Types and Functions of Information Systems Used in Business


This chapter provides an overview of the role of information systems in business.

The objectives of this chapter are to:

  • Define and describe business processes and their relationship to information systems.
  • Describe the information systems supporting the major business functions.
  • Describe the role played by systems serving the various levels of management in a business and their relationship to each other.
  • Explain how enterprise applications and intranets promote business process integration and improve organisational performance.
  • Assess the role of the information systems function in a business.


As previously discussed in Chapter 1, the “digital firm” means connecting each functional area and each management level to one another so they can share information. Data input to the system in manufacturing must be made available to sales, accounting and logistics. Managers in the human resources department must have access to a range of information related to employees. Integrating information from different sources is important for the digital firm.

As we go through this chapter, we’ll look at the types of information systems organisations use at each management level.

Business Processes

Business processes refer to work that is organised, coordinated and focused to produce a product or service. Business processes also refer to the ways in which organisations coordinate and organise activities, information and knowledge to produce their products or services. Every firm has its own set of business processes.

The performance of a firm will to some extent depend on how well its business processes are designed and coordinated. Many business processes are linked to a specific functional area, such as sales and marketing, while others cross many different functional areas and will also require coordination across departments.

Business processes for the manufacturing and production area include product assembling and stock control. For the sales and marketing area, business processes include processing orders. In finance and accounting, business processes involves paying creditors. In the case of human resources, business processes involve evaluating employee performance.

How Information Technology Enhances Business Processes

Information systems enhance business processes in two main ways by:

  • Increasing the efficiency of existing processes
  • Enabling entirely new processes that have the potential to transform the business Information systems can improve the efficiency of a business by removing many of the manual activities. Some processes can be automated through the use of information systems. Internet banking enables customers to pay bills, transfer money and check account balances without any involvement of bank employees.

Information systems can transform the way the business operates and make completely new business processes possible. Companies such as Amazon and Apple have employed entirely new business processes based on new business models that would not be possible without information technology. Ryanair’s business processes both for purchasing tickets, checking in for flights and even checking in luggage would not be possible without information systems and the Internet in particular.


No single system can provide all the information required by an organisation. Even small firms have a collection of different systems, for example: e-mail systems, sales tracking systems, etc. In this section we look at the types of systems used in business from two different perspectives (summarised in Figure 2.1):

  • Functional perspective: identifying systems by their business function.
  • Constituency perspective: identifies systems in terms of the major organisational groups that they serve.



Systems from a Functional Perspective

There are four primary types of information systems that serve different functional areas:

  • Sales and marketing systems
  • Manufacturing and production systems
  • Finance and accounting systems
  • Human resources systems

Sales and Marketing Systems

Sales and marketing information systems assist the firm in marketing and sale of products and services to customers. An important operational system in this area is the sales order processing system which is used to capture customer orders. At a strategic level, information systems are used to forecast trends.

Manufacturing and Production Systems

Manufacturing and production information systems deal with the planning, development and production of products. An important system in this area is an inventory system which is used to provide information about the number of items held in inventory to support manufacturing and production activities.

Finance and Accounting Systems

Finance and accounting information systems keep a record of the firm’s financial assets and the flow of funds. The finance function is responsible for managing the firm’s financial assets such as cash, shares and other investments. To establish if the firm is getting the best return on its investments, the finance function must obtain information from both external and internal sources. The accounting function is responsible for maintaining and managing the firm’s financial records. The accounting function attains information mainly from sources internal to the firm.

An accounts receivable system is an example of a system used by the financial and accounting functional area. It tracks and stores important customer data, such as payment history, credit rating and billing history. Other systems used in this area include accounts payable and budgeting systems.

Human Resources Systems

Human resources information systems maintain employee records, record employee skills, job performance and training, and assist planning of employee compensation and career development. An example of a system used in the human resources area would be a performance appraisal tracking system which is used to track details of each employee’s performance evaluations.

Systems from a Constituency Perspective

Taking a functional perspective on systems tell us how systems serve the various functions but does not tell us much about how the systems help managers with managing the organisation. We can also look at systems in terms of the various levels of management and the type of decisions they support.

The four major types of systems from a contingency perspective are:

  • Transaction Processing Systems (TPS)
  • Management Information Systems (MIS
  • Decision Support Systems (DSS)
  • Executive Support Systems (ESS)

Transaction Processing Systems (TPS)

Transaction processing systems are generally found at the operational level of the organisation. Examples of these systems include order processing, material movement control, payroll, accounts payable and employee record keeping.

