Chapter 01

Chapter 1 Accounting Information Systems:

An Overview

Chapter 2 Overview of Business Processes

Chapter 3 Systems Development and

Documentation Techniques

Chapter 4 Relational Databases

Conceptual Foundations of Accounting Information Systems

Part I

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C H A P T E R 1

After studying this chapter, you should be able to:

● Distinguish between data and information, discuss thecharacteristics of useful information, and explain how to determine the value of information.

● Explain what an accounting information system (AIS) is and describe the basic functions it performs.

● Discuss why studying accounting information systems is important.

● Explain the role an AIS plays in a company’s value chainand discuss how the AIS can add value to a business.

● Discuss how an AIS can provide management withinformation for decision making.

● Compare and contrast the basic strategies and strategicpositions that a business can adopt.


INTEGRATIVE CASE S&S, INC.

After working for several years as a regional manager for a national retailing

organization, Scott Parry decided to open his own business. Susan Gonzalez, one

of his district managers, had also wanted to go into business for herself. Together

they formed S&S, Inc., to sell appliances and consumer electronics devices. Scott

and Susan decided to pursue a “clicks and bricks” strategy. They began by renting

a large and attractive building in a busy part of town but planned to add an elec-

tronic storefront as well.

Scott and Susan each contributed enough money to see them through the

first six months of business. They estimated that they needed to hire 10 to 15

employees—3 or 4 to stock the shelves, 3 or 4 customer sales representatives, and

4 to 7 checkout clerks. They plan to begin hiring these employees within the next

two weeks.

Scott and Susan plan to hold the grand opening of S&S in five weeks. As they

review what remains to be done to meet that deadline, they realize that they have

not yet made the following important decisions:

1 How should they organize their accounting records so that the financial

statements their banker requires can be easily produced?

2 How can they design a set of procedures to ensure that they meet all of

their government obligations, such as remitting sales, income, and payroll

taxes?

Accounting InformationSystems: An Overview


4 Chapter 1: Accounting Information Systems: An Overview

3 How should they price their products to be competitive yet earn a profit?

4 Should they extend credit, and if so, on what terms? How can they accu-

rately track what customers owe and have paid?

5 How should they hire, train, and supervise their employees? What com-

pensation and benefits packages should they offer, and how should they

process payroll?

6 How can they track cash inflows and outflows so that S&S is not caught in

a cash squeeze?

7 What is the appropriate product mix and quantities to carry, given S&S’s

limited showroom space?

8 What functionality should be provided on S&S’s Web site?

Although Scott and Susan could make many of these decisions on the basis of an

educated guess or “gut feel,” they know they will make better decisions if they

obtain additional information. A well-designed accounting information system

(AIS) can solve some of these issues. Moreover, if properly designed, the AIS can

provide most of the information needed to make the remaining decisions.

IntroductionWe begin this chapter by defining several terms, such as system, data, and information.We then explain what an accounting information system (AIS) is. Next we discuss whythe AIS is an important topic to study. Then we describe the role of the AIS in the valuechain and how an AIS adds value to an organization. Then we discuss how the AIS canprovide information for decision making. We conclude by describing the basic strate-gies and strategic positions that organizations can pursue.

Systems, Data, and InformationA system is a set of two or more interrelated components that interact to achieve agoal. Systems are almost always composed of smaller subsystems, each performing aspecific function important to and supportive of the larger system of which it is a part.For example, the college of business is a system composed of various departments,each of which is a subsystem. Yet the college itself is a subsystem of the university.

Each subsystem is designed to achieve one or more organizational goals. Whenthe systems concept is used in systems development, changes in subsystems cannotbe made without considering the effect on other subsystems and the system as awhole. Goal conflict occurs when a decision or action of a subsystem is inconsistentwith the goals of another subsystem or the system as a whole. Goal congruence isachieved when a subsystem achieves its goals while contributing to the organization’soverall goal. Subsystems should maximize organizational goals, even if subsystemgoals are not maximized. The larger the organization and the more complicated thesystem, the more difficult it is to achieve goal congruence.

The systems concept also encourages integration, which eliminates duplicaterecording, storage, reporting, and other processing activities in an organization. Forexample, companies that used to have separate programs to prepare customer state-ments, collect cash, and maintain accounts receivable records now combine thesefunctions into a single application.


Systems, Data, and Information 5

Data are facts that are collected, recorded, stored, and processed by an informa-tion system. Data usually represent observations or measurements of business activi-ties that are of importance to information system users. Several kinds of data need tobe collected in businesses, such as:

� Facts about the activities that take place� The resources affected by the activities� The people who participate in the activity

For example, data need to be collected about a sales event (e.g., the date of thesale, total amount), the resource being sold (e.g., the identity of the goods or services,the quantity sold, unit price), and the people who participated in the sale (e.g., theidentity of the customer and the salesperson).

Information is data that have been organized and processed to provide meaning toa user. Users typically need information to make decisions or to improve the decision-making process. As a general rule, users can make better decisions as the quantity andquality of information increase.

However, there are limits to the amount of information the human mind can effec-tively absorb and process. Information overload occurs when those limits are passed.Information overload is costly, because decision-making quality declines while the costsof providing that information increase. Consequently, information system designersmust consider how advances in information technology (IT) can help decision makersmore effectively filter and condense information, thereby avoiding information overload.For example, Wal-Mart has over 500 terabytes (trillions of bytes) of data in its datawarehouse. That is equivalent to 2000 miles of bookshelves or about 100 million digitalphotos. Wal-Mart has invested heavily in technology so that it can effectively collect,store, and manage these data. Most important, it has spent a great deal of time andmoney figuring out how to turn all of these data into useful information.

The value of information is the benefit produced by the information minus thecost of producing it. The major benefits of information are a reduction of uncertainty,improved decisions, and a better ability to plan and schedule activities. The costs are thetime and resources spent collecting, processing, and storing data, as well as distributinginformation to decision makers. Unfortunately, determining the value of informationis not easy. Information costs and benefits can be difficult to quantify, and it is difficultto determine the value of information before it has been produced and utilized.Nevertheless, the expected value of information should be calculated as effectively aspossible so information is not produced whose costs exceed its benefits.

To illustrate the value of information consider the case of 7-Eleven. The Japaneselicensed the 7-Eleven name in 1973 from Southland Corp. after the 7-Eleven conve-nience store was already a big success. 7-Eleven Japan felt that information about itscustomers and products had value and invested heavily in IT. The U.S. stores did notmake the IT investment.

Each 7-Eleven store in Japan was given a computer that:

� Keeps track of the 3,000 items sold in each store and determines what productsare moving, at what time of day, and under what weather conditions.

� Keeps track of customers (what and when they buy). If their best customersare single men, for example, the store makes sure it has the fresh rice dishesthey purchase on their lunch hour and at the end of the workday.

� Orders sandwiches and rice dishes from suppliers automatically. Orders areplaced and filled three times a day so stores can always have fresh food. Sincefood orders take as many as 12 hours to prepare, 7-Eleven allows its suppliersto access sales data in their computers so they can forecast demand.

� Coordinates deliveries with suppliers. This allows the stores to reduce the num-ber of deliveries from 34 to 12 a day, resulting in less clerical receiving time.

