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COMPETING IN THE INFORMATION AGE

Today, we live in the Information age, where vast quantities of information are available to
persons using computers. Information technology and Information Systems have had a huge impact
on the global business environment.

Evolution of the Role of Information Systems (IS)


The business applications of information systems have expanded significantly over the years.

1950s - 1960s: Until the 1960s, the role of most information systems was simple: transaction
processing, record keeping, accounting, and other electronic data processing (EDP) applications.

1960s 1970s: Then another role was added, namely, the processing of all these data into useful,
informative reports. Thus, the concept of management information systems (MIS) was born. This
new role focused on developing business applications that provided managerial end users with
predefined management reports that would give managers the information they needed for decision-
making purposes.

1970s 1980s: By the 1970s, it was evident that the standard off-the-shelf information products
produced by management information systems were not adequately meeting the decision-making
needs of management, so the concept of decision support systems (DSS) was born. The new role for
information systems was to provide managers with ad hoc, interactive support of their decision-
making processes. This support would be tailored to the unique decisions and decision-making styles
of managers as they confronted specific types of problems in the real world.

1980s 1990s: In the 1980s, several new roles for information systems appeared.
First, the rapid development of microcomputer processing power, application software packages, and
telecommunications networks gave birth to the phenomenon of end-user computing . End users could
now use their own computing resources to support their job requirements instead of waiting for the
indirect support of centralized corporate information services departments.

It also became evident that most top corporate executives did not have time to use either the
voluminous reports from management information systems or the complex analytical modeling
capabilities of decision support systems, so the concept of executive information systems (EIS)
developed. These executive summary information systems were created to give top executives an
easy way to get the critical information they wanted, when they wanted it, and tailored to the formats
they preferred.

Expert systems (ES) and other knowledge-based systems also forged a new role for information
systems. Today, expert systems can serve as consultants to users by providing expert advice in
limited subject areas. One look at Watson playing Jeopardy against the two best players in the world
shows the power of machine learning to rapidly bring us new knowledge.

1990s Present: The mid- to late 1990s saw the revolutionary emergence of enterprise resource
planning (ERP) systems. This organization-specific form of a strategic information system
integrates all facets of a firm, including its planning, manufacturing, sales, resource management,
customer relations, inventory control, order tracking, financial management, human resources, and
marketingvirtually every business function. The primary advantage of these ERP systems lies in
their common interface for all computer-based organizational functions and their tight integration and
data sharing, necessary for flexible strategic decision making.
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We have also seen the emergence of inter-organizational systems such as the supply chain
management (SCM) and customer relationship management (CRM) systems.

We are also entering an era where a fundamental role for IS is business intelligence (BI). BI refers to
all applications and technologies in the organization that are focused on the gathering and analysis of
data and information that can be used to drive business decisions. Through the use of BI technologies
and processes, organizations can gain valuable insight into the key elements and factorsboth
internal and externalthat affect their business and competitiveness in the marketplace. BI relies on
sophisticated metrics and analytics to see into the data and find patterns, trends, relationships and
opportunities that can be turned into profits.

Finally, the rapid growth of the Internet, intranets, extranets, and other interconnected global
networks in the 1990s dramatically changed the capabilities of information systems in business at the
beginning of the 21st century. Internet-based and Web-enabled enterprises and global e-business and
e-commerce systems are becoming commonplace in the operations and management of todays
business enterprises. Information systems are now solidly entrenched as a fundamental resource in
the modern organization.

Today, more information can be provided more quickly and cheaper than before. This is due to the
development of faster, cheaper technology for information processing and developments in
telecommunications for information transmission. Businesses require accurate, up-to-date
information on both external elements such as competitors prices, market preferences, and the
financial market; and internal elements within the organization in order to gain a competitive
advantage and survive.

Understanding information technology provides great benefits to anyone learning about business.
Although business personnel do not need to know a lot of technical details, it would be beneficial for
them to know the capabilities of IT, and what it can and cannot accomplish.

Information Technology vs. Information Systems


Information technology (IT) refers to any computer-based tool that people use to work with
information and to support the information and information-processing needs of an organization. This
includes hardware, software, databases and networks.

