Appunti di Business Information System 1

Business Information System 1

Introduction

Talking about the industrial application of information technology with a focus on the application of information technology to support the management of companies. We face more business administration and management applications of information technologies.

The tools (market technologies available from companies) are referred to as ERP (Enterprise Resource Planning), preexisting software not customized to the requirement of companies. It is important to find a balance in this case: Buying a tool from the market we have pro and con: in fact, it does not require time and money for developing it (pro) but software is not customized for the specific company (con).

To be able to understand how information technologies are applied to the management of companies, we need some basic background knowledge. So, the first 10 hours are used to explain the basics of organization theory and introduce several concepts that we might have seen in previous courses.

Part 1: Information Processing Perspective of Organizational Theory

Theoretical Underpinnings of BIS

Some Definition

To define the word information system, we notice that the word “technology” is not present. Technology is something that has to do with tools and physical machines that we use to accomplish a given task; but if we go to organizational literature we define technology in the following way: it is a set of processes that a given organization is capable of performing, together with all the resources that are needed to perform those processes, which include the tools but also skills (human resources).

Technology is a process (that is a set of activities), so if we take an organization, the technology of that organization is what the organization is able of doing. An example can be useful: the technology of Politecnico of Milan is the capability of teaching and doing research; being able of doing these activities means not only having the tools but also the skills.

The technical system represents a set of machines supporting a given technology. When these machines are computers, the word technologies, and technical system have been specialized into the terms “information system” and “IT architecture”. The information system is a subset of the technology of a company, that is why the word information system does not include any word like “computer”, technical, and so on. It is a set of coordinated processing processes that produce an information output and executes information processing activities.

IT architecture is the technical system supporting a given information system (like machines and computers). A company can execute a certain set of processes and that is the technology of the company; if we focus on the information processes, that is the information system of that company. Concluding, the information system represents the set of information processing processes that a given organization can perform. IT architecture is the set of machines (computers) supporting a given information system.

Organizational Impact of Technical Systems

It exists a traditional debate on the impact of technical innovation on organizational change. For traditional we mean that this debate takes back to the technology that has preceded information technologies, like mechanical technologies. This traditional debate has created a set of consolidated beliefs, something that we all know intuitively, where most of them come from the organizational impact of mechanical technologies.

Not only engineers but also managers have these consolidated beliefs on how technical innovation affects their organization and these beliefs are the intuitive approach that all managers have when they manage technical innovation. Let us be aware that these beliefs do not hold entirely for information technologies. These beliefs are related to non-IT technologies since the activity of managing companies is a horizontal discipline, not only engineering but could be also liberal art.

First belief is that technical innovation increases organizational efficiency. What do we mean by efficiency? Be able to reach a goal in a shorter time, or with fewer input resources. So, produce more with less, we could say it is the quantity of output divided by the quantity of input. Besides, we do not have, for non-IT technologies, a similar intuitive notion linking technical innovation with organizational effectiveness and it is outside our consolidated and beliefs technical background.

After having seen what is efficiency, what is effectiveness? Effectiveness refers to the ability of an organization to reach certain objectives; something is effective if it allows people or organizations to reach certain objectives. These objectives are clear: first, an organization needs to be able to survive. For “survive” means that the organization (companies) needs to be competitive, so sell their product or their services, since they have costs, and if they do not have correspondent revenues they cannot survive.

There is a time in which the cofounders are founding the company, that is the time from the start of the production to the start of its selling. They put and risk their money to make the company survive. Typically, the cofounder has some objectives, usually expressed in terms of revenues, or quantity of products that should be sold in some time. These objectives represent the production objective of the company, and they determine if the company is effective or not effective, which, in the other way, is the ability of the organization to reach certain production or sales objectives. Traditionally, the innovation in the technical system was not related to the concept of organizational effectiveness, it would only assure more efficiency.

In a non-mature market, we can sell what we produce, in developed economics for certain fields is much harder to sell. Second belief is that technical innovation enables scale economies. For scale economies, we talk about economies that we obtain through the scale of the production system of the organization. So larger the organization, greater is the scale economies. To understand intuitively what they are, we can consider the acquisition of new technology. The problem is: should we or should we not buy the technology? In case yes, the company needs to invest, after doing it, they can use it. Typically, if we buy the technology, it means it is innovative, and, as we said, it increases organizational efficiency, reducing cost or time to produce products or the number of input resources needed. So, for sure it has a positive impact on the economy of that organization. However, it reduces only the unit production cost (cost for each product).

