#Business Ethics & Global Business Environment
- Organized efforts of an enterprise to supply goods and services to customers.
- Acquiring of wealth through buying and selling of goods.
- Exchange of goods and services
- Objective = profit
- Numerous transactions
- Risks and uncertainties
- Business skills
- Buyer and seller
- Deals in goods and services
- Connected with production
- Marketing and distribution of goods
- Satisfy human wants
- Social obligations
- Improves standard of living
- Proper utilization of resources
- Better quality of goods
- Large variety of goods
- Creates utilities
- Employment opportunities
- Worker’s welfare
It is the surroundings of the business enterprise, that affects or influences its operations and effectiveness.
It includes factors outside of the firm, that can lead to opportunities or threats.
- Socio-economic factors
- Technological factors
- Cultural factors
Nature of Business Environment
- It is an inseparable part of business.
- It is dynamic.
- Business lacks control over environment.
- It has internal and external factors.
- It is complex.
- It is multifaceted.
- It has opportunities and obstacles.
- It regulates the scope of business.
- It has a long lasting impact.
- It is uncertain.
Constituents of Business Environment
- Has direct impact on business
- Can be controlled
- Factors include personnel, physical facilities, marketing, etc.
* Value system
* Mission, vision and objectives
* Management structure and nature
* Internal power relationships
* Human resource
* Company image and brand equity
* Physical assets and facilities
* Research and development
* Financial resources
* Marketing resources
- Factors outside a firm
- Cannot be controlled
Micro (Operating) Factors
* Market intermediaries
Macro (General) Factors
* International / Global
- Political System = Politics + Government
- Communism + Socialism <> Fascism + Anarchism
- Institutions + Political Organizations + Interest Groups
- Composed of member of social organization who are in power
#**Political factors affecting business (GDP-FP)**
- Government Laws
- National Defense Posture
- Political Stability
- Foreign Policy
- Political Organization
- To Make Law
- Parliament = President + Lok sabha + Rajya sabha
- Delegated Legislation
- Some powers are delegated
- Often published in Official Gazettes
- Laws made under urgency
- By President
- Valid only for a limited period
- To Execute Law
- Council of Ministers
- Union Cabinet = Prime Minister + Colleagues
- Drafts bill and presents to Parliament for approval
- To Adjudicate Law
- Continuation of British legal system
- Independent in nature
- Supreme legal document = Constitution of India
- Supreme Court
- High Court
- District COurts
- Civil Judge
- Political System = Politics + Government
- Communism + Socialism <> Fascism + Anarchism
- Institutions + Political Organizations + Interest Groups
- Composed of member of social organization who are in power
- Open System
- Few or limited laws based on popular beliefs
- Based on authority given or acquired
- Closed, only open for a few
- Based on customary law
- Autonomous groups
- Closed and customary law
- Positivist law
- Non-autonomous groups
- No political law
- Stronger > Weaker
- One person with power
- Benign than dictatorship
- Powers are passed down to other generations
- One person with power
- Laws based on cultural factors
- One person with absolute power
- No transfer of power
- Oligarchy based on religion
- Illegal dictatorship
- For personal gain
- Ruler = Upper class people
- Ruler = Most deserving person
- Ruler = Person with most resources
- Voting based on few groups who in turn decide the authoritative power
- People have the power
- Based on pure voting
#**Influence on Business - (FOOD PPIG)**
- Determines FDI
- Determines the level of foreign involvement in Business
Other Country Relations
- Friendly nations = Favorable foreign trade
- Reduces the need for defence budget
- FTA policies
Opposition Party Views
- Formation of coalitions = Complex = Reduces business efficiency
Defense and Military Policy
- Large defence budget = more taxes + less infrastructure
- Political thinking + approach + vision of government towards economic and social activities
- Decides which areas are to be privatized, FDI, Public, etc.
