Appunti di Business Information System 1

PART 2: OPERATIONAL PORTFOLIO IN MANUFACTURING COMPANIES

We now have to understand what companies do, their task, and the nature of tasks. One of the limitations of the information processing perspective of organization theory, all three of them, is that they don't consider the nature of the task, they never talk about what people have to do. So, the nature of tasks is a differentiator in the application of information technology.

We make a coarse-grained distinction between manufacturing and service companies. Typically, the competitive scenario is we have general providers, like SAP, or Microsoft Dynamics, but we always have vertical industries specific solutions, so these companies always have competitors that are more specialized and become very competitive in that industry. This means that also big company have to adapt their general software to the requirements of specific industries.

Administrative Portfolio

Nature of task: manufacturing vs. service companies

We can do the first

There is an important distinction between manufacturing and service companies, two types of companies where nature changes a lot. Manufacturing companies produce tangible products, physical (i.e. cars); service companies produce an intangible good, a service and typically services are made of information (i.e. education). The nature of tasks between them is quite different; even the organizational function is a bit different in manufacturing and service companies.

For a long time (till mid '90), companies produced the software they needed in-house, hiring developers. At some point, this setting has changed, with innovative organizations that realized that many tasks in the majority of companies are very similar. Given this, they would have also used very similar software. So, the trend became buying software instead of making them. These types of software are called ERP (Enterprise Resource Planning). These tools typically have vertical solutions tailored to the needs of industries, so the degree to

which they are personalized is not the companies, is the industry. One of the effects is that they standardize operations within the same industry. This has pros and cons, good because we standardize and spend less money, bad because we are no more unique, and we become less competitive.

IT portfolio in manufacturing companies

We start focusing on manufacturing. The reason is that it has been a prime mover in the application of information technology and that has to do with technological innovation to implement new technologies that have emerged over time much sooner in manufacturing than in services.

We make a distinction between three portfolios. This is true in particularly at the beginning of the evolution of information technology since companies were developing software by themselves for themselves. The word portfolio recalls the idea of a financial asset made of many different stocks for example.

When we go to a company, we could find applications developed 30 years ago, maybe they have

dismissedpart of the IT portfolio that had been developed ad hoc at the beginning of the evolution of the IT and theyhave replaced with a more modern tool.We make a classification of functionalities of a manufacturing company's software and classification divided functionalities in three: administrative, operational, and executive (same distinction holds in service companies). The functionalities of the modern ERP that fall in one of these classes are typically called core functionalities, a set of functionalities that we assume that are available and that represent the basis that the company must have before they can innovate on top of these functionalities.What an ERP does is setting the schedule of activities and force people to keep up with the schedule; it provides reminders, forecasts, unified information. Manufacture technologies have taken about 20 years to realize the difference between information technology and traditional technologies.In the beginning, managers viewed IT

As a technology that allows them to communicate their plans to the people of the organization and gather information very quickly.

Administrative portfolio

The first step has been the implementation of an administrative portfolio. What is it?

The administrative portfolio is the functionality that automates the administrative and bureaucratic organizational activities. An example is accounting, the activity that companies must take care to count the money they take from clients and money they spent on purchases and then draw a balance sheet. Then they have to perform tax payments, they have to take care of our human resources, paying salaries based on the job done. Then they have finance, the set of activities that take care of investments company takes and prediction of future sales and costs monthly based. The CFO is the person aware of all the cash flows.

So, all these activities have to do with accounting, transaction processes, contracts, payments, keeping track of the expenses for a certain contract.

and all transaction automation at different phases of the economic transaction. If we think back to transaction theory, where we said that according to transaction economics the IT as computer-based is not the first one that has been existed, nevertheless we can say that administrative portfolio historically has been the first one to be optimized. The impact of the administrative portfolio is of greater efficiency. The introduction of the computer was quite an exciting innovation, relieving people from counting manually. Counts are now automated, and this has been a big evolution, a lot of money has been saved without involving a big change in the mentality toward innovation. Some characteristic of administrative portfolio:

• It is almost industry independent.
• It is something country-specific.
• It involves number crunching.

