Why are there different types of Information System?

In the early days of computing, each time an information system was needed, it was
'tailor made' - built as a one-off solution for a particular problem. However, it soon
became apparent that many of the problems information systems set out to solve
shared certain characteristics. Consequently, people attempted to try to build a single
system that would solve a whole range of similar problems. However, they soon realized
that in order to do this, it was first necessary to be able to define how and where the
information system would be used and why it was needed. It was then that the search
for a way to classify information systems accurately began.
How do you identify the different types of information system in an organization?
The different types of information system that can be found are identified through a
process of classification. Classification is simply a method by which things can be
categorized or classified together so that they can be treated as if they were a single
unit. There is a long history of classification of things in the natural world such as plants
or animals, however, Information systems are not part of the 'natural' world; they are
created and acquired by man to deal with particular tasks and problems. The
classification of information systems into different types is a useful technique for
designing systems and discussing their application; it not however a fixed definition
governed by some natural law. A 'type' or category of information system is simply a
concept, an abstraction, which has been created as a way to simplify a complex
problem through identifying areas of commonality between different things. One of the
oldest and most widely used systems for classifying information systems is known as
the pyramid model; this is described in more detail below.
How many different kinds of Information System are there?
As can be seen above, there is not a simple answer to this. Depending on how you
create your classification, you can find almost any number of different types of
information system. However, it is important to remember that different kinds of systems
found in organizations exist to deal with the particular problems and tasks that are found
in organizations. Consequently, most attempts to classify Information systems into
different types rely on the way in which task and responsibilities are divided within an
organization. As most organizations are hierarchical, the way in which the different
classes of information systems are categorized tends to follow the hierarchy. This is
often described as "the pyramid model" because the way in which the systems are
arranged mirrors the nature of the tasks found at various different levels in the
organization.
For example, this is a three level pyramid model based on the type of decisions taken at
different levels in the organization.

Three level pyramid model based on the type of decisions taken at different levels in the
organization
Similarly, by changing our criteria to the differnt types of date / information / knowledge
that are processed at different levels in the organization, we can create a five level
model.

Five level pyramid model based on the processing requirement of different levels in the
organization
What are the most common types of information system in an organization?
While there are several different versions of the pyramid model, the most common is
probably a four level model based on the people who use the systems. Basing the
classification on the people who use the information system means that many of the
other characteristics such as the nature of the task and informational requirements, are
taken into account more or less automatically.

Four level pyramid model based on the different levels of hierarchy in the organization
A comparison of different kinds of Information Systems
Using the four level pyramid model above, we can now compare how the information
systems in our model differ from each other.
1. Transaction Processing Systems
What is a Transaction Processing System?
Transaction Processing System are operational-level systems at the bottom of
the pyramid. They are usually operated directly by shop floor workers or front line

staff, which provide the key data required to support the management of
operations. This data is usually obtained through the automated or semiautomated tracking of low-level activities and basic transactions.
Functions of a TPS
TPS are ultimately little more than simple data processing systems.
Functions of a TPS in terms of data processing requirements
Inputs

Processing

Outputs

Transactions
Events

Validation
Sorting
Listing
Merging
Updating
Calculation

Lists
Detail
Action
Summary reports?

Some examples of TPS

o
o

Payroll systems
Order processing systems

Reservation systems

Stock control systems

Systems for payments and funds transfers

The role of TPS

o
o

Produce information for other systems

Cross boundaries (internal and external)

Used by operational personnel + supervisory levels

Efficiency oriented

2. Management Information Systems

What is a Management Information System?

reports
reports

For historical reasons, many of the different types of Information Systems found
in commercial organizations are referred to as "Management Information
Systems". However, within our pyramid model, Management Information
Systems are management-level systems that are used by middle managers to
help ensure the smooth running of the organization in the short to medium term.
The highly structured information provided by these systems allows managers to
evaluate an organization's performance by comparing current with previous
outputs.
Functions of a MIS
MIS are built on the data provided by the TPS
Functions of a MIS in terms of data processing requirements
Inputs