Transaction Processing Systems (TPS) support the day-to-day or week-to-week processing and recording of routine business transactions such as Orders, Despatch Notes, Invoices, Credit Notes, Payments etc. One example is a sales order processing system.

One of the most important applications of IT has been in making business operations more efficient. Computer based data processing is utilised at the operational level of organisations to handle transactions that were previously carried out by office workers. A major role of IT is in cost reduction through improving operational efficiency in transaction processing.

The primary function of a transaction processing system is transaction handling and record keeping as well as providing information. Transaction processing systems are used in functional areas such as Sales, Purchasing, Accounts etc.

Management Information Systems (MIS)

Management information systems provide managers with reports based largely on data taken from transaction processing systems. Those using management information systems (MIS) require information on a periodic basis rather than a daily basis like those using a transaction processing system. Managers also require information on an exception basis. That is, they need to know if production is higher or lower than the targeted rate or if they are over or under their budgets. They also need to know about trends.

MIS systems tend to have an internal orientation where the primary sources of information are internal and the users are normally members of the organisation. MIS systems are inclined to have limited flexibility in that they present information but usually don’t permit manipulation of the information by the user.

The information presented by MIS systems is retrieved from files or databases and is presented either on screen or in the form of a report. Figure 2.2 illustrates examples of a number of different types of screen presentation utilised by MIS systems.

Examples of management information systems include sales management, inventory control and annual budgeting.


Decision-Support Systems (DSSs)

Decision support systems (DSS) or business intelligence systems, assist managers with nonroutine decisions that are unique, rapidly changing and not easily specified in advance (semistructured decision-making). DSS are more analytical than MIS, as they use a variety of models to analyse internal and external data or compress large quantities of data for analysis. Decision-support systems are generally used at the middle management level.

Decision-support systems are used for complex “what-if” questions that necessitate internal and external data. Decisions made at this management level are predominantly semistructured so the information system needs to be able to respond to the unique needs of the managers.

A selection of decision-support systems includes sales region analysis, production scheduling, profitability analysis and contract cost analysis. Decision-support systems are discussed in more extensive detail in Chapter 8.

Executive Support Systems (ESSs)

Executive support systems (ESS) are used at the top levels of management. ESSs supply a generalised computing and communications environment that assists senior managers in addressing strategic issues and identifying long-term trends in the firm and its environment.

Typical decisions made at the strategic level are characteristically quite unstructured. Often there is no specific question to address, but rather a series of undefined situations executives may face. There are no straightforward, definable answers. These executives require summarised, historical information collected from all other levels throughout the organisation, together with large quantities of external data assembled from many sources.

ESS present graphs and data from a range of internal and external sources through an interface that is uncomplicated for senior managers to use. The information is regularly delivered to senior executives through a portal, which uses a Web interface to present integrated personalised business content.

Executive-support systems are discussed in greater detail in Chapter 8.

Relationship between Systems

The various forms of systems in the organisation exchange data with each another (See Figure 2.3). TPS provide a major source of data for other systems, in particular MIS and DSS, however these systems may also use other data. TPS are operational-level systems that gather transaction data. Some examples of TPS include payroll or order processing that track the flow of daily routine transactions that are essential for conducting business. DSS use data from TPS and also MIS. MIS rely heavily on data from TPS.

ESSs acquire the majority of their internal data from MIS and DSS. These different types of systems are loosely joined in most business firms, but increasingly firms are using new technologies to integrate information that resides in many different systems.




Office Information Systems

This is a category of systems that combine hardware and software and networks to improve the flow of information and enhance communications between employees in an organisation. These systems support the office tasks of creating publishing and distributing information. Office information systems include word processors, desktop publishers, e-mail, voicemail, fax, teleconferencing, videoconferencing and groupware.

The terms “office automation systems” is also used to describe these systems.


Enterprise Applications

Enterprise applications are systems that span functional areas, focus on carrying out business processes across the business firm and encompass all levels of management. Enterprise applications assist businesses in becoming more flexible and productive by coordinating their business processes more closely.

There are four main enterprise applications:

  • Enterprise systems
  • Supply chain management systems
  • Customer relationship management systems
  • Knowledge management systems

Each of these enterprise applications integrates a related set of functions and business processes to improve the performance of the organisation as a whole.

