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Information Processing Perspective in Information Systems, Dispense di E-Business

Politecnico di Milano (POLIMI)E-Business

This document provides an overview of the information processing perspective within information systems and their organizational impact. It covers key concepts like information system definitions, technology's role, and its impact on managerial processes. It explores decision theory, bounded rationality, and information interdependency coordination. Vertical and horizontal information systems, agency theory limitations, and task differences in manufacturing versus service companies are examined. The document also addresses inter-functional information processes, knowledge management in services, executive information system technology architecture and design, information sources, data warehouses, and key performance indicators. It concludes with obstacles to IT integration in service companies and the knowledge management process, including a Cigna Insurance case study.

Tipologia: Dispense

2024/2025

In vendita dal 22/07/2025

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Information Processing Perspective
Definition of information system
- A technology represents a process (or a set of processes) that a given organization can perform, together
with all the resources needed to perform the process (skills, tools, etc.)
- A technical system represents a set of machines supporting a given technology
- An information system is a set of coordinated processes producing an information output and executing
information processing activities
- An information system is a technology, an IT architecture is a techncial system supporting a given
information system
Organizational impact of technical systems
- Traditional debate
- Set of consolidated beliefs tieing technical innovation with organizational change:
- 1. Technical innovation increases organizational efficiency (not effectiveness)
- 2. Technical innovation enables scale economies
- 3. Technical innovation causes an increase in the optimal minimum organizational size
- 4. Technical innovation increases individual specialization
- 5. Tayloristic assumption: there exists an organizational optimum, optimal process obtained through
optimal synchronization of individual tasks
- 6. Groupwork was not an issue (not studied)
- 7. Technical innovation increases bureaucracy and formalization of work
- 8. Overall, technical innovation increases the complexity of managerial tasks
Information processing perspective of organizational theory
- Started in the ’60s-’70s, when IT becomes pervasive inside organizations
- Involves a complete change in traditional beliefs on the organizational impact of technical innovation
- Radical change in the management principles of technology
- Why? Because IT processes information, which is the resource of managerial processes.
- By impacting on managerial processes, IT has an impact on the effectiveness of organization (not only
efficiency)
- Virtuous and vitious circles of information processes
Three schools under the information perspective
1_Decision theory (Galbraith 1973/1977)
1. Organizations as open systems
2. Uncertainty as the variable describing the environment in which organizations operate. Uncertainty measures
the ability of an organization to predict market demand.
3. Several determinants of uncertainty, e.g.
• Market dynamism
• Number of suppliers in the market
• Variety and variability of market requirements
• Degree of innovation ,…
Bounded rationality :
→ Represents the limited ability of individuals to process information
- It causes a need for cooperation
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Information Processing Perspective

Definition of information system

  • A technology represents a process (or a set of processes) that a given organization can perform, together with all the resources needed to perform the process (skills, tools, etc.)
  • A technical system represents a set of machines supporting a given technology
  • An information system is a set of coordinated processes producing an information output and executing information processing activities
  • An information system is a technology, an IT architecture is a techncial system supporting a given information system

Organizational impact of technical systems

  • Traditional debate
  • Set of consolidated beliefs tieing technical innovation with organizational change:
    1. Technical innovation increases organizational efficiency (not effectiveness)
    1. Technical innovation enables scale economies
    1. Technical innovation causes an increase in the optimal minimum organizational size
    1. Technical innovation increases individual specialization
    1. Tayloristic assumption: there exists an organizational optimum, optimal process obtained through optimal synchronization of individual tasks
    1. Groupwork was not an issue (not studied)
    1. Technical innovation increases bureaucracy and formalization of work
    1. Overall, technical innovation increases the complexity of managerial tasks Information processing perspective of organizational theory
  • Started in the ’60s-’70s, when IT becomes pervasive inside organizations
  • Involves a complete change in traditional beliefs on the organizational impact of technical innovation
  • Radical change in the management principles of technology
  • Why? Because IT processes information, which is the resource of managerial processes.
  • By impacting on managerial processes, IT has an impact on the effectiveness of organization (not only efficiency)
  • Virtuous and vitious circles of information processes

Three schools under the information perspective

1_Decision theory (Galbraith 1973/1977)