Processing

Internal
Internal
Structured data

Transactions Sorting
Files Merging
Summarizing

Outputs
Summary
Action
Detailed reports

Some examples of MIS

o
o

Sales management systems

Inventory control systems

Budgeting systems

Management Reporting Systems (MRS)

Personnel (HRM) systems

The role of MIS

o
o

Based on internal information flows

Support relatively structured decisions

Inflexible and have little analytical capacity

Used by lower and middle managerial levels

Deals with the past and present rather than the future

Efficiency oriented?

reports
reports

3. Decision Support Systems

What is a Decision Support System?
A Decision Support System can be seen as a knowledge based system, used by
senior managers, which facilitates the creation of knowledge and allow its
integration into the organization. These systems are often used to analyze
existing structured information and allow managers to project the potential effects
of their decisions into the future. Such systems are usually interactive and are
used to solve ill structured problems. They offer access to databases, analytical
tools, allow "what if" simulations, and may support the exchange of information
within the organization.
Functions of a DSS
DSS manipulate and build upon the information from a MIS and/or TPS to
generate insights and new information.
Functions of a DSS in terms of data processing requirements
Inputs

Processing

Modelling
Internal
Transactions
Simulation
Internal
Files
Analysis
External Information?
Summarizing
Some examples of DSS
o
o

Group Decision Support Systems (GDSS)

Computer Supported Co-operative work (CSCW)

Logistics systems

Financial Planning systems

Spreadsheet Models?

The role of DSS

o
o

Support ill- structured or semi-structured decisions

Have analytical and/or modelling capacity

Used by more senior managerial levels

Are concerned with predicting the future

Outputs
Summary
Forecasts
Graphs / Plots

reports

Are effectiveness oriented?

4. Executive Information Systems

What is an EIS?
Executive Information Systems are strategic-level information systems that are
found at the top of the Pyramid. They help executives and senior managers
analyze the environment in which the organization operates, to identify long-term
trends, and to plan appropriate courses of action. The information in such
systems is often weakly structured and comes from both internal and external
sources. Executive Information System are designed to be operated directly by
executives without the need for intermediaries and easily tailored to the
preferences of the individual using them.
Functions of an EIS
EIS organizes and presents data and information from both external data
sources and internal MIS or TPS in order to support and extend the inherent
capabilities of senior executives.
Functions of a EIS in terms of data processing requirements
Inputs
External
Internal
Pre-defined models

Processing
Data Summarizing
Files Simulation
"Drilling Down"

Outputs
Summary
Forecasts
Graphs / Plots

Some examples of EIS

Executive Information Systems tend to be highly individualized and are often
custom made for a particular client group; however, a number of off-the-shelf EIS
packages do exist and many enterprise level systems offer a customizable EIS
module.

reports

The role of EIS

o
o

Are concerned with ease of use

Are concerned with predicting the future

Are effectiveness oriented

Are highly flexible

Support unstructured decisions

Use internal and external data sources

Used only at the most senior management levels

EXPERT SYSTEMS AND ARTIFICIAL INTELLIGENCE

Expert Systems
Are computer programs that are derived from a branch of computer science research
called Artificial Intelligence (AI). AI's scientific goal is to understand intelligence by
building computer programs that exhibit intelligent behavior. It is concerned with the
concepts and methods of symbolic inference, or reasoning, by a computer, and how the
knowledge used to make those inferences will be represented inside the machine.
Of course, the term intelligence covers many cognitive skills, including the ability to
solve problems, learn, and understand language; AI addresses all of those. But most
progress to date in AI has been made in the area of problem solving -- concepts and
methods for building programs that reason about problems rather than calculate a
solution.
AI programs that achieve expert-level competence in solving problems in task areas by
bringing to bear a body of knowledge about specific tasks are called knowledgebased or expert systems. Often, the term expert systems is reserved for programs
whose knowledge base contains the knowledge used by human experts, in contrast to
knowledge gathered from textbooks or non-experts. More often than not, the two terms,
expert systems (ES) and knowledge-based systems (KBS), are used synonymously.
Taken together, they represent the most widespread type of AI application. The area of
human intellectual endeavor to be captured in an expert system is called the task
domain. Task refers to some goal-oriented, problem-solving activity. Domain refers to
the area within which the task is being performed. Typical tasks are diagnosis, planning,
scheduling, configuration and design. An example of a task domain is aircraft crew
scheduling,

