), making it worthwhile for
firms to contract with external suppliers (though Internet, extranets and e-commerce linkup)
instead of building up own internal sources incurring new resources both staff and
equipment. Hence, IT should also lead to a decline in the number of supervisory middle
managers and clerical workers as information technology substitutes for their labor –
lowering of agency cost and transaction costs (contract & regulation cost)
IT facilitates overall seamless coordination, cooperation and fast efficient processing of all
aspects of business transactions which include purchases, sales, inventory, production,
assembly, transportation, accounting, training of new staff, account receivable, account
payable, supply chain management, customer relationship management and enterprise
resource planning.
The lower transaction costs is achieved together with less labor cost, less office space, less
operational space, reduces firm size (physically) and less agency cost (cost of monitoring
and supervision). Information technology has also facilitated the formation of network
alliance between contract manufacturers, buyers, and customers. This reduces SCRM
(searching, contracting, regulation/monitoring, and maintenance cost) further.
The IT responsible for this phenomenon includes e-business, e-commerce, Internet,

extranet, telecommunication network services, database systems, and global enterprise
information systems such as SCM, ERP, CRM, KMS.
In the sales order processing system – customers can make direct enquiries on prices,
place orders, and check status of their orders without the intervention of firm’s human
labor. This is the case of Asiarooms.com, Zara and Mango’s ERP information systems.
Zara’s sales invoices and reminders of outstanding payments can be automatically created
and dispatched to customers, without human interventions. On top of that, there is less
supervision and monitoring cost (agency cost).
Inventory control and production control are automated with minimum involvement of
human labor as in the case of WalMart Hypermart and Ford Motor using RFID tags. The
inventory level of each item is computed based on the data collected from the RFID tags.
Their inventory system automatically recommended inventory replenishment for items

that falls below the minimum stock levels. Their information systems result in reduced
inventory holding both in the central inventory warehouse and the respective display or
shop-floor holding areas. This means less space is required, less damaged items, less
misplacements, less coordination effort – resulting in all round saving.
Baxter Healthcare formed an alliance with its hospital partners. Baxter healthcare’s SCM
takes care of all the inventory, warehousing and supply needs of the hospitals. The
searching, contracting, regulation and maintenance cost of the hospitals were virtually
eradicated.
Besides the lower transaction costs, the hospital also further benefited as they could
concentrate on their core business and competency. On the other hand, Baxter benefited on
economy of scale and, with lower transaction costs, could deliver its product and services
at a reduced cost. This scenario is also replayed in the case of Flextronics International and
their customers such as Dell and Ericsson.
Call centers handle all customer enquiries for all its various branches. Calls and enquiries
are all channeled to a distributed ‘logical’ centralized network call center that is located in
another country with cheaper labor cost. With this service outsourced, the firm size is
actually reduced too. With virtually no more supervision and monitoring activities, the
agency cost is reduced when layers of middle managers can be removed. We see this with
all banks.
e-Commerce business models and Internet technology provide great transactional saving
and greatly lower the transaction costs. E-Commerce models includes virtual storefront,
information broker, transaction broker, online auction, content provider, virtual
community, online service provider, and information portal. They facilitate low-cost
online transactions with secured e-commerce payment systems, 24/7 services, extended
channel of distributions, low cost barrier to entry, and richness in advertisement.
Amazon.com, a B2C virtual storefront, keeps just-in-time (JIT) inventory of books and
magazines. Supplies are acquired only when customer orders are received online.
Amazon.com also sell e-books and e-magazine that hardly requires any physical
warehouse holding space. In such cases, orders are automatically catered for with
accompany online payment. All this is done without the need for any labor intervention.
Telefonica in Spain operates a virtual storefront - content provider to sell music download,
video-on-demand and customer registrations without incurring cost in labor and office
space. As they are all in digital forms, theoretically there is no need for any warehouse
anymore and yes, thus lowering both transaction and agency costs too.
Another e-business model is the Information broker model. Hardwarezone.com is one

example. It is an information broker portal that provides information services on IT
product specifications, shop locations, and prices. It also provides free price comparison
and product reviews. It is not an IT store and it does not sell any IT products too. Such
information portal reduces the searching and procurement cost of the buyers. It also
The Q is not
really concern reduces information asymmetry.
about
limitations of There are many more examples of great saving in transaction costs using IT, e-Commerce,
IT, but we can and Internet. United Parcel Services, American Airlines, eBay, CTrip, Dell Computer,
put this in the
Toyota, and Ford’s special experience with the invoice-less processing system. The list is
conclusion to
show the endless.
wider effects
of IT Indeed, information technology has greatly lower the transaction costs. However, the
growth of IT, network systems and globalization has created a situation of excessive
databases and global network of information. The ugly heads of information overload,
insecurity, privacy invasion and infringement of property rights are becoming urgent
problems. Control mechanisms and sophisticated software to counter these problems can
offset the benefits and may actually raise transaction costs eventually.
Question E4
Explain outsourcing from a transaction costs perspective. Explain with examples the
The Q is potential roles play by ICT in supporting outsourcing of information systems.
really
concern
about why Similar questions:
outsourcing Q. What is a transaction costs model (TCM)? Why and when would you recommend the
of TCM model approach to design of information systems?
development
of Solution guide:
information
systems is
now Outsourcing is based on the concept of “sub-contracting”, specialization and division of
popular… labor. Outsourcing involves de-internalization of internal process to market processes.
and with Outsourcing involves the negotiation and writing of a contract with intermediaries, or 3rd
transaction parties to perform professional tasks that otherwise would have been performed in-house
cost as the
main reason. with the firm’s own in-house teams of managers, workers, developers, programmers,
office space, machinery and hardware resources
Organizations have begin to ask “why should organization be involved in non-core

business processes when it is cheaper, more efficient, less time-consuming and readily
available skilful experienced professionals to do so?”
Outsourcing from a transaction costs perspective. What is “transaction costs perspective”?

Transaction costs refer to the costs incurred by the series of activities necessary to
complete a transaction.
These costs are incurred during of the search for outsourcing partners, selection of
partners, negotiations of terms, and writing the contract, and regulating, monitoring and
enforcing the contracts, and maintenance and review of the contracts - in short, search,
contract, regulation and maintenance costs (SCRM). The diagram below shows that the
SCRM costs associated with outsourcing are in turn affected by several reasons such as
bounded rationality, opportunism, uncertainty, frequency, asset specificity and small
numbers (BOUFAS).
Uncertainty/
Small Numbers
Bounded
Asset Specificity
Frequency
Take the analogy of “would you outsource your lunch”? Obviously, for nearly everyone,
the answer is yes. Why yes? Reasons are transaction costs in relation to factors of
BOUFAS, economy of scale, convenience, and level of trust. This is the same scenario too
when outsourcing information systems, be it during the development stages, operations or
building the telecommunication network to support the information systems.
Frequency. Frequency describes how often a specific transaction such as new information
system projects, network communication installations, and PC maintenance take place.
Frequency is the measurement of the number of occurrences of a repeated event per unit of
time. The frequency of a particular type of transaction impacts transaction costs
particularly in the area of search, contract, and regulation cost.
With low frequency transaction, the search, contract and regulation (supervisory, agency)
cost increases for the buying parties as the processes to contract (employment contracts)
and manage a new team of developers or professionals get restarted each time a new
project comes around. Keeping a team, sitting around and waiting for new projects
similarly also increase transaction costs, in like ways.
A viable alternative is to outsource part or all of the processes. This has the key advantage
of utilizing the specialist knowledge of professional intermediaries to get the best deal
lowering agency cost. NCS, EDS, and Accenture are three such international IT
outsourcing provider companies.
Bounded Rationality. This limits the inhouse developers abilities to optimize on its limited
resources. This increases transaction costs (search, contract and regulation costs) when
bounded rationality forces the developers to compensate with misguided excessive search
for information on business knowledge, information overload, and incompetent
negotiations of contract of IT tools, and limited ability to maximise on the resources
during development stages.
Bounded rationality can be mediated with external specialist knowledge by engaging

external specialists and professional intermediaries through outsourcing. This is attractive
option opened up the doors to unbounded rationality and reduction of transaction costs,
particularly in agency and coordination cost.
Small numbers and Assest specificity. Within a country where there is a very limited
number of avaliable experienced professional IT specialists in a very specialised business
area, employing such professionals incurred high cost of contracting. This is also the
reason of high asset specificity of the professionals. Investing in intensive search effort not
help much since such professionals are limited. BUT in today context, the world is the
very connected. Already in place are effective network infrastructure and global
connectivity (IT externalities) where the world is becoming "w/o boundaries" - a big dot.
Outsourcing the information systems to faraway professional vendors in another countries
is very viable. This has the effect of diminishing the limiting conditions associated with
small numbers and asset specificity.
(Uncertainty & Opportunism. You will note that all other reasons like complexity,
opportunism, bounded rationality, asset specificity, frequency can lead to uncertainty.
Type of organization forms and goal congruence and trust also affect uncertainty. Think
about it…
you can discuss about market processes and globalization increase uncertainty through
bounded rationality and complexity. Uncertainty leads to information asymmetry,
opportunism and higher transaction costs)
So, how does ICT support outsourcing of information systems? Today, there are many
qualified outsourcing service providers with expert knowledge in all aspects of
information systems activity. They have proven knowledge, wealth of experience,
international networks and development skills. NCS, EDS, and Accenture International are
three such global software outsourcing providers.
Because of a combination of IT technological advances and ease of global connectivity

(through improved communication networks, Internet, extranets, distributed databases,
etc), globalization, availability of expertise, and cheap skilful labor in 3rd world countries,
it is now attractive for companies to outsource their non-core business activities. Examples
included well-known low-cost operational call-centers servicing local enquiries that may
be located in a faraway location and in any part of the world. Application development can
be carried out quickly and cheaply by IT experts in another country and delivered over
global communication networks.
Outsourcing of information systems may be illustrated with the following three main areas.
Computer operations – Owing to globalization and a wired world, most organizations run 24/7
operations. Running on 3 shifts requires more human resources and infrastructure. But when
there is dip in demands or rise in demands as with seasonal promotional sales and lull periods,
it is not easy to maximize the resource utilization in both manpower and infrastructure – hence
higher transaction costs of supervision, monitoring – agency cost.
Many business IS operational processes are standard forms. Standard equipment and devices
are also used. They are fairly easy to operate and maintain. Maintaining full time staff at all
time is hence costly. Whereas shared resources via outsourcing is attractive. Standard chartered
bank and OCBC bank are examples.
Telecommunication networks – Mainframe computers, communication equipment, security

devices, routers, gateways, firewalls, distributed databases are expensive infrastructures. With
globalization and internationalization of business enterprise, managing and building own
international telecommunication networks can be exorbitantly costly. New technology changes
quickly and obsolescence is high (market uncertainty and complexity). Keeping up with the
latest is important to reap best benefits of effective communication networks. This is expensive.
Individual organizations would have problem optimizing without any scale of economies. The
outsourcing of such telecommunication requirements to network providers is most appropriate.
Applications software development – In application development, particularly large scale

developments involving the full life cycle approach is demanding, strenuous, time consuming
and resources sapping. Because it takes years to develop, staff turnover is inevitable during the
various phases of development.
This means delays and higher transaction costs – caused by searching, re-contracting, retraining,
and recruitment. Again, the development team may not have the expert experiences (bounded
rationality). Inevitably, when the development is completed, the problems of retrenching, and
demoralizing existing “left behind” staff become evident.
Given the situation, outsourcing to IT provider with professional experts would be more cost
effective. Singapore Polytechnic is an example.
Outsourcing may open doors. The professional outsourcing company has global reach,
networks, and ICT connectivity. They know where, how, and who to get the best skills,
equipment, techniques, tools, raw materials, logistics support, and at the best price.
Flextronics is an example.
In most organization, many large organizations are shifting towards outsourcing of their
key development and operational activities such as IT operations, systems analysis,
systems designs, application developments, networks and security management. The likes
of these can be found in Standard Chartered Bank, DBS, SIA, and Government statutory
bodies.
In conclusion, in today’s context, outsourcing of information systems indeed has positive

effects on reduction of transaction costs and promotion of core competencies. While this is
true, organization must contend with the sacrifices of losing their own team of IT experts,
weaker system security, lost of control, originality of information systems, property rights
and other factors when having own development team of developers.
Question E5
What do you understand by “property rights” in a transaction? Explain any 2
An
introduction reasons of transaction costs and how IT can mediate in them.
should give
the BIG Similar question:
picture, Q. Describe the transaction costs model. Discuss, with examples, how ICT can reduce the
keywords w/o transaction costs associated to uncertainty and bounded rationality.[2007 Prelim]
any details.
Details,
definitions, Solution guide:
illustrations
should be in Property rights are intrinsic values of an asset. In a transaction or exchange, which attracts
the essay various stages of cost, the property rights of the transacted asset are automatically
body
transferred to the new owner. The cost of an exchange is complicated by various reasons
of bounded rationality, opportunistic behaviors, uncertainty, frequency, asset specificity
and small numbers.
A contract, either implicit or explicit, takes place between the two actors (buyer and seller)
in an exchange. Property rights give the new owner the rights of “use”, “alter”,
“income” and “transfer” (UAIT) of the transacted asset. An asset maybe any kind of
goods, services or information.
“Use” refers to the buyer who can use it in any ways he sees fit. Similarly, he may make
alterations and/or make an “income” out the acquired asset. Of course, all these must be
done within the context of the contract. Finally, he may sell and transfer his rights of the
property to another buyer.
Certain exchanges are simplistic, straightforward transactions while others may be very
complex – this depends on the nature of the transacted asset. The property rights of non-
digitized objects (such as a table, chair, audio player) are evidently less complex as
compared to digitized objects (such as audio CD, textbook, printed material). With the
latter, the asset specificity is much more fluid, manipulative, and transferable.
Low asset specificity suggests that an asset’s form and content could easily be reorganized,
duplicated and transformed for reuse and re-contract. In an imperfect market, the
Be aware possibility of opportunistic behavior arising out of such transactions of digitized objects is
that the
very real. Because of the increased uncertainty associated with such transactions, the
use of too
many UAIT elements deservedly attract closer examination and scrutiny during the
acronyms negotiation/contract stage of the transaction cycle.
may
irritate the A transaction involves various costs and the uses of resources. In a perfect market, all
examiners. transaction costs would be the same irrespective of the suppliers. But this is not true of an
So, on the
safe side, imperfect market where frictions and impediments to a smooth transaction will drive up
write in the transaction costs.
full or use
acronyms Such transaction goes through a cycle of search, contract, regulation, and maintenance
minimally. (SCRM) – and is seen as the various costs incurred during a transaction.
However, in an imperfect market, there are several key reasons that affect SCRM cost. As
seen in the diagram below, these reasons are bounded rationality, opportunism, uncertainty,
frequency, asset specificity, small numbers (BOUFAS), as proposed by Williamson and
A.Cordella.
They impact search, contract, regulation and maintenance (SCRM) cost in various ways
and depth. These factors are indeed the sources and main reasons that determine the final
shapes and sizes of the transaction costs.
Uncertainty/
Small Numbers
Bounded
Asset Specificity
Frequency
How does each BOUFAS factor impact the different SCRM?
The diagram below provides a graphic illustration of a transaction involving 2 actors –

buyer and seller and where the sources occurred. The arrow between the 2 actors
represents the transaction. Bounded rationality and opportunism are factors of the actors.
The other sources are factors of the transaction itself. We shall further investigate two of
the key contributors of transaction costs, namely bounded rationality and frequency.
- Asset specificity
- bounded - Uncertainty - bounded
rationality - Frequency rationality
- opportunism - Small numbers - opportunism
Transaction Transaction
Actor A Actor B
Use, alter, income, transfer
Search cost - Contract cost - Regulation Cost - Maintenance Cost
Bounded rationality. The capacity of the human mind for formulating and solving
complex problems is very small compared with the size of the problems whose solution is
re required for objectively rational behavior in the real world -- or even for a reasonable
approximation to such objective rationality. Hence, individual turns to their past
experiences, exposures, tried & tested methods and this has a limiting effect on getting the
best value from the transaction.
Bounded rationality is a reason of transaction costs, particularly in the area of search,

contract, and monitoring & regulation costs.
How is this so? Take “search cost”. Individual, limited by bounded rationality and being
unfamiliar with the market or not knowing what to look for, may be actually conduct
excessive searches and be overwhelmed with information. This information overload can
lead to increased uncertainty, augment information asymmetry, and confusion.
The same bounded rationality limits the individual ability to negotiate effectively and draft
an incomprehensive contract that may result in higher cost eventually. Thus, humans are
inclined to make erroneous decisions. Errors constitutes increase contract and regulation
costs.
The Sim-Lim story gives an idea how IT can help mediate bounded rationality. The
scenario involved the shopping for the best priced and quality hard-disk at Sim Lim
Electronic Complex [Anthony Cordella, 2007]. Sim Lim has hundreds of IT shops.
Bounded rationality will set in after going around half the shops, as the individuals will
rely on past experiences and limited knowledge to retain the information in his brain. This
will cause him to lose information that he is not familiar with. This increases the search
and contract costs, as the optimal results cannot be attained at the end of his search. But IT
can reduce this cost. A simple exploit of Excel spreadsheet on a handheld would have
greatly improved the data management, and hence reduced the transaction costs!
IT can mediate bounded rationality further with the development of search engines,
information portals, and connectivity to public and private information databases.
Frequency. Frequency describes how often a specific transaction takes place. Frequency
is the measurement of the number of occurrences of a repeated event per unit of time. The
frequency of a particular type of transaction impacts transaction costs particularly in the
area of search, contract, or regulation cost.
The general guidelines for frequency and why IT can mediate to lower certain type of cost
in SCRM are as follow:
o Low frequency – Low frequency of a transaction type increases search and contract
cost for buying parties as the processes to look for a contracting partner get restarted
each time the need to conduct an exchange. With low frequency, the buying parties
will experience lower agency cost (in-house supervision and managerial cost), but
traditionally, does not enjoy low cost associated with high frequency of volume
purchases), increased transaction costs in searching (for reliable intermediaries),
contracting (negotiation, contract terms), and subsequently, maintenance/ review cost.
With the advancement in IT, network communication systems, SCM, and ecommerce,
this is not exactly the truth anymore. Two scenarios have resulted regarding the
frequency factor:
Intermediaries such as e-commerce transaction brokers (e.g. Accomline, Asiarooms,

and Expedia) have blossomed. They are able to exploit IT network communication
systems to harness volume transactions (i.e. high frequency) as intermediate brokers
between buyers and sellers (globally). Because these brokers are able to attract and
accumulate volume sales (electronically, on a global scale), they are able to get a
competitive price/quantity discount (in the market place) similar to distributor status
from the sellers and pass the benefits to their buyers (of low frequency). Traditionally,
getting a good price/quantity discount not possible without high frequency of the
buyers. Market-like form of organizing persists.
Another development is for firm to “transfer” part of their internal business processes
(often non-core competencies) to external market processes. This has the key
advantage of utilizing the specialist knowledge of professional intermediaries
(brokerage) and lowering of sunk cost. Ericsson/Nokia/Dell and Flextronics
International, Baxter Healthcare and its hospital clients, DBS and outsourced
telephone-pool are examples. This form of de-internalization reverses the traditional
internalization strategy to enjoy economy of scale. Again, market-like form of
organizing persists here.
o High frequency – High frequency of a transaction type lowers transaction costs and
permits exploit of economies of scale - processing in-house with own development
team and resources.
This can result in lower search and contract cost, but higher contract cost in
employment contract and regulation cost (agency cost of supervision, control, and
monitoring). Traditionally, high frequency provides opportunity for better control,
coordination, and security. Traditionally, this lead to hierarchy form of organizing
(such as the case of Fisher and GM).
With industry strategy, high frequency provides the opportunity for development of
network externalities where an increase in the number of transactions has very little
or marginal increase in the overall cost, similar to the telephone network and cable
services of Singtel and Starhub, where any increase in numbers of subscribers will
have little or no impact in increased cost on running the telephone network.
In conclusion, IT can mediate in any situation, irrespective of the type of sources. The
actual cost benefits with IT will differ from case to case, nature and type of transactions,
organizational form of organizing, the degree of frictions, the extensiveness and scope of
the implementation of the information systems and technology.
Question E6
Discuss the effect of uncertainty on transaction costs and explain why information
technologies can help in reducing them. [SG]
Solution guide:
A transaction involves costs and the uses of resources. A transaction goes through a cycle
of search, contract, regulation, and maintenance (SCRM) – and often may be seen as the
various costs incurred during a transaction. Transaction-cost recognizes that individuals
might distort the use of information to achieve their individual goals and generate strategic
misrepresentation. Such opportunistic behavior increases uncertainty leading to higher
transaction costs and undesirable consequences. IT can mediate such transactions &
exchanges between parties to lower the transaction costs.
There are several key factors that impact and affect transaction costs in varying ways. The
diagram below recognizes several factors of transaction costs. There are bounded
rationality, opportunism, uncertainty, frequency, asset specificity, and small numbers as
proposed by Williamson and A.Cordella. These factors determine the eventual shapes and
sizes of the various types of transaction costs.
Uncertainty
Opportunism
Small Numbers
Bounded
Asset Specificity
Frequency
Uncertainty factor places a major role in transaction costs. Uncertainty, often also has a
hand in all the other factors of cost.
(You will note that all other reasons like complexity, opportunism, bounded rationality,
asset specificity, frequency can lead to uncertainty. Type of organization forms and goal
congruence and trust also affect uncertainty. Think about it…
you can discuss about market processes and globalization increase uncertainty through
bounded rationality and complexity. Uncertainty leads to information asymmetry,
opportunism and higher transaction costs. The type of asset and its asset specificity can
contribute to uncertainty where the physical specificity is fluid and forms can change
easily.
Opportunism examples: case of fraud by POSB’s lucky draw transaction - 1st prize goes
to the analyst’s house maid. Cases of manipulation of transactions by CAO’s CEO/Chen
and Barring’s Nick Leeson.
IT through electronics networks, e-commerce, e-business and enterprise systems can

