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Chapter 2
Foundational Concepts in Management Information System
Contents
 Introduction
 Objectives
 Business and Management Functions
 Data, Information, Knowledge and Wisdom
 The Information Needs and Sources
 System Concept
 A Framework for Information Systems
 E-Business
 Summary
 Review Questions
2.1. Objectives
After reading this unit, you should be able to:
 Define data, information and knowledge;
 Explain organizational information needs and sources;
 Explain the characteristics and importance of system concept and E-
Business; and
 Explain the framework for understanding MIS.

2.2. Introduction

Management has been defined in a verity of ways, but for our purposes it comprises
the processes and activities that describe what managers do in the operation of their
organization; plan, organize, initiate, and control operations. Because decision making
is such a fundamental prerequisite to each of the foregoing processes, the role of MIS
becomes that of facilitating decisions necessary for planning, organizing, and
controlling the work and functions of the business. From the manager’s point of view,
information serves the purpose of reducing uncertainty regarding the alternative
course of action, in the process of decision making. Availability of information
regarding the alternatives improves the odds in favor of making a correct decision.
Information is recognized as one of the most important corporate resources.

2.3. Business and Management Functions

Business Areas
Managers are found in various business areas of the firm. The three traditional
business areas are marketing, manufacturing, and finance in addition to other two
areas that have gained major importance-human resources and information services.

What managers do?

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 Activity B
What would you suggest to make the system more efficient?
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According the French management theorist, Henri Fayol, managers perform five
major functions.
• They plan what they are to do.
• They organize to meet the plan.
• They staff their organization with the necessary resources.
• They direct the available resources to execute the plan.
• Finally, they control the resources, keeping them on course.
All managers perform these functions, however with varying emphasis as shown below.

Figure-2.1: Management Functions

2.4. Data, Information, Knowledge and Wisdom

Data – raw facts about people, places, events, and things that are of importance in an
organization.
Information – data that has been processed or reorganized into a more meaningful
form for someone.
Knowledge – data and information that is further refined based on the facts, truths,
beliefs, judgments, experiences, and expertise of the recipient.
Wisdom-good sense: the ability to make sensible decisions and judgments based on
personal knowledge and experience.
The information makes a person more knowledgeable. Knowledge is an awareness
and understanding of a set of information that help decision-making. Knowledge
makes a person wise. The sequence is the following-data is processed to get
information; information makes a person knowledgeable, knowledge adds to the
wisdom.

Activity A
What would you suggest the difference between data and information?
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2.5. The Information Needs and Sources
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MIS starts from an appraisal of management needs and overall business objectives.
Who are the information users?
• Managers
From the managers’ point of view, information serves the purpose of reducing
uncertainty regarding the alternative course of action, in the process of decision
making. Information is recognized as one of the most important corporate resources.
The idea of using the computer as a management information system was a
breakthrough because it recognized managers’ need for problem solving information.
Embracing the MIS concept made several firms develop applications specifically
aimed at management support.
• Non-managers
Non-manages and staff specialists also use the MIS output.
• Persons & organizations in the firm’s environment
Information generated by an organization can be valuable to many different people.
Users outside the company benefit from the MIS as well. They can be customers
receiving invoices, stockholders getting dividend checks, and the federal government
checking tax reports.
What are the sources of information?
An organizations information needs are met through gathering information from both
internal and external environment. Internal information can be generated by
maintaining and processing business transactional data and overall organizational data
or information. To this end information system such as TPS & internal database
systems play a critical role. While external information can be generated from the
following diverse sources:
 Various publications of the central, state, or local government
 Various publications of international bodies or their subsidiaries or foreign
governments
 Technical or trade journals
 Books, magazines and news papers
 Reports and publications of various organizations
 Reports of research scholars in different fields
 Public records and statistics, historical documents and other sources of
published information.

In modern days, Internet is used as a base for information retrieval. One can have
access to any kind of information amounting to any quantity through Internet.
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2.6. System View

Simply put, a system is an organized collection of parts (or subsystems) that are
highly integrated to accomplish an overall goal. The system has various inputs, which
go through certain processes to produce certain outputs, which together, accomplish
the overall desired goal for the system. So a system is usually made up of many
smaller systems, or subsystems. For example, an organization is made up of many
administrative and management functions, products, services, groups and individuals.
If one part of the system is changed, the nature of the overall system is often changed,
as well -- by definition then, the system is systemic, meaning relating to, or affecting,
the entire system. (This is not to be confused with systematic, which can mean merely
that something is methodological. Thus, methodological thinking -- systematic
thinking -- does not necessarily mean systems thinking.)