  1. Organizations as open systems
  2. Uncertainty as the variable describing the environment in which organizations operate. Uncertainty measures the ability of an organization to predict market demand.
  3. Several determinants of uncertainty, e.g.
  • Market dynamism
  • Number of suppliers in the market
  • Variety and variability of market requirements
  • Degree of innovation ,… Bounded rationality : → Represents the limited ability of individuals to process information
    • It causes a need for cooperation
  • In turn, cooperation involves individual specialization
  • Specialization generates information interdependencies among individuals/organizational units
  • Information interdependencies must be coordinated (or organized) in order for organizations to reach beyond the limits of individual rationality
  • The need for coordinating information interdependencies is the reason why organizations are created
  • IT is a coordination (or an organizational) technology Information interdependencies: By definition of bounded rationality, no single individual can process all the information required by an organization Hierarchical coordination system:
  • A hierarchy is a coordination system based on command and control (no delegation of decision-making activities)
  • Practically, a hierarchy is a company or an institution
  • Hierachies are associated with - Vertical information systems and
  • Horizontal (or lateral) information systems → The goal of information systems is the reduction of uncertainty Vertical information systems:
  • Relationships between units are purely hierarchical
  • A vertical information system manages information flows along hierarchical relationships Limits of the vertical information system: Environmental uncertainty → exceptions → Exceptions → vertical information flows towards higher hierarchical levels Horizontal (lateral) information system:
  • It coordinates direct lateral information exchanges between units at the same hierarchical level-
  • It is accompanied by a higher degree of delegation of decision-making activities. Summary How can companies deal with environmental uncertainty?

The price system: → The price system is the information system of the market coordination mechanism

  • Prices are not a set by production costs only, but also by the market system
  • If the market system works properly, price is not too far from production costs and is a good indicator of quality Causes for failure of market systems:
  1. Shortage of good/service
  2. Complexity of good/service
  3. Specificity or need for personalization of good/service
  4. Environmental uncertainty and information asymmetry
  5. Negotiation power of customer/supplier
  6. Frequency of transaction Market vs. hierarchies:
  7. The choice between market and hierarchical coordination mechanism is driven by cost (make or buy choices)
  8. When markets fail, hierarchies replace markets Impact of information technology:
  9. IT is an organizational technology that reduces coordination costs
  10. IT has a greater impact on market systems and should reduce hierarchies (smaller and more numerous companies) Limitations of transaction cost economics:
  11. They consider markets and hierarchies as alternative coordination mechanisms
  12. They ignore the impact of behavioural uncertainty inside organizations → Agency theory aims at overcoming these limitations

3 _Agency theory

  1. There exists a continuum between markets and hierarchies
  2. In particular, there exist market coordination mechanisms inside organizations → Agency theory aims at overcoming these limitations by explaining how organizations can apply market coordination mechanisms to increase their efficiency
  • Organizations are seen as networks of contracts among individuals
  • Coordination inside organizations can be based not only on command and control, but also on the execution of transactions
  • There exist transaction costs inside organizations that are called agency costs
  • Agency costs emerge every time a decision-making task is delegated towards lower levels of the hierarchy Example: employment contracts
  • Organizations are seen as networks of contracts among individuals
  • Coordination inside organizations can be based not only on command and control, but also on the execution of transactions
  • There exist transaction costs inside organizations that are called agency costs
  • Agency costs emerge every time a decision-making task is delegated towards lower levels of the hierarchy Example: Delegation and agency costs
  1. Fixed salary
  2. Fixed salary + percentage on sales
  3. Fixed salary + large bonus upon fulfilment of sales objectives (sales threshold)
  4. Fixed salary + all gains from sales – structure costs Example: observations
  5. As we move from solution 1 to solution 4, the degree of delegation increases
  6. In solution 4, the employee acts as an entrepreneur inside the organization
  7. Soft managerial levers can be used to make sure that internal entrepreneurs do not go against organizational objectives:
  • General rules and constraints
  • Organizational culture
  • Image
  • Shared branding actions,… Agency costs Delegation is accompanied by internal contracts similar to market contracts and, thus, creates an internal market with additional coordination costs called agency costs. Agency costs= control costs + warranty costs + residual loss (incorporating market transactions in organization) Hierarchical control inside market systems:
  • In perfect market systems, customers have no control over their suppliers.
  • Pure markets work well when trust is high and delegation is total.
  • In non perfect markets, customers can control their suppliers to some extent (or vice versa). They have visibility over their production process and, in some cases, apply to their suppliers hierarchical forms of control.
  • The overlap between internal markets and hierarchical transactions is diverse. Examples are TQM programs, process inspections, cooperative information systems, joint ventures, controlled start-ups, etc.). Limitations of agency theory:

Porter’s concept of information intensity, IT diversity

  1. Information intensity represents the size and complexity of the information used by processes of an organization (minimal in cigar manufacturing, maximum in banks)
  2. IT intensity is the actual ability of IT to satisfy the information processing requirements or organizational processes (it is greater in banking than it is in insurance)
  3. Management inclination is the degree to which a company’s management considers IT as a strategic lever (it depends on a number of factors such as computer literacy, culture, company history, etc.)
  4. In general, information intensity is greater in services than it is in manufacturing
  5. IT insensity can be freater in manufacturing than it is in services
  6. Historically, the management orientation towards IT was greater in manufacturing. Services have experienced a delay in IT development of about 10 years.
  7. Degree to which information processing activities are structured and, thus, can be easily translated into a computing procedure (predetermined steps and decision tree)
  8. Volumes, i.e. the amount of information to be processed
  9. Frequency with which a given operation is repeated
  10. Computational complexity of operations, the simpler, the better Manufacturing activity cycles, iterative, continuous:
  11. Development cycle → It is in charge of designing and industrializing a) products and b) production processes
  12. Logistic cycle → It is in charge of managing customers’ orders, with the following activities: a. Procurement:
  • acquisition of materials
  • physical management of materials (internal logistic processes), such as reception, warehousing, dispatching to productions plants, etc. b. Production: physical transformation of materials c. Sales and distribution:
  • order management,
  • external logistic processes,
  • post-sale processes (maintenance, customer support, etc.) Interfunctional information processes:
  1. Order management process: it manages the information regarding orders from order check in to post- sale services.
  2. Materials management process: it manages the information regarding materials from outgoing orders towards suppliers to usage within transformation processes.
  3. Operations management process: it manages the information regarding operations from materials dispatching to production plants to product delivery. Observations:
  4. Different products and
  1. Different visions Involve ALL production processes and ALL interfunctional structure information processes → the information systems is tightly bound to organizational structure Different production cycles share information, e.g.:
  • Information on stocks is created by the materials management and used by order management during sale activities
  • Information on stocks is created by the materials management and used by production
  • Information on orders is created during sales activities and used by production
  • Information on orders is created during sales activities and used by internal logistic
  1. Interfunctional information is used by the planning and control processes (or management processes). Examples are:
  • Strategic production planning (which products to produce for which markets)
  • Budget allocation
  • Scheduling and operations management
  1. Interfunctional information is used by administrative activities. Examples are:
  • Cash flow management
  • Project management Standard vs custom production Standard production : productshave a finite set of predetermined features that can be changed to accommodate customer preferences (e.g. color, size, optionals, etc.). in this case, companies produce according to a sales plan, before actual order are received. Custom production : products are designed according to customer requirements and then produced on demand (if something is produced a corresponding order must exist) Observations:
  • There is a continuum between standard and custom production.
  • Intuitively, custom production is associated with complex artifacts, while standard production is associated with simple artifacts.
  • Actually, the degree of standardization and the degree of complexity of products are independent variables and all combinations exist.
  • Information technology (IT) applies to all combinations, but functionalities are substantially different.

Classes of information in the operational database

  1. Transaction information : it describes the flow of operational activities. Transaction information describes the flow of operational activities in terms of exchanges between responsibilities (or organizational units) and between internal responsibilities and external players. Examples are:
  • Contracts with customers and suppliers
  • Status of production activities
  • Transfers of materials and half-finished goods between responsibilities.
  • Certification of events, such as inclusion of a new product in the catalog, the certification of a new suplier, etc
  1. Operations planning information : it describes the objectives and the expected results of operational activities. Operations planning information describes the objectives and expected results of operational activities. In short, it stores the production program.