An information system (IS) collects, processes, stores, analyzes, and disseminates information for a
specific purpose. An IS needs to get the right information to the right persons at the right time in the
right amount of detail in the right format.

IT Literacy vs IS Literacy
You must acquire both IT literacy and IS literacy to be able to use information systems to meet
personal and organizational goals. Computer literacy is a knowledge of computer systems and
equipment and the ways they function. It stresses equipment and devices (hardware), programs and
instructions (software), databases, and telecommunications. The focus is on how to use the computer
and various software.

Information systems literacy goes beyond a knowledge of the fundamentals of computer systems and
equipment. It encompasses how and why information technology is applied in business. It is the

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ability to make decisions, add value to existing information, and solve problems taking advantage of
computer technology.

Knowing about various types of hardware and software is an example of computer literacy. Knowing
how to use hardware and software to increase profits, cut costs, improve productivity, and increase
customer satisfaction is an example of information systems literacy.

Business drivers of information systems


What makes information systems so essential today? Why are businesses investing so much in
information systems and technologies? They do so to achieve six important business objectives:
operational excellence; new products, services, and business models; customer and supplier intimacy;
improved decision making; competitive advantage; and survival.

Operational Excellence: Businesses continuously seek to improve the efficiency of their operations
in order to achieve higher profitability. Information systems and technologies are some of the most
important tools available to managers for achieving higher levels of efficiency and productivity in
business operations, especially when coupled with changes in business practices and management
behavior.

New Products, Services, and Business Models: Information systems and technologies are a major
enabling tool for firms to create new products and services, as well as entirely new business models.
A business model describes how a company produces, delivers, and sells a product or service to
create wealth. Todays music industry is vastly different from the industry in 2000. Apple Inc.
transformed an old business model of music distribution based on vinyl records, tapes, and CDs into
an online, legal distribution model based on its own iPod technology platform.

Customer and Supplier Relationship Management: When a business really knows its customers
and serves them well, the way they want to be served, the customers generally respond by returning
and purchasing more. This raises revenues and profits. Likewise with suppliers: the more a business
engages its suppliers, the better the suppliers can provide vital inputs. This lowers costs.

Decision Making: If a firm does not have accurate information with which to make its decisions,
then at best it can guess what is the best thing to do; at worst, it is completely in the dark. This can
lead to over or under-production of goods and services, the misapplication of resources, and poor
customer service and response times. All of these problems can lead to rising costs and customers
defecting to alternative suppliers. It is crucial for business managers to have good information on
which to base decisions and this often means good information systems.

Competitive advantage: A competitive advantage, put simply, means that you can do things better
than your competitors. Such advantages could take the form of having the ability to:
charge less for products
respond more quickly to customer requirements
have a greater understanding of customer needs
deliver more tailored products and services.

It is important that businesses use information systems to deliver better performance, create superior
products and respond to customers promptly. Note that a competitive advantage, once gained, must
be maintained. If a firm does not improve its business processes continually and exploit new

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opportunities when they are available, then its competitors will soon catch up. What previously was
an advantage will soon become mainstream.

Survival: The reality today for many businesses is that if they do not invest in information systems
they cannot survive. Information systems are now a necessity in many business environments. For
example, most retail stores now use computer-based information systems to help their employees
record customer purchases, keep track of inventory, pay employees, buy new merchandise, and
evaluate sales trends. Store operations would grind to a halt without the support of such information
systems. These information systems, once seen as a competitive advantage, are now industry
necessities.

Core drivers of the Information age


Today, we live in the information age where infinite quantities of facts are available to anyone who
can use a computer. The core drivers of the information age are:
Data
Information
Business Intelligence
Knowledge

Data consists of raw facts that describe the characteristics of a transaction, an event or object. Think
of the data that is created when you buy a product from a retailer. This includes:
- time and date of transaction (eg., 10:05 Tuesday December 2016)
- transaction value (eg., $2500)
- facts about what was bought and how much was bought
- how payment was made (cash, cheque, credit card)
- which employee recorded the sale
- whether any promotional discount applied

These details are recorded, classified and stored, but are not organized to convey any specific
meaning. These data are useful for understanding individual sales; however, they do not provide us
much insight into how the business is performing as a whole.