Systems range from simple to complex. There are numerous types of systems. For
example, there are biological systems (for example, the heart), mechanical systems
(for example, a thermostat), human/mechanical systems (for example, riding a
bicycle), ecological systems (for example, predator/prey) and social systems (for
example, groups, supply and demand and also friendship). Complex systems, such as
social systems, are comprised of numerous subsystems, as well. These subsystems are
arranged in hierarchies, and integrated to accomplish the overall goal of the overall
system. Each subsystem has its own boundaries of sorts, and includes various inputs,
processes, outputs and outcomes geared to accomplish an overall goal for the
subsystem. Complex systems usually interact with their environments and are, thus,
open systems.

A high-functioning system continually exchanges feedback among its various parts to

ensure that they remain closely aligned and focused on achieving the goal of the
system. If any of the parts or activities in the system seems weakened or misaligned,
the system makes necessary adjustments to more effectively achieve its goals.

A pile of sand is not a system. If you remove a sand particle, you have still got a pile
of sand. However, a functioning car is a system. Remove the carburetor and you no
longer have a working car.

Not all systems have the same combination of elements, but a basic configuration is
illustrated in the figure.2.2. below:

Input resources are transformed into output resources. The resources flow from the
input element, through the transformation element, and to the output element. A
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control mechanism monitors the transformation process to ensure that the system
meets its objectives. The control mechanism is connected to the resource flow by
means of a feedback loop, which obtains information from the system output and
makes it available to the control mechanism. The control mechanism compares the
feedback signals to the objectives and directs signals to the input element when it is
necessary to change the system operation.

Open and Closed Systems

 Open system: Connected to its environment by means of resource flows (e.g.,
heating system)
 Closed system: Not connected to its environment. They usually exist in
tightly controlled laboratory systems.

What is a subsystem?
A subsystem is simply a system within a system. This means that systems exist on
more than one level and can be composed of subsystems or elemental parts.

What is interface?
An interface is a connection at system or subsystems boundaries. Example two
typical business systems that interface with each other are inventory control and
purchasing.

What is a Super System?

When a system is part of a larger system, the larger system is the super system.

Physical and Conceptual Systems

 Physical system: The business firm is a physical system, composed of
physical resources
 Conceptual system: It’s a system that uses conceptual resources-information
and data- to represent a physical system.
Example: The Computer is a physical system, but the data and information
stored in it can be viewed as a conceptual system.

The Importance of a System View

A systems view regards business operations as systems embedded within a larger
environmental setting. It’s an abstract way of thinking, but it has potential value to the
manager. The systems view:
– reduces complexity
– requires good objectives
– emphasizes working together
– acknowledges interconnections
– values feedback

Activity B
What would you suggest to make the system more efficient?
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2.7. A Framework for Information Systems
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There is too much data and information in an organization. In order to design a MIS
successfully, we need a framework to structure the information so that the data and
information relevant for decision-making can be separated from rest of the data. For
the successful designing of MIS in business, we should understand well about the type
of information required by managers of the business.

Management can also be seen as structured into three hierarchical levels namely, top
level, middle level and bottom level or strategic, tactical and operational levels,
respectively. Although lines of demarcation are not absolute and clear-cut, one can
usually distinguish certain layers within the organization, which are characterized by,
the classical pyramidical type of structures as shown in Figure 2.1

Figure 2.3: Hierarchy of management

Management Levels
Strategic Planning Level
The strategic planning level involves mangers at the top of the organizational
hierarchy. The term strategic indicates the long-term impact of top managers’
decisions on the entire organization. The term executive is often used to describe a
manager on the strategic planning level.

Management Control Level

Middle-level managers include regional managers, product directors, and division
heads. Their level is called “management control level” due to their responsibility of
putting plans into action and ensuring the accomplishment of goals.

Operational Control Level

Lower level managers are persons responsible for carrying out the plans specified by
managers on upper levels. Their level is called the “operational control level” because
this is where the firm’s operations occur.