� Prepares a color graphic display that indicates which store areas contribute themost to sales and profits.



The information produced by this system has a great deal of value. Average dailysales of 7-Eleven Japan were 30% higher and its operating margins almost double thoseof its closest competitor. And what of Southland and its 7-Eleven stores in the UnitedStates? Profits declined and Southland eventually had to file for bankruptcy. Who cameto the company’s rescue? 7-Eleven Japan and its parent company, who purchased 64%of Southland. 7-Eleven Japan obviously made a wise choice in assessing the value ofinformation about their stores, products, and customers.

Table 1-1 presents seven characteristics that make information useful and meaning-ful for decision making.

Information can be provided to both internal and external users. The informationsupplied to external users is either mandatory information required by a governmen-tal entity (such as a report to the IRS on taxable income and withholdings) or essentialinformation required to conduct business with external parties (such as purchaseorders and customer billings). Most internal information is discretionary information,since choices must be made regarding what information should be made available, towhom, and how frequently. The primary consideration in producing mandatory andessential information is to minimize costs while meeting minimum standards of relia-bility and usefulness and meeting regulatory requirements. The primary considerationin producing discretionary information is that its benefits exceed its costs. Internalreporting is more difficult than external reporting because most managerial decisionsdemand more detailed information than does external reporting and there are moreways to report information to internal users than to external users.

What Is an AIS?An accounting information system (AIS) is a system that collects, records, stores, andprocesses data to produce information for decision makers. This is illustrated in Figure 1-1.

An AIS can be a very simple paper-and-pencil-based manual system, a very com-plex system using the very latest in computers and information technology, or somethingbetween these two extremes. Regardless of the approach taken, the process is the same.The AIS and the people who use it must still collect, enter, process, store, and report dataand information. The paper and pencil or the computer hardware and software aremerely the tools used to produce the information.

There are six components of an AIS:

1 The people who operate the system and perform various functions2 The procedures and instructions, both manual and automated, involved in col-

lecting, processing, and storing data about the organization’s activities

Relevant Information is relevant if it reduces uncertainty, improves decision makers’ ability to make predictions, or confirms or corrects their prior expectations.

Reliable Information is reliable if it is free from error or bias and accurately represents the events or activities of the organization.

Complete Information is complete if it does not omit important aspects of the underlying events or activities that it measures.

Timely Information is timely if it is provided in time for decision makers to make decisions.

Understandable Information is understandable if it is presented in a useful and intelligible format.

Verifiable Information is verifiable if two knowledgeable people acting independently would each produce the same information.

Accessible Information is accessible if it is available to users when they need it and in a format they can use.

Table 1-1Characteristics of UsefulInformation


Why Study Accounting Information Systems? 7

AIS

AIS

Information DecisionData

User

Figure 1-1An AIS Processes Data to Produce Information for Decision Makers

3 The data about the organization and its business processes4 The software used to process the organization’s data5 The information technology infrastructure, including computers, peripheral

devices, and network communications devices used to collect, store, process,and transmit data and information

6 The internal controls and security measures that safeguard the data in the AIS

Together, these six components enable an AIS to fulfill three important businessfunctions:

1 Collect and store data about organizational activities, resources, and personnel.These topics are covered in greater detail in Chapter 2.

2 Transform data into information that is useful for making decisions so manage-ment can plan, execute, control, and evaluate activities, resources, and person-nel. Decision making is discussed in greater detail later in this chapter.

3 Provide adequate controls to safeguard the organization’s assets, including itsdata, to ensure that the assets and data are available when needed and the data areaccurate and reliable. Control concepts are discussed in detail in Chapters 5–9.

Why Study Accounting Information Systems?This section explains several reasons why a student’s knowledge of accounting is notcomplete without an understanding of accounting information systems.

Study of the AIS Is Fundamental to AccountingIn Statement of Financial Accounting Concepts No. 2, the Financial AccountingStandards Board defined accounting as being an information system. It also stated thatthe primary objective of accounting is to provide information useful to decision mak-ers. Therefore, it is not surprising that the Accounting Education Change Commissionrecommended that the accounting curriculum should emphasize that accounting is aninformation identification, development, measurement, and communication process.The commission suggested that the accounting curriculum should be designed to pro-vide students with a solid understanding of three essential concepts:

1 The use of information in decision making2 The nature, design, use, and implementation of an AIS3 Financial information reporting

The other accounting courses you take (financial, managerial, tax, and auditing)focus on your role as a user or provider of information (making journal entries, prepar-ing or reading financial statements or other reports, etc.). It is assumed that you have



access to certain data and can address questions about how to account for, report, oraudit the information. For example, a managerial accounting class may discuss how touse information to make decisions but never discuss how information is collected,stored, or made available to the decision maker. The question of where the informationcomes from is often not even asked in these classes. The answer is that the AIS pro-vides the information. In contrast, the AIS course focuses on understanding how theaccounting system works: how to collect data about an organization’s activities andtransactions; how to transform that data into information that management can use torun the organization; and how to ensure the availability, reliability, and accuracy of thatinformation. Thus, the AIS course complements the other accounting courses you take.

The accounting information systems class is unlike most other accounting classes.It is not a number-crunching course—the course is more concept driven than numbersdriven. Some students feel the AIS course is more ambiguous than other accountingcourses because there often are no numbers to crunch to get the “one right answer.”Instead, there may be two or three or more “right answers.” There are choices amongalternative ways to develop an AIS or gather data and process it to produce informa-tion. Each alternative will work, but each has pros and cons. The developer must selectthe best mix of advantages and disadvantages to solve a problem or achieve a desiredresult.

AIS Skills Are Important to Your Career SuccessYou may intend to pursue a career in public accounting. Auditors need to evaluatethe accuracy and reliability of information produced by the AIS. To do so they mustunderstand how a system is developed, how it operates, and how it can be properlycontrolled. They must be able to evaluate and understand the strengths and weaknessesof an AIS. This course provides you with that knowledge; indeed, that is why manyuniversities make the AIS course a prerequisite to the auditing course. If you special-ize in tax, you need to understand enough about your client’s AIS to be confident thatthe information used for tax planning and compliance work is complete and accurate.

Many students work in private industry or for not-for-profit organizations.Accounting systems work is one of the most important activities performed by corpo-rate accountants. Other important activities include designing internal control systems,business process improvements, and long-term strategic planning.

A third career option is management consulting. One of the fastest-growing typesof consulting services entails the design, selection, and implementation of a new AIS.Indeed, the American Institute of Certified Public Accountants (AICPA) has recentlycreated a new credential, the Certified Information Technology Professional (CITP),to provide CPAs with a means of documenting their systems expertise (see Focus 1-1).The AIS course provides an introduction to that body of knowledge.

The AIS Course Complements Other Systems CoursesMany systems courses help you develop specialized skills in such areas as the designand implementation of information systems, databases, expert systems, and telecom-munications. The AIS course differs from these information systems courses in itsfocus on accountability and control. These issues are important because in most largebusinesses the managers are not the owners. Instead, the owners have entrusted man-agement with assets and hold them accountable for their proper use. Data and infor-mation are some of an organization’s most valuable assets. To see why, consider whatwould happen if an organization lost all information about customers’ balances, or if acompetitor obtained a list of its most profitable customers. Clearly, the AIS mustinclude controls to ensure the safety and availability of the organization’s data.Controls are also needed to ensure that the information produced from that data is bothreliable and accurate. These topics usually receive little attention in other systemscourses. Thus, the AIS course complements other systems courses you may take and isan important part of the information systems curriculum.