- Helps in long-term planning of a country
- Gives a sense of security to people
International Business/MNCs Policies
- Political environment maybe be Domestic, Foreign or International
- Major factor for consideration for MNCs
Government Control and Restrictions
- Highly restrictive = reduces business activities and interests
Corporate Social Responsibility
It may be defined as the intelligent and objective concern for the welfare of the society.
Shareholders or Owners
- Run business efficiently
- Proper utilization of capital and resources
- Growth and appreciation of capital
- Regular and fair return on investment
Employees and Workers
- Provide proper remuneration
- Workplace safety standards
- Worker’s compensation insurance
- Positive working climate
- Quality goods and services
- Fair prices
- Honest ads
- After-sales service
- Research and development
- Consumer’s safety
- Regular supply
- Attend complaints
- Avoid monopolistic competition
- Regular orders for purchase
- Reasonable credit period
- Fair terms and conditions
- Informing about customer taste
- Timely payment of dues
- Information about future development plans
- Accurate information of financial health of organization
- Reasonable price for goods
- Promote healthy atmosphere
- No high sales commissions to intermediaries
- No heavy discounts or free products
- No defaming of competitors by false ads
- Pay taxes
- Follow environmental regulations
- Follow labor laws
- Avoid restrictive trade practices
- Proper financial disclosures
- Avoid corruption
- Protection of environment
- Reasonable use of resources
- Reservation for weaker section
- No anti-social activities
- Development of backward regions
- Financial assistance
- Prevent congestions
- Generate employment
Introduction of contaminants into the natural environment that causes adverse change
Types of Pollution and its control
- Planning and zoning of industrial zones
- Dispersion in scarce locations
- Reduction by process changes
- Raw material substitution
- Fuel substitution
- Process modification
- Equipment modification, repair, maintenance
- Use of control equipment
- Reducing use of chemicals
- Weed control
- Reforestation and recycling wastes
- Solid waste management
- Industrial Effort
- Farming solutions
- Proper waste disposal
- Filtering of water effluents
- Ground water contamination controls
- Source noise reduction
- Change in design and operation
- Control of indoor noise
- Road noise control by buffer zones
- Legislature to control noise
- Education and public awakening
- Awareness programs
- Transmission control
- Protect exposed person
- Cooling towers
- Cooling ponds
- Artificial lake
- Prevention of deforestation
- Treatment of waste before disposal
- Industrial laws
- No radioactive dumping
- Reduction in developmental activities in coastal region
- Ban toxic, sewage dumping
- Minimize oil spills
- Recycling of waste
- Strict regulations
- Education and awareness creation
- Prevention of dumping of oil ballast
- Reduced drilling and dredging in ecologically sensitive areas
- Radiation monitoring
- Source shielding
- Safety education and awareness
- Proper disposal of radioactive waste
- Medical radiation control
- Nuclear test ban treaty
- System by which companies are directed and controlled
#Ethical issues in cross-cultural business
- Sexual and racial discrimination
- Price discrimination
- Human rights
- Harmful products
- Intellectual property protection
- Normative - Moral right or wrong
- Descriptive - Practical right or wrong
Consequentialist (Teleological - end or purpose)
- One with most benefits to most people
- Jeremy Bentham + John Stuart Mill
- Act - for maximum good
- Rule - Possibility of conflicting rules
- Good for others
- Biological reasons
- Neurological reasons
- Cognitive reasons
- Based on individual right or wrong
- Short term oriented
- Fluctuating and changing constantly
- Enlightened egoism - self + others interest
- Psychological egoism - selfish