Influence of Management Level on Information Source and Form

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When designing information systems, it is important to consider the manager’s level.

Such levels can influence both the source of information and how it is presented.
Managers on the strategic level place greater emphasis on environmental information
than do managers on the lower levels. Managers on the operational control level
regard internal information as vital. In addition, strategic planning-level managers
prefer information in a summary format, whereas operational control-level managers
prefer detail.

2.8. E-Business

What is E-Business?
Electronic business, or e-business, means using the Internet and the web to perform
business processes. Although the terms e-business and e-commerce are used
interchangeably, e-commerce refers to selling online, while e-business encompasses
all business transactions—marketing, accounting, operations, procurement and supply
management. E-business is about using web technology to enhance your business
practices. E-business is not a new concept. Banks have been using electronic fund
transfers to move money around the world for decades. Large businesses have used
electronic data interchange to place orders and send invoices since the 1960s. What is
new is the current accessibility of e-business to small businesses due to reduced costs
and simpler set-up.

Why Get Into E-Business?

Like electronic tools developed earlier, including the telephone, fax and
calculator, e- business is simply a tool that can enable you to broaden your
customer service approach, increase productivity and reduce costs. Consider the
top five reasons to use e-business in your organization:
1. Extend your customer base
E-business provides an easy, low-cost mechanism to market and sell your
products and services to customers anywhere. A carefully planned web site and
a targeted marketing strategy can enable you to develop new niche markets,
become an instant exporter and provide product and service information 24
hours a day, 7 days a week.
2. Respond to new customer and competitive demands
A growing number of customers prefer the shopping and communication
convenience, wider product selection (including customized products) and lower
costs that e-business offers. Your competitors may be embracing e-business.
Therefore, you may want to consider e-business to compete effectively.
3. Enhance your productivity
Companies use e-business to be more productive by reducing duplication,
improving communication and streamlining processes. E-mail, for example,
facilitates quick, efficient communication with clients, staff and suppliers. And
it’s very inexpensive to set up. You might also consider setting up a web site to
answer frequently asked questions, save money on printing and paper handling
costs and coordinate your supply chain.

4. Lower your procurement and inventory costs

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Your e-business activity can help you to buy supplies efficiently. You can
research supplier catalogues online and easily compare product features and
prices from many competing suppliers. E-business can also help you forecast
and monitor inventory levels. Also, you can use e-business to compete on
electronic procurement tenders. Many government tenders are now posted on
web sites so businesses can access these opportunities electronically.
5. Improve your customer service
Many people prefer to research product information, download software
updates, pay bills and check warranty information online—all examples of
enhanced customer service. You can use your web site to gather customer
feedback that helps you tailor your products and services to your customers’
needs.

Web-based business models

The array of business relationships which have emerged in recent times:
1. E-mail and Internet
You can easily get connected to the Internet and set up an e-mail address. E-mail
can enhance your communication with partners, suppliers, and customers in
many ways:
A. Marketing
a. Promote products and services to specific client groups and respond to
customer enquiries
b. Bid on tender opportunities
B. Communication
a. Keep partners and business associates informed about projects and
meetings
b. Transfer documents for development, review, or revision
c. Exchange order forms and invoice
d. Send permission-based e-mail such as subscription newsletters
C. Research/intelligence gathering
a. Compare supplier prices and product specifications online
b. Access electronic databases to gain market intelligence
c. Seek advice from similar businesses outside your competitive market
2. Web site
Consider creating a web site for your business. Web sites range from very
simple online brochures to very complex electronic storefronts or marketplaces.
You can use a web site to:
a. Promote your products or services
b. Sell products directly to your customers
c. Generate greater awareness of your business
d. Distribute business information to customers and company
stakeholders
e. Gather client information and feedback

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Figure-2.4: An Electronic Commerce Storefront

3. E-Commerce
Once you market your products and services online, the next step is to buy and
sell online either business to business (B2B) or business to consumer (B2C).

i.) Business-to-Business E-Commerce (B2B)

B2B e-commerce is about electronic transactions between companies. For
example, B2B marketplaces enable suppliers to access new customers, track
sales more efficiently, reduce paperwork, and improve order accuracy. Buyers
normally register free of charge to compare products and prices more easily.
These marketplaces can also help reduce purchasing costs. B2B opportunities
online account for most e-business examples of B2B e-commerce and how you
can use it:
 Product catalogues, bill payment, order tracking, warranty information,
and/or purchasing tools on a seller’s web site.