Why Study Accounting Information Systems? 9

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CITP—A New Specialty Designation for CPAs

he AICPA offers several specialty designationsthat CPAs can earn. One of these is theCertified Information Technology Professional(CITP). The CITP designation identifies CPAs

who possess a broad range of technological knowledgeand understand how organizations use informationtechnology to achieve their business objectives. The newCITP designation reflects the AICPA’s recognition of theimportance of information technology and itsinterrelationship with accounting.

To be awarded the CITP, a CPA must earn 100 points in theareas of business experience, lifelong learning, and an optionalexam. Candidates must earn a minimum of 15 points, and amaximum of 75 points, in the area of business experience.The number of points awarded depends on the number of hoursspent working in the following areas in the three-year periodpreceding application for the CITP designation:

� Information Technology Strategic Planning� Information Systems Management

� Systems Architecture� Business Applications and E-Business� Security, Privacy, and Contingency Planning� Systems Development, Acquisition, and Project

Management� Systems Auditing and Internal Control� Databases and Database Management

A candidate for the CITP designation must also earn aminimum of 30 points, up to a maximum of 70 points, inthe category of lifelong learning. Lifelong learning includescontinuing education, additional degrees, and obtaining ormaintaining other technology-related certifications duringthe three-year period preceding application for the CITPdesignation.

An optional exam is also available for candidates whohave earned at least 60 points in the areas of businessexperience and lifelong learning. Candidates can earn40 points by passing an exam that covers the eight topicalareas listed in the preceding discussion of work experience.

AIS Topics Are Tested on the New CPA ExamThe computerized uniform CPA Exam is a four section, 14-hour exam. A new section,Business Environment & Concepts, was added in April 2004. About 25% of the newsection deals with information technology implications in the business environment. TheAICPA Board of Examiners has approved and adopted content specification outlinesfor each of the four sections. All of the information technology concepts on the approvedcontent specification outlines are covered in this text. Therefore, studying accountinginformation systems using this text is a good way to prepare for the CPA Exam.

The Impact of the AIS on Corporate Strategy and CultureFigure 1-2 shows three factors that influence the design of an AIS: developments ininformation technology (IT), business strategy, and organizational culture. The businesspress frequently report ways IT is changing the way accounting and other business activ-ities are performed. Because this impact is likely to continue, throughout this book wewill focus on understanding how IT can be used to improve the performance of an AIS.

The AIS course, however, is more than a “computer course.” To be sure, your pro-fessor will likely assign out-of-class projects designed to help you refine and improveyour computer skills. Nevertheless, you also need to know how to evaluate the costsand benefits of new IT developments. This requires developing a basic understandingof business strategies and how IT can be used to implement them, as well as how newIT developments create an opportunity to modify those strategies (note the arrow fromIT to strategy in Figure 1-2). These topics are introduced in this chapter and will con-tinue to be discussed throughout the text.

Because an AIS functions within an organization, it should be designed to reflect thevalues of that organization’s culture. Thus, Figure 1-2 shows that organizational cultureinfluences AIS design. Note that the arrow between organizational culture and the AIS isbidirectional. Although the organization’s culture should influence the design of its AIS,

T



OrganizationalCulture

InformationTechnology

BusinessStrategy

AIS

Figure 1-2Factors Influencing Design of the AIS

1This section is based on Michael E. Porter and Victor E. Millar, “How Information Gives You CompetitiveAdvantage” Harvard Business Review, (July–August 1985), pp. 149–160.

it is important to recognize that the design of the AIS can also influence the organization’sculture by controlling the flow of information within the organization. For example, anAIS that makes information easily accessible and widely available is likely to increasepressures for more decentralization and autonomy. Throughout this text we discuss thepotential behavioral ramifications of making changes to a company’s AIS.

The Role of the AIS in the Value ChainThe objective of most organizations is to provide value to their customers.1 This requiresperforming a number of different activities. Figure 1-3 shows that those activities can beconceptualized as forming a value chain.

An organization’s value chain consists of five primary activities that directly pro-vide value to its customers:

1 Inbound logistics consists of receiving, storing, and distributing the materialsan organization uses to create the services and products it sells. For example,receiving, handling, and storing steel, glass, and rubber are some of the inboundlogistics activities of an automobile manufacturer.

2 Operations activities transform inputs into final products or services. Forexample, assembly-line activities at an automobile manufacturer convert rawmaterials into a finished car.

3 Outbound logistics activities distribute finished products or services to cus-tomers. For example, shipping automobiles to car dealers is an outbound logis-tics activity.

4 Marketing and sales activities help customers buy the organization’s productsor services. Advertising is an example of a marketing and sales activity.

5 Service activities provide post-sale support to customers. Examples includerepair and maintenance services.

Support activities allow the five primary activities to be performed efficientlyand effectively. They are grouped into four categories:

1 Firm infrastructure is the accounting, finance, legal, and general administra-tion activities that allow an organization to function. The AIS is part of the firminfrastructure.


The Role of the AIS in the Value Chain 11

Primary Activities

1. Firm infrastructure2. Human resources3. Technology4. Purchasing

1. Inbound Logistics

2. Operations 3. Outbound Logistics

4. Marketing and Sales

5. Service

ManufacturingRepackaging

DistributionShipping

AdvertisingSelling

RepairMaintenance

Support Activities

Receivingand StoringMaterials

Figure 1-3The Value Chain

2 Human resources activities include recruiting, hiring, training, and providingemployee benefits and compensation.

3 Technology activities improve a product or service. Examples include researchand development, investments in new information technology, Web site devel-opment, and product design.

4 Purchasing activities procure raw materials, supplies, machinery, and thebuildings used to carry out the primary activities.

Primary and support activity systems have multiple activities. For example, thesales and marketing system includes market research, calling on customers, order pro-cessing, and credit approval activities.

Information technology can be used to redesign supply chain systems, yieldingtremendous benefits and large cost savings. For example, Tennessee Valley Authority,a power generator, reengineered its supply chain and created an enterprisewide systemthat provides up-to-the-minute information, rather than the “current once a day” sys-tem that it replaced. The new system replaced 20 smaller and often incompatiblesystems and reduced head count by 89 people. The redesigned system is expected tosave $54 million in its first five years of existence.

The primary and support activity systems are subsystems of the value chain sys-tem. In addition, an organization’s value chain is itself a part of a larger system calleda supply chain. As shown in Figure 1-4, a manufacturing organization interacts withits suppliers and distributors.