- respect to everyone
- treat everyone equally
- Duty based ethics (Kantianism)
- Immanuel Kant + Ross
- Based on people level
- treat everyone with dignity and respect
- Right based ethics
- Locke and Hobbes
- Based on basic rights
Value Forming Institutions
Work and Career
Peers and Colleagues
#Various stakeholders and their influence
#Types of Stakeholders
- Society / Community
#Types of Structures of boards
- Domestic company
- Domestic, home country view towards business
- within one country (home country)
- International company
- domestic view
- expanded markets, production to other countries
- home country ways = superior
- Multinational company
- Multi-domestic strategy
- Different strategy and marketing mix used
- to beat world demand
- Global company
- Major strategy difference
- Any one
- Global marketing strategy
- Source = home country; sold = global market (various countries)
- Global sourcing strategy
- Source = various countries; sold = home country
- Transnational company
- Integrated network
- maintains cost efficiency and local responsiveness
#Advantages of IB (SEEM)
- Maximum utilization of natural resources
- Stability in prices
- Economic growth
- Earning of FOREX
#Changing nature of Indian and International business
#Indian Business (SELF-CMMP)
- Supply chain
- Transport cost
- Delay in transport and supply chain (congestion)
- Economic liberalization
- in 1980s
- trade liberalized
- India entered the global market
- Laws and corruption
- Taxes, customs duty, Excise duty
- No control for corruption
- GDP increase due to FDI - 8% in decade
- Increases trade
- Capital flow
- CSR initiatives
- Beginning or nascent stage
- Least understood
- Becoming a necessity
- Continuous power supply
- Black market = non-availability of raw materials
- Efficient use of resources
- Increase in telecommunication technology
- Green revolution
- New marketing strategies
- began in 1991
- More active
- Efficient utilization of resources
#International Business (CLIFT_GD)
- Containerized cargo
- Cooperation among countries
- Liberalization of cross border movements
- Intra-firm trade
- Forced dynamism
- Transfer of technology
- Trade in agricultural and manufactured goods
- Trade between partners of regional trade agreements (RTAs)
- Global production network
- Growth in emerging markets
- Developing countries’ trade
#Factor affecting IBE (SELECT-P)
- Social environment
- Economic environment
- Legal Environment
- Ecological environment
- Cultural environment
- Technological environment
- Political environment
#Components of Global trade and investment
- Trade of goods and services
- FDI (>10%)
- FPI (<10%)
- Other investments
#International Trade Theories
Absolute Advantage Theory
Comparative Advantage Theory
Factor Proportion Theory
International Product Life Cycle Theory
New Trade Theory
Opportunity Cost Theory
National Competitive Advantage Theory
International Trade Theories
- Started in UK in 16th century
- Export > Import
- Favourable balance of trade (Export > Import)
- Unfavourable balance of trade (Export < Import)
- Export surplus to achieve social or political objective
Absolute Advantage Theory
- Adam Smith (1776)
- Focus on producing goods that a country has an absolute advantage
- With other factors remaining constant
- More skill
- Less labor
- Less production time
Longer production runs
- Goods which can only be produced in a country due to its natural environment
- Production of certain goods because of acquired technological advantages
Comparative Advantage Theory
- David Ricardo (1817)
- If one country has absolute advantage in production of all goods
- Focus on producing goods with absolute advantage and less opportunity cost
- Specialization based on comparative advantage
Heckscher Ohlin (Factor Proportions) Theory
- Eli Heckscher (1919) + Bertin Ohlin (1933)
- Based on 3 factors
Land + Labor + Capital
Country A = 60 + 10 + 30
Country B = 50 + 40 + 10