reduce SCRM selectively. Give examples how ecommerce, SCM can mediate such as
AsiaRooms, ebay, Baxter, Flextronics etc.
In conclusion, IT can mediate in lowering of transaction costs is applicable in any situation,

irrespective of the type of reasons or sources. The actual cost benefits with IT will differ
from case to case, nature and type of transactions, organizational form of organizing, the
degree of frictions, the extensiveness and scope of the implementation of the information
systems and technology.
Question E7
Explain how the transaction costs model applies to the design of information systems.
Explain how e-Commerce helps in reducing such transaction costs.
Similar Q:
The transaction-cost model has often been used to inform e-business strategies. After a
brief presentation of this model discuss, providing examples, how transaction costs theory
has informed B2C strategies [2008 May ZoneB]
Solution guide
The transaction-cost model (TCM) views the organization as a bundle of transactions and
network of contractual arrangements to govern each set of transactions and exchanges.
The contracts are binding instruments between individuals, and organizations. TCM
recognizes that individuals might distort the use of information to achieve their individual
goals and generate strategic misrepresentations. TCM recognizes that IT can mediate
transactions & exchanges between parties to lower transaction costs. At the same time,
TCM can use IT to foster a more intensive use of markets and market-like organizational forms.
A transaction goes through a lifecycle or series of stages from search to eventual purchase
and review. These stages incur various kind of transaction costs. Transaction costs are
incurred during of searching for buyers and sellers (vendors), selection of partners,
negotiations, and writing the contract terms, and regulating, monitoring and enforcing
the contracts, and maintenance and review of the contracts. The intensity of the search,
contract, regulation and maintenance (SCRM) costs are affected by several reasons such as
bounded rationality, opportunism, uncertainty, frequency, asset specificity and small
numbers (BOUFAS).
So, how does TCM apply to the design of information systems? The primarily objective
of these information systems is to exploit ICT to reduce transaction costs in each
stages of the transaction either by streamlining, eradicating or minimizing the
intermediate processes and the reasons (BOUFAS) promoting the transaction costs.
<you need to argue how each BOUFAS factors can be incorporated into the design
of information to reduce cost regulated contractual obligations>
Information systems such as e-commerce, m-commerce, e-business, ERP, SCM

applications and electronics communication networks are all concerned with reducing
process complexity, reducing market uncertainty, improving efficiency and
effectiveness of transaction handling. Processes in transaction incur resources and
cost – labor, office, factory space, logistics, machinery, material and time and
coordination cost in handling and managing the information resources.
e-Commerce is rapidly becoming the infrastructure of choice for electronic handling

transactions. It offers easy and fast way to link with other business partners and individuals
at low cost. Most e-Commerce systems ride on the Internet technology and extranets.
Internet provides a universal and easy-to-use set of technologies and technology standards
that can be easily adopted by all participating organizations, no matter what computer
system or information technology platform the organizations are using.
e-Commerce has great potentials in reducing search cost, cost of selection of partners, cost
of writing contract, and cost of enforcing the contract terms. We can see this in the
examples of AsiaRooms, Zuji, Baxter, and Flextronics (you may explain these example
further).
e-Commerce facilitates market transactions to be available anytime, anyplace, shrinking

distance and time, promote dis-intermediation, reduce “time to market” of products and
services, provide extended channels and new marketplaces. Trading partners can directly
communicate with each other, bypassing intermediaries and inefficient multi-layered
procedures reducing complexity, uncertainty, coordination cost and contract costs. Web sites
are available to consumers 24 hours a day, 7 days a week (24/7).
Can we say In a “bricks & mortar”, handling market transactions is often time consuming, complex,
“eCommerc and expensive. Market uncertainties abound. Processes are difficult to control and re-
e” indirectly engineer, as they are dictated by market forces that outside the control of the organization.
internalize
external
processes? However, with the introduction of e-commerce, the market processes are suddenly
becoming manageable and easier to streamline. E-Commerce facilitates electronic
automation of many of the market processes and removable of intermediaries reducing
search and regulation costs. New business model, and new e-commerce payment system
are examples. This has resulted in reduction of transaction costs and agency cost besides
reducing delivery time of goods and services.
The new business models provide new channel of distributions and new types of products
and services are spawned. e-Commerce “forces” organizations to rethink and reduce
transaction costs in new ways with efficient online offerings, easy access, low-cost
exchanges, innovative services and improve their strategic advantage. So, what are the
new electronic business models? Here are the main ones and examples.
Virtual storefront: Amazon.Com; TigerAirways.com

Information broker: shopila.com, hardwarezone.com
Transaction broker: Finatiq.com, cTrip.com, Asiarooms.com, Zuji.com
Online Marketplace (also known as eAuction): eBay. com
Content provider: CNN.com, MP3.com
Virtual community: iVillage.com Geocities, Fortunecity
Information Portal : Yahoo.com, MSN.com, google.com
An organization often uses more than one electronic business models in their e-Commerce
strategy. Telefonica’s e-Commerce strategy, as an example, initially uses 3 of the
electronic business models to improve customer reachability and reduce transaction costs.
They are virtual storefront, online marketplace and information portal. Telefonica use e-
commerce to extend their existing distribution channels, creating outlets for attracting and
serving customers that otherwise would not patronize the company.
In a virtual storefront eCommerce, the vendor need not have to own any physical store to
market their products and services. They can use the Internet to distribute the information
surrounding their wares, such as product pricing, options, availability, and delivery time.
Web-based discount brokerages have attracted new customers who could not afford paying
the high commissions and fees charged by conventional brokerage and financial services
firms. This is the case of the transaction broker business model.
Handling transactions electronically can reduce transaction costs and reduce delivery
time for some goods and services. This is especially the case for those that are
purely digital such as music download, e-magazine, e-newspaper, e-books, software,
images, videos or services of trouble shooting over the networks. These products and
services can be distributed over e-Commerce as electronic versions. This is the “digital
content provider” business model.
With the information portal business model, like Google and Yahoo, search for
information and procurement have never been make more convenient. This not only
reduces information asymmetry but reducing the transaction search cost for many
activities. The model facilitates for a one-stop location to reach a variety of market
information resources.
TCM becomes more prominent with the pervasive use of e-Commerce information
systems as they contribute strongly to lowering of transaction costs. As e-Commerce is
about market transactions, it has fostered a more intensive use of markets and market-
driven infrastructures. Although potentially beneficial in all aspect of business commerce,
eCommerce attracts opportunistic behaviour, fraudsters, system insecurity, invasion of
privacy and property rights. As in any technology, e-commerce has its own limitations too.
Other Questions:
Q. What do you understand by “information systems are viewed as socio-technical
systems”? Would the Transaction-cost model approach suffice?
F. INFORMATION SYSTEMS STRATEGY & STRATEGIC INFORMATION
SYSTEMS
Question F1
What is competitive advantage? What is the role of people in defining the strategic
implications of ICT solutions? [SG]
Similar Q:
What is an information systems strategy? Critically discuss the role of people in defining
the strategic implication of ICT solutions [2007 ZA exam]
Solution guide:
Keywords: competitive advantages, people, strategic implications, ICT solutions. Strategic
information system.Porter 5 forces, ladder of business benefits with IT, 3 levels of strategy:
business, firm, and industry. BPR, Value chain, Value Web, Ecosystem, Network economy
& externalities, IT partnership. Topdown, bottom-up, CIO, CEO, CFO, COO, CTO,
managers, end-users, social and technical aspects, CSFs, TQM
Competitive advantage refers to an organization having positive market leverages over

its competitors. Michael Porter states that a competitive advantage, sustainable or not,
exists when a company makes economic rents. A well-designed ICT solution, that
involves both technical and social aspects, is a catalyst to attaining competitive
advantage.
Competitive advantages are goals of strategic information systems. Strategic

information systems are information systems that are designed with the objectives to
effectively change the goals, operations (both internal and external), products, services,
or business relationships of organizations.
Such activities that will reshape organization, differentiate services and products, build
“barriers” or transform the business. Not just ordinary improvement in efficiency or
productivity, but company wide improvement either in sustained profits, alliance,
capturing larger market share, locking-in (the customers), and reducing cost.
Michael Porter summarizes these into five strategic competitive aspects that can impact
competitive advantages:
a) threat of new entrants into its market,
b) pressure from substitute products or services,
c) bargaining power of customers,
d) bargaining power of suppliers, and
e) low cost rivalry
Venkatraman suggests the five stages in his “Ladders of Business Benefits with IT” with
the last three stages as revolutionary where competitive advantages can be attained:
a) localized exploitation
b) internal integration
c) business process redesign
d) business network redesign
e) business scope redefined
Organization gaining competitive advantages with strategic use of ICT includes
American Airlines, Baxter healthcare, Quaker Chemical. We’ll now take a quick look.
American Airlines gained competitive advantage not because of cost reductions but
because it redesigned it business process to give a significantly better service to travel
agents and passengers. This success led to American Airlines redefining its business scope
and transforming its business.
Firms achieve competitive advantage when they provide more value to their customers or
when they provide the same value to customers at a lower price. An information system
could have strategic implications if it helps the firm provide products and services at a
lower cost than competitors.
The Baxter Healthcare’s stockless inventory is a powerful instrument for locking in customers,
thus giving the supplier a decided competitive advantage. Information systems can also raise
switching costs by making product support, service, and other interactions with customers more
convenient and reliable
Harness business intelligence! It breeds and promotes organizational learning. This leads
to organizational sharing, enterprise collaboration, new innovative products/services and
better customer services. KMS helps Quaker to create and sustain competitive advantage.
Competitive advantage can be achieved by enhancing the firm's ability to deal with
customers, suppliers, substitute products and services, and new entrants to its market,
which in turn may change the balance of power between a firm and other competitors in
the industry in the firm's favor. Hence, strategic uses of ICT to gain competitive
advantage can be carefully addressed at the firm-level, business-level and industry-level.
A firm-level and business-level competitive advantage can be attained with value chain
and related value web strategies. The activities of the firm value chain, and its partner’s
value chain could be enhanced with supply chain management information systems to
make each of the value transaction more cost-effective.
This is the case of Flextronics and its customers (e.g. Cisco, Ericsson). A firm can
achieve a competitive advantage over competitors by developing highly effective and
efficient ties to its business partners and their value chains.
By working with other firms, industry participants can to develop ICT solution for
industry-wide standards for exchanging information or business transactions
electronically, which force all market participants to subscribe to similar standards. We see
this in the bank consortium of OCBC, DBS and UOB establishing the NETS electronic
payment system – an industry-level strategy indeed. Eco systems such as Microsoft
operating system and network economy & externalities such as Starhub Cable are other
examples.
Strategic information systems are not specific to any one organizational level. They
have more far-reaching and deep impact than any other kinds of systems. They
profoundly alters the way a firm conducts its business. As we will see, organizations
may need to change their internal operations and relationship with customers,
suppliers, business associates, and even competitors in order to take advantage of new
ICT solutions.
The competitive advantage gained from new strategic ICT solution often does not last
forever. It is often difficult to sustain. Competitors can retaliate and copy the strategic
systems. We see this happening with American Airline's SABRE computerized
reservation system, Toyota’s SCM, and Citibank's ATM system. Firms must hence be
constantly on their toes to identify new strategic uses of ICT to keep ahead and sustain
their competitive advantage.
Strategic ICT solutions provide the catalyst in strategic transitions – demanding

“revolutionary” changes in both the technical and social elements of the organization.
Thus, we may view strategic transitions as movements from one level of socio-technical
systems to another involving people in the identification of ICT solutions and their
strategic implications. Defining strategic implications can be carried out with a bottom-
up or top-down approach.
The bottom-up approach starts from the ground involving the people at the operational
level. Understanding the social aspect of people working in an organization plays an
important role in defining the new ICT solutions and its strategic implications.
The bottom up approach involves its all workers, supervisors and managers before moving
up to the divisional managers and top executives such as CEO, COO, and CFO. The CIO
provides the leading role and manages the strategic implications and transitions. The
bottom up approach can be very tedious but welcoming in term of achieving change
management.
Departmental managers and his staff know their areas of work and concerns well. They are
the people who have direct dealings with the customers, suppliers and other supply chain
partners. Understanding and addressing their needs, not just the technical but also the
social aspects, are crucial in the new ICT solutions.
Failure to understand the social aspects is an early warning sign of disaster of the new ICT
solution. Certain approaches like strategic analysis, total quality management, and BPR
can be deployed to involve the people early to unearth their concerns and identify strategic
implications of new ICT solutions.
Strategic Analysis (also known as critical success factors – CSFs) argues that an
organization’s information systems success is dependent on critical success factors
identified by the managers and supervisors of the various functional units. Hence, new
information systems should be shaped to support these CSF to ensure organizational
success.
Besides, planning change towards the new information systems would be synonymous to
supporting the functional unit managers’ CSFs. “Inventory system to eradicate losses and
damages” is an example of a likely CSF from the inventory supervisor and storekeepers.
Total quality management (TQM) is a management approach for an organization, centred

on quality, based on the participation of all its members and aiming at long-term success
through customer satisfaction, and benefits to all members of the organization and to
business partners. The concept of TQM is to make quality the responsibility of all the staff
in an organization and use TQM as the basis for change. An example of improved quality,
as identified by TQM process lies “in reduction of downtime in assembly line through
QC”
Business process reengineering (BPR) is a management approach that involves workers,

supervisors and managers. BPR examines various aspects of related business processes
and its interactions on an organisational wide basis with a view to radical redesign and
streamline the processes for better productivity and efficiency.
With the top-down approach, the opinions of top executives are the core catalysts to the
identification of strategic ICT solution. They are the CEO, CFO, COO, CIO, CTO, CKO,
key business divisional and departmental managers may be involved, where appropriate,
in defining strategic implications and specifications of the new ICT solutions.
CIO provides the direction and focal point for ICT deployment and development
initiatives. He takes the lead role in the formulation of the information systems strategy
(ISS) and identification of information systems that provide strategic competitive
advantages.
The CTO is the technology expert. He provides technology R&D support and assess
strategic potentials of new technology to business strategies. The CKO is the latest
addition, in the information age, who is responsible to cultivate a culture of harnessing
knowledge, learning organization, and motivation of development of knowledge-based
core competencies.
The CIO - in consultation with the CTO and other top executives like CEO, COO and
CFO - must determine how the organization wants to use ICT technology to achieve the
goals set out in the business strategy (BS).
Strategic ICT solutions will have to be carefully determined at business, firm and
industry level. CIO and his team (CKO, CTO, project leaders) must be aware that
different information systems strategy at each level is required to achieve low cost,
product/service differentiation and changing the scope of competition. He must be able to
correctly assess the level of IT culture in the organization, and formulate a good strategy
to move the organization up the ladder of business benefits with IT.
In any implementation of any information systems strategy and strategic ICT solutions, the
CIO and his team of developers must manage the change carefully. He must ensure the
end-users are well informed and well prepared for the change. Only when the changes are
successfully implemented, then can we hope to see competitive advantages filtering
through.
Deployment of the latest sophisticated ICT technology in the hope of achieving

competitive advantages without a well thought out information systems strategy (ISS) will
meet futile soil if there is no strong committed support from the higher executives. This is
especially so if the CEO does not “walk the talk”.
The CEO, together with his lieutenants (CFO, COO, divisional directors) to be involved in
the defining of strategic implications of the new ICT solutions and possibly be present in
the many user-meetings, announcements and briefings. CEO and his top executives play
vital roles. Their unreserved supports are crucial.
New information systems signify impending organizational and structural changes. It

involves social responsibilities couple with technical aspect. The development process
must be handled with great care to ensure successful identification, definition and
implementation of any new ICT solution and it strategic implications.
Question F2
Why is it often argued that technology is not enough to provide competitive
advantage? What is the role of people in defining the strategic implication of ICT
solutions? [SG]
Solution guide:
Indeed, “technology alone is not enough to provide the competitive advantage over
competitors”. In any successful strategic technological solutions, the social responsibilities
play equally important roles besides the technical aspects.
ICT =
information 0%Key management executives such as CIO, CFO, COO, CTO, CKO, and CEO play
& comm
systems
important roles in defining strategic ICT solutions and deployment of the ICT strategy.
The line managers and key functional personnel also contribute to defining strategic ICT
solutions.
First, lets understand what is “technology”. Then follow by “competitive advantage”. We

will then proceed to discuss how the involvement of people in defining strategic ICT
solutions leading to competitive advantage.
“Technology” includes computer hardware, input-output devices, networks,

telecommunication systems, the Internet, extranet, intranet, systems software, application
software including enterprise information systems, e-commerce, e-business, multi-media
hardware and software, database systems, and storage devices. This represents the possible
combination of technologies that could make up the ICT platform of an organization. It is
not a question of simply deploying the latest and most expensive technologies.
An optimal mix includes the considerations of the social aspects of people - their readiness,
knowledge, expectations and fear. New techology must be planned for and meet the firm’s
business strategy (BS) and business plans (BP). As we know, business strategy and
business plans are the responsibilities of the CEO and his senior executives CFO, and
COO.
Competitive advantage refers to an organization having positive market leverages over

its competitors. Michael Porter states that a competitive advantage, sustainable or not,
exists when a company makes economic rents.
In today’s context, ICT technology and solutions are strategic. ICT technology shrinks the
distance and time factors between trading partners. ICT creates opportunities for an
extended marketplace, enhance collaborative partnerships and commerce, facilitate
seamless transaction processing on global basis, and promote effective global enterprise
computing. ICT technology has the capacity to create competitive advantages. This can be
done by in several ways: differentiating its products and services, lowering transaction
costs, changing the scope of competition with niche market or creation of new market
opportunities.
As ICT has great influences over an organization’s overall business strategy and business
plans, deployment of ICT technologies must be carefully planned and organized. This
Be aware optimal mix of ICT technologies appropriate to the enterprise is defined in the information
that the technology strategy (ITS). But an ITS must in turn support the organization’s information
use of too
many needs which must support its business strategy (BS) and business plans (BP).
acronyms
may The information needs must include strategic ICT solutions that will bring about
irritate the competitive advantages for the organization. Such information needs are defined in the
examiners. organization’s information systems strategy (ISS).
So, on the
safe side,
write in The CIO with its lieutenants (CTO, system team) must understand and ensure the
full or use information systems strategy provides the backbone and directions on how ICT solutions
acronyms and technology can be used to create competitive advantages at business, firm and
minimally. industry levels.
Strategic ICT solutions provide the catalyst in strategic transitions - demanding changes in
both the technical and social elements of the organization. Thus, we may view strategic
transitions as movements from one level of socio-technical systems to another, as the
adoption of the information systems strategy requires changes that go well beyond the
technical infrastructure to encompass improved ways of conducting internal and external
operations, new business goals, relationships with customers, suppliers, business
associates and even competitors. Be able to identify and adopt the correct strategies at firm,
business, and industry levels.
It has to be responsible people to decide how best to use the technology, how and what
roles will change and redesign. It has to be responsible people to ensure that information
technology strategy (ITS) is aligned to information systems strategy (ISS). The diagram
below shows, that they must in turn be aligned to business strategy (BS) and business plan
(BP).
Flextronics, Baxter, Zara, and Telefonica are examples of organisations that planned and
aligned their strategies well. They attained tremendous successes with the uses of ICT
technology.
ITS BP
ISS BS
So, who will be the person/s responsible for the formulation of information systems
strategy and defining of strategic ICT? Generally, this can be proceeded with the Top
down or Bottom-up approach.
The bottom-up approach starts from the ground involving the people at the operational
level. Understanding the social aspect of people working in an organization plays an
important role in defining the new ICT solutions and its strategic implications.
The bottom up approach involves its all workers, supervisors and managers before moving
up to the divisional managers and top executives such as CEO, COO, and CFO. The CIO
provides the leading role and manages the strategic implications and transitions. The
bottom up approach can be very tedious but welcoming in term of achieving change
management.
Departmental managers and his staff know their areas of work and concerns well. They are
the people who have direct dealings with the customers, suppliers and other supply chain
partners. Understanding and addressing their needs, not just the technical but also the
social aspects, are crucial in the new ICT solutions.
Failure to understand the social aspects is an early warning sign of disaster of the new ICT
solution. Certain approaches like strategic analysis, total quality management, and BPR
can be deployed to involve the people early to unearth their concerns and identify strategic
implications of new ICT solutions.
With the top-down approach, the opinions of top executives are the core catalysts to the
identifications of strategic ICT solution. They are the CEO, CFO, COO, CIO, CTO, CKO,
key business divisional and departmental managers may be involved, where appropriate,
in defining strategic implications and specifications of the new ICT solutions.
CIO provides the direction and focal point for ICT deployment and development
initiatives. He takes the lead role in the formulation of the information systems strategy
(ISS) and identification of information systems that provide strategic competitive
advantages.
The CTO is the technology expert. He provides technology R&D support and assess
strategic potentials of new technology to business strategies. The CKO is the latest
addition, in the information age, who is responsible to cultivate a culture of harnessing
knowledge, learning organization, and motivation of development of knowledge-based
core competencies.
The CIO - in consultation with the CTO and other top executives like CEO, COO and
CFO - must determine how the organization wants to use ICT technology to achieve the
goals set out in the business strategy (BS).
Strategic ICT solutions will have to be carefully examined at business, firm and industry
level.
CIO and his team (CKO, CTO, project leaders) must be aware that different information
systems strategy at each level is required to achieve low cost, product and service
differentiation and changing the scope of competition. He must be able to correctly assess
the level of IT culture in the organization, and formulate a good strategy to move the
organization up the ladder of business benefits with IT.
The ladder of business benefits with IT has 5 stages. It depicts how an organization moves
from efficiency to business transformation, achieving sustainable competitive advantages.
UPS, Baxter healthcare and American Airlines are organizations that have moved through
the higher stages and achieved sustainable competitive advantages.
At each stage of the ladder, the CIO should know what strategy models may be deployed
to achieve the advantages of that stage.
As stated, strategies are formulated at business, firm and industry level. Each level has
its own effective strategic ICT solutions.
There are two possible approaches to defining strategic ICT solution at firm-level. They
are to create synergies between business units within firm and enhance firm’s core
competencies. Besides the CIO and project leader, the roles of business unit line managers
and executives in defining the solutions are crucial too.
Since the firm may be viewed as a bundle of transactions between and among its various
business units, management might opt for an information systems strategy at the firm level
that promotes the sharing of knowledge across business units whenever there are synergies
between business units.
In other words, synergies make the transactions between business units more frequent
because they tie together the operations of disparate business units so that their combined
production is greater than the sum of their individual production.
Laudon and Laudon (2006) define those information systems that integrate the key
internal business processes of the firm as enterprise systems such as ERP and CRM.
The core competencies of organizations, e.g. American Airlines is in (1) selling air-tickets,
(2) selling online-ticketing system, and (3) providing training (on ticketing system).
OCBC core competencies are in the businesses of (1) ATM services, (2) Investments, (3)
Safe deposit boxes, and (4) Forex, while Ericsson is in (1) Design handsets (2) Production
Handsets (3) Distribution & Logistics and (4) Marketing/Sales.
Firm outsourced business units that dilute their competent areas so as to concentrate on
their area of strength. CIO and responsible business unit managers identify the information
systems that encourages the sharing of knowledge that enhances core competencies and
help employees become aware of new external knowledge to gain business leverage.
There are four possible approaches to defining strategic ICT solutions at the business level.
CIO provides the lead role with involvement of key responsible divisional managers. They
are:
a) leverage technology in the value chain to lower transaction costs
b) products/services differentiation with information systems
c) systems to focus on market niche
d) supply chain management
Value Chain. Deployment of information systems infrastructure that make customer and
supply chain data flow seamlessly among the various business partners. Business should
try to develop strategic information systems for both the internal value chain activities and
the external value chain activities that add the most value. This solution requires the
involvement of the IT project leader, business units and business partners.
Computerized reservation systems such as American Airlines's SABRE system started out
as a powerful source of product differentiation for the airline and travel industries.
The key strategic question at the Industry level is whether to compete against or co-
operate with other rivals in the industry. There are four possible approaches to designing
strategy at the industry level. They are:
a) Information Partnerships
b) Porter’s competitive five competitive forces model
c) Business Ecosystems: Keystone firms
d) Network economics & externalities
At the industry level, the CIO will have to formulate strategic solutions on how best to
exploit the four strategies to produce strategic ICT implications. Of course, any selection
of these strategies must be appropriate to the organization’s business strategy. The CIO
with his team must ensure that any information systems strategy (ISS) be carefully aligned
to the business strategy (BS) and business plans (BP).
OCBC, Maybank, UOB, and Standard Chartered formed a partnership to share their
ATMs. The partner banks and all their customers benefited from this partnership. There is
saving in transaction costs for all parties, and “lock in” qualities.
Honda, Aprila, Suzuki and Vespa scooter formed a European partnership to procure raw
material as a group. These organizations can raise the industry's productivity by working
together to create an integrated supply chain.
Such partnerships help firms gain access to new customers, creating new opportunities for
cross-selling and targeting products. Companies that have been traditional competitors
may find such alliances to be mutually advantageous
In Porter's competitive forces model, a firm faces a number of external threats and
opportunities (Porter 1985). There are the
a) threat of new entrants into its market,
b) pressure from substitute products or services,
c) bargaining power of customers,
d) bargaining power of suppliers, and
e) low cost rivalry (result of Internet and information asymmetry)
The concept of a business ecosystem builds on the idea of the value web described earlier,
the main difference being that cooperation takes place across many industries rather
than many firms. For instance, both Microsoft and Wal-Mart provide platforms com-
posed of information systems, technologies, and services that thousands of other firms in
different industries use to enhance their own capabilities.
Microsoft has estimated that more than 40,000 firms use its Windows platform to deliver
their own products, support Microsoft products, and extend the value of Microsoft's own
firm.
In network externalities, the CIO and CEO have to decide to whether to work in close
partnership with their rivals to develop industry-wide standards for exchanging
information or business transactions electronically.
Such efforts raise the entry barriers at the industry level while creating network
externalities because the larger the number of users, the more valuable the industry-wide
standard. In a network, the marginal costs of adding another participant are close to zero
while the marginal gain can be much larger. Examples are Starhub cablevision, SingTel
fixed telephone lines.
In any implementation of any information systems strategy and strategic ICT solutions, the
CIO and his team of developers must manage the change carefully. He must ensure the
end-users are well informed and well prepared for the change. Only when the changes are
successfully implemented, then can we hope to see competitive advantages filtering
through.
Deployment of the latest sophisticated ICT technology in the hope of achieving