→ Information is created at the beginning of a cycle to be used later on. A proactive approach is needed to exploit information at an executive level with an integrated view of an organization. Horizontal vs. vertical IT integration:

  1. Horizontal integration: integration of systems along operating processes (Porter’s primary processes → CIM (computer integrated manufacturing))
  2. Vertical integration: integration between the operational portfolio and the executive portfolio → MRP (material requirements planning)

CIM (computer integrated manufacturing)

Enabling technologies:

  • numeric control machines and robots
  • “mini” computers Deployment time frame: ‘60s-’70s Main objective of CIM: optimal scheduling and production resource management → Production efficiency Sample functionalities of CIM:
  • Transformation processes: scheduling of transformation activities, scheduling of machines, machine control, lead-time measurement
  • Workforce management: allocation of specialists to production activities, work shifts, workforce monitoring
  • Plant management: tracing of functional states, maintenance schedule, alarms
  • Materials management: tracing of outgoing orders, deliveries, and internal logistic
  • Quality management: quality control, data aggregation and analysis

MRP (materials requirements planning)

Enabling technologies:

  • CIM
  • local area networks Deployment time frame: ’70s-’80s Main objective of MRP: flexibility and scale economies through optimal planning. → Production effectiveness Main idea: integrate product structure through
  • Concurrent engineering of products
  • Inside-out production processes

MRP allows greater effectiveness by enabling sope economies with a more flexible materials requirement planning process (production is closer to market demand).

Operational Portfolio in Service Companies

Services vs. manufacturing:

  • Manufacturing companies produce tangible products, service companies produce intangible products
  • Services are made of “bits”
  • Manufacturing products are made of atoms → In service companies, IT is a production technology → Services are produced while they are delivered → In services, IT is simultaneously a production technology and a distribution channel In service companies, the overlap between production and distribution is called service delivery. Services value chain – definitions
  • Service set-up: all the tasks that are needed to set up the production capacity of the company (e.g. for a bank, opening a new branch, or definiting contracts with external data entry services)
  • Back-office tasks: production activities that are performed without the physical/virtual presence of the client, upon a client’s order
  • Front-office tasks: production activities that are performed with the physical/virtual presence of the client, upon a client’s order
  • Marketing and sales: tasks needed to advertise the company’s services, attract prospect customers, and sign service contracts with new customers Inter-functional information processes
  • Order management: it manages the information regarding orders from order check in to post-sale services.
  • Knowledge management: it manages the new information on customers acquired during service production and distribution by transforming into knowledge that can be used to in future production and distribution activities to improve customer satisfaction → Order management and operations management coincide → Materials management is replaced by knowledge management Knowledge management in services
  • Service customization is a fundamental driver of customer satisfaction
  • Service customization requires knowledge about (individual) customers

→ This learning process is more difficult than the MRP planning process → it is a knowledge management process Knowledge management process in service companies: Knowledge management is a mix of production planning and service R&D (called service innovation) [ + case study: Cigna insurance ]

Executive Information Systems

Traditional control model, Anthony’s pyramid

  • Strategic control → overall business objectives
  • Management control → financial resource management (budgeting vs. strategic objectives)
  • Operational control → operating activities (vs. business objectives and financial resources) Technology architecture of executive information systems: Information in data warehouses:
  • Key Performance Indicators, i.e. aggregate information providing a summary evaluation of a set of production activities or performance parameters
  • Indicators have a value defined by different dimensions, including:
  • Time (extension and granularity)
  • Organizational unit
  • Customer
  • Product
  • Process and activity
  • Other dimensions such as channel, geographical area, project… Design steps of executive information systems:
  • Business requirements (key performance indicators)
  • Information sources
  • Information processing (ETL)
  • Information storage (data warehouse design)
  • Table of facts
  • Table of keys
  • Processing level
  • Presentation and reporting
  • Decision support engines
  • Visualization engines
  • Knowledge extraction engines Information sources: Operational DBs represent the main sources of information. They include:
  1. ERP operational data
  2. CRM data
  3. Operational information from custom applications
  4. Operational information from legacy applications
  5. Information from the administrative portfolio Information processing:
  6. Selection of source data
  7. Data quality control and data cleaning
  8. Data integration
  9. Data aggregation
  • CSFs are an abstract concepts, such as:
    • Security of cars
    • Dependability of cars
    • Design appeal of cars
  • CSFs are complex constructs and correspond to multiple KPIs CSF method – steps:
  1. Predefinition: desk analysis
  2. Interview: with top managers, aimed at identifying CSFs
  3. Robustness analysis: aimed at selecting KPIs
  4. Refinement and documentation: presentation to customer, possibile modifications, specification (written, but informal) CSF method – robustness analysis - Criteria to evaluate/select KPIs:
  • Cost of information (e.g. customer satisfaction is costly)
  • Significance, that is contribution to understand corresponding CSF
  • Frequency, if informaiton is seldom updated, KPI should be eliminated
  • Structuredness, quantitative is preferred against qualitative