Information: When these facts are organized and arranged in a meaningful manner, they become
information.
Think of data as raw material it needs to be processed and organized before it can be turned into
something useful - information.

The transforming
Data process (selecting, Information
(Input) organizing and (Output)
manipulating data)

At its simplest, data about a transaction is processed to create information for example, a receipt.
The same data would also be useful to the manager of the retail store. For example, a report showing

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total sales for the day, or which are the best- or slowest-selling products. So the data concerning all
store transactions in the day needs to be captured, and then processed to create a management report.

In order to make good decisions, decision makers need to have access to information which has the
following characteristics.
Good information is
(a) relevant for its purpose
(b) sufficiently accurate for its purpose
(c) from a source in which the user has confidence
(d) communicated to the right person
(e) communicated in time for its purpose
(f) that which contains the right level of detail

Business intelligence (BI) refers to applications and technologies that are focused on the gathering
and analysis of data and information from multiple sources such as company sales, suppliers,
customers, competitors, and partners etc. so as to show patterns, trends, and relationships for business
decision making.

Knowledge includes the skills, experience, intelligence and expertise that create a persons
intellectual resources. Knowledge workers are individuals valued for their ability to analyze and
interpret information. They use BI along with personal experience to make decisions based on both
information and intuition.

Using data, information, business intelligence, and knowledge to make decisions and solve problems
is the key to finding success in business. Together, they reduce the uncertainty surrounding the
potential effectiveness of the solution.

What is a System?
Like information, another central concept is that of a system. A system is a set of elements or
components that interact to accomplish goals. Systems have inputs, processing mechanisms, outputs,
and feedback. For example, consider the automatic car wash.
Obvious tangible inputs for the process are a dirty car, water, and various cleaning ingredients
used. Time, energy, skill, and knowledge are also needed as inputs to the system. Knowledge is used
to define the steps in the car wash operation and the order in which those steps are executed. Skill is
the ability to successfully operate the various cleaning devices.
The processing mechanisms consist of first selecting which of the cleaning options you want
(wash only, wash with wax, wash with wax and hand dry etc.) and communicating that to the
operator of the car wash. Liquid sprayers shoot water, liquid soap, or car wax depending on which
options you selected.
The output will be a clean car (hopefully).
There is also a feedback mechanism (your assessment of how clean the car is).

So, the car wash system has independent elements or components (like the car wash employee, water,
liquid sprayer, air dryer etc.) that interact to accomplish a goal which is to produce a clean car.

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What is an Information System?
An information system is a set of interrelated elements or components that collect data (input),
manipulate (process), store and disseminate (output) data and information and provide a feedback
mechanism to meet an objective. Input captures or collects raw data from within the organization or
from its external environment. Processing converts this raw input into a meaningful form. Output
transfers the processed information to the people who will use it or to the activities for which it will
be used. Information systems also require feedback, which is output that is returned to appropriate
members of the organization.
Feedback to Management
(Control)

The transforming
INPUT process (creating OUTPUT
(Raw product, providing (Finished
materials, service, organizing and product,
Data) manipulating data) Information)

In a business firm, the control mechanism or feedback loop is management. The control process
involves receiving information from the system, evaluating it, and transmitting information back to
the system when some type of change must be made. The feedback loop, therefore, provides a
communication channel for the information.

A computer-based information system (CBIS) is composed of hardware, software, databases,


telecommunications, people, and procedures that interact to collect, manipulate, store and process
data into information.

Competitive Advantage

A competitive advantage is a feature of a product or service on which customers place a greater


value than they do on similar offerings from competitors. A competitive advantage over competitors
can be gained by offering consumers greater value, either by means of lower prices or by providing
greater benefits and service that justifies higher prices.

It is a significant (and ideally) long-term benefit to a company over its competition. However, in
reality, competitive advantage is often temporary, as competitors find ways of duplicating the product
or service. The firm then needs to develop a strategy based on a new competitive advantage.
Establishing and maintaining a competitive advantage can be complex and expensive, but a
companys survival and prosperity depend on its success in doing so.