competitive advantages is a misnomer. New technology and new ICT solutions involve
social responsibilities as well as effective technical exploitations. The whole process must
be handled with great care to ensure successful identification, definition and
implementation of any new ICT solution and it strategic implications.
Question F3
Why is an “information system strategy” important to an organization? What is strategic
alliance? Show how potential strategic competitive advantages may be gained through
such alliances.
General Guidelines and keywords

Remember the question is “WHY” not “WHAT ISS? So, answer from the “WHY” angle.
WHY ISS (ICT) is important now? Importance at Firm-level, business-level, industry-level,
identification of information needs of the organization at all levels including strategic IS
with strategic implications and the organization’s general information needs at all levels.
Strategic implications/competitive advantages=product/service differentiations, build
technological barrier, move up Venkatraman’s ladder of business benefits with ICT.
Strategic alliance = any form of cooperation, collaboration, coordination with suppliers,
competitors, customers, associates partnerships using ICT. Information partnership,
business ecosystem/network externalities, SCM, collaborative commerce, value web.
Strategic competitive advantages are gained using examples like Baxter, AA,
Aprila/Honda/Suzuki,, Flextronics/Cisco, Microsoft, Intel, Dell, NETS.
solution guide
(note. There is no fixed solution. There is always more than one approach with “strategy”, eCommerce” or
“design type” questions).
The last decade has seen persistent, aggressive advancement in computer networks,
communication systems and info-communications technology. This has fostered the
market into a favorable global stage for proactive organizations to do business, add value,
and compete in.
The drive towards knowledge economies has increased the level of urgency and
importance for organizations to plan their information system strategy to explore these
technologies and identify strategic implications toward the development of strategic
information systems. One such potentially powerful strategy is the formation of strategic
alliances with industry partners.
An information system strategy (ISS) is a strategic plan. It details the new information
systems and ICT infrastructure needed by the enterprise to achieve its long-term strategic
goals (for the next 5, 10 years or so). The new information systems include strategic and
operational (non-strategic) information systems necessary to position the enterprise to
meet the new challenges.
An ISS is important to an organization because info-communications technology (ICT)

plays crucial technological roles in today’s fast-paced dynamic marketplace peppered with
endless market uncertainties.
ICT has progressed rapidly over the last two decades. Then, ICT was playing only
backroom roles. In those early days, most organisations were contented just using ICT for
efficient record-keepings such as tracking customer sales orders, purchase orders,
accounting book-keeping, and coordinating employee payrolls.
Over the years, computers have become extremely powerful and efficient. The bandwidth
and capability of communication networks has increased tremendously. This facilitates
high-speed transmission (of voice, data and graphical content) promoting a new kind of
globalization in both global trade and communications. Application software has improved
dramatically facilitating global commerce and trade.
Today, ICT has become very important and is one of the key infrastructure pillars in
enterprise. Organizations cannot afford not to include it as one of its important strategic
weapon.
The importance of ICT and strategic information systems requires strategizing them at all
levels of firm, business and industry-level.
At firm-level strategy, the organization looks at ICT solutions as strategies in maximizing

its internal resources and processes - synergizing all it functional units (departments or
business units). Often, an enterprise resource planning system (ERP) is implemented to
integrate and manage them.
At business-level strategy, the organization examines strategies to maximize its value

chains and processes with its partners, suppliers, customers and associates (both upstream
and downstream processes) through such information system like the supply chain
management system (SCM).
At industry-level strategy, the organization strategies in competing against or combining

with competitors to leverage competitive advantages against other competitors in the
industry.
The importance of information system strategy (ISS) can be further illustrated using the
example of Flextronics. Flextronics, a 12 year-old global electronic contract manufacturers,
realizes the strategic implications with ICT and the need to carefully strategize its
deployment with a formal ISS to support its overall business strategy.
Flextronics’ success was phenomenal, catapulting it into the world’s number two position,
over 10 short years. The ISS of Flextronics includes, amongst others, the development of a
global enterprise resources planning (ERP) information system, a global integrated supply
chain management system (SCM), a collaborative design systems (CDS) integrating its
engineers with designer engineers from its suppliers and manufacturers.
You will notice that the ERP is part of the firm-level IS strategy, the SCM at business-
level IS strategy, and the CDS at Industry-level IS strategy.
Strategic alliance is a cooperation and collaboration between business organisations that

Be aware
that the aim for a synergy. The synergy from the alliance hopefully result in strategic competitive
use of too advantges and economic gain which will be greater than those effort from an individual
many enterprise. The organisations in the alliance may be comprised of suppliers, customers,
acronyms business associates, organisations from another industry, or business competitors.
may
irritate the
examiners. Such strategic alliance includes information partnership, strategic partnership, value web,
So, on the business ecosystem and network externalities. The alliance is further strengthened with
safe side, information system such as supply chain management and collaborative commerce
write in systems.
full or use
acronyms
minimally. Information Partnership. Firms can form information partnerships and share part of
their information systems to achieve unique synergies. In an information partnership,
both companies can join forces without actually merging by sharing information.
saving in transaction cost for all parties, and “lock in” qualities.
together to create an integrated supply chain (SCM) and higher purchasing power as a
group. This can lead to low cost production and cheaper products by all partners – thus a
potential strategic competitive advantage over their rivals.
Strategic partnership. A strategic partnership is a formal alliance between two

enterprises, usually formalized by one or more business contracts but falls short of
forming a legal partnership or, agency, or corporate affiliate relationship.
American Airlines formed a strategic partnership arrangement with Citibank to award one
mile in its frequent flier program for every dollar spent using Citibank credit cards.
American Airlines benefits from potential competitive advantage of increased customer
loyalty, while Citibank gains new credit card subscribers and a highly creditworthy
customer base for cross-marketing - thus, increasing market share for both partners
In local context, many banks are in strategic partnerships with hotels, restaurants, spa
resorts, passenger car distributors, and even supermarkets. Such partnerships help firms
gain access to new customers, creating new customer market base and new opportunities
for cross-marketing and targeting products.
Value Web. This is an extension of the firm’s value chain. A value web system (often
called “value system”) includes the value chains of a firm's supplier/manufacturer partners,
the firm’s distribution channels, and other associate partners with the firm’s own business
processes. This may include the firm’s competitors.
In fact, today’s small businesses like the neighborhood’s motor-tire shops, computer shops
and restaurants have their own “value web”. Often a shop who has sold out on a product
will still be able to “sell” because it just “borrow first” from its neighboring “business
partner” shop!
Value web can lead to competitive advantage of low cost for all partners.
Business Ecosystem is a strategic strategy and widely adopted in the high tech community.
It is loosely coupled but interdependent networks of business community of “partners”
including suppliers, lead producers, competitors, and other stakeholders who produce
goods and services of value to their customers, who are themselves members of the
ecosystem.
In a business ecosystem, the economic community’s directions is often set by one or

more central companies. In order words, business ecosystems can be characterized as
having one or a few keystone firms that dominate the ecosystem and create the
platforms used by other niche firms.
For instance, Microsoft is the keystone firm that provides the key platform where
thousands of other firms in different industries use to enhance their own capabilities,
products and services. The potential competitive advantages for keystone firms in
business ecosystem lie in the sophisticated technological infrastructure barriers present
to new entrants.
The Microsoft’s business ecosystem would include loosely coupled technology partners
such as Intel, Oracle and Cisco. As seen in the diagram below, Microsoft has estimated
that more than 40,000 firms (e.g. Dell, SAP, Cisco, Oracles, software developers) use its
Windows platform to deliver their own products and services, support Microsoft
products, and even extend the business values of Microsoft's own firm. Niche firms
include thousands of software application firms, software developers, service firms,
networking firms, and consulting firms that support and rely on the Microsoft products.
IBM Dell Acer

Software developers
Microsoft Operating System
Oracles
Intel SAP
Another, Wal-Mart's order entry and inventory management system is a platform used by
thousands of suppliers to obtain real-time access to customer demand, track shipments,
and control inventories.
General Motors, Cisco networks, and Unix open-platform are other examples of keystone
firms in business ecosystems where thousands of other firms’ products and services
“come” together, thus forming their own economic communities.
Network Economics & Externalities. Network economics refers to business economics

that benefit from the network effect. This is when the value of a good or service increases
when others buy the same good or service provided by the network economics and
externalities.
The potential strategic competitive advantages through such alliance lie in the product and
service differentiation resulting from the development of new industry-wide standards in
effective exchange of information and business transactions electronically.
Many firms might find it more profitable to cooperate with their rivals to gain long-term
strategic advantage. For instance, firms might decide to work in close partnership with
some rivals to compete with others in the industry.
Exploit of Several local banks, (UOB, DBS, OCBC) have come together to build a new standard in
high e-commerce online payment system called NETS (Network for Electronic Transfers
frequency? Services) 1985. The objective is to operate payment networks and drive adoption of
electronic payments.
NETS has been at the forefront of Singapore’s cashless revolution for more than twenty
years. Such efforts raise the entry barriers at the industry level while creating network
economies and externalities because the larger the number of users, the more valuable the
industry-wide standard the group has created.
Starhub is example of a single organization that developed a new network economics and
externality with its cable network infrastructure setup. We see that the marginal costs of
adding another participant or subscriber are close to zero while the marginal gain is
increasing getting larger.
The diagram below show the more subscribers there are in Starhub’s cable network (or a
telephone network exchange), the greater the value to all participants because each user
can interact with more people. At the same time, the business values of Starhub’s cable
network also increase.
It is no more expensive to operate a cable network, telephone exchange or television

station with 1,000 subscribers than with 10 million subscribers. Adding a new subscriber
has a marginal cost which is close to zero. Unlike traditional economics, the law of
diminishing returns does not work here.
Company subscribers Individual subscribers
VoD providers Starhub Cable Network ISPs
In conclusion, we have observed that OCBC, Maybank, UOB, Honda, Aprila, American
Airlines, Citibank, Microsoft, NETS and Starhub have one thing in common in the
approach in their ICT strategies and information system strategy. They exploited and
capitalized on the advances made in ICT technology to derive strategic advantages for
their firms. Many of these organizations could not have done it alone without some form
of partnerships, either formal or loosely coupled, with its suppliers, customers, business
partners and even competitors.
Question F4
What are information system strategy and strategic information system? Give examples of
ICT strategies that exploit and capitalize on the concept of partnership, of any forms.
Other similar Questions:

Q: Why do we refer to industry level information strategy? Why can firms decide to work
in close partnership with their rivals to develop industry-wide standards for
exchanging information or business transactions electronically? Critically discuss
with examples.[2007 ZB exam]
Q. What are the strategic implications of ICT? Discuss with examples. [2007 Prelim]
Q. Striking information partnerships with rival firms might entail costs rather than
benefits. Discuss the factors for and against this strategy. [SG]
General Guidelines and keywords

Remember the question is “WHAT” not “WHY ISS and SIS? So, answer from the
“WHAT” angle. Some keywords: competitive advantages, medium-long term, firm-level,
business-level, industry-level, strategic alliance, value chain, value web, information
partnership, ecosystem and network economics/externalities. Baxter, AA, Aprila/Honda,
Flextronics/Cisco, Microsoft, Intel, Dell, Starhub, NETS.
(check out http://supernet.som.umass.edu/austria_lectures/fintrosl.pdf)
Using the Today, impressive technological advancements have taken place in the field of ICT. It has
keywords become critical that every firm looks for effective ways to exploit existing advanced
from the Q telecommunications, network systems, computer systems, e-commerce, powerful
to form an databases, knowledge management system, supply chain management and other
introduction
sophisticated enterprise systems to gain competitive advantage and stay relevant and
competitive.
Firm must plan and strategize for the medium and long-term ICT needs and how they can
strategically align to the firm’s overall business strategy and plans. Hence, identifying
strategic information systems that exploit and capitalize on the concept of partnerships are
some of the key strategies found in an information system strategy.
An information systems strategy (ISS) may be viewed as a plan for the development of
information systems towards some future vision of organization that meet the overall
business strategy. An information systems strategy identifies strategic information
systems, other support-level non-strategic information systems and ICT infrastructure for
the long and medium terms. Information systems, often of socio-technical in nature, can
operate effectively at several different levels of strategy. They are firm, the business and
the industry-level strategies.
At firm-level strategy, the organization looks at ICT solutions as strategies in maximizing

its internal resources and processes - synergising all it functional units (departments or
business units). Often, an enterprise resource planning system (ERP) is implemented to
integrate and manage them.
At business-level strategy, the organization examines strategies to maximize its value

chains and processes with its partners, suppliers, customers and associates (both upstream
and downstream processes) through such information system like the supply chain
management system. At industry-level strategy, the organization strategies in competing
against or combining with competitors to leverage competitive advantages against other
competitors in the industry.
Strategic information systems (SIS) are information systems that are designed with the
objective to gain strategic competitive advantages over their competitors. This includes
developing strategic information system that creates high technological barriers (thus
preventing new entrants from joining the fray), differentiate services (thus retain and
increase market share) and transforming relationships between its customers, suppliers,
business associates and even competitors.
SIS has more far-reaching and deep impact than any other kinds of systems. SIS
provide the catalyst in strategic transitions – demanding “revolutionary” changes in both
the technical and social elements of the organization. Hence, SIS profoundly alters the
way a firm conducts its business. Organizations may need to change their internal
operations and relationships with customers, suppliers, business associates, and even
competitors in order to take advantage of new information systems and technology.
Formulation of information systems strategy and defining of strategic information systems

can be a top down (involving largely the higher executives) or bottom up approach
(involving all people elements in an organization). Formulating information system
strategy, identifying strategic information systems and their implications can be generally
classified collectively as ICT strategy.
ICT strategy that exploits and capitalizes on the concept of partnership includes
information partnership, strategic partnership, cross marketing partnership, business
ecosystems (loose coupled business partners), and network externalities. Organisations
that successfully exploit these strategies include Baxter/Hospital clients, American
Airlines/Hotels and other travel industry partners, Flextronic/Ericsson,
Aprila/Honda/Suzuki, Microsoft/Intel, and Starhub.
Information Partnership. Firms can form information partnerships and share part of
their information systems to achieve unique synergies. In an information partnership,
both companies can join forces without actually merging by sharing information.
saving in transaction cost for all parties, and “lock in” qualities.
together to create an integrated supply chain (SCM) and higher purchasing power as a
group.
Strategic partnership. A strategic partnership is a formal alliance between two

enterprises, usually formalized by one or more business contracts but falls short of
forming a legal partnership or, agency, or corporate affiliate relationship.
American Airlines formed a strategic partnership arrangement with Citibank to award one
mile in its frequent flier program for every dollar spent using Citibank credit cards.
American Airlines benefits from increased customer loyalty, and Citibank gains new
credit card subscribers and a highly creditworthy customer base for cross-marketing.
In local context, many banks are in strategic partnerships with hotels, restaurants, spa
resorts, passenger car distributors, and even supermarkets. Such partnerships help firms
gain access to new customers, creating new opportunities for cross-marketing and
targeting products.
Value Web. This is an extension of the firm’s value chain. A value web system (often
called “value system”) includes the value chains of a firm's supplier/manufacturer partners,
the firm’s distribution channels, and other associate partners with the firm’s own business
processes.
This may include the firm’s competitors. In fact, today’s small businesses like the
neighborhood’s motor-tire shops, computer shops and restaurants have their own “value
web”. Often a shop who has sold out on a product will still be able to “sell” because it just
“borrow first” from its neighboring “business partner” shop!
Business ecosystem is another term for loosely coupled but interdependent networks
of business community of “partners” of suppliers, distributors, outsourcing firms,
transportation service firms, and technology manufacturers (Lansiti and Levien, 2004).
The concept of a business ecosystem can be viewed as a large-scaled value web

partnership described earlier. The cooperation may even take place across industries
rather than firms, involving large numbers of “partners”.
In a business ecosystem, the economic community’s directions is often set by one or

more central companies. In order words, business ecosystems can be characterized as
having one or a few keystone firms that dominate the ecosystem and create the
platforms used by other niche firms. For instance, Microsoft is the keystone firm that
provides the key platform where thousands of other firms in different industries use to
enhance their own capabilities, products and services
The Microsoft’s business ecosystem would include loosely coupled technology partners
such as Intel, Oracle and Cisco. As seen in the diagram below, Microsoft has estimated
that more than 40,000 firms (e.g. Dell, SAP, Cisco, Oracles, software developers) use its
Windows platform to deliver their own products and services, support Microsoft
products, and even extend the business values of Microsoft's own firm. Niche firms
include thousands of software application firms, software developers, service firms,
networking firms, and consulting firms that support and rely on the Microsoft products.
IBM Dell Acer

Software developers
Microsoft Operating System
Oracles
Intel SAP
Another, Wal-Mart's order entry and inventory management system is a platform used by
thousands of suppliers to obtain real-time access to customer demand, track shipments,
and control inventories.
General Motors, Cisco networks, and Unix open-platform are other examples of keystone
firms in business ecosystems where thousands of other firms’ products and services
“come” together, thus forming their own economic communities.
Network Economics & Externalities. Network economics refers to business economics

that benefit from the network effect. This is when the value of a good or service increases
when others buy the same good or service.
Firms might find it more profitable to cooperate with their rivals to gain long-term
strategic advantage. For instance, firms might decide to work in close partnership with
Singtel with their rivals to develop industry-wide standards for exchanging information or business
Bharti transactions electronically.
Airtel, Globe
Transit,
Several local banks, (UOB, DBS, OCBC) have come together to build a new standard in
Google,
KDDI and e-commerce online payment system called NETS (Network for Electronic Transfers
Pacnet will Services) 1985. The objective is to operate payment networks and drive adoption of
build a electronic payments.
10,000Km
ultra high-
NETS has been at the forefront of Singapore’s cashless revolution for more than twenty
speed
submarine years. Such efforts raise the entry barriers at the industry level while creating network
cable system economies and externalities because the larger the number of users, the more valuable the
named industry-wide standard the group has created.
Unity. It will
link the
Starhub is example of a single organization that developed a new network economics and
United
States to externality with its cable network infrastructure setup. We see that the marginal costs of
Japan. The adding another participant or subscriber are close to zero while the marginal gain is
cable system increasing getting larger.
is expected
to be ready
The diagram below show the more subscribers there are in Starhub’s cable network (or a
for service in
the first telephone network exchange), the greater the value to all participants because each user
quarter of can interact with more people. At the same time, the business values of Starhub’s cable
2010 (BT, network also increase.
26/2/08)
It is no more expensive to operate a cable network, telephone exchange or television
station with 1,000 subscribers than with 10 million subscribers. Adding a new subscriber
has a marginal cost which is close to zero. Unlike traditional economics, the law of
diminishing returns does not work here.
Company subscribers Individual subscribers
VoD providers Starhub Cable Network ISPs
In conclusion, we have observed that OCBC, Maybank, UOB, Honda, Aprila, American
Airlines, Citibank, Microsoft, NETS and Starhub have one thing in common in the
approach in their ICT strategies and information system strategy. They exploited and
capitalized on the advances made in ICT technology to derive strategic advantages for
their firms. Many of these organizations could not have done it alone without some form
of partnerships, either formal or loosely coupled, with its suppliers, customers, business
partners and even competitors.
Question F5
Is ICT strategic? Can ICT alone provide business the competitive advantages they
need to compete successfully?

