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?

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.
2.5. The Information Needs and Sources

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.
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 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

2.7. A Framework for Information Systems

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

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

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

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.
 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.