==> Country A exports = Land and Labor intensive products
==> Country B exports = Capital intensive products
Product Life Cycle Theory
- Raymond Vernon (Mid 1960s)
- Production location changes according to the product life cycle stage
- 4 stages
New Trade Theory
- Paul Krugman (1980)
- First mover advantage
- Well established
- Capture significant portion of world market
- Competitive advantage
- Economies of scale (Learning by doing)
Internal Economies of Scale
- Big firm = Big economy of scale = lower prices = sell more = monopoly
- Intra-industry Trade Index of i (pdt cat.) = |Xi – Mi|/(Xi + Mi)
External Economies of Scale
- Small firm in many countries = Large firm in total = More market capture = ensures dominance
Opportunity Cost Theory
- Gottfried Haberler (1983)
- Produce goods with less opportunity cost
- 10 units of cloth / 20 units of wine ==> 1 cloth = 2 wine
- ==> Produce wine and export and import cloth
- Focuses on importance of substitution
National Competitive Advantage - Diamond Model
- International organization
- To facilitate and liberalize international trade
- 1st January, 1995
- Headquartered in Centre William Rappard, Geneva, Switzerland
- Replaced General Agreement on Tariff and Trade (GATT - 1947)
- 76 initial members on the 1st day
- 153 members (97% total world trade) and 30 observers
- Meeting every 2 years
- Governed by
- Ministerial Conference (MC) - meet every 2 years and policy decision
- General Council (GC) - day-to-day administration
- Director General (DG)
#**Principles of WTO (TFPPE)**
Trade without discrimination
- Most Favoured Nation (MFN) - Treating other people equally
- National treatment - Treating foreigners and local equally
Freer trade - gradually, through negotiation
Predictability - through binding and transparency
Encouraging development and economic reform
#**Structure of WTO**
Ministerial Conference (MC)
- Meet every 2 years
- Policy and strategy making body
- Top decision making body
General Council (GC)
- Executive body
- All members are representatives in GC
Dispute Settlement Body (DSB)
- Trade in Goods
- Trade in Services
- Trade related aspects of Intellectual Property Rights (IPR)
Trade Policy Review Body (TPRB)
- Trade and Development
- Balance of Payments
- Budget, Finance and Administration
Director General (DG)
Secretariat of the WTO
#**Role and Functions of WTO (EGGS-TH)**
- Encouraging development and economic reform
- Giving information to public
- Global economic policy making
- Specialized help for export
- Helping developing and transition economies
- Taking information
#**Impact of WTO**
+ Promotes peace within nations
+ Disputes handled constructively
+ Based on rules
+ Free trade
+ Increased quality and choice of products
+ Increased income (Per Capita Income)
+ Stimulates economic growth
+ Increased efficiency
+ No lobbying
+ Good governance
- Not democratic
- Not transparent
- Focus on profit
- No focus on labor or human rights
- Increases inequality
- Hurts poor, small countries in favor of rich powerful nations
- No local level decision-making for countries
#European Union (EU)
- 27 members
- Euro - trading currency
#North American Free Trade Agreement (NAFTA)
- 3 Members
- Canada, USA, Mexico
#Association of South East Asian Nations (ASEAN)
- 6 members
- Singapore, Brunei, Malaysia, Philippines, Indonesia. Thailand (SBM-PIT)
- January 1992 - Effect on Jan 1993
- 15 years plan
#South Asian Association for Regional Cooperation (SAARC)
- 7 members
- Bangladesh, Bhutan, Nepal, India, Maldives, Sri Lanka, Pakistan
#South Asian Free Trade Area (SAFTA)
- 7 members as SAARC
- 6th Jan, 2004 - effect 1st Jan, 2006
- 12th SAARC summit
- It is an investment made by an entity in one country, into an an entity based in another country.
- Acquires 10% share of the company - affects managing decisions
- It is a cross border investment.
- It is long lasting in nature.
- It is more stable.
- It flows into the primary market.
- It enhances the capital of a specific enterprise.