Q. What are the strategic implications of ICT? Discuss with examples.
Solution guide:
(with partial extracts from “IT strategy for Business”, Joe Peppard, Pitman Publishing)
Yes, ICT is a strategic resource that can create new opportunities, competitive
advantages, and support business strategy and goals. However, ICT can become a
double-edged sword and be detrimental to the organization, if proper strategic
planning is not carefully carried out.
ICT offers new management and business opportunities and can be applied strategically
in at least four different ways:
• to gain a competitive advantage
• to improve productivity and performance
• to facilitate new ways of managing and organizing
• to develop new businesses.
However, the strategic application of ICT raises a number of key business concerns.
These concerns, which directly influence the effectiveness of ICT in an
organisation, can be categorised under the headings of planning, technology, and
people.
Planning - Just as organisations coordinate and plan their business direction they must
also plan their investment in technology. No business strategy is now complete
without an ICT strategy. ICT must not only support business strategy but may also
provide a strategic opportunity in its own right.
Technology - In many organisations a gulf exists between management and the
'technology people' (the IT professionals). To identify potential competitive advantage
opportunities and to align the ICT strategy with the business strategy, management
must be able to bridge this gap.
An in-depth knowledge of technical details is not necessary but rather an understanding

of the technologies' capabilities, the opportunities they present, and the strategic
issues they raise. Every ICT strategic planning process makes assumptions about the
nature and the role of technological developments.
People - The ICT plan is only a blueprint, which must be put into action.
Implementation involves developing the various applications which result from the ICT
strategy and managing this process. Implementation of an ICT plan also involves
change, and this change must be managed effectively.
People are generally frightened of change so they need the support of a well managed
change process. Ineffective implementation is the prime reason why IT investments fail
to result in business gains.
There must, of course, be an underlying understanding of the strategic significance of

ICT and its role in the management of the information resource. The overall driving
force of the ICT planning process is the underlying business strategy: the ICT strategy
is derived from the business strategy.
Managers don't need an in-depth knowledge of computers or telecommunications to

identify opportunities where ICT might be used strategically or to manage ICT
investments effectively. What they do need to understand is how ICT can contribute
effectively to achieve business objectives in their organisations.
We must admit that many technological innovations are very impressive; however, one
should not loose sight of the raison d'etre (French for “reasons to be”) of these systems.
Just as a high quality paint-brush is rarely sufficient to produce a legendary Mona Lisa
art piece, technology itself is usually not sufficient for superior performance.
Technology is only a means to an end and for any organisation this end is the effective
management of the information resource.
The information age is well and truly upon us. Many countries are information societies
today. The most universally obvious effect is shown in the changing distribution of
work across the whole economy. If profiles of working populations in the developed
world are examined, they show that the largest proportion of workers are now engaged
in some form of information handling work. Today's business organisation is an
information-based, and digitally driven organisation.
Information is the lifeblood of any organisation and everything an organisation does

involves using information in some way. It is intricately bound up with the control of
other resources. Information both supports and is involved in the total business.
Strategy and strategic planning. Strategy has become a key term in every major
organisation.
The essence of business strategy lies in creating future competitive advantages faster than
competitors. It is seen as involving a complete reappraisal of the organisation in relation
to its environment and is a blueprint for which alternative entrepreneurial, competitive
and functional area approaches will be pursued in positioning the organisation.
As a result of the work of Michael Porter, a Harvard University Professor, the 1980s saw
a pronounced emphasis on industry and competitor analysis and the search for
competitive advantage. So influential has Porter's work been that we apply many of his
ideas in developing an ICT strategy.
ICT strategies which significantly improve information use and context in order to enhance
performance and coordinate activities across functional and business unit lines, as well as
the interactions with external entities, in pursuit of strategic competitive advantage.
This is the case of Flextronics, Zara, and Baxter Healthcare. They developed integrated
systems, called enterprise applications, to efficient and effective coordinated the business
processes across the whole company and form strategic collaborative system with their
customers and suppliers.
In order to manage information strategically, organizations develop what are known as

strategic information systems.
ICT can provide business with competitive advantages with the development and
deployment of strategic information systems. Technically, strategic information
systems may be no different from traditional information systems, however they can
be distinguished by their focus on treating information as a strategic resource.
Their objective is not just to automate existing information flows and operations to
increase efficiency (as in most cases of transaction processing systems) but to give the
business competitive advantage. We see this in American Airlines whose global online
ticketing (SABRE) and Flextronics whose global SCM – both largely transactional
information systems – scored strategic advantage over their competitors in the area of
service/product differentiation and low production cost.
By using ICT strategically, organisations attempt to externally disturb the competitive

forces at work in an industry and in so doing change the industry structure.
Consider the impact which ICT has had in the financial services industry from 'Big
Bang' through to 24 hour electronic trading in equities. The once familiar open call
system of the stock exchange has been replaced by buyers and sellers linking
together electronically to buy and sell shares. A physical presence in the exchange is
now no longer necessary. There are many other examples with the rise of e-
commerce, collaborative commerce, and e-business.
The innovative use of computer-related technology has enabled a wide range of firms in
many different industries to create new products, new services, new processes, and
dramatically reduce costs, thereby gaining a significant and sustainable competitive edge
over their competition. Well known examples include Flextronics, Amazon.com, e-
Bay, Google, YouTube, and Blogger.com
Competitive advantage through ICT is not only to make an old process more
efficient or quicker but to transform it and radically change the way business is
conducted. For example, firms traditionally pay bills on receipt of supplier invoices
and pay by cheque. This process could be redesigned so that payment is made on receipt
of goods rather than an supplier invoice (what is known as self-billing). After all, the
invoice just reconfirms the delivery.
This is the product of a business process re-engineering project which later came to be
known as Ford Motor Invoiceless System. Instead of sending a cheque, an electronic
payment instruction is sent to the payor's bank. The payor's account is debited and the
payee's account is credited. A traditional way of doing business has been redesigned to
take advantage of IT.
We are not arguing that traditional systems are no longer appropriate. On the
contrary, strategic systems supplement existing systems and in many cases derive from
them. However some interesting characteristics emerge if we compare their differing
emphasis:
Strategic ICT Traditional IT

1. External focus on customers, Focus on internal processes.
suppliers, competition, and
other market entities.
2. Adding value – differentiation Cost reduction.

through better products or services.
3. Sharing the benefits - within Localised benefits.

the organisation and with customers or
suppliers; even with competitors through
appropriate strategic alliances.
4. Understanding customers needs Solving internal problems.

and delivering value and solutions
to problems.
5. Business-driven innovation Technology-led development.

without emphasis on the latest
technology.
6. Incremental development - Total system defined and developed.

stepped approach, often by 'trial
and error, or prototyping or package
or outsource.
7. Exploiting the information to No exploitation beyond initial

develop the business - for example, system.
by market segmentation.
In thinking about the role ICT should play in an organisation, managers must
understand the nature of the competitive position of the company or business unit and
how it competes. This position and competition situation significantly influence the
degree to which ICT is strategically important to a unit, the way investment in IS
technologies should be considered and the way planning should be executed.
It is imperative to recognise that there is a difference between having an ICT strategy

and having an ICT strategy that is aligned to the business strategy.
For many organisations ICT investment has tended to be piecemeal and haphazard.
Coordination and integration of systems is very often not a consideration. This has
been exacerbated in many organisations with the advent of cheap micros and local area
network (LAN) software.
Aligning ICT with existing business strategy requires the development of both an ISS
(IS strategy) - what is required in relation to information systems, and an IT strategy
(ITS) – what technology platform will be needed to deliver the ISS. The key is that
business strategy drives IS strategy and IT strategy.
However, beyond using ICT to support existing business strategy, firms have the
opportunity in using ICT, proactively, to create new opportunities for the business.
This has happened for many organizations, such as FedEx and American Airlines.
So, what are the ICT technologies? What issues need careful consideration when planning
the strategy?
It is one of the ironies of business strategic planning that those furthest from the
customer generally formulate it. Similarly, people with little understanding of ICT
usually decide on IT investment decisions.
This is especially true for small-to-medium sized companies who don't normally
have the in-house technological expertise. While senior managers aren't expected to
have an in-depth knowledge of technologies, they should, however, be aware of their
capabilities and the issues involved.
Every ICT planning process must make assumptions about the nature and role of
technological evolution. There are two main reasons for this
• implementing an ICT strategy takes time

• technology is rapidly changing.
One of the consequences of this is that you plan now to develop a system with a
technology which may be obsolete by the time it is actually fully implemented.
Telecommunications is the technology of information transfer. Multinational

organisations (like Flextronics, Toyota, and Mango) especially need good
communication systems to coordinate the activities of many people in diverse
locations.
Communications can be used by all organisations to reduce the costs and delays
associated with more traditional means of communication, improve sales through
better customer service, and establish better means of communicating with suppliers
and customers.
The ultimate goal of this evolution in communications is a broadband integrated digital

network where a wide range of traffic types (voice, data, image, video) and value
added services are supported by a global communications network. The Internet, which is
owned by nobody and freely accessible to all, is today the most use communication
network.
Advances in communications have lead to collaborative networks where

organisations have begun to link to each other electronically. So, for example,
instead of sending orders through the post, which can take several days, they can
now be sent electronically in real-time.
Developments in value added networks and network security lead to services like
electronic data interchange (EDI), intranet and extranet - these developments can be
used to improve document (like product design) exchange, slash inventory, improve
cash flow, streamline a company's operation, and often forge a competitive
advantage.
Research in artificial intelligence (Al) seeks to expand the frontiers of information

management, and spans a new era: the "intelligence age". Probably the most successful
results to date in Al are expert systems that seek to encapsulate the knowledge of experts
in specific domains. Neural networks, intelligent databases, voice recognition, biometric
systems, multimedia, virtual reality and document image processing are recent
technologies that can become strategic weapons for the proactive organizations.
Implementing an IS strategy is a crucial stage. Formulating an IS strategy is one thing,

implementing it is another. Organisations are social structures composed of people and
ICT has a direct effect on their role in the organisation. It is important that actions and
changes required to implement an ICT strategy are anticipated so as to maximise the
benefits.
Implementing an ICT plan involves change. Employees are given new roles and
responsibilities; there is change in the way tasks are performed and how people
work with each other. Information itself is a resource that is closely linked with status,
enhances authority, and shapes relationships.
Changes in the availability of information can result in disruption and organisation

conflict. To gain maximium benefits from information systems, both its flow and use
throughout the organisation must be properly managed.
The success of the implementation will ultimately be measured by how effectively this
change is managed. Change management must begin with an understanding of the
nature of change itself.
In conclusion, ICT is strategic to modern organizations. Failure to maximize on new ICT
technologies and identification of potential competitive advantages can spell the
beginning of the end of any multinational organization.
Summary Key points:

Information should be regarded as a key resource.
No corporate strategy is complete if there is no IS strategy. This should be

obvious by now.
ICT is too important to be left solely to the IT professionals
Planning. for ICT should be an important and integral part of the firm's
competitive strategy development. ICT must be planned for strategically.
ICT can be used to create substantial and sustainable competitive advantage.
Keep abreast of how other companies are using ICT around the world.
Remember that innovative applications in another industry may be just the
key to permit you to get a jump on your competitors.
Cultivate a culture that considers IS/IT issues as it does general business

issues. ICT permeates the whole organisation and it is now an integral part of
the competitive makeup of industries. An appropriate environment must be
established within the organisation to reorientate the treatment of IS/IT.
Technological choices are essentially business decisions. Technology is just a

means to an end.
Filter out buzz words. They are the IT industry's way of confusing the
business community. Managers do not need an in-depth knowledge of technical
details but an understanding of the technologies' capabilities, the opportunities
they present, and the issues that they raise.
Question F6
a) Distinguish between an information systems strategy and an information
technology strategy. Is it sensible for a medium sized or large organization to
recognize these 2 distinct areas?
b) In developing an IS or an IT strategy to what extend should a company be
influenced by what other organizations are doing? [2006]
Solution guide
a)
Information Technology strategy (ITS) refers to the set of Information technology that
provides the best platform for the enterprise application software to run from. An
Information systems strategy refers to the desirable set of information systems and
strategic information systems which an organization must identify and implement in order
to achieve the objectives of the business strategy and plans.
A strategy spells out HOW best and with WHAT resources should be used to achieve a
certain set of enterprise objectives and results. Example of strategy could be “building
barrier to new entries”, “broaden the base of customers and suppliers to reduce their
powers”.
IT includes database systems, type of computers, communications technologies, network

infrastructure, Internet, intranet, extranet, e-commerce, e-commerce payment systems,
input and output devices.
IS includes all form of applications to meet the requirements of the various function in an
enterprise. Such functions include inventory, sales order processing, purchase order,
warehousing, assembly, production control, OC/QA, logistics, invoicing, accounting,
payroll, finance, human resources, e-commerce applications, KMS, KWS, CRM, SCM
and ERP.
IT and IS are interlinked (note the diagram below & explain it). Particularly for medium
and large organization, the danger of many disparate systems with varying platforms can
arise over the longer term – making the progress to adopt new technology increasing
difficult.
However, it has been argued though that as long as developments are modular, client-
server architecture, Internet technology based, web-based technology - it may not pose
real problems to integrate any IT infrastructure. This is partially true as disparate systems
still require integration and ‘handshaking” interfaces.
ITS BP
ISS BS
b) In developing an IS or an IT strategy to what extend should a company be
influenced by what other organizations are doing?
Company ISS is influenced by other organizations and technology in following ways:
- technology pull – the desire to be the forerunner in using new technology but risks
associated! But may result in ‘cash cows”.
- technology push – the desire to keep up and follow with competitors. E.g. if many
banks have biometric security, the remaining banks may be pushed into adoption and
hence requires monetary resources. Walmart uses of RFID. Flextronics extensive use
of ERP. American airline on computer network and online ticketing are examples.
They led and forces others to follow or “die”
(What should company do? Company influences by effects on other companies and their
reactions. Strategy will have to be formulated at business, firm and industry level.
for discussion of business, firm and industry level strategies, see E1)
Question F7
a. Explain the purpose of an information systems strategy and who it is of use to?
b. Are all information systems strategic for an organisation, or are some more
significant than others in terms of their benefits and their impact on the
organisation? [2002/Q7]
Solution guide.
a.
The purpose of an information systems strategy (ISS) is provide a strategy to
approach the development of enterprise applications that will achieve the business strategy
and business plans of the organization. ISS includes the identification of strategic
information systems (SIS) and how best IT resources (database systems,
telecommunication, networks, computers, software, security platform, data protection
policy, IT budget, IT personnel policy) are deployed.
A good ISS must support and be aligned to the company’s business strategy and
requirements in the medium and long terms. “Strategic” refers to operations that could
Draw the make a difference to the company performances and future achievements over their
alignment competitors.
diagram of 4
boxes: BS, ISS detailed how best to use and incorporate IT in line with the firm’s overall business
BP, ISS, ITS
strategy. ISS considers all factors (organisational aspects, environmental etc). ISS may be
developed to incorporate strategy at 3 levels: business, firm and industry.
At business level – BPR and value chain

At firm level – collaborative network, value web with e-commerce
At the industry level, one powerful strategy model lies in Michael Porter’s 5 forces. e.g.
“new entrants into the markets”. “New substitute product and services e.g. Typewriter
substitutes by PC + word-processor and Greeting card substitutes by e-Card. Avoid
competition on low price rivalry by using IT to improve design, functionalities and cost.
Power of consumers and suppliers base.
(to expand briefly with examples)
So who use the ISS? The key users will be the higher management – in particular CEO,
CIO, CTO, CKO, and CFO who are responsible for using IT strategically. ISS has great
impact on what goes into the business strategy and business plan. ISS provides the
overall directions and guidelines to what, when, which IS, IT and human resources be
acquired, and installed. Managers from various departments such as the financial, HR
would be involved.
The ISS often included another important component called the ISP (information system
plan). It is the result of input from ISS + Business strategy + Business Plan. Amongst
other items, the ISP details the development timeframe of new information systems
(including SIS) to be developed over the medium and long term.
The CIO, and CTO are jointly responsible for identify suitable development approaches
and plans to achieve the ISS. They have identified whether the development is carried out
in-house, outsource, or go for application packages. They have to work closely with the
end-users to pace the necessary development and deadline of the ISS/ISP.
b. Are all information systems strategic for an organisation, or are some more
significant than others in terms of their benefits and their impact on the organisation?
No. Not all information systems are strategic to all organisations. “Strategic” implies
“transformation”, “made a great difference” “critical success factors” and involve major
changes affecting the company’s current and future competitive position and directions.
American Airline, and Baxter Healthcare are examples that transform the company’s
customer base by a large margin as a result of the successful implementation of their
strategic applications.
A firm’s overall information needs often consist of a basket of different types of

application systems falling into 4 quadrants as suggested by McFarlan. McFarlan’s
strategic grid suggests that organization often has a balance portfolio of applications
namely Turnaround, Strategic, Factory, Support. Turnaround applications are future “cash-
cow” applications.
Strategic information systems (SIS) or applications are those that are very important
applications, and are strategic, a “critical success factor” to the company today.
An example is Flextronics International’s ERP and SCM which links all its global
subsidiaries and global suppliers into an international supply chain network. This enables
Flextronics to source for the best suppliers and subcontractors world-wide with speedy
responses to their customers at low price.
Factory and support applications are often applications that are required to keep the
factory running in its day-to-day operation efficiently and effectively. They are not
strategic but equally important too. Bills and salary need to be paid, taxes needs to be
collected like GST, sales orders need to be captured, office emails and word processing
packages must continue to work correctly – all these are either factory or support
applications – not strategic but important to the daily running of the company.
Information systems and innovations may not have same strategic importance to different
type of industry. Take the Inventory system – this kind of application may be critical and
strategic to Walmart and Baxter Healthcare, as examples.
Walmart controlling their daily store inventory would be a bread and butter issue for them.
While for Baxter, their Inventory-less information system that is networked & linked to all
their hospital customers is both critical and strategic to Baxter. BUT an inventory system
to an educational institute or a cement factory that keep inventory of stationery or office
material may just be superfluous – such computerized inventory system may be not
necessary at all.
Another example would be the ticketing system – a transaction processing system (TPS).
Such would be critical and strategic to the airline industry but may not be that critical for a
cinema or public swimming pool collecting entry tickets. Would an accounting system be
strategic or a necessity?
Many IT applications may not be “strategic” applications but they are important to keep
the daily operations running smoothly or ensure the middle management received
management reports to help them monitor and control the operations.
A key question to ask to help determine the application’s critical and strategic importance
is “What happens if the computer systems break down for a week, 2 or three weeks?”
“Strategic IS” are applications that will help a firm gains strategic advantages and leverage
against its competitors. SIS helps achieve the strategies laid out in the Business strategy
and ISS.
This is achievable with Information Systems that improve the enterprise’s value chain,
discover unique processing methods, achieving strategic advantages through low cost,
product or service differentiation, better design, substitute product, faster and accurate
processing, broaden the base of customers and supplier (Porter’s 5 forces), and integrated
information to help top manager make effective strategic decisions - like new factory,
new product line, new sale force, dividend declaration, low cost or cost barrier strategy.
A point to note though is that strategic IS are NOT necessary targeted or used by the top
management. A strategic application may belong to transaction processing system (TPS),
MIS, DSS, KMS, or ESS category.
Also take note that an application will lose it strategic values when other competitors copy
and built similar systems. Once that happens, then what was strategic yesterday may
become a necessary normal operational system today (like ATM machine provided by all
Banks).
Question F8
a. Explain the purpose of an information systems strategy

b. How should such a strategy be developed?
c. How significant are an organizations existing information systems and technical
knowledge when developing such a strategy? [2001/Q7]
a. What is an information systems strategy?

b. Why is such a strategy widely believed to be essential for most modern
organisations?
c. Who should be involved in developing such a strategy? [2003/Q7]
Solution guide
a. What is an information systems strategy?