Building an expert system is known as knowledge engineering and its practitioners are
called knowledge engineers. The knowledge engineer must make sure that the
computer has all the knowledge needed to solve a problem. The knowledge engineer
must choose one or more forms in which to represent the required knowledge as
symbol patterns in the memory of the computer -- that is, he (or she) must choose
a knowledge representation. He must also ensure that the computer can use the
knowledge efficiently by selecting from a handful of reasoning methods. The practice of
knowledge engineering is described later. We first describe the components of expert
systems.
The Building Blocks of Expert Systems
Every expert system consists of two principal parts: the knowledge base; and the
reasoning, or inference, engine.
The knowledge base of expert systems contains both factual and heuristic
knowledge. Factual knowledge is that knowledge of the task domain that is widely
shared, typically found in textbooks or journals, and commonly agreed upon by those
knowledgeable in the particular field.
Heuristic knowledge is the less rigorous, more experiential, more judgmental knowledge
of performance. In contrast to factual knowledge, heuristic knowledge is rarely
discussed, and is largely individualistic. It is the knowledge of good practice, good
judgment, and plausible reasoning in the field. It is the knowledge that underlies the "art
of good guessing."
Knowledge representation formalizes and organizes the knowledge. One widely used
representation is the production rule, or simply rule. A rule consists of an IF part and a
THEN part (also called a condition and an action). The IF part lists a set of conditions in
some logical combination. The piece of knowledge represented by the production rule is
relevant to the line of reasoning being developed if the IF part of the rule is satisfied;
consequently, the THEN part can be concluded, or its problem-solving action taken.
Expert systems whose knowledge is represented in rule form are called rule-based
systems.
Another widely used representation, called the unit (also known as frame, schema,
or list structure) is based upon a more passive view of knowledge. The unit is an
assemblage of associated symbolic knowledge about an entity to be represented.
Typically, a unit consists of a list of properties of the entity and associated values for
those properties.
Since every task domain consists of many entities that stand in various relations, the
properties can also be used to specify relations, and the values of these properties are
the names of other units that are linked according to the relations. One unit can also
represent knowledge that is a "special case" of another unit, or some units can be "parts
of" another unit.

The problem-solving model, or paradigm, organizes and controls the steps taken to
solve the problem. One common but powerful paradigm involves chaining of IF-THEN
rules to form a line of reasoning. If the chaining starts from a set of conditions and
moves toward some conclusion, the method is called forward chaining. If the conclusion
is known (for example, a goal to be achieved) but the path to that conclusion is not
known, then reasoning backwards is called for, and the method is backward chaining.
These problem-solving methods are built into program modules called inference
engines or inference procedures that manipulate and use knowledge in the knowledge
base to form a line of reasoning.
The knowledge base an expert uses is what he learned at school, from colleagues, and
from years of experience. Presumably the more experience he has, the larger his store
of knowledge. Knowledge allows him to interpret the information in his databases to
advantage in diagnosis, design, and analysis.
Though an expert system consists primarily of a knowledge base and an inference
engine, a couple of other features are worth mentioning: reasoning with uncertainty, and
explanation of the line of reasoning.
Knowledge is almost always incomplete and uncertain. To deal with uncertain
knowledge, a rule may have associated with it a confidence factor or a weight. The set
of methods for using uncertain knowledge in combination with uncertain data in the
reasoning process is called reasoning with uncertainty. An important subclass of
methods for reasoning with uncertainty is called "fuzzy logic," and the systems that use
them are known as "fuzzy systems."
Because an expert system uses uncertain or heuristic knowledge (as we humans do) its
credibility is often in question (as is the case with humans). When an answer to a
problem is questionable, we tend to want to know the rationale. If the rationale seems
plausible, we tend to believe the answer. So it is with expert systems. Most expert
systems have the ability to answer questions of the form: "Why is the answer X?"
Explanations can be generated by tracing the line of reasoning used by the inference
engine (Feigenbaum, McCorduck et al. 1988).
The most important ingredient in any expert system is knowledge. The power of expert
systems resides in the specific, high-quality knowledge they contain about task
domains. AI researchers will continue to explore and add to the current repertoire of
knowledge representation and reasoning methods. But in knowledge resides the power.
Because of the importance of knowledge in expert systems and because the current
knowledge acquisition method is slow and tedious, much of the future of expert systems
depends on breaking the knowledge acquisition bottleneck and in codifying and
representing a large knowledge infrastructure.