Investment decision has not been particularly complex, they just need to look at how much having an administrative portfolio costs, how much money we save in.

term of human works and how much is more precise a machine compared to an individual. The only drawback in its implementation was the fact that fora machine to work we need to develop software.A software is developed according to requirements, but if the requirements change, we have to maintain thesoftware updated. For this reason, companies started to experience obsolesce due to changing requirements.Even at starting time, it was clear that managing IT was different from managing any other technology: if webuy a car, what we get is what we have and we are not going to change our requirements since we know thatif we change requirements we need to buy a different car; with a computer, there is this strange thing thathardware remains the same, but the software has to change continuously with the change of requirements.This is a battle that developers are still struggling with: if we change requirements, we need to change thesoftware accordingly. And software development is inherently slow,

is a time-consuming activity. Manufacturing production processes and inter-functional information processes. We talk about processes that are more specific to manufacturing and different from the service industry. First, we introduce Porter's concept of information intensity.

• In general, information intensity is greater in services than it is in manufacturing.
• IT intensity can be greater in manufacturing than it is in services.
• Historically, the management orientation towards IT was greater in manufacturing. Services have experienced a delay in IT development of about 10 years.

Management of companies can be very different depending on the contingent situation of that company. Some managers are IT-oriented, others are not. What Porter tried to say was: companies are different from each other and this difference depends on the nature of the task they have to accomplish.

Information intensity represents the size and complexity of the information used by the

1. The degree to which information processing activities are structured and,
2. The degree to which information processing activities are unstructured.

These two factors determine the level of information intensity in an organization. In industries where information processing activities are highly structured, such as cigar manufacturing, the information intensity is minimal. On the other hand, in industries like banking where information processing activities are highly unstructured, the information intensity is maximum.

Another important factor is IT intensity, which refers to the actual ability of IT to satisfy the information processing requirements of organizational processes. IT intensity is greater in banking compared to insurance, as banking has a greater opportunity to apply IT.

Management inclination is also a crucial factor in determining the level of information intensity in an organization. It refers to the degree to which a company's management considers IT as a strategic lever. Management inclination depends on various factors such as computer literacy, culture, and company history.

Overall, information intensity reflects how much information is used in the production and management processes of an organization and how complex it is. It is influenced by the structure of information processing activities, IT intensity, and management inclination.

Now, let's explore the drivers and opportunities for applying IT in a particular industry. Porter provides a classification of drivers, and one example is the degree to which information processing activities are structured or unstructured.

thus, can be easily translated into a computing procedure (predetermined steps and decision tree). For structure, we mean that those information processing activities follow a set of predetermined steps, for example, the administrative portfolio, which means that those activities are a candidate to be translated in a computer procedure.

1. Volumes, i.e. the amount of information to be processed.
2. The frequency with which a given operation is repeated. It does not worth using a software for an operation we do only once.
3. The computational complexity of operations, the simpler, the better. We are not looking complex operations: according to Porter the opportunity of implementing IT is greater if operations are frequent and simple.

The complexity of computation is something that slows innovation down rather than speeding it. So, the banking industry is an industry with high information intensity and high IT intensity, while the insurance industry has a comparable information intensity but has amuch lower IT intensity (opportunity of applying IT, the cost depends on the risk and this valuation can't be done only by computers). Manufacturing Production Processes Let's focus on manufacturing, we need a model of manufacturing production processes. To explain to us the opportunities of IT in operations, Porter moves inside the operational portfolio. We know from decision theory that vertical information systems along the functional hierarchy are not enough, they do not provide enough flexibility, companies are not reactive enough, so companies have to complete the vertical information system with a horizontal information system. The information has to flow cross-functional. The interesting part of Porter is that the starting point was the functional structure; talking about the nature of tasks, the model that Porter suggests is not a functional hierarchical model, is a process model. This is probably the main shift in perspective that can be credited to Porter: we should view

organizations as a set of processes instead of functions. So, we have already introduced the concept of proce