ISS is a strategy that detailed how best to incorporate and maximize ICT into the firm’s
overall business strategy (BS) and business plan (BP). The strategy includes examining
new technology and company’s existing IT resources (both IT infrastructure, applications
and IT human resources). ISS identifies information systems that are strategic and critical
to the firm’s current and future operations. Such information systems are often called
strategic information systems (SIS).
IT covers databases, computers, communications systems, application software, system

software, security and data protection policy. ISS also takes into consideration
organisational aspects (politics, social, culture), environmental, software development
policy and current infrastructure).
“Strategic IS” refers to information systems that could make a difference to the company
performances and future achievements over their competitors. These include competitive
differentiation, enterprise transformation, forming competitive alliances, special product
features, designs and revolutionary operational efficiency. Help an organisation gains
strategic and sustainable advantages over their competitors.
ISS may be developed to incorporate strategy at three levels: business, firm and industry.
At business level – BPR and value web with e-commerce

At firm level – Core competencies and value chain
At the industry level, powerful strategic models lie in eco-systems, information

partnership, and in Michael Porter’s 5 forces. e.g. “new entrants into the markets”. “New
substitute product and services e.g. Typewriter substitutes by PC + word-processor and
Draw the
alignment Greeting card substitutes by e-Card. Avoid competition on low price rivalry by using IT to
diagram of 4 improve design, functionalities and cost.
boxes: BS,
BP, ISS, ITS (to expand briefly with examples)
ISS is derived after alignment with the firm’s business strategy and plans. Alignment
ensures that the best results are attained in each quadrant. In today’s fast paced
technological advances and strategic progress in IT (telecommunication, database systems,
application systems and computer hardware), IT has major impacts on BP and BS -
affecting the final shapes of BS and BP. Unlike the 1990’s, IT was simply tools and exists
only to help organisation achieve their BP and BS.
ISS may be developed following one or more strategy models like Value Chain Analysis,
5-Strategic forces, McFarlen’s strategic grid (do NOT over detailed on these strategy
models). ISS may be approached from a top-down, bottom-up approach or a hybrid
approach.
b. Why is such a strategy widely believed to be essential for most modern

organisations?
ISS is essential for most modern organisation because it provides directions on what
and how best IT be used to realise the firm’s BP (implementation plans) and BS (vision
and goals).
ISS is focus on gaining and sustaining strategic advantages for the firm. With globalisation
and growth in importance in knowledge economy, IT has become more strategic today.
They are no more just merely tools to help an organisation automate it operations or
providing information for management decisions in control and monitoring functions.
They affect the ways business compete and grow its business.
Strategic information systems can result in paradigm shift in the ways business operates
and transform its operations. Venkatraman’s ladder of business benefits from IT attests to
this.
Today, IT can help resolve strategic issues by building barrier to entry, counter the threats
Be aware from new product and service substitution, erodes the power of suppliers and customers,
that the
use of too lock-in customers or change the rivalry through low cost or differentiation.
many
acronyms ISS looks at the needs of management of all levels: strategic, tactical, operational issues as
may a whole. It examines which TPS, MIS, KWS, ESS, DSS could meet with management
irritate the issues of operations, planning, monitoring, organizing, directing, controlling and
examiners.
So, on the improving the firm’s value chains at enterprise and industry levels. SCM, CRM, ERP,
safe side, KMS are often the results that meet these needs.
write in
full or use Ford, Baxter, Toyota, UPS, Flextronics, AA (Sabre) are some of the global companies that
acronyms have benefitted with effective, well-aligned ISS.
minimally.
Who should be involved in developing such a strategy?

Depending on the culture of the firm, some may advocate a top down (top management
decides), or bottom up (analysing proposals from lower operational supervisors, managers
first), or a combination.
A good start would be to look at what current technical knowledge, and IT resources the
company possess. Then review the new IT technologies and resources that may be
important to the future development of the organisation.
A good strategy should transverse all five stages of IT exploitation per Venkatraman’s
ladder of business benefits with IT. A balance portfolio as per McFarlen’s strategic grid
should be perceived. It must include strategic information systems that could help the
organisation gain strategic and sustain advantages over their competitors.
The major stakeholders (investors) representations lie with top mgt (CIO, CEO, CFO,
CTO, COO, CKO). The lower operational managers and supervisors are in direct contacts
with what’s happening on the ground – both customer and suppliers, and they are
important ingredients an ISS must consider.
It is often the case though that top management plays larger role as they are in better
position to develop a firm and industry-level ISS as they are aware of market
developments, company business plan, goals and strategy which the ISS must align to.
Question F9
When is an information system considered strategic?
Why are strategic information systems (SIS) difficult to build and sustain?
Solution guide
Information systems are strategic when the applications aim to provide strategic and
competitive advantages to an organization - adding significant values and changes to the
organization. This could be a firm, business or industry strategy.
The characteristics of a strategic information system (SIS) are positioning organization

towards gaining & sustaining competitive advantages, help achieve strategic results,
support enterprise global operations, new effective operational procedures, new products
and better services, build and strengthening business relationships (behavioural), nurturing
a learning organization environment (cognitive). “Strategic” activities make a difference to
the company performances and future achievements over their competitors
Strategic information systems (SIS) are difficult to build and sustain simply because it
is often large and complex system. Often, they involved innovative concepts, new
technology, comprehensive array of both hardware (networks, databases), software
resources, technical skills and human resources.
Be aware They often involved many higher-level management and many experts. Case in points -
that the think of American airline’s SABRE when they first developed the systems, think of
use of too Baxter’s inventoryless system and Flextronic international’s global SCM and ERP.
many
acronyms As SIS is often huge and complex, they require complete holistic data sources (internal
may
irritate the and external, environment, formal & informal). Building SIS is time consuming and large
examiners. pool of expertises in various fields are often required to be involved in the specifications
So, on the and designs of the applications, particularly in KMS, ERP and SCM.
safe side,
write in These applications also ride on the latest relevant technology (telecommunications,
full or use
acronyms computer hardware, database systems) to exploit their new capabilities. But new
minimally. technological developments and new tools are arriving at a very fast rate making the
selection of the right choice infrastructure difficult.
The ability to think strategically, possess global knowledge and special skills are necessary.
SIS is often a multinational enterprise or global system. Many different country’s culture,
expectations, organisational hierarchy, competitions, and local regulations would have to
be taken into consideration. Identify strategic systems that differentiate, innovate and
transform the organisation is no easy task
Globalisation and rapid business changes add to the difficulties to build a sustainable SIS.
Changes must be monitored and a flexible IS to quickly adapt to the changing
environment is necessary.
Competitors can easily copy the technology and one quickly loses the competitive
advantages. To sustain, strategic IS must be reviewed, and continuously improve to
strengthen the parameters mentioned in Porter’s 5 forces. An effective SIS would also
often take into consideration the behavioural and cognitive aspects.
SIS is one of the main key factors of success to any modern organisation. Although
difficult to build and sustain, organisation must strive to identify them, build and sustain
them so as to compete effectively in the current age of globalisation, industry networks
and international systems.
Note: Strategic Information Systems (SIS) Not = Information Systems Strategy (ISS)
Other relevant questions:
Q. What are the alternatives to a planned change approach to information systems starting
at the top with an IS strategy?
Q. Why do strategic-level decisions entail a higher degree of improvisation?
Q. Can markets and organizations both be viewed as sets of transactions? If they can,
when is it more efficient to buy rather than make a product?
Q. What is the difference between business process re-engineering and market process re-
engineering?
Q. Can you find out a situation where the Internet shrinks the information asymmetry
rather than augmenting it?
Q. Is an executive support system (ESS) best seen as a type of decision support system or
as an extension to classic management information systems? Justify your answer. [SG]
Solution guide:
The solution requires a comparison of ESS and MIS. ESS uses data from MIS, hence
extension perse. But the set of people using them are different – ESS by top executives,
while MIS by mid-level managers for different decision making purposes. Users of ESS
require high degree of improvisation with market knowledge (market uncertainty,
complexity) + external information + unbounded rationality + “word of mouth” from
marketplace. The ESS may contribute only a very small percentage to the final
decision. Whereas, MIS users strictly uses inhouse data/ information with high degree
of accuracy and MIS has great impact on the decision made. Hence, ESS is seen more
as another type of decision support rather than an extension of MIS which has a much
higher influence in the decision process.
Q. In what situations would you think of ‘word of mouth’ as a more efficient information
system than executive support systems (ESS)? [SG]
Solution guide:
“Word of mouth” = informal system. Market is imperfect and always dynamic, with
changing conditions. Higher executives “muddling thru” and deal with dynamic and
fast changing market condition like financial market = Money, equity, gold, oil
market and political situation which is full of uncertainty and complexity. They have to
be open to all possible sources of information including word of mouth (by business
associates, partners, conferences, round of golf, and market rumours). ESS takes
considerable effort and time to generate, and involved considerable time lags in
information collection and processing (both internal and external sources) – albeit
ESS would be more organized and well thought through. Hence, it is possible that
“word of mouth” information being more up-to-date may be more efficient than ESS.
G. OPERATING SYSTEMS, NETWORKS, TELECOMMUNICATIONS
Question F1
a. Describe the main hardware elements of a modern desk-top computer and how
they work together
b. Briefly describe how an application program makes use of these hardware
elements as it runs on the computer
c. Explain how physical characteristics of 3 hardware elements can restrict or limit
a computer’s performance [2000/Q3]
Solution guide.
a) Describe the main hardware elements of a modern desk-top computer and how
they work together
The main hardware elements of a modern desk-top computer comprises of 6 main

building blocks. There are the CPU (Central Processing Unit consists of ALU +Control
unit + set of registers), Primary (main) memory storage which includes the ROM memory,
input devices, output devices, secondary storage, and communication unit. They are
connected to the motherboard of the computer.
The CPU is the “brain” – the central control. It is called MPU, in smaller computers like
PDA, or desktops. It controls and synchronizes the other building blocks of the computer.
Together with the operating system, it is like the government of a country – taking full
charge of what’s going on in the whole computer. All the building blocks worked together
under the control of CPU.
The CPU acts as the traffic controller and overall manager. The CPU tells all the hardware
devices when and what to do. If the CPU goes down the whole computer will hang (dead).
As there are many devices attached in a computer, the normal CPU is assisted by 2 other
key components called the northbridge and southbridge units. The diagram below show
that together, they manager and share the load for all these connected resources and
devices like RAM memory, PCI bus, clock and so on.
The diagram below shows all the building blocks being linked together by a set of 3 types
of buses: data bus, address bus, control bus to the CPU. Each of these buses performs a
specific task. The data bus contains the data being moved, the address bus points to the
location to get the data or move to, while the control bus contains the control signal to the
hardware element.
All devices that are connected to the computer have their software drivers to help interface
correctly into the CPU and the overall hardware platform. These drivers are often built-in
as part of the operating system.
b) Briefly describe how an application program makes use of these hardware

elements as it runs on the computer
When an application program (e.g. Order entry) runs, it often makes use of these
hardware elements to complete it processing requirements. When an application
program is not running, it is normally stored in the secondary storage - an external
storage hardware element like a disk drive or CDROM.
In order for the application program to run, the CPU (via the Operating System) will load
the application program from the external secondary storage device into the main or
primary storage hardware element (RAM memory). The operating system is the system
software that is responsible for managing, allocating and controlling all the resources
through the CPU. The operating system (OS) is made up of 7 managers: main memory,
input/output, secondary storage, processor, network, program and human-interface
manager.
The CPU’s Control unit through the OS program manager will remember where the
application program is located in the main memory. It is also responsible to remember
the exact address of the instruction in the application program that is being executed. The
execution of a program’s instruction is carried out by the CPU Logical Unit.
During execution, the application program may request for input or output (I/O) services
from certain I/O devices or communication services.
The CPU (via the Operating System) will call the appropriate driver to do the appropriate
interfacing of reading, writing from or to the appropriate devices through the set of 3 buses
(data, address, control).
When the work is done the appropriate device will inform the CPU’s via the operating
system. It then continues to fetch the next instruction for execution. This continues until
the application program completes it’s processing.
c) Explain how physical characteristics of 3 hardware elements can restrict or limit a

computer’s performance
The physical characteristics of 3 hardware elements (like keyboard, printer, OCR) can
restrict or limit a computer’s performances.
The main reason is CPU works very fast, and executing in terms of billions of machine
cycle per seconds. An program instruction is often between 1 to 8 bytes long. Each byte is
roughly executed by one machine cycle. A machine cycle comprises of a fetch and an
execute cycle. The CPU spent most time waiting for the physical transfer of data between
itself and these hardware building blocks. It is hence mostly under utilized.
Keyboard: The transmission and capture of data is dependent on human speed. Keyboard
is designed for interaction with the human user. A human fastest typing speed is 120
words or 700 characters per minutes. This is way behind the computer speed. If the
computer is waiting for only keyboard input, then the computer performance will be very
low. Also, keyboard has a limited buffer to store the keystrokes too.
Printer – A printer receives data from the computer. But printer’s speed and capability are
limited by its mechanical movement as in the print-head, print-chain, paper-tractor etc and
its small print buffer. Computer’s CPU must wait for the printer to fill its buffer and to
print. When a printer gets into a bottleneck, the computer performance is affected. It has
to wait for the printer’s buffer to clear.
OCR. The same goes for OCR. Although it is much faster than keyboard entry, the OCR
must read and translate the marks into appropriate digital forms. It is designed to interact
with human. As the human speed is involved again in handling & positioning the
document - the computer will have to wait each time.
Additional Q.
What device is faster than the Computer’s CPU?
Disk storage devices.
The speed of writing and reading of data on hard disk is very fast and more efficient than
CPU. Infact, it is much faster than the processing speed of most computer CPU. Maximum
overall computer performance cannot be fully utilized unless the CPU’s machine cycle is
improved further. In this case the reverse is true where the computer limits the
performance of the disk drives!
Question G2
“Show how the Operating System is an important system software.”
similar questions:
Q. Briefly describe how an operating system works. How do computers connect to the
internet? How is the data transfer managed?[2007 ZA Exam]
Q. Briefly describe the main components of a computer and how an operating system works.
(2007, Prelim)
Brief: The main components of a computer can be represented by 6 building blocks.
These building blocks represent the hardware layers or resources. To manage these
scarce resources, the operating system, with its 7 managers, played the important
roles of coordinating, allocating, and controlling them effectively and efficiently.
Solution guide.
A computer system needs software, particularly application software, to perform

meaningful, useful work. To do so, they rely heavily on the operating system. The
operating system comprises of a suite of system software programs. Together, these
programs control, allocate, monitor, regulate, process, terminate, reclaim and manage all
the resources and operations of a computer system.
We can think of an operating system as a good government. Without, a country (like a

computer) will be in total chaos. It would be out of control when every opportunistic
individual (like computer programs) do whatever they like to gain control and access to
the limited resources.
One way of viewing the importance of an operating system is that it coordinates the
execution of the application software. It is resident in RAM memory at all time so
that it can immediately attend to the many requesting complex tasks in real time.
As shown in the diagram below, when a user wishes to run an application software, for
example a spreadsheet program, he tells the operating system the name of the program.
No application software is allowed to gain direct access to the hardware resources. If

this is allowed, there will be traffic bottlenecks as all application software will
opportunistically block and hold down resources even though they are not using it for
some times.
The execution processes and coordination with the hardware resources that follow are
all managed by the operating system’s set of functions. This frees the spreadsheet
program to concentrate on the actual useful work that it should perform rather than
trying to handle the many complicated technical communications with the hardware
resources.
Application Software (e.g Excel, Word, ERP)
System Software (main one: Operating System)
Hardware resources: CPU, I/O, Primary Memory, Secondary Stores
To perform these important technical chores, the responsibilities are divided up into seven
software managers (similar to a government with its various ministries & statutory
boards). These are main Memory (or RAM primary memory), Input/Output, User-human
Interface (or human-machine interface), Secondary storage, Processor, Program and
Network managers. Let understand their importance.
Main Memory (MM) Manager. The MM manager of the operating system controls,
monitors, allocates and reclaims main memory (RAM) of the active application
programs. The spreadsheet program has to be allocated some RAM in which to locate
itself and the data it manipulates, before it can be executed. It is like the human being,
where one has to think (load into memory) about that something so as to be able to
communicate (execute) about that thing.
Similar to our human brain, RAM is limited in space. Yet, like our wonderful human
brain, MM is able to handle almost unlimited number of application software
“concurrently” – technically called multiprogramming, multi-tasking. How does this
work?
Typically if an application is 200KB-size, then theoretically a RAM space of about 50

pages (says, where 1 page = 4KB RAM) is required. However, in reality only the active
one page, that is being executed, need be in RAM while the rest can be in virtual storage
on standby and are moved in and out of RAM using a technique called “page-in, page-
out”. Like the many activities occupying our brain, many active processes are “page-in”
and “page-out”, without lost of connectivity between related processes, in a given
timeframe.
The memory manager takes care of all these actions rather than the individual user-
program arranging for their own space and corrupting each other spaces. RAM uses
memory maps to remember or reclaim the memory pages in RAM when an active program
is completed.
Input/Output (I/O) Manager. The part of the operating system that is responsible to
manage I/O devices to enable application programs to obtain input (e.g. keyboard) and to
direct outputs (e.g. screen or printer) is the I/O Manager. A spreadsheet will need input
from the keyboard.
When the user types at the keyboard it is the I/O manager that directly reads the
keystrokes from the keyboard and passes them on to the spreadsheet program. Of course,
in performing this simple task, it has to seek assistances from other managers such as the
MM and program managers.
The I/O Manager controls the uses all input/output devices such as printer, scanner, mouse,
keyboard, disk drive, DVD, modem etc. Each I/O device has its own appropriate device
driver to interpret and handle the needed tasks. Just imagine how difficult and chaotic it
would be to print anything without the I/O manager. As there is a possibility of more than
one application programs wishing to print at the same time, who will set up the print queue
and ensure that the printout are not garble, overlapped, and mess out?
User-human Interface/ Human-Computer Interface. The operating system provides

standard user interface features (called routines) such as the WIMP (windows, mouse,
icon, pull-down menu) through its user-human interface manager.
These special features are available to new application software that uses the
operating system as its platform. New applications software merely need to perform
a “call” in their programs to import the ready-made WIMP features during execution
time. This is similar to pre-fab in building construction, where many building
components like beams, doors, aircon ducts are ready-made and simply “reuse” in
the designs of the different building.
Importantly, the user-human interface facilitates effective communication, higher

productivity, and reduced learning curve of new application software for its users and
developers. We can see this common “look & feel” in many applications, such as Excel and
IE (Internal explorer) that runs on same Windows platform.
Secondary Storage (SS) Manager. Often, data has to be kept for subsequent processing.
The operating system, through it SS manager, caters to this need by allocating space on
an external storage device, like a CD or hard disk, to keep the data into a file. The SS
manager maintains a directory index of file names and locations, so that each file can be
located and read for subsequent processing.
This is similar to the way we put our documents into paper files and into sections in a
drawer of a filing cabinet or books nicely categorized into shelves with an index card on
its side in a library. Of course, without the SS, data files will be storage laissez-faire all
over the places in the external storage devices, and many would eventually be lost,
misplaced, or accidentally overwritten.
You’ll note that data cannot be left in the main memory (RAM) for subsequent
processing, because once the computer is switched off, the data is lost forever. Although,
humans may be more successful in recalling data from their brain after “switching off”
each night, often though the data is distorted by the passage of time. In reality, humans
therefore have the writing pad and diary, which act as the secondary storage to store the
“data”.
Processor Manager. The processor manager interprets instructions from an active

program and directs it to the appropriate central processor unit (CPU) on what to do. This
is especially important with computer that has multiple CPUs or processor multiplexing
(simulation of multiple CPUs). In today context, the typical PC has dual-core CPU (or
even quad-core) too. This is similar to a man simulating with two heads – and, logically,
he should be able to think, process much faster than someone with just one head!
Sometimes, we see a printer-program printing while at the same time the computer is also
retrieving data for the Internet Explorer program. This is multiprogramming, like someone
who could write with both hands, talk and eat at the same time.
The processor manager optimizes on the multiple CPUs and multiplex to achieve faster
processing results and often “split” a task up in sub-tasks to achieve this goal. You can
imagine what the processor manager must do with proper matrix control and
synchronization between the various sub-tasks, mother tasks and the main programs - an
impossible task for individual programs running on the computer.
Program Manager. A user working on a PC often runs several application programs at

the same time. Word, IE and mail programs are common situation. When many programs
are running simultaneously in a computer it become inevitably more complicate to keep
track where they are located in RAM. RAM memory cannot be shared between two
programs, input must be to be directed to the correct program, and print output must be
careful queue.
Without the program manager, all user applications and their sub-tasks have to remember
its “memory boundary” and all its corresponding sub-tasks (e.g. printing requests, wait for
message) are well related and coordinated with its communication threads properly link
back to its mother program.
Network Manager. Today, most computers are connected in a local or wide area network.
Many users use the IE program to surf the nets and retrieve information. Users share,
retrieves or writes files on a networked file server. How can this is be done? We need the
network manager. It establishes the network communication linkage, so that the
appropriate application can follow through with its demands.
Together with a network interface card or adaptor, a cable or communication modem, and
an ISP (Internet service provider), the network manager provides the means to connect to
the outside world, a wide area network or the Internet. Without the network manager, it
would be extremely difficult for individual user application program to perform its own
data packet-assembly and editing, flow and error control, and handshaking protocol into
the outside world of networking.
Limitations. An operating system is not without limitations. Its suite of software is

complex and does not facilitate personalization. Being written for a specific hardware
platform, the application software that is written with its I/O interfaces face portability
difficulties. Migrating and populating such application software to another platform may
face legal consequences and roadblocks too.
Being the platform where applications are launched, popular operating systems (such as
Windows XP and Unix) draw unwanted attentions and become the launch-pad for spams,
viruses, spoofing, phishing and Trogen horses. These impair, diminish and corrupt the
security and important roles of the operating system.
In conclusion, given the range of important duties that an operating system performs and
coordinates, and considering the limitations are small glitches, we can deduce it would be
quite impossible to get any substantial, meaningful work out of a computer if the machine
comes without an operating system. Similarly, it is true that a competent operating system
would be next to nothing, if an insufficient range of useful application software is not
attract to execute on its platform because of insecurity and other digital parasites.
Question G3
Briefly describe what a software package is. How do computers connect to the Internet?
How is the data transfer managed? [2007, ZB Exam]
Solution guide:
A software package is a set of prewritten and pretest application software programs

written by IT specialists and commercially available for sale or lease. The program may
either be a system software or an application software.
Software packages, in particular application software, are intended to remove the need for
programming altogether by the end users. Professional experts have come together to
develop industry packages. Packages are very sophisticated, modular, and can cater to a
variation of configurations through module options and parameter settings to meet the
varying requirements of different organizations.
System software package includes the operating systems, device drivers, utilities, and
computer languages. They manage, coordinate, and enable the computer hardware and its
resources to function efficiently as a coordinated system.
Application software package includes database systems, groupware, and enterprise