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 online B2B marketplaces that are focused on a specific industry (e.g.,

steel, agriculture, oil and gas) or maintenance, repair, and operations
products that are
 Useful across various industries (e.g., tires, cleaning supplies, paper and
pens).
 Request for quotation (RFQ) or request for proposal sites (e.g., Alberta
Purchasing Connection, Merx).
 Online project management tools that improve collaboration between
companies.

B2B e-commerce can be approached from a sell-side or a buy-side perspective.

There are companies that set up web sites to sell products (sell-side).
Conversely, some cities, governments and large companies set up sites to post
tender online (buy-side). Either way, it is easy to compare prices, set up delivery
schedules, purchase products and track information. Some B2B sites also
include auction, collaboration and project management capabilities. Virtually all
goods and services can be sold online.

ii.) Business-to-Consumer E-Commerce (B2C)

B2C e-commerce incorporates businesses selling their products or services to
consumers online. Virtually all goods and services can be sold online. Online
retailers, sell more than books, music, collectibles, clothe and consumer
electronics online. They also sell financial products, airline tickets, health
information, digital goods and real estate.

E-business has the potential to increase the scope and profits of your business.
Used effectively, you and your staff will be more productive as you serve
greater numbers of customers in a wider marketplace at lower costs. At the same
time, effective use of e-business requires considerable thought and planning
combined with a readiness to invest in technical and human resources to do it
right.

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Case Example-1
Web-based Business Models Creating Opportunities in the Chemical
Industry

Phil Allen(PA), Marketing Excellence Practitioner and Value Creator and

CEO), Market Ability and
Ron Fillmore(RF), Executive Director, Xiameter, discuss the benefits of web-
based business models.

How important are web-based business models to the chemical industry?

PA: Although they are still in their infancy, web-based business models have
become an essential part of the chemical industry today and the way it does
business. Some people seemed to think that electronic commerce was a fad, but
businesses such as Xiameter have proven their value and have shown that they
can be a major factor in spurring growth. I think the biggest problem is that
companies are not exploiting the full potential of web-based businesses. People
need to use their imaginations and consider new ways to benefit from them.

RF: In the chemical industry, we’re always striving to provide sustainable

performance in the eyes of our customers. Being web based allows us to do that
by satisfying the needs of customers who are serious large volume buyers, who
know what they want, and know how to use the product. E-commerce has
enabled Xiameter to provide ongoing excellent performance, which has
differentiated us in the eyes of our customers relative to our competitors in the
chemical industry.

What do you see as the benefits of e-commerce to purchasers?

PA: For one, online ordering levels the playing field by making it possible for
purchasers to easily and efficiently compare product features, services, and
prices of potential suppliers. They can access and obtain all types of knowledge
and technical data online as well as up-to the-minute information. The round-the
clock availability of web-based businesses makes it possible to work across time
zones and to overcome language barriers.

RF: In our case, e-commerce has allowed purchasers to self-identify themselves

more easily. By that, I mean since we launched Xiameter, customers we never
knew existed have come forward, even in mature markets we thought we knew
thoroughly. Customers can also self-qualify themselves by learning through the
website whether or not Xiameter would be the right supplier for them based on
the business rules we have implemented.

Another significant benefit is speed and access to accurate information. Instead

of having to wait for a returned phone call, information such as order status,
order tracking and order history is on the web waiting for you. And with today’s
technology, you can access that information around the world, from your office,
your home, hotel, or airports. The risk of misinterpreting an order is also much
lower because a web-based system provides real-time access to data and is fully

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integrated. In our case, Xiameter allows us to focus on being reliable and

delivering what we say we can.

What are other benefits of web-based businesses?

PA: E-commerce can help you learn more about what your customers need and
how they behave. If you have that knowledge and your competitors don’t, you
can stay ahead of the game and continue tailoring, choosing, and adjusting your
offerings as you see and anticipate customers’ needs changing and evolving.
Also, from a supplier’s perspective, the location of their businesses now matters
a whole lot less.