By paying attention to the interorganizational linkages in its supply chain, a com-pany can improve its performance by helping the other organizations in the supplychain to improve their performance. In the opening case, for example, S&S canimprove its purchasing and inbound logistics activity by implementing a just-in-timeinventory management system. S&S’s costs are reduced because its purchasing andinbound logistics activities are performed more efficiently and because less of itscapital is tied up in inventory. S&S can reap additional benefits if it links its new sys-tems with its suppliers to help them perform some of their primary value chain activi-ties more efficiently and effectively. For example, by providing more detailed andtimely information about its inventory needs, S&S can help its suppliers more effi-ciently plan their production schedules to meet S&S’s needs. This reduces their costs,

Raw MaterialsSupplier

Manufacturer

Distributor

Retailer

Consumer

Figure 1-4The Supply Chain



and part of that reduction is likely to be passed on to S&S in the form of lower prod-uct costs.

The problems that result from not having a good supply chain system are illustratedby examining what happened to Limited Brands. Limited experienced explosive growth,including acquisitions of other retail companies, such as Lane Bryant, Victoria’s Secret,Lerner, and Abercrombie & Fitch. These acquisitions left Limited with a tangled web ofover 60 incompatible information systems. This complexity caused significant problemswith its supply chain system. The problems came to a head one night when 400 trailersconverged on a distribution center parking lot that could only fit 150 trailers. The trailersblocked traffic along all the highways around the distribution center and caused count-less traffic and community problems. No one in Limited knew where all the trailers camefrom, what the merchandise was, or where it was to be sent. Chaos reigned for sometimeuntil the merchandise could be routed to stores and other distribution centers.

Limited is working to solve its information systems problems. It is replacing its older,incompatible systems with a new, integrated system that will greatly improve its supplychain processes and technologies. Limited hopes the new systems will result in highersales, more flexibility in responding to market demands, and automated logistics tasks soemployees can focus on selling products instead of ordering them. Developing the systemwill not be easy. Limited has over a thousand suppliers and sells its merchandise usingvarious platforms, including retail stores, the Internet, catalogs, and third-party retailers.

How an AIS Can Add Value to an OrganizationAs a support activity, the AIS adds value by providing accurate and timely informationso the five primary value chain activities can be performed more effectively and effi-ciently. A well-designed AIS can do this by:

1 Improving the quality and reducing the costs of products or services.For example, an AIS can monitor machinery so operators are notified immedi-ately when performance falls outside acceptable quality limits. This helps main-tain product quality. It also reduces the amount of wasted materials and the costsof having to rework anything.

2 Improving efficiency. A well-designed AIS can make operations more efficientby providing more timely information. For example, a just-in-time manufacturingapproach requires constant, accurate, up-to-date information about raw materialsinventories and their locations.

3 Sharing knowledge. A well-designed AIS can make it easier to share knowl-edge and expertise, perhaps thereby improving operations and even providing acompetitive advantage. For example, the largest public accounting firms all usetheir information systems to share best practices and to support communicationbetween people located at different offices. Employees can search the corporatedatabase to identify the relevant experts to provide assistance for a particularclient; thus, all of a public accounting firm’s accumulated international expertisecan be made available to service any local client.

4 Improving the efficiency and effectiveness of its supply chain. For example,allowing customers to directly access the company’s inventory and sales order entrysystems can reduce the costs of sales and marketing activities. Moreover, if suchaccess reduces customers’ costs and time of ordering, both sales and customer reten-tion rates may increase.

5 Improving the internal control structure. Security, control, and privacy areimportant issues in today’s world. An AIS with the proper internal control struc-ture can protect systems from problems such as fraud, errors, equipment andsoftware failures, and natural and political disasters.

6 Improving decision making. Because improved decision making is so impor-tant it is discussed more fully in the next section.

Focus 1-2 discusses how information technology added value to UPS.


Providing Information for Decision Making 13

Providing Information for Decision MakingDecision making is a complex, multistep activity: identify the problem, collect and inter-pret information, evaluate ways to solve the problem, select a solution methodology, andimplement the solution. An AIS can provide assistance in all phases of decision making.Reports can help to identify potential problems. Different decision models and analyticaltools can be provided to users. Query languages can facilitate the gathering of relevant dataupon which to make the decision. Various tools, such as graphical interfaces, can help thedecision maker interpret decision model results and evaluate and choose among alternativecourses of action. In addition, the AIS can provide feedback on the results of actions.

Information can improve decision making in several ways:

� It identifies situations requiring management action. For example, a costreport with a large variance might stimulate management to investigate and, ifnecessary, take corrective action.

� It provides a basis for choosing among alternative actions by reducing uncertainty.For example, information is used to set prices and determine credit policies.

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p until the early 1980s, UPS invested heavilyin training its employees to perform tasks inless time but spent comparatively little moneyon new information technology (IT). Back then,

when you wanted to ship something you called UPS,scheduled a pickup, and waited until you were notifiedthat the shipment had arrived at its destination.

Today, UPS is among the leaders in IT spending (over $1billion a year) because of the value IT adds to its business.It has 4,700 employees devoted to developing andmaintaining proprietary software and a Web sitethat almost 19 million people visit each day. It has fifteenhuge mainframe computers and almost 9,000 servers.This technology allows UPS customers to control eachshipment (15 million a day) from the time a delivery orderis initiated to the time it arrives at its destination. Here ishow the system works:

� Customers use UPS software or go to the UPS Website to initiate a delivery. They create labels con-taining detailed information on the sender, as wellas the time the shipment should arrive at its desig-nated destination. They print the labels and attachthem to their shipment.

� They schedule a pickup time electronically.� The UPS system routes the label information to

the distribution center closest to the shipment’sdestination.

� At the distribution center, proprietary softwareuses the shipment’s destination, desired arrivaltime, traffic and weather conditions, and streetinformation (such as one-way streets) to create

the most efficient delivery route. Drivers havehandheld computers with a global-positioningsystem (GPS) that guide them on their routes.

� The system creates a label that specifies where toput the shipment on the delivery truck so the earli-est shipments are nearest the driver. Drivers aver-age 100 pickups and deliveries a day, and boxesloaded out of order can delay the driver for aslong as 30 minutes.

� Customers can log onto the UPS Web site andreroute or track their shipment. The GPS allowsUPS to predict accurately the approximate arrivaltime of the shipment.

� The handheld computer is programmed to beep atthe driver if a shipment is delivered to the wrongaddress or forgotten.

UPS’s commitment to IT has produced dramatic results.The most recent system improvements have alloweddrivers to make seven to nine more stops each day, havereduced the number of miles UPS drives each year by1.9 million, and save over $600 million per year inoperating costs.

However, UPS is not sitting back congratulating itselfon how well it has used IT to improve its business. The UPSsystem is a work in progress. UPS continues to innovateand find ways to use IT to become even more efficient andbetter serve the customer.

Source: Corey Dade, “How UPS Went from Low-Tech to an IT Power—and Where It’s Headed Next,” The Wall Street Journal, July 24, 2006, R4.

U

The Use of Technology by UPS



� Information about the results of previous decisions provides valuable feedbackthat can be used to improve future decisions. For example, if a particular mar-keting strategy is tried and the information gathered indicates that it did notsucceed, a different marketing strategy is selected.

� An AIS can improve decision making by providing accurate information in atimely manner. For example, Wal-Mart has created an enormous database thatcontains detailed information about sales transactions at each of its stores.It uses this information to optimize the amount of each product carried at eachstore. It also analyzes the data to discover patterns of items that seem to bepurchased together, and it uses such information to improve the layout of mer-chandise to encourage additional sales of related items. In a similar vein,Amazon.com uses its database of sales activity to suggest additional booksthat customers may want to purchase.