For example, a car factory, if it invests in new technology, needs to produce a minimum number of cars to have a positive return on the investment. This minimum number of cars is indicated as the break-even production quantity, so the minimum quantity to guarantee that the investment that the company makes in the technology, results in a positive return; this positive return is called scale economies. Of course, scale economies represent a consequence of the positive impact on the efficiency of technical innovation.

Predictions are very important for companies in purchasing decisions, whether buying new technologies. If a company is too small, the investment is going to be too large for the company; not financial, but given the quantity that the company produces and forecasts to be able to sell for the incoming periods, the economic advantages that that company could get from the investment, do not justify the investment. If the companies are too small, they would not be able to afford innovation and that refers precisely to this impact of scale economies; and their unique production cost would be higher than larger competitors. This means that I spent more on a car, the price is going to be higher so not competitive in the market.

Another point is added: aside from surviving, companies need also to grow inside, and this growth is necessary for the company for continuously innovating production processes and hence scale economies and hence competitors. An important point to remember is that technological innovation has an impact on scope economies, an economy that comes from better planning in the utilization of the resources (i.e. MRP).

Third belief: technical innovation causes an increase in the optimal minimum organizational size. This is a direct consequence of scale economies. A company needs to grow and technical innovation through the mechanisms of scale economies has caused an increase in organization size. Companies must grow to remain competitive, but when the economic system is not competitive anymore, the company must be split into multiple smaller companies to guarantee competitiveness.

Fourth belief: technical innovation increases individual specialization. A worker, without any high level of education, becomes over time increasingly specialized. We can consider increasing specialization as a consequence of technical innovation, even if it is not the only cause. For example, the industrial revolution has caused a shift of artisans from labs to factories; when they were artisans, they had general duties and abilities, able to organize all the activities of production, from the thought to the final product. They had also a shop, where they could sell their product, so they have to do everything, from design to research, development, production, marketing, and sales. This gave them a sense of self-satisfaction, they deserved all the credit for what they produced and managed to sell, so they were passionate about their job. Within the industrial revolution, technical innovation has brought the idea of buying complicated machines that can help with the production of the final product; these machines are convenient, they reduce the cost of production.

Machines are typically organized in different tasks; this means that given that machines involve knowledge on how to use them, the greatest possible efficiency of the overall production chain is obtained if we make sure that people working on production line specialize on the usage of one machine and acquire the skills that are necessary to use the tasks involved in their duty.

Fifth belief: a lot of theory has been developed on the production chain and how to make it more efficient; this theory takes the name of Taylorism. The tayloristic assumption is that given a production goal and a set of technical systems that can support production, there is only one optimal way of organizing production, that way that minimizes the time going from starting to finishing of the chain and the mistakes the workers do.

Taylor said that organizing is a job that should be performed by engineers who should look for organizational optimum. This optimization is reached from perfect synchronization of individual tasks, as fast as possible, no error, and so on. Lead time has many definitions; for us is the time that goes from the beginning of production to the end of production. It is fundamental to reducing this time to increase production.

Sixth belief: with the industrial revolution, group work was not an issue, no teamwork, people just execute their work tasks in the possible fastest way as possible. People organizing work will be the decision-makers and people executing work will be the executors, no cooperation, no need to have any particular soft skills, no delegating of decision making. We do not have artisans anymore, workers need only to repeat their tasks with a job that becomes more specialized and more boring. Of course, this had an impact on human behavior, and there is a literature on this. However, as engineers, we can’t enter this debate, we just care about improving technology.

Seventh belief: technical innovation increases bureaucracy and formalization of work. This is clear also inside Politecnico; having many students create a relation more formal and bureaucratic, students are anonymous. An informal setting would be an area where there are fewer students. This informal setting is not possible with 300 students. Going in general, as we increase the size of a group, the group becomes more bureaucratic and formal. Bureaucracy is made of written rules. A company is bureaucratic when it writes what we must do, a book where are listed all the behaviors that workers must have.