Small suppliers that might otherwise be ignored can now compete with the big
companies, and they can tailor their offerings accordingly. This access gives
them fresh insights that help them stay ahead of competitors. Online businesses
also allow suppliers to serve small customers efficiently online in ways that
wouldn’t have been affordable otherwise.

RF: Many companies have looked at web business as a cost-cutting measure, to

improve their internal profitability, but we see it as an opportunity to meet the
needs of our customers and provide them with choices. Even though we are
web-enabled, we still maintain important interaction with customers. We have
people behind Xiameter who have a host of different experiences from customer
service professionals to dedicated traders who are experienced in the industry
and can help customers if they need it.

How do you overcome resistance to change and get potential new users to
try online ordering?

PA: It’s important to help people to see the benefits. There are some people who
are still technophobes. They need to see the value of having access to so much
knowledge and information. In many Asian countries, people are open to trying
new things and to doing business online. The important factor is making it
available in an affordable and easy-to-use way. In most markets, we can identify
Early Adopters – people who are more open-minded and forward-looking. They
tend to adopt new technology first, and then they encourage others in their
companies or peer groups to follow suit. They are seen as leading thinkers. It is
important to segment people according to their openness and willingness to
adopt new technology. They then become internal role models and opinion
leaders. The key factor is people’s openness to change. That’s a more important
determinant than the industries they represent. Over the next 10 years, more
young people will be moving up the career ladder that have had exposure to new
electronic commerce technology. They want to use it and more fully understand
its potential. By the year 2020, in fact, I predict that we will no longer be using
web-based ordering. By then, we will have invented new ways to interact with
customers altogether. But please do not ask me today what it will look or sound
like.

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RF: Giving customers what they need and want is the best way to get them to
purchase on-line. Xiameter reaches out to customers who purchase large
volumes of commonly-used silicon-based products at market driven prices.

Making the experience as intuitive and customer oriented as possible is the best
way to encourage repeat visits. If we have a customer in China, for example,
who doesn’t speak English, trying to navigate in English, we’ll have a customer
service representative who is multi-lingual, talking to that person and explaining
how to use the site. This is a perfect example. If a customer whose English is not
their first language can navigate our site and navigate it effectively every time,
then it tells you that it’s a pretty clean site in the eyes of our customers.

For more information about Xiameter, visit www.xiameter.com.

©2005 Dow Corning Corporation. Xiameter is a trademark of Dow Corning Corporation. Dow
Corning is a registered trademark of the Dow Corning Corporation.

Case Example-2
An example in practice Look at the e-marketing case of Greenfingers.com on
www.cim.co.uk This Company was set up to sell garden equipment and plants
over the Internet. It also provides an extensive search and information service
for visitors to the site. The company deals directly with customers by using
email to collect feedback once their order has been fulfilled. Using this
feedback, the company has profiled its typical customer and plans to use this in
future to conduct more 'one-to-one' direct marketing activity, tailored to
individual needs.

Although the company has made its initial impact through the web, it is now
looking to consolidate its activity by using more conventional marketing
methods and integrating web activity with other elements of the promotional
mix.

For example, it has just launched a mail-order catalogue and plans to distribute
almost 2 million of these to potential customers by inserting them in popular
gardening magazines.

The company has succeeded in raising its own profile by linking in and
associating with other well-known names. For example, a direct mail campaign
is planned to target established direct mail subscribers through the Book Club
Association and the Royal Mail. Interactive TV and home shopping on Sky TV
is another\target area for development.

The case highlights the fact that it is the right combination of promotional activity
conducted at the right time that helps a business to succeed. By making only promises
that they can deliver and regularly monitoring customer feedback, Greenfingers has
established itself well in its chosen marketplace.

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2.8. Summary

In this unit, you have been introduced to basic concept of data, information, and
knowledge. You have also learnt the needs and sources of information in an
organization. The importance and characteristics of system concept and E-
business was introduced. You have as well learnt the framework for understanding
MIS.

2.9. Review Questions

1. Explain the systems concept?

2. Describe the management functions at various levels in the context of

relationships between management and information needs?

3. Discuss the advantages of E-Business over conventional business?

4. What are the functions that MIS supports in an organization?

5. Explain the following statement, “there is a two way relationship between

organization and information systems”.

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