The degree to which an AIS can support decision making depends, however, onthe type of decision being made. Decisions can be categorized either in terms of thedegree of structure that exists or by their scope.

Decision StructureDecisions vary in terms of the degree to which they are structured. Structured decisionsare repetitive, routine, and understood well enough that they can be delegated to lower-level employees in the organization. For example, the decision about extending credit toestablished customers only requires knowledge about the customer’s credit limit andcurrent balance. Structured decisions can often be automated.

Semistructured decisions are characterized by incomplete decision making rulesand the need for subjective assessments and judgments to supplement formal dataanalysis. An example is setting a marketing budget for a new product. Although suchdecisions usually cannot be fully automated, they are often supported by computer-based decision aids.

Unstructured decisions are nonrecurring and nonroutine. Examples includechoosing the cover for a magazine, hiring senior management, and selecting basicresearch projects to undertake. No framework or model exists to solve such problems.Instead, they require considerable judgment and intuition. Nevertheless, unstructureddecisions can be supported by computer-based decision aids that facilitate gatheringinformation from diverse sources.

Decision ScopeDecisions vary in terms of their scope. Operational control relates to the effectiveand efficient performance of specific tasks. Examples include decisions relating toinventory management and extending credit.

Management control relates to the effective and efficient use of resources foraccomplishing organizational objectives. Examples include decisions relating to bud-geting, developing human resource practices, and deciding on research projects andproduct improvements.

Strategic planning relates to establishing organizational objectives and policiesfor accomplishing those objectives. Examples include decisions relating to settingfinancial and accounting policies, developing new product lines, and acquiring newbusinesses.

A correspondence exists between a manager’s level in an organization and his orher decision-making responsibilities. Top management faces unstructured and semi-structured decisions involving strategic planning issues. Middle managers deal withsemistructured decisions involving management control. Lower-level supervisorsand employees face semistructured or structured decisions involving operationalcontrol.


The AIS and Corporate Strategy 15

2The material in this section is based on Michael E. Porter, “What Is Strategy?” Harvard Business Review(November–December 1996), pp. 61–78.

The AIS and Corporate StrategyThere are many opportunities to invest in IT to improve decision making. Mostorganizations, however, do not have unlimited resources to invest in improving theirinformation systems. Therefore, it is important to identify which potential AISimprovements are likely to yield the greatest return. Making this decision wiselyrequires an understanding of the organization’s overall business strategy. To illustratethis, consider the results of a “State of the CIO” survey conducted by CIO magazine.Five hundred Chief Information Officers were asked to identify the three most impor-tant skill sets for a CIO. Over 75% of the respondents put strategic thinking andplanning on their list.

Strategies and Strategic PositionsMichael Porter, world-renowned professor of business at Harvard, argues that thereare two basic business strategies that companies can follow:2

1 A product differentiation strategy entails adding features or services not pro-vided by competitors to a product so you can charge customers a premium price.

2 A low-cost strategy entails striving to be the most efficient producer of a prod-uct or service.

Sometimes a company can succeed in both producing a better product than its com-petitors and doing so at costs below its industry average. Usually, however, companiesmust choose between the two basic strategies. If they concentrate on being the lowest-cost producer, they will have to forego some value-added features that might differenti-ate their product. If they focus on product differentiation, they most likely will not havethe lowest costs in their industry. Thus, a business strategy involves making choices.

Porter argues that the fundamental choice companies must make involves select-ing a specific strategic position they wish to adopt. He describes three basic strategicpositions:

1 A variety-based strategic position involves producing or providing a subset ofthe industry’s products or services. For example, Jiffy Lube Internationalfocuses on oil changes and lubrication services rather than a wide range of auto-motive repair services.

2 A needs-based strategic position involves trying to serve most or all of theneeds of a particular group of customers in a target market. For example, AARPfocuses on retirees.

3 An access-based strategic position involves serving a subset of customers whodiffer from other customers in terms of factors such as geographic location orsize, which creates different requirements for serving those customers. Forexample, the stock brokerage offices of Edward Jones are located primarily insmaller towns and cities not served by the larger brokerage houses.

Porter explains that these three basic strategic positions are not mutually exclusiveand, indeed, often overlap. For example, Southwest Airlines employs a variety-basedstrategic position because it only offers a subset of the products provided by the airlineindustry (no first-class seating, no meals, no international flights). Southwest alsoemploys a needs-based strategic position in that it has identified a specific target market(price-sensitive leisure travelers) for which it designs its services. Finally, Southwestemploys an access-based strategic position because it does not service all markets.



Choosing a strategic position is important because it enables a company to focusits efforts; otherwise it risks trying to be everything to everybody. Porter argues thatthe specific strategic position an organization selects is not important. What is impor-tant is to design the organization’s activities so they mutually reinforce one another infilling the selected strategic position and in implementing the business strategy. Thisresults in synergy, wherein the entire system of organizational activities is greater thanthe sum of each individual part. This makes it difficult for competitors to successfullyimitate, because they must do more than just mimic specific procedures. Indeed, com-panies that have achieved a high degree of fit among their activities often do not worryabout keeping their processes secret from competitors because they know that theycannot be adopted piecemeal.

Information Technology and Business StrategyAs shown in Figure 1-2, IT developments can affect business strategy. The growth of theInternet is a classic illustration. It has profoundly affected the way many value chainactivities are performed. For example, the Internet enables organizations to signifi-cantly streamline their inbound and outbound logistics activities. The Internet alsosignificantly affects both strategy and strategic positioning. For example, the Internetdramatically cuts costs, thereby helping companies to implement a low-cost strategy. If every company in a given industry, however, uses the Internet to adopt a low-coststrategy, then the effects may be problematic. Indeed, one possible outcome may beintense price competition among firms, with the likely result that most of the cost sav-ings provided by the Internet get passed on to the industry’s customers, rather thanbeing retained in the form of higher profits. Moreover, because every company can usethe Internet to streamline its value chain activities, it is unlikely that any particular com-pany will be able to use the Internet to gain a sustainable long-term competitive advan-tage vis-à-vis its competitors. Therefore, once the majority of companies in an industrybegin to fully integrate the Internet into their value chains, the effect may be to encour-age companies to shift from following primarily a low-cost strategy toward adoptingsome form of product differentiation strategy.

The Internet may also affect the relative desirability of following the three strategicpositions described previously. For example, by drastically reducing or eliminatinggeographic barriers, the Internet makes a company’s products available almost any-where. Consequently, it may be more difficult to establish and maintain an access-basedstrategic position.

As Focus 1-3 explains, the Internet alters many fundamental characteristics ofindustry structure, thereby requiring companies to carefully reconsider their overallbusiness strategy.

Many other technological advances affect company strategy and provide an oppor-tunity to gain a competitive advantage. An example is predictive analysis, which usesdata warehouses and complex algorithms to forecast future events, based on historicaltrends and calculated probabilities. Predictive analysis provides an educated guess ofwhat one may expect to see in the near future, allowing companies to make better busi-ness decisions and improve their processes. FedEx uses predictive analysis to predict,with 65% to 90% accuracy, how customers respond to price changes and new services.Blue Cross Blue Shield of Tennessee uses a neural-based predictive model to predictthe health care that specific patients will need, the severity of illnesses, and organ fail-ures. Stock market analysts are using predictive analysis to predict short-term trends inthe stock market.