information systems. Unlike system software, they do useful works.
Application software packages can be considered to belong to two main categories: dedicated
and general purposes. Dedicated packages normally refer to a particular business function
like Airline reservations, Banking, Accounting, Payroll, Manufacturing, Sales systems, ERP,
CRM and SCM. The general packages refer mostly to general office applications like
spreadsheets, word processing software, and database systems.
<provide a brief explanation of useful work done by any application e.g. airline
reservations, SCM etc>
<advantages (convenient, faster development time etc), disadvantages of packages
(configuration problems, dependency, loss of expertise, etc) >
Computers connect to the Internet and to one another by establishing handshaking

protocols with computer nodes in the network and dispatching data packets through the
connected nodes. There are two main modes: packet switched or circuit switched. The
transmission media could be wireless (wifi, wimax, bluetooth, infrared) or wired (coaxial,
cable, fibre optics, telephone lines) and over earth surface, across oceans, or sky satellites.
The diagram below shows that a packet-switched network has many computer nodes to
help relay the packets (one packet at a time) across the network between the sending
computer-A and the receiving computer-B. Each packet may take a different path in the
network.
B
A
Each packet goes thru

different flow path.
Connection is between 2
nodes at time. The connection
network path is discarded once a
packet has passed.
To set up a network connection, all connecting computers must obtain their own IP
address (e.g. 208.200.012.102). The IP address acts like a house number, with its street-
name, district and country code. A computer must install a network interface card or
adaptor. This provides the network manager (of the operating system) to the mean to
access the local area network, or a wide area network (such as Internet) through a
modem provided by a local Internet services provider (ISP) such as Singtel and Starhub.
The network manager, with the help of the ISP, is responsible for assembling and editing
the data packets to be sent out, establish handshakes between the computer nodes,
transmit the data packets, control flow control, provide error control and re-transmission
of error packets.
So, how is the data transfer managed? The data or document to be transferred must meet
transmission protocol standards of the network. The steps to carry out the data transfer can
be listed thus:
1. The sending host first “cuts” the message into protocol standard packets.
2. Each packet bears and ID reference in running sequence.
3. The packets, after being encrypted, are then injected into the WAN network
4. Each packet is sent from one computer node (or switching routers) to the next
computer node of the WAN network after a successful handshake between the 2
nodes. The packets are transported independently over the network.
5. When they arrive at the next node, the node decides using a routing algorithm (i.e.
formula) which outgoing transmission line to route through. Hence, the packets of
a message could be taking different routes in the network.
6. Eventually, they are deposited at the receiving host computer.
The host computer reassembled the packets, in accordance to sequence of their IDs, into
the original message before forwarding to the final receiving host computer.
The speed of data transfer depends on the transmission median, data upload and download
speed of the service providers.
Question G4
a) How is the operating system (OS) related to the computer’s hardware resources?
b) Illustrate, with examples, how users can benefit from, any 3 features, of an
operating system.
Solution guide:
a)
The OS is related to the computer hardware resources through the responsibilities it
perform. The OS is made up of 7 software managers which manages the following
resources:
• Primary or main memory manager
• input/output (I/O) manager
• data storage manager
• human-computer interface (HCI) manager
• program manager
• processor manager
• network manager
The six main hardware building blocks (resources) are: CPU, Input devices, Output
devices, Primary (Main) memory, secondary storage, and communication devices.
Their relationships can be represented by table below:
O/S Managers Hardware resources control by the O/S manager

i) main memory allocate RAM memory to running programs.
i) input devices control keyboard, mouse, fingerprint reader, etc
iii) output devices control Monitor, Printer, disk
iv) processor direct and carry out work for the CPU Processor
v) network control communication devices: Modem, Router, hotspots.
vi) data storage maintain indexing table to facilitate storing and retrieving of files in
secondary memory: disk, SD, thumbdrive, CD, DVD etc
vii) program control the active applications that they do not overlap in memory
(provide explanatory notes on the table with examples)
The diagram shows that the hardware resources are available to the application software
through the operating system. The operating system acts as the traffic and resources
controller so as to ensure the hardware resources are optimally utilized by running
application software.
Application Software (e.g Excel, Word, ERP)
System Software (main one: Operating System)
Hardware resources: CPU, I/O, Primary Memory, Secondary Stores
b)
The objectives of OS are to facilitate the end-users like the computer programmers to
concentrate on how to make the best uses of the computer resources through the
application software. Otherwise, users will be overwhelmed with the need to control,
manage and manipulate the hardware resources directly. There will be havoc when every
application software attempts to write freely onto printer or main memory resources.
We shall look into these 3 features of OS: Main memory manager, Secondary storage
manager, and Program manager.
Main memory manager manages, allocate, and retrieve free space in primary main
memory. Using the example of the user wishing to use MS word or Excel spreadsheet
software, the user need not have to worry about primary memory spaces where the
application program will be located. Even in situation where there is hardly any primary
memory space left, the main memory manager will use the page fault and paging
techniques to ensure the application program can execute successfully. The user needs
only to click the icon of the software to execute it.
Secondary storage manager manages and retrieve files store on the secondary disk
storage like the DASD, CDROM, thumbdrive.
Using the example of the MSWord program wishing to save the data keyed, a new file
would have to be set up. The storage manager would have to manage and update its
directory and index table with the new filename, location, file-size, type, date of creation,
and other file details, store the new file, and remember how to retrieve it later.
Program manager manages and control boundary and security of running programs and
processes. Using the example of 2 or more programs running on the computer, says IE,
MSWord and Mail program, the Program manager will take charge of all information of
all the active programs.
Why? To prevent program overwriting one another, keep records on which stage of the
processing of each active programs, assist main memory manager to locate the pages
during the page in - page out processes, assist the processor manager to fetch the correct
instructions from the current active program.
Question G5
a) Is there any difference between wired and wireless communication? [SG]
b) Illustrate with examples, any 2 cases where wireless technology was deployed by
organizations to manage their operations.
c) Explain, with examples, how the data is transferred and how the speed of data
transfer being 2 points is calculated. [SG]
Solution guide:
a)
The main differences in wired and wireless lie in the transmission medium, the speed, and
the security aspects.
Wireless transmission does not use any cable or wire to physically connect the sending
and receiving computers (nodes).
Technically speaking, the data packets are sent through the “space” through hot-spots,
transmitters, repeaters, earth satellites and celestial satellites.
There are the various mediums available with wireless transmission. These include radio
frequency wave, microwave, satellite, infrared, natural light, ultra violet, x-ray, gamma
ray. Commercially, they are also referred to as RFID, bluetooth, WiFi hotspots, WiMax,
GPS, Inmarsat (used in aeroplanes) and maritime VSAT (used in ships).
With wired transmission, a physical cable or wire connects the 2 or more computers. Data
packets are then carried through this physical medium. These mediums include coaxial
cable, telephone twisted pair, fibre optic and submarine cable.
In general, the speed of transmission of wireless system (theoretical max speed: 600 Mbps)
is slower as compared with their wired cousins like co-axial (max. 1 Gbps) and fibre optic
cables (max 6.4 Tbps). As the data are openly transmitted though space with wireless
transmission, the risk of insecurity is greater.
b)
The 2 examples are:
• Ford Motor and Walmart supermarket use wireless RFID tags to manage their
supply chain. In the case of Ford, to manage the shop floor holding inventory to 2
hours of stock. As in Walmart, the RFID tags facilitate immediate billing at cashier
exit point. In both cases, the data is used to replenish inventory stocks and issue
P/O to suppliers.
• Johannes Diaries uses wireless GPS for their location-based information system to
simulate the best daily transportation routes and logistics for their delivery
vehicles. They also use the GPS to provide logistics on the daily status of delivery
c)
A communication network allows 2 or more computers to exchange data via its
communication device such as network interface card or adaptor. An ISP (Internet service
provider) is often required to provide the connection services. The data or document that is
to be sent are first broken down into fixed length, and assembled into packets.
The packets are edited with information like sender and receiver addresses, properly
numbered in sequential order and security features. A handshake takes place between the
computers in the network to assist the transmission of the packages through the network.
Often, subnets in the WAN communication networks, like Internet, provides the
handshaking between networks. Speed of transmission varies according to the type of
services provided and medium used by the ISP.
To demonstrate or measure the speed of data transfer transmission speed, we will use an
example a document (packets of total size) of 15Mbytes size to be transmitted over 2
different types of lines: a wireless modem (1.5megabit/sec) and a wired LAN (30
megabit/sec). Both operated in a digital signal environment. Of course, we could use an
analogy modem of 50kbit/sec as an alternative example too. This way, we have an idea of
the speed of transmission over different medians.
Assuming the wireless modem has an upload speed of 1.5mbps (mega bits per second), the
time taken for transmitting the document of 15Mbytes is (15M * 8) / 1.5 mbps = 80
seconds.
Assuming the wired LAN has an upload speed of 30mbps, the time taken for transmitting
the same document of 15Mbytes is (15M * 8) / 30mbps = 4 seconds.
In both transmissions, we assumed a smooth, uninterrupted, error-free passage with zero

time taken up for handshaking between nodes and flow control.
Question G6
Explain the differences between wireless and wired network communication.
How do computers exchange data amongst them? Explain, with examples, how to
measure the speed of data transfer among computers. (SG)
Solution guide:
a) see F5
b)
How do computers exchange data amongst them? Well, there must be a network
communication system where the subscribing computers are part of the network. A
network could be a WAN, LAN, MAN or even PAN. The participating computer must be
installed with an appropriate network interface card or adaptor. To communicate or
exchange data with a computer across a WAN (like Internet, or Extranet), the services of a
service provider (like Singnet or Starhub Cable) would be required.
Within the network, there is a communication protocol such as TCP/IP. The subscribing
computers will have to adhere to the protocols to handshake and exchange data. A
communication network provides these main duties: format the message into standard-size
packets, establish handshake, transmit the packets, control of the flow of the packets
through the network, perform error handling, packet re-transmission, and perform
multiplexing.
First the message must be divided and assembled into the stipulated fixed packet size (says,
2K i.e. 2048 or 4K i.e. 4096 bytes). Then each packet is labeled with the necessary header,
trailer, destination addresses following the rules of the protocols. The packets are then
sequentially numbered before being dispatched into the communication network.
All computers (called nodes) in the network will help to store, forward, and route the
packets to arrive at the target destination. In a non-switched circuit transmission, the
packets can arrive in any sequence (packet switched, as shown in diagram below). The
final receiving host server will keep and wait until all the packets have arrived and them
re-assembled the packets into their original sequence before forwarding them in one
complete data to the destination computer.
B
A
Each packet goes thru

different flow path.
Connection is between 2
nodes at time. The connection
network path is discarded once a
packet has passed.
Question G7
a. Describe the essential tasks that any computer’s operating system must perform
b. Explain in detail how an operating system can allow 2 or more programs to run
at the same time and share a single processor [2003/Q4]
Solution guide
a. Describe the essential tasks that any computer’s operating system must perform
The essential tasks that any computer’s operating system must perform are
controlling, scheduling and monitoring the computer hardware resources.
The operating system consists of a suite of system software. They perform 7 main
functions of memory management, I/O device management, storage file management,
program (multiprocessing, multithreading, multiprogramming) management, processor
management, interface management, and network management.
I/O devices refers to input and output devices like biometric input devices, keyboard,
mouse, touch-screen, voice recognition, RFID.
(expand with examples)
b. Explain in detail how an operating system can allow 2 or more programs to run at
the same time and share a single processor
An operating system can allow 2 or more programs to run at the same time and share a
single processor with a technique called multiprogramming.
The concept is called ‘Multiprogramming’ allows two or more application programs to

execute “concurrently” using the computer’s only CPU (processor). The concept
involves the use of virtual storage, and control & allocation of time-slice to each running
application software.
O/S
Application-1
Application-2
Application-4 PageFile
Application-3
Main Memory Virtual memory storage
When an application program starts, the operating system via its memory manager will
allocate designated spaces in RAM memory. Many application programs may run on the
computer. In the above diagram, 3 applications are running and a 4th one is trying to come
in but the RAM memory has no more space. The Operating system will find RAM space
by temporary paging out inactive portions of existing application programs onto the virtual
memory storage. This way, the new application can be squeezed into memory to run.
The Operating system will give each application program a time-slice, process ID, and a
priority-no. The CPU, via the Operating system, will take instructions from one program
at a time. Each application program can execute up to the allocated time slice (says 100
microseconds) or some higher priority application program takes over before giving
control back to the Operating system.
The working data of the program may be saved (page out) by the Operating system to the
virtual memory storage, before the next application program takes over and starts
execution. The operating system may need to reload (page in) relevant working data from
the previous time out. The small time slice gives an impression that the single CPU is
handling 2 or more programs concurrently.
Another situation is an application program requests for I/O services e.g. to print some
data (above diagram). The CPU, under instruction from the Operating System, will pass
the request and data to the printer driver (another system software).
The printer works independently of the CPU. It will actually execute the request by itself
within it own printer’s built-in MPU. The CPU is now momentarily free to execute
another application program while the first one waits for results of the print request from
the printer driver. This multiprogramming-multithreading approach gives the user the
impression that the CPU is attending to several application programs concurrently.
QuestionG8
a. Explain the concept of client-server computing
b. Give 3 positive characteristics of this approach, and three problems that it poses
c. What key characteristics would you identify for an operating system of a
minicomputer working as a server? [2002/Q4]
Solution guide:
a) Explain the concept of client-server computing
The concept of client-server computing comprises a simple architecture of 3 major

‘modular” components:
- Client = front end= user’s interface = requester
- Server = back end= provider= network & database resources.
- Middleware = network transport layer or interface application
This concept provide for the dissection of processing duties between the client-end and the
server-end (versus the monolithic approach of older days).
The server is responsible for the databases accesses and processing. Its backend resources
can be “used” and shared by any clients.
Client is responsible for the interface presentations, and its processing is independent of
server processing in that they are black boxes to each other and a failure in client is not
equal to a failure in the server end.
Client-Server processing empowers the end-user to do what is appropriate with the data at
their end. Client can have different platforms amongst themselves or the server. This way
the computing power is delivered to the individual desktop as the end-user decides the
kind of desktop powers he needs for his own client activities.
Clients and servers communicated via “messages”.
There are five categories of client-server:

(draw the diagram and briefly explains them from intensive processing at the server-end,
to intensive processing at the client-end).
In the optimal case though, the client-side should have minimal processing and
concentrate on the presentation of information to the user.
b) Give three positive characteristics of this approach, and three problems that it poses
The three positive characteristics of this approach are:

Portability=programs can run anywhere.
Scalability= the increase or reduction of number of clients or servers in the network will
not affect the other.
Maintainability = changes can be applied and introduce w/o hiccup or disruption.
Robust= Failure in the network can be tracked down easily and shutdown w/o affecting
overall performance
Three problems that client-server poses:

Disparate platforms = integration, unforeseen and difficult-to-resolve problems.
Security= clients and servers are distributed all over many locations, this increase the
threat of higher insecurity which is not the case with centralized computerization.
Integrity of data & data protection is similarly made more difficult.
Management & control: Databases are mirror or duplicates in many server-ends making
managing of changes and installations more difficult
c) What key characteristics would you identify for an operating system (OS) of a
minicomputer working as a server?
The key characteristics for an operating system of a minicomputer working as a

server would include the network manager, storage manager, memory manager, program
manager, and processor manager. A powerful CPU with large storage capacity and
network capability is needed.
As a server, the GUI interface is not that important, but the other functions of memory,
network, data storages, processor, and program management remain important. The I/O
management is also not critical in relation to the fact that not to many I/O devices like
mouse, scanner, touch-screen, biometric input devices, and joysticks are unlikely to be
attached to a server.
The OS serving the server must have powerful memory, process, and network
management to keeping tracks of requests and responses to the correct request – hence
able to handle multiprogramming, hyper-threading, virtual storage, and multiple
processing. The OS must be able to manage and ensure network security and integrity with
strong firewall features and capabilities.
Question G9
Which is most important in a programming language: getting the best out of the hardware,
getting the best out of the programmer or doing the best for the program’s user? [SG]
Solution guide:
Get the best out of the programmers should be the first priority.
Why? Programming languages are designed for and to be used by programmers.
Programmers should concentrate on how best to interpret the specifications into computer
programs (their core competency) and not be concerned other aspects like hardware
specificity like memory management, multiprogramming, or network connectivity (which
should be taken care for by the operating system that sits on a particular computer
platform), or the ease of use by the end-users (which is also the concern of the platform
the programs will be running on… which is this case of the operating system’s user
graphics interfaces such as WIMPs, GUI, APIs and to facilitate learning curve).
Expand essay using following questions: What are the programmer duties and special
skills and knowledge? What do we mean by other aspects of hardware specificity? Why
OS?
H. INFORMATION SYSTEMS DEVELOPMENT
Question H1
(a) What is an Enterprise Resource Planning (ERP) package? What are the primary
advantages for a company that adopts an ERP package as the basis of their core
information systems?
(b) It is often said that the best way to reduce system development costs is to use
application package software. Is this always the case? Are there some
exceptions? [2004/Q7]
a)
ERP package is an enterprise level business application that services the information needs
Note: this ERP
(Enterprise
of all primary and secondary business functions of an enterprise. ERP packages are often
resource large, sophisticated information system. They are development by external professional
planning is not specialists. Because it is a package, firm often has to purchase standard ERP package and
the same at the
road gantry
its modules that may include functions they do not use.
ERP =
Electronic road ERP is made up of many modules. Each module covers the business processes of a core
pricing.
business function. These core business functions include production, assembly, sales,
marketing, warehousing, inventory control, purchasing, logistics, QC/QA, assembly, fixed
asset control, accounting, finance, and human resources.
Often, an ERP information system does not only handle the processing on a country basis
but also on a world-wide scale as in the case of Flextronics International. ERP requires the
backing of powerful databases and efficient computer networks and telecommunication
systems so as to reap the full benefits of the system.
As an ERP package is often developed to meet the needs of as many potential customers
as possible, the appropriate functions would have to be selected and installed by a
particular user firm. This means large enterprise packages like ERP would come along
with many parameters for configuration and twitching to facilitate “customization”.
So what are the primary advantages in adoption of ERP package as their core information
system?
As we have seen, ERP information system is the backbone of an organization business

“core” processing needs. A fully implemented ERP system would have taken care of all the core
implies business functions of an organization. Hence, the primary advantages of using an ERP
“main” or
“key” or package are reduction in development time, provides a ready base for processing other
“foundation” information needs, increase confidence with customers & suppliers, co-ordinate training,
reliable well-tested system developed by industry professionals, and resources problems
encountered with in-house development.
Reduction in development time. With ERP package, the timeframe from feasibility study
to implementation would be greatly reduced. The core information systems would be up
and running in much reduced timeframe.
Of course large complicated package like ERP requires a good understanding of the
various parameters that need to be twitched to meet the organization’s specific
environment and processing requirements. However, this installation, tuning and
configuration effort on the package should still be much shorter than otherwise. With the
ERP ready, this means all key informational needs of the core business processes are
available.
Without the ERP package approach, the alternative is to outsource or develop the ERP
system in-house. Both approaches will require very thorough investigations, data
collections, and verifications during the various analysis, design and construction phases.
The total development process will take a long time. Meanwhile, the organization may
suffer without an ERP system – resulting in negative consequences like bad data
management and coordination, loss of confidence from customers, suppliers, staff,
management and competitive disadvantage.
Ready base for processing other information needs. With the core business functions in
place, the ERP database serves as a server for any other information needs. Developers
and end-users can search and query the databases to service ad-hoc and unstructured
requests from customers, suppliers or management.
Other core and non-core information systems can now be built around this core ERP
system. Accounting information, CRM, SCM, KMS can be built around this core ERP
system.
Increase confidence. With the ERP package running and servicing the core business
functions, we can expect timely, accurate information and updates for customers, suppliers,
and managers. This means better relationships all round (socio aspects). The results –
increase confidence, trust, and better rapport
Co-ordinate training. As a package provides for faster implementation, training can start
sooner. Trainings are often more systematic, well planned and organized since the package
vendor would have the experience of doing many times with other customers. This means
participants can get to see and learn from experienced trainers. This means a better chance
of a successful change or cut-over to the new system.
Reliable, well tested system. The ERP package would have been well tested and well used
already with other enterprises.
ERP packages often have the advantages of many professional experts of the vendor
working on the package producing a final version with “formula-1” type qualities.
Previous customers problems would have been corrected and improvement effected.
Hence, the ERP package has the advantages of incorporating the improvements generated
by all previous users. Errors and hiccups are not to be expected with ERP packages.
Resources problems. IT staffing problems during the developmental stages would mostly
be non-existent. Nevertheless, outside experts may be required to help configure the ERP
package to meet the specific requirements of the organization. Late schedules and budget
overrun will be much easier to control.
b). It is often said that the best way to reduce system development costs is to use
application package software. Is this always the case? Are there some exceptions?
How does package reduces development cost? They come in modular form, configurable,
ready to use, well tested, professionally developed, and with professional support
services. Of late, this has become the best way even with large enterprise systems.
ERP is a large enterprise application comprising of many business functions. Each
business function is represented by an “independent” module. Hence, ERP it is modular,
scalable, and implementation can be carried out in stages (module by module).
System development, particularly with an ERP system, entails many layers of IT