Competitive intelligence is the process of gathering information about the competitive environment,
including competitors plans, activities, and products, to improve a companys ability to succeed. It
means understanding and learning as much as possible as soon as possible about what is occurring
outside the company to remain competitive.
Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not send its
sales representatives into grocery stores just to stock shelves; they carry handheld computers and
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record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses
this information to gain competitive intelligence on everything from how well competing products
are selling to the strategic placement of its own products.

Managers use three common tools to analyze competitive intelligence and develop competitive
advantages including:
1. The Five Forces Model (for evaluating industry attractiveness).
2. The three generic strategies (for choosing a business focus).
3. Value chain analysis (for executing business strategies).

Porters Competitive Five Forces Model


Factors that Lead Firms to Seek Competitive Advantage

The best-known framework for analyzing competitiveness is Michael Porters competitive forces
model (Porter, 1985). Porters model identifies five major forces that can endanger or enhance a
companys position and its profitability in a given industry. Although the Web has changed the nature
of competition, it has not changed Porters five fundamental forces. Every competitive organization,
no matter how large or small, or what business it is in, is driven by these forces. The way in which
the business responds to these forces will determine its success.

Formally defined, Porters Five Forces Model analyzes the competitive forces within the environment
in which a company operates to assess the potential for profitability in an industry. Its purpose is to
combat these competitive forces by identifying opportunities, competitive advantages, and
competitive intelligence. It can also be used by entrepreneurs to determine whether entry into a
particular industry is viable. So, it would benefit businesses to understand the impact of the 5 forces
on their success within an industry, so that they can determine their competitive strategies for
survival and profitability. If the forces are strong, they increase competition; if the forces are weak,
they decrease competition. This section details each of the forces and its associated IS business
strategy.

The 5 competitive forces are:

1. the threat of new entrants


2. the (bargaining) power of suppliers
3. the (bargaining) power of buyers
4. the threat of substitute products
5. rivalry among existing competitors

Information technology can aid a business in using these competitive forces to its advantage and
create a competitive advantage for a firm that is able to use it constructively.

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Threat of New Entrants. The threat of new entrants is a competitive force that established firms in
an industry would like to deter or minimize. Within any industry there is always the threat that a new
company may enter and attract some of the existing demand for the products of that industry. This
will reduce the revenue and profit of the current competitors. A threat appears when entry and exit
costs to an industry are low and the technology needed to start and maintain a business is commonly
available.
For example, a small food stall is threatened by new competitors. Owners of small stalls do not
require millions of dollars to start the business, food costs do not decline significantly for large
volumes, and food processing and preparation equipment is readily available. When the threat of
new market entrants is high, the desire to seek and maintain competitive advantage to dissuade new
entrants is also high.

Reducing the threat of new entrants is accomplished by an organization by developing barriers to


entry. Barriers to entry include
Large capital investments to enter the industry
Use of sophisticated information systems
Product differentiation and strong brand loyalties to already established companies
Economies of scale

Economies of scale are the cost advantages from expanding the scale of production in the long run.
The effect is to reduce average costs over a range of output. For example, when a company buys
inputs in bulk - for example, potatoes used to make French fries at a fast food chain - it can take
advantage of volume discounts. Also, as the scale of production of a company increases, a company
can employ the use of specialized labor and machinery resulting in greater efficiency. Large
economies of scale can constitute a significant barrier to entry into an industry. When economies of
scale are insignificant, they will not pose a major barrier to firms wishing to enter a market.

The Internet can lead to an increased threat of new entrants in some industries (such as sales of
products and services), because of reduced barriers to entry due to lower investments required for
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startup and operations (smaller sales force, physical facilities, no requirement for distributors and
retailers, access to cheap call centers located in other parts of the world etc.).

Bargaining Power of Suppliers. Suppliers provide the necessary inputs of raw materials, machinery
and manufactured components for the firms production process. Supplier power is the extent to
which suppliers have the ability to exert control over price. Higher supplier power may also result in
the supplier not maintaining the high quality of their products. When an industry is dominated by
only a few, large suppliers, they have a lot of power.

Thus, a new entrant would find a market unattractive if it is dominated by a few large suppliers. It
would be harder to establish a foothold.