ERP Architecture

Introduction to ERPs

  • ERP (together with CRM) has involved a major change in the IT industry (starting from the mid ‘90s), since:
    • It has represented a global phenomenon
    • It has transformed the approach to computerization from coding to purchasing a package +. Consulting services
    • It has integrated all three portfolios:
      • Operational
      • Administrative
      • Executive
  • Our goals:
    • Provide an overview of ERPs
    • Relate ERPs to a corresponding organizational change
  • ERP stands for Enterprise Resource Planning. The acronym has been coined in the mid ’90s by Gartner Group.
  • There is an important distinction between: - ERP modules supporting internal processes, called core ERP.
    • Core ERP modules include:
      • Administrative portfolio
      • Operational portfolio (industry dependent, vertical solutions)
      • Executive portfolio - ERP modules supporting the interaction with external parties, such as customers and suppliers, called extended ERP
    • Extended ERP modules include:
      • CRM, Customer Relationshiop Management,
      • SCM, Supply Chain Management),
      • E-Procurement and Market Place

The EPR Paradigm

  1. Information integration
  2. Extension and modularity
  3. Process prescriptiveness Information integration: integrating legacy systems Information integration: ERP vision
  • Horizontal data consistency (information sharing)
  • Vertical data consistency (from operations to executive dashboards) 13
  • Conceptual consistency: one, common, integrated data model Extension and Modularity
  • Functional completeness
  • Modularity:
  • One Stop Shopping (one supplier)
  • Best of The Breed (multiple suppliers)
  • This enables a real-time reconciliation of budgets, resource consumption, progress of operations and cashflows
  • Activity-based costing (ABC) represents a fundamental component of this integration Activity based costing (ABC)
  • Operations are associated with costs
  • Operations can be associated with an internal pricing system
  • Progress can be assessed from both a project management (time, quality) and financial (cost) perspective
  • Progress can be reconciled with administrative cash flows Conclusions: So far, ERPs have integrated innovation into a unified solution. Is this trend going to continue in the future? Is cloud a threat to the ERP paradigm? Is Gen AI a threat to the ERP paradigm?

CRM Customer Relationship Management

Multi-channel integration: CRM vision (different vision with respect to Information integration: ERP vision)

  • Multi-channel integration ensures cross-channel service consistency
  • Value extraction from customer data with analytic CRM
  • Customer understanding and monitoring with executive functionalities Analytical CRM – Mining
  • Mining refers to data analysis with the goal of discovering insights that are relevant for business management.
  • Mining can be performed with any technique: descriptive statistics (e.g. mean values), data visualization techniques (e.g. plotting data on a bidimensional chart), statistical correlations (e.g. correlating IT investments with sales). More recently, also with machine learning techniques.
  • Why mining data?
  • Several companies have huge operational databases embedding new knowledge (KM information process)
  • Data mining is used to extract patterns
  • Patterns should be explained by summarizing findings in an intuitive way (e.g. simple statistical indicators, recurring associations, etc.)

Analytical CRM – Customer profiling Example of behavioural analysis: customer segmentation Customers who can be traced (with a loyalty card) can be segmented according to different dimensions:

  • Loyalty, from the analysis of their purchasing habits, such as frequency, recency and expenditure.
  • Price sensitivity, such as up, low and mid market
  • Lifestyle, that is the behavioural orientation of customers along different dimensions, such as «business», «casual», «classic», «vintage» or «sports wear» Customer segmentation represents the basis for targeting promotions, by:
    • Targeting a segment or a mix of segments.
    • Using the average characteristics of a segment to complement the knowledge on individual customers Analytical CRM – Campaign management Campaign management is a set of functionalities that support marketing campaigns. Campaigns have four fundamental phases and related functionalities: Reporting: Example
  • Reports show customer and product segments vs. KPIs, for example:
  • sales of each product segment
  • profitability of each customer segment
  • Data are extracted from the customer data warehouse (or from marts) and shown with the reporting functionalities of the CRM software Operational CRM – Sales Force Automation (SFA)
  • Goal: to provide CRM front-end functionalities to the sales force in both B2C and B2B
  • Advantages for companies:
  • Management perspective: governance of the sales force.
  • Sales force perspective: stronger sales capabilities.
  • Operating objectives :
  • Reduce the costs of customer acquisition.
  • Increase customer retention.
  • Reduce bureacracy for customers and increase responsiveness during the sales process.
  • Increase the effectiveness of the sales force. Sales process on physical channels