Knowledge engineering

Is the art of designing and building expert systems, and knowledge engineers are its
practitioners. Gerald M. Weinberg said of programming in The Psychology of
Programming: "'Programming,' -- like 'loving,' -- is a single word that encompasses an
infinitude of activities" (Weinberg 1971). Knowledge engineering is the same, perhaps
more so. We stated earlier that knowledge engineering is an applied part of the science
of artificial intelligence which, in turn, is a part of computer science. Theoretically, then,
a knowledge engineer is a computer scientist who knows how to design and implement
programs that incorporate artificial intelligence techniques. The nature of knowledge
engineering is changing, however, and a new breed of knowledge engineers is
emerging. We'll discuss the evolving nature of knowledge engineering later.
Today there are two ways to build an expert system. They can be built from scratch, or
built using a piece of development software known as a "tool" or a "shell." Before we
discuss these tools, let's briefly discuss what knowledge engineers do. Though different
styles and methods of knowledge engineering exist, the basic approach is the same: a
knowledge engineer interviews and observes a human expert or a group of experts and
learns what the experts know, and how they reason with their knowledge. The engineer
then translates the knowledge into a computer-usable language, and designs an
inference engine, a reasoning structure, that uses the knowledge appropriately. He also
determines how to integrate the use of uncertain knowledge in the reasoning process,
and what kinds of explanation would be useful to the end user.
Next, the inference engine and facilities for representing knowledge and for explaining
are programmed, and the domain knowledge is entered into the program piece by
piece. It may be that the inference engine is not just right; the form of knowledge
representation is awkward for the kind of knowledge needed for the task; and the expert
might decide the pieces of knowledge are wrong. All these are discovered and modified
as the expert system gradually gains competence.
The discovery and cumulation of techniques of machine reasoning and knowledge
representation is generally the work of artificial intelligence research. The discovery and
cumulation of knowledge of a task domain is the province of domain experts. Domain
knowledge consists of both formal, textbook knowledge, and experiential knowledge -the expertise of the experts.
Tools, Shells, and Skeletons
Compared to the wide variation in domain knowledge, only a small number of AI
methods are known that are useful in expert systems. That is, currently there are only a
handful of ways in which to represent knowledge, or to make inferences, or to generate
explanations. Thus, systems can be built that contain these useful methods without any
domain-specific knowledge. Such systems are known as skeletal systems, shells, or
simply AI tools.
Building expert systems by using shells offers significant advantages. A system can be
built to perform a unique task by entering into a shell all the necessary knowledge about