When the bargaining power of suppliers is strong, buyer companies need to improve their
competitive advantage to maintain their bargaining position.

Suppliers Company Consumers (customers, buyers)

For example, Dell Computers has a number of suppliers who supply the various parts, which Dell
then assembles to sell to you, the consumer.

The Internet can lead to a decrease in Supplier power because of the large number of alternative
suppliers globally which allows buyers to have a wider choice.

Power of Buyers. This is the ability of buyers to affect the price of an item. If buyer power is high,
they can force the suppliers in the market to be more competitive, thus keeping prices down and
quality high.

The bargaining power of buyers can be high when there are many sellers, the product is
undifferentiated (that is, there are many alternatives available, giving the buyer plenty of choice
among suppliers), when they place orders in large volumes, or when switching costs are low
(allowing them to switch suppliers easily without high penalties).

The Internet can increase the power of buyers by giving them greater access to many, global
suppliers, more choices, price transparency, easy access to information.

When customers have a lot of bargaining power, supplier companies try to increase their competitive
advantage to retain their customers. One way to decrease buyer power is for the company to
introduce switching costs. These are negative costs that a consumer incurs as a result of changing
suppliers, brands, products or services. Switching costs include financial as well as intangible costs
(for example, frequent flyer miles, switching to a new doctor)

Companies can also reduce buyer power with loyalty programs, which reward customers based on
their spending. The airline industry is famous for its frequent-flyer programs, for instance. Because of
the rewards travelers receive (free airline tickets, upgrades, or hotel stays), they are more likely to be
loyal to or give most of their business to a single company. Keeping track of the activities and
accounts of many thousands or millions of customers covered by loyalty programs is not practical
without large-scale business systems, however. Loyalty programs are thus a good example of using
information systems to reduce buyer power.
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Threat of Substitute Products or Services. Companies that offer one type of goods or services are
threatened by other companies that offer similar goods or services. Substitutes refer to those
products that are available in other industries that meet an identical or similar need for the buyer. For
example, take a paper newspaper. Substitutes to getting the news are enewspapers, blogs, other
websites, social media. If a particular item has a lot of substitutes available, buyers then have more
choices. So, if the supplier were to raise prices or provide low quality, the buyer would have no
problem switching to another supplier providing a substitute (elasticity of demand).

The advent of the Internet has led to an increase in the threat of substitutes due to the availability of
alternative electronic products/services in addition to physical. Substitutes for paper-based books are
ebooks in different formats (for PC and ereaders). Also, the choice of new and used books from
services like eBay, Amazon etc. It must be noted, however, that we are talking about legal
substitutes. Downloading a video or movie or ebook for free from a website (where the material has
been uploaded by a user) violates copyright laws and is piracy. Buying an ebook from online stores
allows you to download the ebook onto your computer as soon as the transaction has been completed,
thus saving you time and shipping costs. Making online reservations (for example, airline) saves you
the time, effort and money to physically visit the airline agency to make your reservation.

Rivalry among existing Competitors. There are various factors that can affect the rivalry among
competitors in a market. If there are a lot of competitors, there is increased competition to gain a fair
market share. Low levels of product differentiation would also lead to increased rivalry, since this
means that everybody is basically offering the same product, giving buyers more power of choice. It
now becomes harder to retain customers and keep them loyal to your product, since they would now
wander over to whoever is selling the product for the best price. Also, when market growth is slow
or sluggish, you have declining sales volumes and revenues, creating increased competition.

Firms within an industry can use IS to compete against their rivals. For example, Amazon uses
product differentiation in the form of providing its customers with recommendations for products that
they may be interested in, based on their previous searches and purchases. In this way, Amazon has
reduced its rivals power by offering its customers a differentiated service.

The Internet increases rivalry among competitors due to their global presence. It widens the
geographic market, thereby increasing the number and intensity of competitors

As we have seen, the Internet plays an important role in increasing/decreasing each of the 5
competitive forces. It has changed the way buyers, suppliers and competitors interact with each
other. As a result, organizations are forced to change their traditional ways of running their firms and
conducting business in order to survive.