#**Reasons for FDI**
- Cheaper production cost
- Reduced transportation cost
- Lack of domestic capacity
- Need to alter products and services
- Bypass trade restrictions
- Effects of Country of Origin
- Government regulations
- International quality
- Labor cost
- Manufacturing of similar products in different countries
- Due to high costs of transportation or export
- Strategic rivalry and FDI (Knicker Bocker’s theory)
- Mittal steel + Arcelor
- TATA steel + Corus
- Product life cycle (Vernon’s theory)
- Location specific advantages (Dunning theory)
- Fragmenting production globally
- Different production stages are outsourced abroad
- Profitable when input prices differ in countries
- Forward vertical (Parent company acts as the supplier)
- Backward vertical (MNC acts as the supplier for parent company)
#**Factors affecting FDI (BFF-STEM)**
- Business / investment climate
- Factor cost
- Fiscal incentives
- Size of the host market
- Trade barriers / openness
- Economic distance / transport costs
- Mass production facility (Agglomeration effect)
#**Strategies for FDI (CREMEF)**
- Cross investment strategy
- Reduce competition strategy
- Economizing cost strategy
- Mode of investment
- Entering new areas strategy
- Firm specific strategy
#**FDI in the World**
- Global FDI increased by 11% in 2013 - USD 1.46 Trillion
- Developed countries FDI decreased - 12% increase in 2007 - USD 576 billion
- UK FDI increased; USA FDI decreased
- Developing countries FDI increased - 52% - USD 759 billion in 2013
- Asia remains the largest host region in the world
#**FDI in India**
- 100% FDI in single brand retail segment
- Improvement in real estate
- Lacking in retailing and insurance
- India is 3rd biggest economy in terms of purchasing power
- Increase by 8% in 2013-14
- In 2012-13, FDI doubled in the same month, i.e. March
- Highest FDI is in services > automobiles > telecommunications > pharmaceuticals > construction development
- Highest investors in FDI is Singapore > Mauritius > U.K. > Netherlands
- India requires USD 1 trillion between 2012 - 2017 (12th 5 year plan) for infrastructure projects
- Needs FDI to increase economic growth (only 4.5% in 2012-13)
- Job opportunities
- Elimination of middlemen
- Increase in no. of foreign investors
- GDP growth
- Aid to Indian agriculture
- Brings trade balance
- Increases liquidity
- Increase in monopoly of supermarkets
- Threat for manufacturing sector
- Marginalizes domestic players
- Monopoly of global players
- Monopoly among suppliers
- Economies of scale
#**Foreign Exchange Market**
- Market for currencies
- Trading of one currency for another takes place
- Largest and most liquid financial market in the world
- If all country use same currency - no need for FOREX
- Geographical dispersal (Found everywhere)
- Intermediary (between buyers and sellers of FOREX)
- Transfer of Purchasing power (Local currency acquired)
- Electronic market (No physical place)
- Minimizing risk (of trade due to the currency value fluctuation)
- Provision of credit (Through L/C, bankers’ acceptance, etc.)
- To accomplish transfer of purchasing power by transfer of currencies
- Using credit instruments such as telegraphic transfers, bank draft, foreign bills
- To provide credit
- Both national and international
- To promote foreign trade
- Credit for about 3 months till maturity is required
- To hedge FOREX risks
- Fluctuations in market rate of currencies - Higher risk of loss or gain
- This exchange risk should be avoided or reduced
- Hedging using forward contracts
- Lasts for 3 months
- Price is agreed for a fixed rate of exchange that is paid on a future date
- Thus fluctuations are ignored
#**Major FOREX Instruments**
- Transactions occur within 2 days of the deal
- Rate of exchange = Spot exchange rate
- Transaction = Spot transaction
- Only cash, no contracts
- No interest
- For transactions in a future date
- The rate is agreed = Forward rate
- Transaction = Forward transaction / Outright forward
- Very flexible in nature
- Used to hedge transactions
- Forward transaction with standard contract size and maturity dates
- Includes interest amount
- Normally 90 days
- Similar to forward market, except the rates are not obligated to the person
- 2 types - Call and Put options (Teji - Mandi)
- Similar to forward market, for more than one transaction
- Private agreement between 2 parties
- Involves a number of transactions
- Can be extended upto 30 years
- International Monetary System
- Sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states.
- Includes rules, policies, procedures, conventions, institutions, etc.