Enterprise Systems

Enterprise systems, or enterprise resource planning (ERP) systems, model and automate many business processes, for instance filling an order or scheduling a shipment, with the objective of integrating information throughout the company and eradicating complex, costly links between computer systems in different areas of the business. Information that was in the past split between different systems can now effortlessly flow throughout the company, allowing it to be shared by business processes in manufacturing, accounting, human resources and other areas of the organisation. Distinct business processes from sales, production, finance and logistics can be integrated into company-wide business processes that flow across organisational levels and functions.

The enterprise system assembles data from a range of key business processes and stores the data in a single comprehensive data repository where it can be utilised by other parts of the business. Managers are provided with information that is more accurate and timely for assisting in the coordination of the daily operations of the business and a firm-wide view of business processes and information flows.

Supply Chain Management Systems

Supply chain management (SCM) systems facilitate businesses with managing relationships with their suppliers. These systems help suppliers, purchasing firms, distributors and logistics companies share information about orders, production, inventory levels, and delivery of products and services so that they can source, produce and deliver goods and services more efficiently.

SCM systems increase firm profitability by reducing the costs associated with moving and manufacturing products and by enabling managers to make better decisions about how to organise and schedule sourcing, production and distribution.

Supply chain management systems are a form of inter-organisational system because they automate the flow of information across organisational boundaries. Firms that carefully manage their supply chains get the correct amount of products from their source to the point of consumption in the minimum amount of time and at the lowest cost.

Customer orders, shipping notifications, optimised shipping plans and other supply chain information, flow between the Warehouse Management System (WMS), Transportation Management System (TMS), and its back-end corporate systems.

Customer Relationship Management Systems

Customer relationship management (CRM) systems focus on coordinating the business processes regarding a firm’s interactions with its customers in sales, marketing and service, to fully optimise profits, customer satisfaction and customer retention. They merge customer data from numerous sources and communication channels to enable firms to identify profitable customers, acquire new customers, improve service and support and target products and services more accurately to particular customers’ preferences.

Knowledge Management Systems

The value of a firm’s products and services is based not only on its physical resources but also on intangible knowledge assets. Some firms perform better than others because they have superior knowledge regarding the creation, production, and delivery of products and services. Knowledge management systems support processes for discovering, codifying, sharing, and distributing knowledge, as well as processes for generating new knowledge and integrating external sources of knowledge.

ERP, SCM and CRM systems are discussed in more detail in Chapter 9 while knowledge management is discussed in Chapter 10.

Intranets and Extranets

Companies that do not boast the resources required to invest in enterprise applications can still achieve some information integration through the use of intranets and extranets.

Intranets normally present information to employees through a private portal that supplies a single point of access to information from numerous different systems and to documents using a Web interface. Corporate portals regularly feature e-mail, collaboration tools and tools for searching for internal corporate systems and documents. Companies can connect their intranets to internal company transaction systems, allowing employees to carry out actions fundamental to a company’s operations, such as checking the status of an order or granting a customer credit.

Extranets accelerate the flow of information between the firm and its suppliers and customers. They can facilitate different firms working collaboratively on product design, marketing and production. Intranets and Extranets are discussed in detail in Chapter 5. Enterprise applications and technologies are transforming firms’ relationships with customers, employees, suppliers and logistic partners into digital relationships via networks and the Internet.

E-Business, E-Commerce and E-Government        

Electronic business, or e-business, refers to the use of digital technology and the Internet to execute the major business processes in the organisation. E-business includes activities for the internal management of the firm and for coordination with suppliers and other business partners. It also includes electronic commerce or e-commerce.

E-commerce is the division of e-business that deals with buying and selling of goods and services over the Internet. It encompasses activities that support these market transactions, for example advertising, marketing, customer support, security, delivery and payment.

E-government (electronic government) refers to the use of the Internet and networking technologies in digitally enabling government and public sector agencies’ relationships with citizens, businesses and other arms of government. In addition to enhancing delivery of government services, e-government can make government operations more efficient, transparent and accountable. Furthermore, it can empower citizens by allowing them easier access to information. The different categories of e-government include:

  • G2C – government to citizens
  • G2B – government to business enterprises
  • G2G – inter-agency relationship within government

E-business and e-commerce are discussed in greater detail in Chapter 7.


The Information Systems Department

In all but the smallest of firms, the information systems department is the formal organisational unit responsible for information technology services. The information systems department is in charge of maintaining the hardware, software, data storage and networks that make up the firm’s IT infrastructure. The information systems department proposes new business strategies and new information-based products and services. It then coordinates both the development of the technology and the planned changes in the organisation.