THE THREE GENERIC STRATEGIESCHOOSING A BUSINESS FOCUS

Once top management has determined the relative attractiveness of an industry and decided to enter
it, the firm must formulate a strategy for doing so. If our sample company decided to join the airline
industry, it could compete as a low-cost, no-frills airline or as a luxury airline providing outstanding
service and first-class comfort. Both options offer different ways of achieving competitive advantages
in a crowded marketplace. The low-cost operator saves on expenses and passes the savings along to
customers in the form of low prices. The luxury airline spends on high-end service and first-class
comforts and passes the costs on to the customer in the form of high prices.
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Porter has identified three generic business strategies for entering a new market:
(1) broad cost leadership,
(2) broad differentiation, and
(3) focused strategy.

Broad strategies reach a large market segment, while focused strategies target a niche or unique
market with either cost leadership or differentiation. Trying to be all things to all people is a recipe
for disaster, since doing so makes it difficult to project a consistent image to the entire marketplace.
For this reason, Porter suggests a company adopt only one of the three generic strategies.

Broad market and low cost: Walmart competes by offering a broad range of products at low prices.
Its business strategy is to be the low-cost provider of goods for the cost-conscious consumer.

Broad market and high cost: Neiman Marcus, a luxury department store, competes by offering a
broad range of differentiated products at high prices. Its business strategy offers a variety of specialty
and upscale products to affluent consumers.

Narrow market and low cost: Payless competes by offering a specific product, shoes, at low prices.
Its business strategy is to be the low-cost provider of shoes. Payless competes with Walmart, which
also sells low-cost shoes, by offering a far bigger selection of sizes and styles.

Narrow market and high cost: Tiffany & Co. competes by offering a differentiated product,
jewelry, at high prices. Its business strategy allows it to be a high-cost provider of premier designer
jewelry to affluent consumers.

VALUE CHAIN ANALYSISEXECUTING BUSINESS STRATEGIES

Firms make profits by taking raw inputs and applying a business process to turn them into a product
or service that customers find valuable. A business process is a standardized set of activities that
accomplish a specific task, such as processing a customers order. Once a firm identifies the industry
it wants to enter and the generic strategy it will focus on, it must then identify the business processes
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required to create its products or services. Of course, the firm will want to ensure the processes add
value and create competitive advantages.

Porters Value Chain Model


Michael Porters value chain model views a firm as a series of business processes that each add value
to the product or service. A value chain is a sequence of activities through which the organizations
inputs are transformed into more valuable outputs. The value chain is a system of interdependent
linkages. In other words, the way one activity is performed may affect the performance of others.

Value chain analysis is a useful tool for determining how to create the greatest possible value for
customers. The goal of value chain analysis is to identify processes in which the firm can add value
for the customer and create a competitive advantage for itself, with a cost advantage or product
differentiation.

According to Porters value chain model, the activities conducted in any organization can be divided
into two broad categories: primary activities and support activities.

Primary activities are those which are directly related to the production and distribution of the
organizations product or service, thus creating value for which customers are willing to pay.
Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide
after-sales services.

Primary activities include:


1. Inbound logistics these activities include delivery and handling of incoming materials; they are
stored until the point where they are needed; (receipt of goods, warehousing, inventory control)
2. Operations these activities include manufacturing/processing related functions, including parts
assembly and quality assurance; operations could include room service in an hotel, packing of
books, videos by an online retailer, or the final tune-up for a new cars engine.
3. Outbound logistics these activities support the processing of orders and the shipping of goods
and services to customers;
4. Marketing and sales these activities include advertising, promotion, and sales force management;
5. Service these activities support repair and maintenance of its goods and services, after-sales
service, complaints handling, training;.

Support activities, along the top of the value chain, include firm infrastructure, human resource
management, technology development, and procurement. These support the primary value activities.
1. Firm infrastructure: these include activities such as general management, legal work, and
accounting;
2. Human resource management: provides employee training, hiring, and compensation.
3. Technology development: applies IT to processes to add value. This could include production
technology, Internet marketing activities, development of IS
4. Procurement: purchases inputs such as raw materials, resources, equipment, and supplies.

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Examining the firm as a value chain allows managers to identify the important business processes
that add value for customers and then find information system solutions that support them.

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