- manages trade flow, capital flow, FOREX rates, BOP adjustments.
- Constantly evolving in nature, due to constant changes in political and economic systems worldwide.
- Gold standard (1870-1914)
- Inter war years (1914-1944)
- Bretten Woods system (1945-1972)
- Post Bretten woods system (1972-present)
- IMF, World Bank
- Last evolved - Asian crisis (1997-98) and Euro (1999)
- Packing credit by bank
- Packing credit by government
- Advance payment from bank against cheques/drafts
- Advance payment from buyer
- Negotiation against L/C with export documents
- Purchase of export documents under export order
- Advance against export bills sent on collection
- Advance against regular consignments
- Advance against undrawn balance
- Advance against claims of Duty drawback
- Against L/C
- Against bills under collection
- Against deferred payments
- Under foreign credit
- Letter of commitment
- Import loans by Export-Import bank of India
#Promises and Pitfalls of Exporting
Promises / Benefits
- Market diversification
- Additional source of revenue
- Use of excess production capacity
- Economies of scale
- Leverage of purchasing power
- Stability of business operation
- Product lifecycle extension
- Product improvement
- Better technology access
- Lower unit cost
- Minimizing seasonal fluctuations in sales
- Untapped markets
Pitfalls / Limitations
- Financial management efforts
- Customer demand
- Improvement in communication technology
- Management mistakes
- Trade barriers
- Political constraints
- It is a trade in which, the seller is required to accept goods or services from the buyer as either full or partial payment.
- The goods and/or services are exchanged with other goods and/or services of equal value, where little or no money is paid by the buyer.
- This is the only trade activity with no money involved.
- Barter involves a single contract that covers both transaction flows.
- The seller supplies plant, equipment or technology and agrees to buy goods produced with that plant, or equipment as payment.
- The seller of equipment can receive a part of the payment in the shape of products produced by that equipment and the remaining amount in the shape of cash.
- Longer term and larger amounts are involved.
- The seller receives a part of the payment is cash and the rest in shape of products.
- In counter purchase agreement seller receives the full amount in cash, but agrees to spend an equal amount of money in that country within a given time.
- In contrast to bartering, both parties pay for their purchases in cash but agree to fulfill their counter commitments.
- At the same time, transactions do not become part of a single contract, but are entered into two different contracts.
- Counter purchase is also called “Parallel Trading” or “Parallel Barter”.
- Example: Pepsi Cola sold concentrates in the USSR and got paid in Rubles, which according to the agreement with Russia, these Rubles were spent for purchase of Russian products like Vodka and wine
- This type of trading is between two or more than two countries in the shape of an agreement, under which agreed volume of goods are imported and exported over a specific time period without the payment of foreign currencies.
- At the end of the agreed time period, the balance is settled in an agreed foreign currency for example US Dollars.
- Offset is the type of countertrade, which is mostly related to very high value of exports and/or medium to high technology capital goods supplied by a multinational corporations or a major manufacturer.
- It may be in many forms such as co-production, license production, subcontractor production, technology transfer, overseas investment, research and development, technical assistance and training, or patent agreements etc.,
- When some components of the item sold are to be manufactured within the buyer’s country and that the seller agrees to buy those components to use them in-house.
- When the buyer requires the seller to enter into a long term industrial or other co-operation and investment, but this co-operation or investment is not related to goods supplied by the seller.
- Switch Trading involves the role of third party in a countertrade transaction.
- If a seller in the countertrade does not want goods offered by the buyer as payment, it may bring in third party to dispose of the merchandise offered by the buyer.
- The seller supplies raw material and receives finished goods produced from this raw material as payment from the buyer.
- The seller can receive the payment partially in finished goods and partially in cash.