a task domain. The inference engine that applies the knowledge to the task at hand is
built into the shell. If the program is not very complicated and if an expert has had some
training in the use of a shell, the expert can enter the knowledge himself.
Many commercial shells are available today, ranging in size from shells on PCs, to
shells on workstations, to shells on large mainframe computers. They range in price
from hundreds to tens of thousands of dollars, and range in complexity from simple,
forward-chained, rule-based systems requiring two days of training to those so complex
that only highly trained knowledge engineers can use them to advantage. They range
from general-purpose shells to shells custom-tailored to a class of tasks, such as
financial planning or real-time process control.
Although shells simplify programming, in general they don't help with knowledge
acquisition. Knowledge acquisition refers to the task of endowing expert systems with
knowledge, a task currently performed by knowledge engineers. The choice of
reasoning method, or a shell, is important, but it isn't as important as the accumulation
of high-quality knowledge. The power of an expert system lies in its store of knowledge
about the task domain -- the more knowledge a system is given, the more competent it
becomes.
THE APPLICATIONS OF EXPERT SYSTEMS
The spectrum of applications of expert systems technology to industrial and commercial
problems is so wide as to defy easy characterization. The applications find their way
into most areas of knowledge work. They are as varied as helping salespersons sell
modular factory-built homes to helping NASA plan the maintenance of a space shuttle in
preparation for its next flight.
Applications tend to cluster into seven major classes.
Diagnosis and Troubleshooting of Devices and Systems of All Kinds
This class comprises systems that deduce faults and suggest corrective actions for a
malfunctioning device or process. Medical diagnosis was one of the first knowledge
areas to which ES technology was applied (for example, see Shortliffe 1976), but
diagnosis of engineered systems quickly surpassed medical diagnosis. There are
probably more diagnostic applications of ES than any other type. The diagnostic
problem can be stated in the abstract as: given the evidence presenting itself, what is
the underlying problem/reason/cause?
Planning and Scheduling
Systems that fall into this class analyze a set of one or more potentially complex and
interacting goals in order to determine a set of actions to achieve those goals, and/or
provide a detailed temporal ordering of those actions, taking into account personnel,
materiel, and other constraints. This class has great commercial potential, which has

been recognized. Examples involve airline scheduling of flights, personnel, and gates;
manufacturing job-shop scheduling; and manufacturing process planning.
Configuration of Manufactured Objects from Subassemblies
Configuration, whereby a solution to a problem is synthesized from a given set of
elements related by a set of constraints, is historically one of the most important of
expert system applications. Configuration applications were pioneered by computer
companies as a means of facilitating the manufacture of semi-custom minicomputers
(McDermott 1981). The technique has found its way into use in many different
industries, for example, modular home building, manufacturing, and other problems
involving complex engineering design and manufacturing.
Financial Decision Making
The financial services industry has been a vigorous user of expert system techniques.
Advisory programs have been created to assist bankers in determining whether to make
loans to businesses and individuals. Insurance companies have used expert systems to
assess the risk presented by the customer and to determine a price for the insurance. A
typical application in the financial markets is in foreign exchange trading.
Knowledge Publishing
This is a relatively new, but also potentially explosive area. The primary function of the
expert system is to deliver knowledge that is relevant to the user's problem, in the
context of the user's problem. The two most widely distributed expert systems in the
world are in this category. The first is an advisor which counsels a user on appropriate
grammatical usage in a text. The second is a tax advisor that accompanies a tax
preparation program and advises the user on tax strategy, tactics, and individual tax
policy.
Process Monitoring and Control
Systems falling in this class analyze real-time data from physical devices with the goal
of noticing anomalies, predicting trends, and controlling for both optimality and failure
correction. Examples of real-time systems that actively monitor processes can be found
in the steel making and oil refining industries.
Design and Manufacturing
These systems assist in the design of physical devices and processes, ranging from the
high-level conceptual design of abstract entities, all the way to factory floor configuration
of manufacturing processes.
BENEFITS TO END USERS

Primarily, the benefits of ESs to end users include:

A speed-up of human professional or semi-professional work -- typically by a

factor of ten and sometimes by a factor of a hundred or more.
Within companies, major internal cost savings. For small systems, savings are
sometimes in the tens or hundreds of thousands of dollars; but for large systems,
often in the tens of millions of dollars and as high as hundreds of millions of
dollars. These cost savings are a result of quality improvement, a major
motivation for employing expert system technology.