An organization’s AIS plays an important role in helping it adopt and maintain astrategic position. Achieving a close fit among activities requires that data be collectedabout each activity. It is also important that the information system collect and inte-grate both financial and nonfinancial data about the organization’s activities.

The authors of this text believe that the disciplines of accounting and informationsystems have much in common and should be closely integrated. Therefore, we do nottry to distinguish between an AIS and other types of information systems. Instead, we


Key Terms 17

F CUS1-3

The Internet Makes Strategy More Important Than Ever

he Internet has changed the way manybusiness processes are performed. It has alsodramatically affected the five characteristicsthat determine the profitability of an entire

industry: the bargaining power of buyers, the bargainingpower of suppliers, barriers to entry, the threat of substituteproducts or services, and the level of rivalry amongexisting competitors.

Unfortunately for companies in most industries, thedevelopment of the Internet has tended to increase the relativepower of one or more of these five factors, thereby decreasingthe overall profitability of the average firm in a given industry.The Internet has reduced barriers to entry in many industriesby reducing or eliminating the need to invest in and developspecific assets, such as a dedicated sales force. It increases thepower of buyers by reducing switching costs and simplifyingdetailed comparisons across products and services. The

Internet creates new methods of performing basic businessprocesses, thereby creating new substitute products andservices. It enables suppliers to bypass intermediaries and sell directly to end consumers. Finally, because the Internetdecreases the level of variable costs relative to fixed costs, it increases pressures to compete more on price.

As a result of these factors, many companies find thatalthough the Internet has made them more efficient andeffective, they are unable to retain much of those benefitsin the form of increased profits. In fact, if a company is notcareful, it can find itself drawn into a vicious level of pricecompetition that benefits only consumers. The only waycompanies can avoid that trap is to define a strategy andstake out a strategic position that effectively differentiatesthemselves from their competitors. Thus, the most importanteffect of the development of the Internet is the increasedimportance of strategy.

T

adopt the viewpoint that the AIS can and should be the primary information system ofan organization and that it will provide users with the information they need to per-form their jobs.

SUMMARY AND CASE CONCLUSION

Scott and Susan require a well-designed AIS to provide the information they need toeffectively plan, manage, and control their business. S&S’s AIS must be able to processdata about sales and cash receipts, purchasing and paying for merchandise and services,payroll and tax-related transactions, and acquiring and paying for fixed assets. The com-pany’s AIS must also provide the information needed to prepare financial statements.

Fortunately, there are many computer-based accounting packages available forthe retail industry. As they begin looking at various popular software packages, how-ever, Scott and Susan quickly learn that considerable accounting knowledge isrequired to choose the one that will best fit their business. Because neither has anaccounting background, Scott and Susan decide that their next task will be to hirean accountant.

KEY TERMS

system 4systems concept 4goal conflict 4goal congruence 4integration 4data 5

information 5information overload 5value of information 5mandatory information 6essential information 6discretionary information 6

accounting informationsystem (AIS) 6

value chain 10primary activities 10support activities 10supply chain 11



AIS IN ACTIONCHAPTER QUIZ

1 Data differ from information in which way?a. Data are output and information is input.b. Information is output and data are input.c. Data are meaningful bits of information.d. There is no difference.

2 Which of the following is not a characteristic that makes information useful?a. It is reliable. c. It is inexpensive.b. It is timely. d. It is relevant.

3 Which of the following is a primary activity in the value chain?a. purchasing c. post-sales serviceb. accounting d. human resource management

4 Top management continually emphasizes and supports investments designed toimprove the efficiency of the manufacturing process. Such a focus most likelyreflects the pursuit of which type of strategy?a. product differentiation c. needs-basedb. low-cost d. variety-based

5 Which of the following is not a means by which information improves decisionmaking?a. increasing information overloadb. reducing uncertaintyc. providing feedback about the effectiveness of prior decisionsd. identifying situations requiring management action

6 In the value chain concept, upgrading IT is considered what kind of activity?a. primary activity c. service activityb. support activity d. structured activity

7 Lower-level management employees are most likely to make which of thefollowing decisions?a. structured decisions involving strategic planningb. unstructured decisions involving managerial controlc. structured decisions involving operational controld. unstructured decisions involving strategic planning

8 Which of the following is a function of an AIS?a. reducing the need to identify a strategy and strategic positionb. transforming data into useful informationc. allocating organizational resourcesd. automating all decision making

structured decision 14semistructured

decision 14unstructured decision 14operational control 14management control 14

strategic planning 14product differentiation

strategy 15low-cost strategy 15variety-based strategic

position 15

needs-based strategicposition 15

access-based strategicposition 15

synergy 16predictive analysis 16


Discussion Questions 19

9 A firm, its suppliers, and its customers collectively form which of the following?a. supply chain c. ERP systemb. value chain d. AIS

10 A company that focuses its marketing efforts on a specific subset of the population (e.g., college students) is probably pursuing which type of strategicposition?a. variety-based c. access-basedb. needs-based d. low-cost

DISCUSSION QUESTIONS

1.1 Apply the value chain concept to S&S, Inc. Explain how it performs the variousprimary and support activities.

1.2 The value of information equals the difference between the benefits realizedfrom using that information and the costs of producing it. Would you, or any organization,ever produce information if its expected costs exceeded its benefits? If so, providesome examples. If not, why not?

1.3 One function of the AIS is to provide adequate controls to ensure the safetyof organizational assets, including data. Many people, however, often view controlprocedures as “red tape.” Discuss how controls can improve overall efficiency andeffectiveness.

1.4 One interesting property of digital assets is that they can be reproduced and dis-tributed via the Internet at very little cost. What are some of the implications of havinga product with a marginal cost close to zero?

1.5 Figure 1-2 shows that organizational culture and the design of an AIS influenceone another. What does this imply about the degree to which an innovative systemdeveloped by one company can be transferred to another company?

1.6 Figure 1-2 shows that developments in IT affect both an organization’s strategyand the design of its AIS. How can a company determine whether it is spending toomuch, too little, or just enough on IT?

1.7 To what extent can all the characteristics of useful information listed inTable 1-1 be simultaneously met?

1.8 Information technology enables organizations to easily collect large amounts ofinformation about employees. Discuss the following issues:

a. To what extent should management monitor employees’ e-mail?b. To what extent should management monitor which Web sites employees

visit?c. To what extent should management monitor employee performance by, for

example, using software to track keystrokes per hour or some other unit oftime? If such information is collected, how should it be used?

d. Should companies use software to electronically “shred” all traces of e-mail?

e. Under what circumstances and to whom is it appropriate for a company todistribute information it collects about the people who visit its Web site?



PROBLEMS

1.1 Write a two-page report explaining the two basic strategies that S&S, Inc. canpursue and the three different strategic positions that it can adopt. Include in yourreport a discussion and examples of how IT can be used to support the different strate-gies and strategic positions.