The information systems department consists of specialists, such as:

  • Programmers: technical specialists who write the software instructions for computers.
  • Systems analysts: the principal liaisons between the information systems groups and the rest of the organisation.
  • Information systems managers: leaders of teams of programmers and analysts, project managers, physical facility managers, telecommunications managers or database specialists.

In many companies, the information systems department is headed by a chief technology officer; a senior manager who supervises the use of information technology in the firm. End users are employees of departments outside of the information systems group who use the information systems.

Small companies may not have a formal information systems group. Larger companies will normally have a separate information systems department

    Using Information Systems to Achieve Competitive Advantage

Firms with a competitive advantage over others, typically have access to special resources that others do not or are have special competencies that enable them to use resources more efficiently, or in ways that their competitors find difficult to imitate. Competitive advantage can be turned into higher profits for the company. Porters five forces model can be used to understand the competitive force in an industry and how they affect profitability.

Porter’s Competitive Forces Model

Michael Porter’s competitive forces model (Figure 2.4), describes five competitive forces that shape the fate of the firm.

  • Intensity of Rivalry between competitors: Generally the strongest of the five forces. Rivalry can be focused on such factors as; price, performance features, new product innovation, quality, durability, warranties, after-sale service and brand image.
  • Threat of new market entrants: New companies have certain advantages, such as not being locked into old equipment, as well as disadvantages, such as less expertise and little brand recognition. Barriers to entry can include; economies of scale, capital costs, and access to supplier, distributors, expertise and customer loyalty.
  • Threat of Substitute products and services: These are substitutes that customers might use if prices become too high. For example, Internet telephone services can substitute for traditional telephone services. The more substitute products and services available in an industry, the harder it is to control price and the lower profit margins will be as a result.
  • Bargaining power of Customers: The power of customers grows if they can easily switch to a competitor’s products and services, or if they can force a business and its competitors’ to compete on price alone where there is little product differentiation and all prices are known instantly (such as on the Internet).
  • Bargaining power of Supplier’s: The more different suppliers that are available to a firm, the greater control the firm can exercise over suppliers in terms of price, quality and delivery schedules. Where there are many suppliers in an industry their power will be low.


Information System Strategies for dealing with Competitive Forces

Michael Porter developed a number of generic strategies that can be used by companies to deal with competitive forces. A company will normally choose the particular strategy which best suits the particular competitive advantage they want to pursue in the market place. The following section shows how information systems can be used with each of the following strategy options:

  • Low-cost leadership: Information systems can be used to achieve the lowest operational costs and the lowest prices. For example, a supply chain management system can be used to directly link customers to distribution, production and supply chains, helping lower inventory and distribution costs.
  • Product differentiation: Information systems can enable new products and services, or greatly change the customer convenience in using existing products and services. For example; Dell uses mass customisation, offering individually tailored computers using the same production resources as mass production, to customise computers to individual customer needs.
  • Focus on market niche: Use information systems to enable a specific market focus and serve this narrow target market better than competitors. Information systems support this strategy by producing and analysing data for finely tuned sales and marketing techniques.

The Internet’s Impact on Competitive Advantage

The Internet has seriously damaged some industries and has severely threatened more. It has also created entirely new markets and formed the basis for thousands of new businesses.

Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense. Internet technology is based on universal standards, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the Web. Some industries, such as the travel industry and the financial services industry, have been more impacted than others. However, the Internet also creates new opportunities for building brands and establishing very large and loyal customer bases, as is the case for Google,  Facebook and eBay.

Table 2.5 summarises some of the potential impacts of the Internet on the five competitive forces identified by Porter.

Table 2.5: The impact of the internet on the five competitive forces

Five forces Impact of the internet
Intensity of Rivalry The internet has had the effect of reducing differences between companies and makes it more difficult for any one company to maintain competitive advantage
Threat of new entrants The internet reduces the barriers to entry making it easier for a new company to enter a market. E-commerce can be used instead of investing in new shops.
Threat of Substitutes The internet has enabled new substitutes to emerge and new ways of meeting customer needs.
Bargaining power of Customers This is increasing as customers can use the internet to find cheaper product and services.
Bargaining power of Suppliers Companies can use the internet to source new suppliers thus reducing their power. Suppliers can also benefit from the power of the internet to eliminate intermediaries and in some cases enables them to sell directly to consumers.


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