Improved quality of decision making. In some cases, the quality or correctness of

decisions evaluated after the fact show a ten-fold improvement.

Preservation of scarce expertise. ESs are used to preserve scarce know-how in

organizations, to capture the expertise of individuals who are retiring, and to
preserve corporate know-how so that it can be widely distributed to other
factories, offices or plants of the company.

Introduction of new products. A good example of a new product is a pathology

advisor sold to clinical pathologists in hospitals to assist in the diagnosis of
diseased tissue.

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 able to use resources more efficiently, resulting in
higher revenue growth, profitability, or productivity growth (efficiency), all of which
ultimately in the long run translate into higher stock market valuations than their
competitors.
Michael Porter's competitive forces model describes five competitive forces that
shape the fate of the firm.
1. Traditional competitors: Existing firms that share a firm's market space
2. New market entrants: New companies have certain advantages, such as not
being locked into old equipment and high motivation, as well as disadvantages,
such as less expertise and little brand recognition. Some industries have lower
barriers to entry, ie: cost less for a new company to enter the field.
3. Substitute products and services: These are substitutes that your customers
might use if your prices become too high. For example, Internet telephone
service can substitute for traditional telephone service. The more substitute
products and services in your industry, the less you can control pricing and raise
your profit margins.

4. 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 in a transparent marketplace where there
is little product differentiation and all prices are known instantly (such as on the
Internet).
5. Suppliers: The more different suppliers a firm has, the greater control it can
exercise over suppliers in terms of price, quality, and delivery schedules.
Figure 3-10

FIGURE
3-10
PORTERS
COMPETITIVE
FORCES
MODEL
In Porters competitive forces model, the strategic position of the firm and its strategies
are determined not only by competition with its traditional direct competitors but also by
four forces in the industrys environment: new market entrants, substitute products,
customers, and suppliers.
There are four generic strategies used to manage competitive forces, each of which
often is enabled by using information technology and systems:
1. Low-cost leadership: Use information systems to achieve the lowest
operational costs and the lowest prices. For example, a supply chain
management system can incorporate an efficient customer response
system to directly link consumer behavior to distribution and production and
supply chains, helping lower inventory and distribution costs.
2. Product differentiation: Use information systems to enable new products and
services, or greatly change the customer convenience in using your existing
products and services. For instance, Land's End uses mass customization,
offering individually tailored products or services using the same production
resources as mass production, to custom-tailor clothing to individual customer
specifications.

3. 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 analyzing data for finely tuned
sales and marketing techniques. Hilton Hotels uses a customer information
system with detailed data about active guests to provide tailored services and
reward profitable customers with extra privileges and attention.
4. Strengthen customer and supplier intimacy: Use information systems to
tighten linkages with suppliers and develop intimacy with customers. Chrysler
Corporation uses information systems to facilitate direct access from suppliers to
production schedules, and even permits suppliers to decide how and when to
ship suppliers to Chrysler factories. This allows suppliers more lead time in
producing
goods.
Strong
linkages
to
customers
and
suppliers
increase switching costs (the cost of switching from one product to a competing
product)
and
loyalty
to
your
firm.
The Internet has nearly destroyed some industries and has severely threatened
more. The Internet 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 building very large and loyal customer bases, such as Yahoo!, eBay, and
Google.
The value chain model highlights specific activities in the business where
competitive strategies can best be applied and where information systems are
most likely to have a strategic impact. The value chain model views the firm as a
series or chain of basic activities that add a margin of value to a firm's products
or services. These activities can be categorized as either primary activities or
support activities.

Primary activities are most directly related to the production and distribution of
the firm's products and services, which create value for the customer. Primary
activities include inbound logistics, operations, outbound logistics, sales and
marketing, and service.

Support activities make the delivery of the primary activities possible and
consist of organization infrastructure (administration and management), human
resources (employee recruiting, hiring, and training), technology (improving

products and the production process), and procurement (purchasing input).