1.2 Decision scope categorizes decisions into three broad areas of managerial deci-sion making. These three areas are operational control, management control, andstrategic planning. In your own words, define operational control, management con-trol, and strategic planning in relation to managerial decision making. Based on yourexperience working at a summer job or part-time job during the school year, providetwo examples of operational control, management control, and strategic planningdecisions that you or your manager would make.

1.3 Information technology is continually changing the nature of accounting and therole of accountants. Write a two-page report describing what you think the nature ofthe accounting function in a large company will be like in the year 2020.

1.4 The annual report is considered by some to be the single most important printeddocument that companies produce. In recent years, annual reports have become largedocuments. They now include such sections as letters to the stockholders, descriptionsof the business, operating highlights, financial review, management discussion andanalysis, a discussion of company internal controls, segment reporting, and inflationdata, as well as the basic financial statements. The expansion has been due in part to ageneral increase in the degree of sophistication and complexity in accounting stan-dards and disclosure requirements for financial reporting.

The expansion also is reflective of the change in the composition and level ofsophistication of users. Current users include not only stockholders but also financialand securities analysts, potential investors, lending institutions, stockbrokers, cus-tomers, employees, and, whether the reporting company likes it or not, competitors.Thus a report that was originally designed as a device for communicating basic finan-cial information now attempts to meet the diverse needs of an ever-expanding audience.

Users hold conflicting views on the value of annual reports. Some argue that theyfail to provide enough information, whereas others believe that disclosures in annualreports have expanded to the point where they create information overload. Othersargue that the future of most companies depends on acceptance by the investing publicand by its customers; therefore, companies should take this opportunity to communi-cate well-defined corporate strategies.

Required

a. Identify and discuss the basic factors of communication that must be consid-ered in the presentation of the annual report.

b. Discuss the communication problems a corporation faces in preparing theannual report that result from the diversity of the users being addressed.

c. Select two types of information found in an annual report, other than the finan-cial statements and accompanying footnotes, and describe how they are helpfulto the users of annual reports.

d. Discuss at least two advantages and two disadvantages of stating well-definedcorporate strategies in the annual report.

e. Evaluate the effectiveness of annual reports in fulfilling the information needsof the following current and potential users:1. Shareholders2. Creditors


Problems 21

3. Employees4. Customers5. Financial analysts

f. Annual reports are public and accessible to anyone, including competitors.Discuss how this affects decisions about what information should be providedin annual reports.

(CMA Examination, adapted)

1.5 Research the programming language XBRL and write a two-page report aboutits effect on financial reporting via the Internet.

1.6 United Services Automotive Association (USAA) grew to become the fourth-largest insurer of homes and the fifth-largest insurer of automobiles during its first fifteenyears. One reason for its success was the use of IT to lower costs and improve customerservice. USAA spent almost $150 million on computer and imaging technologies over a25-year period.

USAA uses its extensive database to keep track of minute details, such as which autoparts are fixed most frequently. It also uses its database to find ways to reduce claimscosts. For example, USAA discovered that repair shops would rather charge up to $300 toreplace a windshield with punctures than to charge $40 to repair it. USAA began offeringto waive the deductible if the owners would repair the windshield rather than replace it.

USAA spent extensively to develop an image-processing system that digitizes allpaper documents sent in by claimants (over 25 million a year). It only takes a fewkeystrokes for a policy service representative to retrieve pictures of all the documentsin a customer’s file. The system can sort and prioritize documents so that employeesare always working on the most important and urgent tasks.

Required

a. Why should USAA collect data on which auto parts are getting fixed most fre-quently? What could it do with this data?

b. Even though USAA offered to waive the deductible, the repair shops still man-aged to convince 95% of the owners to replace rather than repair their damagedwindshields. How could USAA use its AIS to persuade more shop owners torepair rather than replace their windows?

c. How does the image-processing system at USAA add value to the organization?

1.7 MatchingMatch the description listed in the right column with the information characteris-

tic listed in the left column.

___ 1. Relevant

___ 2. Reliable

___ 3. Complete

___ 4. Timely

___ 5. Understandable

___ 6. Verifiable

___ 7. Accessible

a. The report was carefully designed so that the datacontained in the report became information to thereader.

b. The manager was working one weekend and needed tofind some information about production requests for acertain customer. He was able to find the report on thecompany’s network.

c. The data in a report was checked by two clerks workingindependently.

d. An accounts receivable aging report included allcustomer accounts.

e. A report was checked by three different people foraccuracy.

f. An accounts receivable aging report is used in creditgranting decisions.

g. An accounts receivable aging report was receivedbefore the credit manager had to make a decisionwhether to extend credit to a customer.



1.8 The Howard Leasing Company is a privately held, medium-size business thatpurchases school busses and leases them to school districts, churches, charitable orga-nizations, and other businesses. To better serve its customers and, more importantly, toprotect its investment in the busses, Howard operates a large maintenance facility tomaintain and repair leased vehicles and vehicles available for lease. Howard’s annualsales for last year were $37 million with a net income of $2.9 million. Howardemploys approximately 150 people.

After graduating with a degree in accounting, you were recently hired as a staffaccountant for Howard and are eager to prove your worth to the company. Your super-visor just called you into her office and asked you to prepare an accounts receivableaging report as of the end of the year for use in the upcoming audit of the company’sfinancial statements.

Required

a. What is an accounts receivable aging report?b. Why is an accounts receivable aging report needed for an audit?c. What is an accounts receivable aging report used for in normal company

operations?d. What data will you need to prepare the report?e. Where will you collect the data you need to prepare the report?f. If the data are maintained on paper, how will you collect the necessary data?g. If the data are in machine-readable form, how will you collect the data?h. What will the report look like (i.e., how will you organize the data collected to

create the information your supervisor needs for the audit)? Prepare anaccounts receivable aging report in Excel or another spreadsheet package.

i. How will you distribute the report? How many copies will you make? Whoshould receive the copies? What security features will you implement?

1.9 Based on Wal-Mart’s success in the United States, many expected the companyto dominate the British market after it bought the Asda grocery chain in 1999. That hasnot happened; Wal-Mart’s market share in groceries is only half that of its biggestcompetitor, Tesco. Tesco’s sales and net income are rising significantly while Wal-Mart’s sales and net income are increasing at a much slower rate.

Wal-Mart is finding Tesco to be a formidable worldwide competitor. Tesco oper-ates almost 2,400 stores in Britain in four different formats. It has a very successfuloperation in Central Europe. Tesco has plans to expand to the United States. In Korea,Tesco’s 39 stores are thriving while Wal-Mart gave up after an eight-year effort tosucceed and sold its 16 stores.

One of the biggest reasons for Tesco’s success is its use of technology. In 1995,Tesco started a loyalty card program, called Clubcard, and 80% of Tesco customers arenow members. Shoppers fill out an application in the store and receive a plastic card inthe mail that is scanned before they make a purchase. Tesco gathers massive amounts ofdata about its customers’ 15 million purchases each week. Sales data are analyzed andturned into information that provides Tesco with a significant competitive advantage.

As traditional advertising loses effectiveness, these large stores of data allowTesco to find new and creative ways to market its products.