Besides, division of labor involves a specialization; the company grows, workers become more specialized, firstly with a division between sales and production. A first division is based on personal inclination. If we have multiple shops, we need another unit, administration, formed by accountants; besides we could also benefit from marketing, so another division is created from the sales department. After administration, marketing, and sales, another distinction could be done with a group of people that focus on continuous innovation (research and development), and then we have a production unit. So as time goes, the organization of the company is divided into different units specializing in different tasks. Those units are called functional units since they execute different tasks. The way people organize their work is called coordination, people need to coordinate, because they produce with other people, not alone as the artisans. Mutual adjustment is the simplest to coordinate people, but it is possible only with few workers. Increasing the size, everything must be done more in a bureaucratic way, making the boss know and deciding. Managing people in a bureaucratic way is of course more complex than a smaller organization.

Eighth belief: the complexity of managerial tasks has reached a point where the engineers are not qualified to design organizational systems, they need a school to organize production, a management school, where executing managerial tasks is taught. Many companies, enlarging in different countries, need to duplicate themselves, also to respect the laws of that country (taxation). However, they do not necessarily replicate all the original functional structures; not all countries will have an R&D unit, it is usually centralized except for particular reasons.

Information Processing Perspective of Organizational Theory

This is the core of what we want to learn. IT has very specific characteristics and managers are still learning how to manage information technology; we cannot say we have a mature theory behind, it’s a theory that we call information processing perspective and this perspective has revisited the traditional Taylorism and the principles of the industrial revolution with new technology. This is a radical change.

IT is the only technology where input and output are information. Information is an organizational resource, and it goes through a production process. Those processes are typically managerial. Typically, who manage information are people in the office, like in the education industry, but is used by managers. Managers in tayloristic view, would not use material resources, they would delegate execution and making decisions; it is a job that includes a lot of decision making, and they are made on information. So, for much time in history, there is a technology that helps to process that information (very first was in Cnosso, to write down the purchase between citizens).

By having an impact on decision making, IT has an impact on the effectiveness of an organization. As explained, effectiveness has to do with reaching a goal, and the main goal of the organization is surviving; so managers need to make a plan, and as time goes by, as they take information, they need to update the plan to increase the probability of surviving, like which product to produce in which quantity. That decision is based on prediction on how much the company will be able to sell and is not simple. The market is subject to uncertainty. Wrong predictions are a fundamental cause of a lack of effectiveness of the company, and it is the responsibility of managers to make predictions, plans, and decisions.

There is a research done in virtuous and vicious circles of information processes; if companies apply IT to automate well-managed processes, the companies become more effective, creating a virtuous circle. Nevertheless, it is evident that if a company is not well managed, if we apply IT, the opposite occurs. Concluding, is important to remark that IT has a huge impact on the effectiveness of an organization, not only on the efficiency of the organization, unlike previous technologies.

So how technology management principles change for a technology that has such a different organizational impact compared with previous technologies? The goal of this course is to understand how IT affects traditional management principles. To do that, we describe the evolution of technology over time, from the ‘60s onwards.

Many companies work still with old software. This happens since when people work for years with a software, this becomes part of the know-how of the company, and no one wants to get rid of it. First of all for the investment; the second reason for this skeptical behavior is that IT continuously change, so even a new tool is a novelty only for a limited amount of time and it is a usual thought to remain with a software or a tool if it still works. Changes are done when changes are easy.

An important point is the following. In the ‘60s ERPs were made in house and little by little developed; at some point, with SAP, for example, a change has been reached, only one ERP for all companies, getting rid of developers inside companies. Developing code in house created a lot of problems related to human resources, management, developers; software development is a slow process.

With this new software, companies can give up code development; however, when companies don’t have the capability of developing custom code, then it is difficult for them to remain competitive. So, getting rid of the developer and capability of programming is not entirely positive, even if faster and cheaper.

Three Schools Under the Information Perspective

All the studies about organization theory have been grouped into 3 theories, from the oldest one to the newest.

Decision School

It emerged in the ‘70s with two contributions mainly by Galbraith and it is probably the most important school among the three. The first observation he did was that in organization theory, with respect to the old Taylorism, we should change perspective completely, in particular, we should...