professionals, teamwork, and coordination. The stages are lengthy requiring great attention
and uses of professional tools. Inevitably, an in-house development will be met with
delays and staff turnover problems, making training and change management difficult to
handle.
Application packages remove most of the problems associated with in-house system
development, since the development has been done by the professional skilled vendor.
However, application packages are developed to meet business requirements and solutions
to industry standards, standard procedures and structured problems. Often it would cover
all possible functions, and superfluous requirements – since a package will try to satisfy as
Is this
many different prospective customers as possible.
always the
case? An ERP package is often “fat & heavy” with many extra modules, options and many
different parameter settings. Questions to ask would be “Does my company requires all
the “Formula-1” features and capabilities?” “Should a lesser cheaper model like “Honda
Civic” do?” “How do we go about doing so?”.
Evaluating for a suitable application package can be a formidable task. It will require
expert knowledge of the various packages’ functionalities, options and various parameters
for configuration (fine tuning).
Choosing a correct package with the relevant modules can be a daunting task without
expert helps. Outside experts are also required to help configure the application package
during installation. This means additional cost. This means relying on outside help. This
means loss of confidentiality and security. Will the company accept all these?
Other
exceptions Organizations with too special requirements will not be able to use application packages
off the shelf. Modification (with re-tailoring of the programs) can spell problems when a
new version of the application package is released later. Too much modification can
distort the infrastructure of the package and cause it to malfunction unknowingly. Vendor
will also refuse to provide maintenance support. It will be too costly.
As a guide, it is advised that any packages that exceed 10% modifications should not be
adopted by the enterprise. Such 10% should be confided to output report layouts or screen
designs and not redesign of program logics.
Packages should be avoided, if the business processes are largely non-standard. This is so
with processes that are unique and critical to the company’s successes that involved
confidentiality and high security. In such cases, the need to develop own in-house
expertise or outsource is the alternative. A guaranteed continuity for business
sustainability is preferred.
Question H2
a) What is an ERP package? What are the primary problems faced by a company
during the acquisition and implementation of an ERP package?
b) Does the use of packaged software solutions, when available, always give the
best results? [2004/Q4]
Solution guide
ERP package is an enterprise level business application that services the information needs
of all functional aspects of the businesses in the organization. ERP helps planning and
managing of sales, marketing, production, warehousing, assembly, inventory control,
purchasing, logistics, QC/QA, accounting, and human resources not only on a country
basis but, possibly on world wide scale like the case of Flextronics International.
ERP would often require the backing of powerful databases, computer networks,
telecommunication system, and ERP business experts so as to reap the full benefits of the
system.
The primary problems faced by a company during the acquisition and implementation of
an ERP packages can be pinpointed to detailed analysis of requirement, evaluation,
implementation, change management, and cut-over policy.
During the acquisition stage, a detailed thorough analysis must be carried out so to look
for a best match of available packages. The major problem faced is who to do this job.
With package implementation, we know many of the technical experts and supporting
staff would be removed once the package route is decided. Those left behind may also
soon face the axe.
So, who will hearten to do a good detailed analysis? Outside experts could be recruited to
do the functional analysis but will it be as thorough and completed as in-house experts?
Will it take into consideration all the socio-technical, cognitive aspects of the organization?
Will the package selection and evaluation processes consider the best interests of the
company and the people working there? Taking into consideration company expansion,
further needs, scalability, local support availability, matching installed procedures,
friendliness, documentations and cost. Again, identification of good experts to carry
through the analysis and evaluation would be a great challenge.
Evaluating package has the problems of first understanding the package itself.
Can in-house experts know what exactly is performed by the package, without first being
exposed to using the package at all? Particularly with larger package like enterprise
systems (ERP, SCM, KMS, CRM), what are the intricacies, configuration options and
parameters available.
To be able to conduct a fair evaluation of the package, the experts must know the package
well! So, outside experts who have experienced with the package would have to be
employed indeed. This means cost. Again, how much can an organization trust the experts?
A big question during evaluation is how much modifications would be carried out on the
ERP package to meet the organization’s special needs.
Who will carry out the modifications? How long and what kind of cost? Then again, what
percentage of re-tailoring would be acceptable?
What impacts will such modifications have when the ERP package vendor releases
another newer version later (again, will need to modify!!). Experts suggest that any re-
tailoring that constitutes a sizeable change should not take on packages.
Our examiner, Antonio, has indicated the unbearable maximum limit of modifications is
probably 10%.
Note:
Modification = re-tailoring. Part programs of the ERP package have to be specially
reprogrammed.
Configuration = the process of fine-tuning the package by selecting the appropriate
module, options and parameters to suit the company specifications. All packages come
with varying configuration options and parameters. Configuring a package is NOT
modification to the package.
Implementation of package means getting the people to embrace the new information
system. Staff training, configurating the ERP package, cutover policy, data conversion, job
re-design, and new work procedures are inevitable.
The question is know the employees best to conduct effective training taking into
consideration the company culture, working habits, and informal systems. Outside experts
from Oracle, Accenture or NCS?
Well, these professional have good exposures to such packages and probably implement a
few packages already. They should be the qualified professionals and more effective than
trying to train internal staff to conduct training. But this means more cost.
ERP package is large and complicate information system. They are designed to fit as many
organizations as possible – hence called a package – but this means the package has many
relevant and irrelevant features - a “fat” application. The ERP package must be configured
to suit the organization. Then, again, does the internal IT staff have the ability to configure
the package to meet the company’s specific needs?
Configuring the hundreds of parameters of a large enterprise package is no easy meat.
Again, should outside expert be used? But who is in a better position to assess what is the
special needs of the company? An outside expert? And further cost?
The implementation’s cut-over policy is critical. Who should decide? An outside expert
again? Using an immediate cutover policy can risk the viability of the organization should
the cutover fails. A parallel cut-over policy would drain the resources of the organization.
So, a carefully evaluated decision is very importance.
Another necessary action is the conversion of existing database to the new ERP package
format. Again, external experts familiar with the package will have to be employed. This
is cost. Key question is how, what and when must be done to ensure data conversion can
be carried smoothly?
Implementation of a new ERP package (or any new information system, for that matter) is
serious change management in action. New jobs are created, old jobs are removed, new
work procedures are introduced - and all these can be very damaging, confusing and
discouraging for employees.
All activities require very careful and detailed planning. Bridging the new package to the
people resources (both internal and external) in effective and seamless ways is crucial.
b). Does the use of packaged software solutions, when available, always give the best
results?
System development entails many layers of IT professionals, teamwork, and coordination.

The stages are lengthy requiring great attention and technical skills. Detailed systems
design and construction will have to be carried out in-house. Professional development
tools will have to be acquired. With ERP system, large team of developers and end-users
will be involved during the various stages of development. Inevitably, there would be
delays, staff turnover problems, scheduling, and budgeting problems
Packages remove all the problems associated with in-house system development. The
development is completely done by the professional vendor. The package is professional
developed with the expertise that the vendor has gathered over the years, having deal with
several other customer organizations. It is fully tested and ready working application for
installation anytime. These represent major advantages of using packages.
With packages, the maintenance of a development team is a non-issue. There is no worry

of staff turnover. Because it is a ready package and taken off the shelf, problems related to
insufficient ERP knowledge, to late delivery, problem of acquiring and learning new
development tools are virtually non-existent.
Does this means packages always give the best results? Application packages are often
“general purposes” information systems. Being general purposes they are designed to meet
the industry standard specifications, operations and business processes. Standard
procedures, input and output interfaces. But to attract a larger base of customers, most
packages would also attempt to incorporate a variety of possible known requirements of
different consumers. Therefore, packages are often not of optimum size and are “larger
and fatter” with undesirable overheads. This will not be the case if the ERP information
system is specially developed for an organization, whether in-house or outsourced.
This being the case, packages are often developed in modular structure. This way,
customers can pick the modules they need and not pay for the whole package. But for
large enterprise packages like ERP, the individual modules are themselves still “large and
fat” with built-in overheads.
Installation of enterprise packages like ERP will require experts with good knowledge of
the package’s functionalities and features. There is no guarantee that after configuring the
modules and the overall package, the package will be optimum and work satisfactorily.
Enterprises with special requirements will need modifications. Successful modifications

do not mean the problems are solved. Simply said, a new version of the ERP package in
the future will create the same problems face in the first instance. If nothing is done to use
the latest versions, after a while, the first modified version will be obsolete.
Using enterprise packages mean company would have to bend their business processes to
fit the package’s processes and standards. Also to meet the package’s standard data
structures, formats and telecommunication specifications. This signals the beginning of the
organization losing its originality, confidentiality and data security.
So, there are many tradeoffs in using packages. One assumed the vendor will be around
forever to support the package. Packages do not necessarily give the best results and may
courts more disadvantages with frequent update versions release over time. And, paying
for additional features that may not be needed by the firm!
Question H3
a. What is outsourcing? Describe three distinct aspects of information systems
operations that might be outsourced. In each case give key reasons why such
outsourcing might be appropriate?
b. Nowadays, most organizations assume that all information systems activity will be
outsourced unless a good case is made for developing the system in-house. Why has
this occurred? [2004]
Similar question:
Q. Explain outsourcing from a transaction costs perspective. Explain with examples the
potential roles play by ICT in supporting outsourcing of information systems.
(see D4 for sample solution)
Solution guide
a).
Outsourcing is the practice of contracting IT works to external specialist vendors. These
IT works include computer center operations, telecommunications networks, and
applications development.
The reasons and benefits for the organization are timely delivery, minimal staff turnover
problems, utilization of international experts, concentration on core competency, efficient
utilization of shared resources, backup systems, and faster startup.
The appropriateness of outsourcing the following 3 distinct IT works are reasoned thus:
Computer operations – Owing to globalization and a wired world, most organisations run 24/7
operations. Running on 3 shifts requires more human resources and infrastructure. But when
there is dip in demands or rise in demands as with seasonal promotional sales and lull periods,
it is not easy to maximize the resource utilization in both manpower and infrastructure. Many
business processes in most organizations are standards. Standard equipment and devices are
also used.
They are fairly easy to operate and maintain. Maintaining full time staff is hence wasteful.
Whereas shared resources via outsourcing is attractive. Standard chartered bank and OCBC
bank are example.
Telecommunication networks – These communication equipment, security locks, routers,

gateways, firewalls, databases are expensive infrastructure. With globalization and
internationalization of business enterprise, building own international telecommunication
networks can be exorbitantly costly. Technology changes very fast.
Keeping up with the latest is important to reap best benefits of effective communication is
expensive. Individual organizations would have problem maximizing on the usage with no
scale of economies. The outsourcing of such telecommunication requirements to Network
providers is hence appropriate. Such providers include ISP: Internet Service Providers (Singtel,
Pacific.Net), TSP: telecommunication services provider (Singapore One, Singtel, M1, Starhub).
Applications development – In application development, particularly large scale ones, using the
life cycle approach is particularly strenuous, time consuming and resources sapping. Because it
takes some time to develop, staff turnover is inevitable during the various phases. This means
delays – caused by retraining, and recruitment.
The team may not have the expert experiences and often outside consultants have to be
engaged - resulting in additional cost. Inevitably, when the development is completed, the
problems of retrenching, demoralizing existing staff become evident. Given the situation,
outsourcing to provider with relevant experts would be probably more appropriate. Singapore
Polytechnic is an example.
b).
Outsourcing “all information systems activity” would mean various IT activities such as the
feasibility studies, systems analysis, design, application developments, operations,
networking, and maintenance of IT resources and information systems are “sub-contracted”
to a professional third party.
Developing “in-house” would mean the organization would have to employ and maintain its
own team of experts, developers, and operation staff to handle all the information systems
activity itself.
Nowadays, outsourcing has become the norm. Many companies outsource. This includes
companies like Standard Chartered Bank (outsource their IT operations and application
development), STPB (outsource their application development), and Singapore
Polytechnic (outsource their operations, application development)
Why is this so?
Today, there are many qualified service providers with expert knowledge in all aspects of
information systems activity. They have proven knowledge, wealth of experience,
international networks and development skills. NCS, EDS, and Accenture are three such
international outsourcing provider companies.
Outsourcing is based on the concept of “sub-contracting”, specialization and division of

labor. The party that can provide the expert services and products efficiently and cheaply
should do the job. Every organization should not try to do every thing itself. Every
organization should concentrate on what they can do best and enhance their core business.
Organizations have begin to ask “why should organization be involved in such non-core
business processes when it is more costly and time-consuming to do so?” This is situation
of Baxter Healthcare’s Inventory-less system that nearly all USA hospitals have
outsourced to. Organizations can then concentrate on cultivating their core business and
core competency.
Thanks to the improved & powerful IT infrastructure - computers, information systems,

Internet, telecommunication systems, database systems - the distance and time that use to
separate the world into many different zones have now been broken down.
The world is now a global village. Accessibility and availability of expert services and
professional products are no longer bother by time zone and physical distance. Unlike the
industrial age, human & infrastructure resources must be pooled in one physical location
in order to carry out business processes effectively, the current IT age is the reverse.
Business processes can be equally achieved through logical presence and communication
networks.
The cost of doing global business has dropped drastically. Cheap labor and expertise – in
any part of the world – can now be readily made available. Thanks to Internet, the IT
literacy in many part of the world has also improved drastically.
Because of a combination of IT technological advances, availability of expertise and

cheaper labour in 3rd world countries, it is now attractive for companies to outsource their
non-core business activities. A lower cost operations call-centre, servicing local enquiry,
can be located anyway and in any part of the world. Application development can be
carried out quickly and cheaply by IT experts in another country.
Hence, outsourcing has now become the choice for many organizations. It is definitely
more cost effective and practical.
When is it a good case for NOT using outsourcing services? This would be the case when
organization fears the loss of critical in-house technical skills, loss of privacy and security,
control IT directions by outsourcing companies, contractual obligations are not guarantee
over the long term (particularly, if the outsource providers go bust).
Question H4
(a) Is the choice of an outsourcing strategy essentially just an economic decision

about achieving required results at minimum cost?
(b) When evaluating a proposed outsourcing arrangement, and assessing an
outsourcing partner, what are the relevant factors that a company should consider?
[2005]
Solution guide
Note: you can

a)
disagree. Yes, the choice of an outsourcing strategy often indeed essentially boils down to
Often security economic decisions. While security and productions secrets might be the reasons for not
and designs/ outsourcing, the many factors contributing to achieving minimum cost in the
production
secrets are development of information systems are overriding.
more
important. In Some of these factors include lower human resource cost, technical resource cost,
such case in-
house specialization, develop on core competency, using outside experts, faster response time,
development cheaper production cost. But, greater benefits of social (behavioral, cognitive) aspects
is preferred can come from outsourcing for the enterprise and the economy, in general.
Human resources – Often a major reason of outsourcing is cheaper labor, which is

available in 3rd world like India, and Philippines. They are also good sources for skilled
programmers and designers.
Globalization, Internet, and powerful telecommunication systems have made possible to

effective contractual deployment of offshore labor. Many skilled specialists are available
overseas and they can easily work on information system projects effectively without
having to be physically present in the organization.
Sourcing, staffing and retaining the people with the right skill sets are time consuming and
involve high expenditure. With Outsourcing, this part of the cost is virtually saved.
Technical resources - Identifying, procuring and acquisition of technical resources to

support the new information systems are difficult tasks. Experienced and capable people
are required.
New technologies replace older technologies at a very fast rate. A huge portion of budget
often goes into technical resources. With outsourcing, the problem is shifted to the
outsourcing company.
Specialisation - Outsourcing allows the outsourced enterprise to specialize in their areas

that provide them the best competitive advantages. This is particularly true with offshore
outsourcing.
Like Flextronics, any of their international subsidiaries that can provide the best prices get
the contract. Other subsidiaries then began to then specialize in other areas which they
have the best strength and economic factors. This also results in minimum cost.
Core competency - Outsourcing facilitates the outsourced enterprise in concentrating on

their core businesses and developing their core competencies. An orgainsation should not
try to perform every business role by itself. Doing so will dilute their professional
capacity.
For examples, it is expensive and difficult to maintain an IT technical team to develop and
maintain computer systems especially when the core business and competency of the
enterprise is in furniture and design. Baxter healthcare Inventory-less is an example. Their
customers, namely the US hospitals, could concentrate on their core business of health
care and leave the business of inventory control of medical supplies in the hands of Baxter
Healthcare. As a result, various roles of the enterprise are achieved effectively, yet at
lower effective cost.
Experts - Often, experts are difficult to cultivate, retain and employ. Outsourcing is
applicable to various areas of programming (production), systems analysis, systems
design, operations, telecommunication, and call centers.
Outsourcing partners have the experts. They cater to large pools of customers justifying
the setup of team of experts in various areas. Outsourced organization gets the benefits of
exploiting these experts, but at minimal cost!
Response time – With outsourcing, faster time-to-market delivery is achievable.

Outsourcing partner will guarantee delivery time and quality. In-house development has
the problems enduring long tedious development through the various stages of production,
with delivery delay. Outsourced enterprises can achieve their promises to their customers
with minimal logistics, hence at minimal cost in doing so.
Cheaper production – Outsourcing partners are often able to produce at much cheaper
cost. Like Flextronics, and Telefonica, they have the volume to be able to provide an
assembly part or services cheaply. Riding on the outsourcing partner’s cheaper production
techniques, would indirectly mean acquiring raw materials at minimal cost.
However, in outsourcing, there are other greater benefits of a socio nature. These include
union problems, higher added value jobs, progression up the ladder of business benefits
(competitive advantages, differentiation) for local enterprise and economy.
Union problems – Outsourcing means all problems of production are also outsourced.
Labor strikes and union disputes, which can be costly to production, are virtually non
existence now.
Higher added value jobs – Where intensive labored work can be outsourced, the value-
added work can be retained in the outsourced enterprise. This means better quality and
expert staff who are more professional with better innovative, motivated, adaptable
personalities. This can lead to a knowledge-based culture. In a knowledge economy, better
design and products can be achievable this way. Thus benefiting both the outsourced
enterprise and the economy in general.
Progression – With outsourcing, the outsourced enterprises can concentrate on the
relevant activities that can achieve knowledge-based core competencies such as improved
production processes, product designs, service differentiation, branding, niche market,
business alliance and transformation – progressing up the ladder of business benefits with
IT.
b)
In evaluating a proposed outsourcing arrangement, the following should be considered:
Budget – what is the cost? Will it meet the budget for the project
IT resource – What are the IT resources, and who will be providing the development and
testing, integration platforms.
Integration – The outsourced development must integrate as seamlessly as possible with
existing information systems, including legacy systems.
Functionality – Are the function specifications clearly understood? Will the finished
product meet the specifications and what are the test criteria.
Contract – roles and commitments of outsourcing company, the legal aspects, penalities
for late delivery, consequences must be clearly stated.
Schedule - the delivery must match the schedule of the organization. Tie in nicely with
other related in-house development.
In assessing an outsourcing partner, the relevant factors include reliability, references,

dependability, services quality, technical support, global support, board of directors behind
outsourcing company.
Reliability factors – how reliable is the outsourcing company? Can they be trusted? Will
they be able to keep confidential data safe? Will they be able to maintain good security?
Will they be able to keep to schedule and take responsibility to resolve problems quickly?
Will they do what they said, and said what they do effectively?
Reference factors – Do they have customers who are willing to share their experiences?
Who are they big customers? How long does their customers stay with them?
Dependability – How long have they been around? Will they be around to give support in
5, 10 or 15 years time?
Service quality – Do they own any industry award for their products? How do their
services rated against competitors?
Technical support – Do they have the expertise in the various aspects? On average, how
long does their technical staff stays on? What specialized resources do they possesed?
Global support - For offshore outsourcing and international systems, does the outsourcing
partner has the local knowledge of culture, laws, formal and informal system?
Board of directors – What general quality of directors? What are their personal
background, history, technical know-how?
Outsourcing is applicable to various areas of programming (production), systems analysis,

systems design, operations, telecommunication, call centers. Outsourcing partners may not
be good in all aspects. Hence, in assessing various factors, the relevant areas must be
identified first.
Question H5
In theory, outsourcing is a rational way for organizations to gain access to services

they cannot produce themselves as efficiently as they can be purchased in the market.
In practice, in the case of information systems, it is often an admission of defeat by
senior managers who are just baffled by technology and want to get rid of the
problem”. Critically discuss this statement. [2006/Q6]
Solution guide:
Outsourcing, in theory, produces following benefits:

- reduces agency & transaction costs
- benefits from knowledge and exposure of external experts
- guaranteed delivery (example of Accenture paying for not delivering on time)
- benefits from external resources which is too expensive to acquire in-house
- problems with in-house resources – e.g labor strife, recruitment, wrong equipment,
space
- problems of having to deal with development staff after information system is
completed
- exploitation of current benefits with globalisation
Senior managers, in practice:

- May be true that technology outpaces managers. There new developments almost
every month!
- But outsourcing allows for concentration on core competency. Specialization. There is
a limit -managers can only do so much and best to do what he is best in for his
company.
- In outsourcing, new skills like legal contract writing & evaluation (particularly with
off-shore outsourcing) are key qualities senior managers will have to acquire
- Examples, Flextronics provides outsourcing services on electronics device production
and facilitates the outsourced companies to concentrate on their core competency on
design and marketing. Similarly Baxter Healthcare provides outsourcing in inventory
management for most USA hospitals and enthuse the hospitals to concentrate on their
core competency of patient care.
Question H6
a. When would you recommend taking a life cycle approach to developing a new
information system?
b. How can systems developer ensure that they have the best possible understanding
of the needs of the users of a proposed system? [2003/Q2]
solution guide
a.
The life cycle approach is often appropriate for large-scale system development with
sophisticated complicated specifications and which involve a large team of developers.
The alternative strategy of outsourcing, and package have been deemed inappropriate
because of the nature of the system either its confidentiality or competitive characteristics.
For such large-scale in-house development, it is important that the large team of project
developers or team members “speak one language” – using same standard well-defined
tools, procedures, guidelines, methodologies.
Project team members are often divided into groups. Their works must be integrated at
some later point in time. Life cycle approach provides for the orderly management of the
various stages of development.
The Life cycle approach details the types of techniques and deliverables expected at the
end of each phase. This ensures complete cooperation, communication, coordination and
control amongst all project team members. It is crucial and very important for the success
of such large project that often takes up to hundreds of man-years.
Such large information systems can be found in enterprise applications such as CRM, ERP,
SCM and KMS. However nowadays, packages developed by global professionals have
becoming more feasible and are replacing the development of structured, large project by
life cycle approach. But still, there are other reasons why some companies still prefer the
life cycle approach.
These other reasons include building and maintaining their own system expertises. For
large international organizations like Toyota, Zara, Mango, Microsoft, and Flextronics
International, building their own enterprise applications is important.
This ensures continuity and control over their current and future development.
Database Maintenance and integration with existing systems could also be key reasons. With
integration, packages and outsourcing, this would be a difficult aspect to handle. The different options
legacy and parameters from the various international subsidiaries demand varying degree of
systems,
global
tailoring to fit their specific needs in their respective countries. Yet, the enterprise
specs. applications must provide for integration and consolidation to facilitate global reporting.
Maintaining the privacy and security of the databases is another reason why life cycle is
appropriate. Where international company’s product designs and development processes
are key critical success factors, it is important to keep these secrets close to your hearts.
Life cycle approach offers the best alternative for companies with these special needs. Life
cycle provides the following features and advantages that are not available with other
development approaches like prototyping and packages
• Control and Monitoring: Stages are clearly defined. Automated tools are available
to facilitate the captured, control, and sharing of requirements, designs, database,
and program codes.
• Breakdown of work: Life cycle detailed what tools to use at each stage. A well-
known methodology called SSADM actually breakdown the required works of
each stage into hundreds of well-documented steps.
• Facilitate workload estimation: The well-documented steps in each stage and
expected deliverables facilitate the estimation, planning, timing and organizing of
workload and resources requisitions.
• Facilitate teamwork: As automated tools are available, team members could see
each other progress. It provides a good basis for coordination, communication,
cooperation, and control at the same time. It also provides an easy mean to conduct
walkthrough for members and the end-users.
• Clear deliverables at each stage: At the various stages of the life cycle, deliverables
are well itemized. For example, DFD, ERD, Context diagram, Data dictionary,
Process specifications are expected at the System Analysis stage. Structured
diagram, screen interfaces, report output design, database design and form design
are expected at the System Design stage.
• Standardization of designs: Standard formats and requirements are well-defined in
a centralized folder. If an automated tool (like CASE – computer aided software
engineering) is available, project standards can be referred to quickly by any
project team members.
• Basis for development with well defined tools and techniques: All life cycle
approach requires the tools, methodology or techniques to be used to be made
known up front to all members. This may include standards for DFD, ERD, Data
modeling, Data Dictionary, Structured charts, process specifications, database
design, print and form standards. This provides a good basis to ensure all members
know what, how and when to use, who to contact in case of doubts.
The life cycle approach has its weaknesses too. But with large-scale projects that require
confidentiality, tailoring to niche area of requirements, building up own team of expertise,
the life cycle is still the best way to develop the new information system.
(Note: It is true too, that in today’s globalization, speed in development has become so
important. End-users want to see results and get involved during the analysis, design and
construction stages. Packages (where the requirements are industry standards with
standard processing) and outsourcing (where experts in specialized areas are available) are
slowly but surely taking over in-house development).
b. How can systems developer ensure that they have the best possible understanding
of the needs of the users of a proposed system?
Systems developer can ensure that they have the best possible understanding of the needs
of the users by following the procedures laid out in life cycle approach, use structured
techniques, adopt appropriate systems analysis investigation techniques, conduct
structured walkthrough, use prototyping approach and Joint application development
(JAD).
The life cycle stages, besides offering an effective way to control development, also depict
the tools available to capture the users’ specifications at the systems analysis and design
stages.
During the SA and SD phases, developers will attempt to discover, confirm, redefine, re-
engineer procedures and requirements. Structured techniques and tools ensure users
requirements are carefully captured and documented.
Such structured techniques include DFD, Context Diagram, ERD, Data modeling, Data
dictionary, Normalization, Process specification and Structured charting. Often automated
CASE (computer assisted software engineering) systems are used to improve the accuracy
and data capture and synchronization. CASE is an automated system integrating all the
structured techniques listed earlier.
Conducting regular structured walkthroughs with peers and end-users is a must-do. This
facilitates specifications verifications, discovery of errors, and confirmation of
understanding, ensuring all requirements are properly and completely captured. Involving
end-users is always important. Structured walkthrough should be conducted during the SA,
SD, Construction and testing stages.
Where certain aspect of the system cannot be easily specified and documented,
prototyping can also be used. Prototyping has the ability to quickly provide for a “quick
and dirty” models of the requirements. End-users can “play’ with it to determine his needs.
Through repetitive, iterative communicative processes between the end-users and the
developers, the final requirements can be worked out. Such requirements refer to the input,
process, and output requirements. Rapid Application Development (RAD – like VBasic),
4GL, DBMS (Database management systems) and Database SQL tools are examples of
prototyping tools.
Often, Joint Application Development (JAD) is also used where the end-users jointly work
with the system developers to define the specifications and produced the final information
system. A hand-on approach for the end-users!
Structured investigation techniques demand the developers analyze all document materials,
codebook, procedures, and rules. They may also get involve in the operations and handling
of the current system to fully understand and discover any new information needs.
Developers do not merely develop what end-users specify but are also responsible to know
the business and to propose solutions. The various investigation techniques available
include:
- interview of all key management and operational personnel

- participation in key roles of the operations for a period of time to understand the
operations first hand
- observation of operational peaks period and flow of documents and processes
- survey to discover and understand all end-users understanding of the current and
new systems
- questionnaires to discover, confirm, and clarify specifications and requirements
- visits to vendor’s customer sites to discover and understand how others are using
such system
All these approaches provide a strong basis for communication, cooperation, coordination,
discovery, and specification verifications between the developers and the end-users. The
increased communications will break down any barriers between developers and end-users.
The result is a thorough discovery of specifications and complete system requirements.

This will ensure that any misunderstanding and errors are rooted out as early as possible.
This way, the strong chance of developing a new system acceptable to the end-users
during the cutover stage can be assured.
Question H7
a. When would you NOT recommend taking the life cycle approach to developing a
new information system?
b. How should the interests of users be represented in a systems development project?
In what ways are their interests distinct from those of management? [2003/Q2]
solution guide:
a.
Be aware Life cycle approach (SDLC) is not recommend when the project is small, or when the
that the requirements of the new information system are of industry standards. Package software,
use of too or prototyping, in this case, is more appropriate.
many
acronyms
may SDLC is tedious and rigorous. Requires an army of experience and discipline system
irritate the developers. Costly to build and time consuming. Unstructured and semi-structured type
examiners. applications are also not suitable for life cycle approach.
So, on the
safe side,
write in b.
full or use Interests of end-users (the workers) are involved in frequent project walkthroughs at
acronyms various stages of development. Examples data input analysis, requirement analysis, screen
minimally. design and reports formats. Socio-technical balance? Various structured data capture
techniques at system analysis and design phase are available to ensure end-users’ interests
and specifications are properly captured.
The management (decision makers) forms the steering committee. Often management
looks at technical rational aspects - economic cost & operational efficiency. Detailed
processing is often missed out.
Question H8
a. What are the benefits of adopting standard software packages as the basis of an
organization’s information systems?
b. Using examples, explain what types of business applications are most suitable for
such approach and those that are not [2002/Q2]
solution guide:
a. The benefits of adopting standard software packages as the basis of an organization’s

information systems are speed of implementation, external expertise, and initial lower cost.
These benefits can be detailed as:

- Speed. Save time. Implementation is almost immediate for smaller application, as
it is a working application created by experts in the field. Obviously, large
packages like SCM, CRM, ERP would require very specialized experts skills –
often involving consultants (from companies like Accenture) to provide
professional assistance in the configurating and minor modifications, if any to the
package . But generally the package should not be taken if there is more than 10%
modifications. Companies should consider modifying their work procedures rather
Configurating
large than the packages especially when later versions need the same modifications
packages like again.
ERP can - External expertise.
complicating o Professional training is often provided. This is useful when company is
and require
professional shorthand in the first place.
knowledge in o Packages are produced by experts who have professional experience in the
selecting the area. Often, companies do not have enough experts and experience to
correct develop the solution and is too expensive and impractical to recruit, train
parameters to and build up own staff to do so.
meet specific
firm needs. - Lower cost.
o Likely to be error free and well tested, and a proven product particularly if
the product has been around for some time and used by many other
companies.
o Referral from market as guidance before committing. It is easy to ask for
references and check with companies who have used the package. One
should check for implementation difficulties and weaknesses of the
package.
o Cost-wise. If the requirements are standard type and fit the firm almost
100%, then startup cost would be much lower. There is no worry on the
tedious SDLC phases and no worry of employing in-house staff & the need
to “fire” them or worry about deployment later when project is completed.
o Having said, packages (particularly enterprise packages like ERP, SCM,
CRM, KMS) can cost more after the initial implementation. Subsequent
changes can be very costly. If it is not accurately evaluated to meet all
functional requirements, technical supports, training and further expansion.
Afterall, companies using packages has little control over the package
supplier’s direction and business continuity.
In today environment, organization has to built enterprise systems and industry networks
to compete and stay competitive. To completely develop all their information needs in-
house with own experts will take too long. Today, most organizations are turning to
proven packages or outsource to experts to resolve this software development problem.
b. Using examples, explain what types of business applications are most suitable for
such “packages” approach and those that are not
The type of business applications that is most suitable for such “packages” approaches are
those where the business processes are structured, uses industry standards, standard input
and outputs. Decision-making is very structured in nature.
Fig -1
TPS
Such applications are normally TPS (transactional processing) type. Those at the bottom
of the information needs of a company (fig-1). These are transactional nature such as
payroll processing, inventory, sales order processing and account payable. Enterprise
applications like ERP, CRM, and SCM can also be packages. SAP’s ERP and Microsoft’s
CRM are examples. Such applications are often industry standard and use in many
organization and industry and their requirements (functions, technical support, training)
are nearly similar. Packages are often the answer for companies that do not have a large
team of experts in that particular area of the business applications.
The type of business applications that is not suitable is the non-standard type and requires
decision-making of a semi-structured or unstructured nature.
Such applications would be those in the professional or higher level of the triangle of
information needs in an organization. Such applications have non–standard requirements.
Standard procedures and rules are difficult to streamline and apply correctly.
Knowledge systems used by professionals such as Expert Systems, AI, Knowledge work
systems (KWS), and those use by higher executives such as Executive support systems
(ESS) and Decision support systems (DSS). Web-based Internet applications are also in
this category. Often, because of its non-standard nature, the changing look-and-feel, and
dynamic interactive interfaces. Instead of packages, prototyping combined with SDLC or
outsourcing would be more suitable.
J. PROFESSIONAL ROLES & THEIR IMPACTS ON INFORMATION STRATEGIES
Question J1
a. Compare the job of a Systems Analyst with that of a professional programmer
(software engineer)
b. What must a systems analyst do to ensure that a new information system is
technically well structured and meets users’ requirement? [2002]
Solution guide:
a. The job of a systems analyst (SA) and a professional programmer is tied to the phases of
the SDLC. Of course, the project leader is involved in all stages including the first stage of
problem exploration (PE). The diagram below summarizes graphically the different stages
the involved of these two IT professional. The SA is mostly at the early and last phases
while Programmer is in the middle phases of SDLC.
<<< Stages of
Development Life
Cycle
SC= System construction
FS/SA SD SC ST CO EM ST= System Testing
SA SA
Programmer
Systems Analyst (SA): conduct FS (feasibility study), SA (systems analysis), understand

business requirements, current systems and problems, new system and program
specifications, data storage requirement, database design, system and program designs. He
must know how to use structured technique tools such as ERD (entity relationship
diagrams), DFD (data flow diagram), DD (data dictionary), etc.
He must also know investigation, analysis and information acquisition (i.e. structured
investigation) techniques. Systems Analyst needs to get end-users involved and end-user’s
desired to take ownerships of the new system solution. He has to conduct regular
walkthrough for the users and the development team. This way, the users are involved
throughout the development stages and will also act as change agent during the
implementation (cut-over) stage.
System Analyst is also involved in the testing phase and takes charge of the cut-over phase
(for smaller project, where he is also the project leader) to ensure proper documentation
and smooth cutover to new system.
The “big picture” responsibility of Systems Analyst is defining the “WHAT” requirements
of the new information system, be good in communication throughout the development
stages, and a good change agent. He is largely involved in the early and later stages of the
system development life cycle (SDLC).
Programmer: He is responsible for the construction of computer programs according to

Systems Analyst’s specifications and design. He needs to understand the deliverables
produced by the structured techniques. There is little need for him to understand the
business aspects though. He is responsibility to conduct program and system-level
integration testing and eventual maintenance of the new information system.
The “big picture” responsibility of a programmer is “HOW” to interpret the new

information system requirements to produce the necessary suite of computer programs to
run smoothly on the computer. Unlike the Systems Analyst, he is largely involved in the
middle stages of the system development life cycle.
b. Systems Analyst can ensure that a new information system is technically well
structured and meets users’ requirement by deployment of appropriate structured
development tools and conduct comprehensive FS, SA, SD covering socio-technical
aspects respectively.
The structured techniques and tools include data modeling, DFD, ERD, data analysis, data
Dictionary, information acquisition techniques (e.g. interview, observation, survey,
participation, questionaire), and specification techniques (such as pseudo codes, NS
diagram, flowchart).
Often, to assist and automate the data capturing and structuring processes, a Database
Management system (DBMS) and Computer aided software engineering (CASE) tool are
also used. Other techniques like prototyping and Rapid application development
techniques could also be relevant to discover requirements and errors in specifications. All
these approaches provide a strong basis for communication, cooperation and coordination
between the developers and the end-users.
Besides providing opportunities for both developers and end-users to meet often, Systems
Analyst should discuss all documented materials, codebooks, procedures, and operating
rules to ensure the requirements are fully analyzed. The increased communications will
break down any barriers between developers and end-users and lead to a thorough
discovery of additional specifications/requirements and the complete development of
specifications by the users.
Regular communications and appropriate techniques are the keys to ensuring that
developers have a good understanding of the end-users. Developers must conduct regular,
progressive walkthrough of their progress with end-users and their developer counterparts.
This will ensure that any misunderstanding and errors are rooted out as early as possible.
This way, the strong chance of developing a new system acceptable to the end-users
during the cutover stage can be assured.
In conclusion, while the use of structured techniques and tools are important to ensure
requirements are properly captured and structured, the Systems Analyst must be a good
change agent and be able to excite the end-users into “looking forward” and taking
ownership of the new information system – better still, convert them to change agents too.
Question J2
a) Why do developers use the structured approach to systems analysis?

b) Explain how a Systems Analyst goes about collecting and structuring the
information that they need when undertaking the analysis task [Exam 2005/Q5]
Solution guide
a)
Developers use the structured approach to systems analysis because the approach
provides a structured set of well-defined structured techniques and deliverables. They
guide analytical activities and defined formal deliverables to ensure successful
coordination & completion of the new system. Provide checkpoints for effective
management control.
The system requirements and designs stand a better chance of being consistently identified,
analyzed, verified, and documented. Caters to a team development approach, where
dozens of systems analysts and programmers must work together as an effective
coordinated team. The final product stands a better chance of meeting all the user
requirements and a successful cutover.
Structured approach is a proven strategy. It has been used in many successful development
projects including development by the UK government (using SSADM), Mindef, and IDA
Singapore.
Why?
The system development life cycle (SDLC) approach is suitable for large-scale project
involving many developers. Adoption of well-structured approach is critical so that all
members in the whole development team will “speak” the same language.
With large systems, it is often the case that many programmers and developers are divided
into teams. Effective tools to ensure timely and effective communication are paramount
importance.
What characteristics?
Structured techniques are graphical, partition, top-down, communicative, predictive,

consistent, durable, minimal redundancy reducing wastage and time. Communication,
control, and standardization are very important in these large projects.
The system analysis stage is a key phase of the system development life cycle. There must
be proper tools and techniques to assist the Systems Analyst in capturing all the
requirements. Tools used must also help the systems analysts document them and
collaborate with end users effectively.
Standardization and structured techniques and tools ensure that all the developers’ work
can be eventually combined to form the overall finished product.
What are the tools? Structured approach provides powerful structured techniques and
tools. These include DFD, ERD, data-modeling, data-dictionary, interviewing techniques,
process specifications, and structured walkthrough technique.
ERD methodology provides for the analysis and identifications of all the data objects in
the new application system. ERD relationships between the relations are uncovered. ERD
traces the access paths between the relations to provide information on the data traffic of
the new database system.
Data modeling methodology provides for detailed analysis and capture of all the fields
(columns) and the records (rows, tuples) that make up the logical and physical database.
DFD methodology provides for the identification of all the processes and the data of the
current and new system.
An important document of DFD is the context diagram. It provides a overall bird-eye

“executive summary” picture of the whole database system. Affected schedule and budget
can be immediately revised. This ensures developmental changes are managed with
updated budget and schedules.
Some examples. Many end-users are consulted continuously and use of structured
walkthrough to iron out any misconceptions or missing details. Structured walkthrough is
a technique that guides the developers and users in conducting regular reviews of the work
done. Get feedbacks and identification of errors as early as possible. Keep users aware of
the progress of the development. As such, control and interactive documentation
standards facilitate and improve communications between developers themselves and
between the end-users.
The use of standard procedures, tools and techniques facilitate identification and
documentation of during the SA development process. The structured nature of the
techniques gives rise to the creation of automated version called Computer aided software
engineering (CASE) which further facilitate and improve the effectiveness of structured
techniques. Structured approach is an efficient and effective methodology. It ensures every
stakeholder know they roles and play their part in each stages and sub-phases.
b) Explain how a Systems Analyst goes about collecting and structuring the information
that they need when undertaking the analysis task
A Systems analyst goes about collecting information by adopting proper information

collection techniques such as interview, observation, survey, and participation. He needs
work with and understand the end-users. Who “own” what documents, who “use” what
data and what procedures are in place. He needs to understand all operating procedures
(both formal and informal), code-books, rules, approval authority, and laws of the
organization.
A Systems Analyst is a key member in the application system development team. He has
to ensure that the problems are fully understood - be able to capture and define them
accurately. He has to look into viable alternative solutions and give proposal in details.
Often has to work together with his project leader on the project’s budget, schedule,
manpower requirement, machine and other IT resources requirements. He has to ensure
the specifications of the new system solutions are clear, complete, well structured and
defined. To so do, the systems analyst has to ensure the collected information is properly
structured with the appropriate documentation tools and techniques.
In structuring the information and data collected, the systems analyst has many
available structured tools and techniques. These include Context diagram, DFD, ERD,
Data Modeling, Process specification tools, and structured charting. If objected orientation
is involved, the OOD Structured diagram, Use and Sequence diagramming techniques are
involved.
These tools and techniques have a graphical, top down, partitioned approach to structuring
the collected data and information. Important aspects are highlighted and the deliverables
are themselves powerful communicative tools.
Systems Analysts have to ensure that the new application system meets to the needs of the
end-user and the specification guidelines in the ISP (Information Systems Plan). Good
communications exchanged between the developers and the end-users are crucial and
these tools/techniques will serve this purpose well.
The socio-technical changes that come with the implementation of new application
systems will need careful planning and integration well right up front at the early stages of
systems analysis and design. Hence, it is important that accurate, effective and correct
techniques are deployed.
Other related questions
Q. Why is it often argued that technology is not enough to provide competitive

advantage? What is the role of people in defining the strategic implication of ICT
solutions? [SG]
Q. What is competitive advantage? What is the role of people in defining the strategic
implications of ICT solutions? [SG]

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Singapore Institute of Management

Information Systems & Organization

This guide is privilege access to registered SIM students only.

1. e-Commerce strategy, market & business process reengineering

Theories of information systems

Technical (computer science, OR, mgt science) – Data Model

The technical perspective emphasizes mathematically based models to study information

The cognitive perspective draws on socio-psychological theories to study how decision-

The Data Model

The Decision-making model (readings: Laudon’s Chapters 1, 2, 3, 12 and 13)

The model examines how the organization can be conceptualized as a decision-making

The lower hierarchical decision makers, bounded by standard operating procedures

An organization is generally made up of three different broad layers of managers. They

Mgt & Control:

The transaction-cost model

Hence, in general, information systems will be more complicated in organizations where

In the transaction-cost model, we may conceive of information technology as a mediating

In the transaction-cost model, information technology is further seen as increasing the

Information Systems Strategy

What is strategic implication?

Strategic implications, when realized, lead to the achievement of the competitive

Firm: American Airlines.

E-commerce: a transaction-cost analysis

E-Commerce is fuelling the growth of electronic marketplaces by replacing manual and

e-Commerce makes market transactions more efficient than firm transactions –

The growth of e-commerce (and now extended to m-commerce) is probably unstoppable.

Business process re-engineering = internal processes

B2B is more complicated than B2C, C2C?

Organizations have began to ask “why should we be involved in such non-core IT

Because of a combination of IT technological advances, availability of expertise and

Why Operating System?

Objectives Take Flextronics, as the example

BS: Identify medium & BS: Global contract manufacturing with

Devt Analyse, design, Fully working and networked ERP,

Solution guide (note that the Q has 4 parts):

E-Commerce is fuelling the growth of electronic marketplaces by replacing manual and

We can conceptualize the implementation of e-commerce as market process re-

An e-Commerce website often involved monetary transactions. An appropriate e-

However, with the introduction of e-commerce, new IT advances and electronic

There is an abundance of easily accessible information reservoirs and information is

Just-in-time (JIT) information reduces information

Dis-intermediation removes intermediate layers of transactions and streamline processes.

E-Commerce rides on global computer networks. Today, such networks deploy

E-commerce supports advanced design and manufacturing concepts like zero-inventory,

E-Commerce generates transaction information immediately in the form that permits

E-Commerce has great potentials.

The significance and growth potential of E-Commerce is linked to the broader

e-Commerce has great potentials in many areas of industries in making market

Limitations. As in any technology, there are also limitations in using E-Commerce

Information societies have becoming increasing reliance on E-Commerce. A prolong

Electronic market refers basically to commerce over electronic communication means,

E-commerce streamlines market processes, making market transactions as efficient or

Can electronic market or e-Commerce reduce transaction costs?

A major reason for these factors of cost is caused by an unequal distribution of

A supplier may successfully bid in a competitive environment (market) for a customer’s

This explosive growth has contributed to availability of quality information, search

We shall now look at some e-commerce examples to understand how transaction

Hardwarezone.com is a B2C information broker e-commerce business model. It provides

How to FAIL quickly !

e-Commerce reduces information asymmetry, remove intermediary agents (dis-

e-Commerce applications include new e-business models, e-commerce payment systems,

b) BPR radically may impact changes across-the-board in the whole enterprise. A