Required

a. What kind of information do you think Tesco gathers?b. How do you think Tesco has motivated over 12 million customers to sign up for

its Clubcard program?c. What can Tesco accomplish with the Clubcard data it collects? Think in terms

of strategy and competitive advantage.d. What are some of the disadvantages to the Clubcard program?

1.10 Have you ever imagined having one electronic device that does everything youwould ever need? Mobile phone makers in Japan have gone beyond the imagining phase.


Quiz Key 23

Cell phones in Japan are becoming more versatile than ever. Newer models of cell phonescontain a myriad of applications and can do many of the things that a personal computer(PC) can do. PCs are also able to function as phones. DualCor Technologies offers ahandheld Windows XP PC that also comes with a built-in cell phone. The PC comes witha 1.5 GHz processor, 1 GB of memory, and a 40 GB hard drive that it shares with the cellphone component. The PC is 6.5 inches long, 3.3 inches wide, 1.2 inches thick, has a 5-inch diagonal screen, and costs around $1,500. A small but growing number of profes-sionals are trading in their laptops for BlackBerrys and other handheld computers.

Required

a. What commercial activities can be done with a cell phone/PC combination device?b. How can businesses utilize this technology to attract more customers, sell more

products, advertise their products, facilitate the sale of products, and conductand manage their businesses more efficiently and effectively?

c. What are some problems or drawbacks you can see with using this device inbusiness?

CASE 1-1 Any Company, Inc. An Ongoing Comprehensive Case

The Web case at the end of each chapter is an assign-ment that allows you to apply key concepts to a localcompany. This case, then, may become an ongoing

CASE 1-2 Ackoff’s Management Misinformation Systems

case study on which you work throughout the term.The Any Company Case can be found on the Web sitefor this book.

The Web site for this book contains an adaption ofRussell L. Ackoff’s classic article “Management Mis-information Systems” from Management Science. In thearticle, Ackoff identified five common assumptionsabout information systems and then explained why hedisagreed with them.

Required

Read the five assumptions, contentions, and Ackoff’sexplanations. For each of the five assumptions, decide ifyou agree or disagree with Ackoff’s contentions. Preparea report in which you defend your stand and explain yourdefense.

AIS IN ACTION SOLUTIONSQUIZ KEY

1 Data differ from information in which way?a. Data are output and information is input. [Incorrect. Data are facts and fig-

ures that once organized can become information. Therefore, data are inputsand information is output.]

✔ b. Information is output and data are input. [Correct.]c. Data are meaningful bits of information. [Incorrect. Information is organized

and processed data that provide meaning.]



d. There is no difference. [Incorrect. There is a difference. Data are unorga-nized facts and figures. Information is meaningful, organized, and processed data.]

2 Which of the following is not a characteristic that makes information useful?a. It is reliable. [Incorrect. This is one of the information characteristics listed

in Table 1-1 on page 6.]b. It is timely. [Incorrect. This is one of the information characteristics listed in

Table 1-1 on page 6.]✔ c. It is inexpensive. [Correct. This is not one of the information characteristics

listed in Table 1-1 on page 6.]d. It is relevant. [Incorrect. This is one of the information characteristics listed

in Table 1-1 on page 6.]

3 Which of the following is a primary activity in the value chain?a. purchasing [Incorrect. This is a support activity.]b. accounting [Incorrect. This is a firm infrastructure support activity.]

✔ c. post-sales service [Correct. Service is a primary activity.]d. human resource management [Incorrect. This is a support activity.]

4 Top management continually emphasizes and supports investments designed toimprove the efficiency of the manufacturing process. Such a focus most likelyreflects the pursuit of which type of basic business strategy?a. product differentiation [Incorrect. This strategy adds new features and services

not provided by competitors.]✔ b. low-cost [Correct. Seeking to improve manufacturing efficiency is part of a

low-cost strategy.]c. needs-based [Incorrect. This strategy focuses on serving most of the needs of

a particular group of customers in a target market.]d. variety-based [Incorrect. This strategy focuses on producing or providing a

subset of the industry’s products or services.]

5 Which of the following is not a means by which information improves decisionmaking?

✔ a. increasing information overload [Correct. Decision makers receiving toomuch information have difficulty incorporating all of the information intotheir decision framework and as a result decision quality can be reducedrather than improved.]

b. reducing uncertainty [Incorrect. More reliable information leads to lessuncertainty and thus better decisions.]

c. providing feedback about the effectiveness of prior decisions [Incorrect.Knowledge of effective and ineffective decisions can lead to better decisionsin the future.]

d. identifying situations requiring management action [Incorrect. Identifyingthe need for management action can lead to improved decision making.]

6 In the value chain concept, upgrading IT is considered what kind of activity?a. primary activity [Incorrect. Investing in IT is a support activity.]

✔ b. support activity [Correct. Technology activities, including investing in IT, areconsidered a support activity.]

c. service activity [Incorrect. The value chain includes only primary and supportactivities. A service activity is a type of primary activity.]

d. structured activity [Incorrect. The value chain includes only primary andsupport activities. A structured activity is neither a primary nor a secondaryactivity.]

7 Lower-level management employees are most likely to make which of thefollowing decisions?a. structured decisions involving strategic planning [Incorrect. Strategic planning

decisions are made at the executive level.]


Quiz Key 25

b. unstructured decisions involving managerial control [Incorrect. Mid-levelmanagers are typically involved in managerial control decisions.]

✔ c. structured decisions involving operational control [Correct. Everyday opera-tional decisions are made by lower-level managers.]

d. unstructured decisions involving strategic planning [Incorrect. Strategicplanning decisions are made at the executive level.]

8 Which of the following is a function of an AIS?a. reducing the need to identify a strategy and strategic position [Incorrect.

An AIS does not reduce the need to identify a strategy. It provides informa-tion to executives for the purpose of making strategic decisions.]

✔ b. transforming data into useful information [Correct. This is one of the primaryfunctions of an AIS.]

c. allocating organizational resources [Incorrect. Decision makers allocateresources, and the purpose of the AIS is to provide information to the decisionmakers so they can make the allocation.]

d. automating all decision making [Incorrect. The AIS provides information todecision makers; it is not designed to automate all decision making.]

9 A firm, its suppliers, and its customers collectively form which of the following?✔ a. supply chain [Correct. The supply chain is comprised of the firm, its suppliers,

and customers.]b. value chain [Incorrect. The value chain is comprised of primary and support

activities within the firm.]c. ERP system [Incorrect. An ERP system integrates all aspects of an organiza-

tion’s activities into one system.]d. AIS [Incorrect. The AIS is comprised of the human and capital resources

within an organization that are responsible for collecting and processingtransactions and preparing financial information.]

10 A company that focuses its marketing efforts on a specific subset of thepopulation (e.g., college students) is probably pursuing which type of strategicposition?a. variety-based [Incorrect. This strategy focuses on providing a subset of an

industry’s products or services.]✔ b. needs-based [Correct. This strategy focuses on serving most of the needs of

a particular group of customers, such as college students.]c. access-based [Incorrect. This strategy focuses on serving a subset of customers

based on geographic location or size.]d. low-cost [Incorrect. This strategy focuses on providing products and services

at the lowest cost.]


Documents

Chapter 01