Figure 3-11

FIGURE
3-11
THE
VALUE
CHAIN
MODEL
This figure provides examples of systems for both primary and support activities of a
firm and of its value partners that can add a margin of value to a firms products or
services.
You can use the business value chain model to identify areas where information
systems will improve business processes. You can also benchmark your business
processes against your competitors or others in related industries, and identify and
implement industry best practices.

Benchmarking involves comparing the efficiency and effectiveness of your

business processes against strict standards and then measuring performance
against those standards.

Industry best practices are usually identified by consulting companies, research

organizations, government agencies, and industry associations as the most

successful solutions or problem-solving methods for consistently and effectively
achieving a business objective.
A firm's value chain is linked to the value chains of its suppliers, distributors, and
customers.
Information systems can be used to achieve strategic advantage at the industry level by
working with other firms to develop industry-wide standards for exchanging information
or business transactions electronically, which force all market participants to subscribe
to similar standards. Such efforts increase efficiency, making product substitution less
likely
and
perhaps
raising
entry
costs.,
Internet technology has made it possible to create highly synchronized industry value
chains called value webs. A value web is a collection of independent firms that use
information technology to coordinate their value chains to produce a product or service
for a market collectively. It is more customer-driven and operates in a less linear fashion
than
the
traditional
value
chain.
Figure 3-12

FIGURE
3-12
THE
VALUE
WEB
The value web is a networked system that can synchronize the value chains of business
partners within an industry to respond rapidly to changes in supply and demand.
A large corporation is typically a collection of businesses. Information systems can
improve the overall performance of these business units by promoting synergies and
core competencies.

In synergies, the output of some units can be used as inputs to other units, or two
organizations pool markets and expertise, and these relationships lower costs
and generate profits.

A core competency is an activity for which a firm is a world-class leader, such

as being the world's best miniature parts designer. A core competency relies on
knowledge that is gained through experience as well as incorporating new,
external knowledge. Any information system that encourages the sharing of
knowledge across business units enhances competency.

Business models based on a network may help firms strategically by taking advantage
of network economics. In network economics, the marginal costs of adding another
participant or creating another product are negligible, whereas the marginal gain is
much larger. For example, the more people offering products on eBay, the more
valuable the eBay site is to everyone because more products are listed, and more
competition
among
suppliers
lowers
prices.
Another network-based strategy is the virtual company, or virtual organization, which
uses networks to link people, assets, and ideas, enabling it to ally with other companies
to create and distribute products and services without being limited by traditional
organizational boundaries or physical locations. One company can use the capabilities
of another company without being physically tied to that company.
The traditional Porter model of competitive forces assumes a relatively static industry
environment; relatively clear-cut industry boundaries; and a relatively stable set of
suppliers, substitutes, and customers. With the emergence of the digital firm and the
Internet, some modifications to the original competitive forces model are needed. Some
of today's firms are much more aware that they participate in business ecosystems,
loosely coupled but interdependent networks of suppliers, distributors, outsourcing
firms, transportation service firms, and technology manufacturers. In a business
ecosystem, cooperation takes place across many industries rather than many firms.
Figure 3-13

FIGURE
3-13
AN
ECOSYSTEM
STRATEGIC
MODEL
The digital firm era requires a more dynamic view of the boundaries among industries,
firms, customers, and suppliers, with competition occurring among industry sets in a
business ecosystem. In the ecosystem model, multiple industries work together to
deliver value to the customer. IT plays an important role in enabling a dense network of
interactions among the participating firms.
Business ecosystems can be characterized as having one or a few keystone firms that
dominate the ecosystem and create the platforms used by other niche firms. Keystone
firms in the Microsoft ecosystem include Microsoft and technology producers such as
Intel and IBM. Niche firms include thousands of software application firms, software
developers, service firms, networking firms, and consulting firms that both support and
rely on the Microsoft products.