#IB entry modes
Manufacturing without FDI
Manufacturing with FDI
- Domestic purchasing
- Export Houses / Export Management Companies (EMCs)
- Trading Companies
#Manufacturing Without FDI (LF-CTM)
- Product (Loreal - Green Trends)
- Business ( McDonald’s)
- Contract manufacturing
- Management contracts
- TATA tea in Sri Lanka by Estate Management Services Pvt. Ltd.
- Turnkey projects
- L&T in Tamakoshi Hydroelectric project, Nepal Hydel project
#Manufacturing With FDI (JAM-SAW)
- Joint Ventures
- Ranbaxy, Reddy’s, Lupin
- Complex in nature = Legal contract
- TATA - Jaguar
- Easiest way to expand
- One time only
- Partly (Majority share to control) or wholly
- Asian paints + Essel propack
- Equal combination
- Strategic alliances
- Assembly operations
- Videocon assembly unit - LG, Sony, etc.
- For assembly to reduce tax on finished products
- to reduce transport costs
- Wholly-owned subsidiaries
- TATA tea owned by Tetley in UK
- When unsure about the market to launch a new branch
- Very popular among MNCs
- Based on company strategy
- Result of merger, joint ventures, acquisitions, etc.
- No legal entity required
- Company retains core strategic assets
- Outsources other activities
- for strategic business growth
- to reduce competition
- to increase production, distribution, etc.
- to improve R&D
- to increase market coverage
- Economy of scale
Basis of direction of alliances
- Diversification alliances
- for market or product diversification to reduce risk in any one sector
- Vertical networks and alliances
- Backward - with Suppliers
- Forward - with distributors, etc.
Basis of extent and timescale of collaboration
- Extent of cooperation focused and complex alliances
- Collaboration on single or many activities
- Timescale of collaboration
- Short - medium term alliance
- for time-limited projects
- Construction projects, etc.
- Partner selection
- Alliance structure
- Managing the alliance
#Factors affecting selection
- Market size
- Market growth
- Government regulations
- Level of competition
- Physical infrastructure
- Level of risk
- Political risk
- Economical risk
- Operational risk
- Cost of production
- Shipping cost (Transportation)
- Company objectives
- Availability of company resources
- Level of commitment
- International experience
#Elements of System
- Elements that enter a system
- Human, Physical, Information
- Elements that come out of a system
- Inputs processed into outputs
- Finished goods, Information, Services
- Elements that operate on the input to produce output
- Production unit, machines, people
- Logical procedures, rules and regulations which govern inputs to be converted into outputs
- It keeps check on the inputs and outputs
- Measure of outputs against some standards
- It measures performance and produces feedback
- Positive feedback - adds to inputs = Feed-forward
- Negative feedback - reduces inputs
- Collection of all elements that surround a system
- It does not belong to a system, but interacts with the system
- Limits within which a system works
- Feature that defines and outlines a system
- The element through which a system interacts with its environment out of the boundary
#Roles of IS
Support Business Processes and Operations
Supports Business Decision-Making
Supports Strategies for Competitive Advantage
#Elements of MIS
- Physical devices and materials
- Includes written or stored information and data
- Computer System
- Computer Peripherals
- Programs + Procedures
- System Software
- Application Software
- End Users (Users or Clients)
- IS specialists (Develop and operate IS)
- Raw materials
- Valuable resources
- Databases (Processed or organized data)
- Knowledge bases (Experience based data)
- Communications Media (Satellite, towers, etc.)
- Network Infrastructure (Physical network components)
#Operational Support System
- Transaction Processing System (TPS)
- Process Control System (PCS)
- Enterprise Collaboration System (ECS)
#Management Support System
- Management Information System (MIS)
- Decision Support System (DSS)
- Executive Information System (EIS / ESS)
- Expert System (ES)
- Knowledge Management System (KMS)
- Strategic Information System (SIS)
- Business Information System (BIS)
- Office Automation System (OAS)
#Executive Information System (EIS)
• An executive information system (EIS) is a decision support system (DSS) used to assist senior executives in the decision-making process.
• It is also called as Executive Support System (ESS).
• It is commonly considered a specialized form of decision support system (DSS).
• It does this by providing easy access to important data needed to achieve strategic goals in an organization.
• An EIS normally features graphical displays on an easy-to-use interface.
• Executive information systems can be used in many different types of organizations to monitor enterprise performance as well as to identify opportunities and problems.
• It uses information based on intelligence.
o Market intelligence
o Investment intelligence
o Technology intelligence
• External databases
• Technology reports like patent records etc.
• Technical reports from consultants
• Market reports
• Confidential information about competitors
• Speculative information like market conditions
• Government policies
• Financial reports and information
Features of Executive Information System
Advantages of ESS
• Easy for upper level executive to use
• Ability to analyze trends
• Augmentation of managers’ leadership capabilities
• Enhance personal thinking and decision making
• Contribution to strategic control flexibility
• Enhance organizational competitiveness in the market place
• Instruments of change
• Increased executive time horizons.
• Better reporting system
• Improved mental model of business executive
• Help improve consensus building and communication
• Improve office automation
• Reduce time for finding information
• Early identification of company performance
• Detail examination of critical success factor
• Time management
• Increased communication capacity and quality
Disadvantage of ESS
• High implementation costs
• System may become slow, large, and hard to manage
• Need good internal processes for data management
• Functions are limited
• Hard to quantify benefits
• Executive may encounter information overload
• Difficult to keep current data
• May lead to less reliable and insecure data
• Excessive cost for small company
• System dependent
#Decision Support System (DSS)
• Decision support systems are interactive software-based systems intended to help managers in decision making by accessing large volume of information generated from various related information systems involved in organizational business processes, like, office automation system, transaction processing system etc.
• It uses the summary information, exceptions, patterns and trends using the analytical models.
• Decision Support System helps in decision making but does not always give a decision itself.
• The decision makers compile useful information from raw data, documents, personal knowledge, and/or business models to identify and solve problems and make decisions.
• Typical information gathered by a DSS may include:
- Projected revenue and sales figures, some based on new product sales projections
- Comparative sales figures between selected time periods
- Inventory data organized into relational databases for timely analysis
Types of Decisions
Programmed decisions are basically automated processes, general routine work, where
• These decisions have been taken several times.
• These decisions follow some guidelines or rules.
Non-programmed decisions occur in unusual and non-addressed situations, so
• It would be a new decision.
• There will not be any rules to follow.
• These decisions are made based on available information.
• These decisions are based on the manger’s discretion, instinct, perception and judgment.
DSS applications are used in many diverse fields, including
• Medical diagnosis
• Credit loan verification
• Evaluating bids on engineering projects
• Business and business management
• Agricultural production at the farm and policy levels
• Forest management
• Railroad (for evaluation of defective rails)
Characteristics of a DSS
• Support for decision makers in semi structured and unstructured problems.
• Support for managers at various managerial levels, ranging from top executive to line managers.
• Support for individuals and groups. Less structured problems often requires the involvement of several individuals from different departments and organization level.
• Support for interdependent or sequential decisions.
• Support for intelligence, design, choice, and implementation.
• Support for variety of decision processes and styles
• DSSs are adaptive over time.
Benefits of DSS
• Improves efficiency and speed of decision making activities.
• Increases the control, competitiveness and capability of futuristic decision making of the organization.
• Facilitates interpersonal communication.
• Encourages learning or training.
• Since it is mostly used in non-programmed decisions, it reveals new approaches and sets up new evidences for an unusual decision.
• Helps automate managerial processes.
#Management Information System (MIS)
• Management Information System, ‘MIS’ is a planned system of collecting, storing and disseminating data in the form of information needed to carry out the functions of management.
• A Management Information System (MIS) is a broadly used and applied term for a three-resource system required for effective organization management.
• MIS is sometimes referred to as “IT management” (information technology management) or “information services” (IS).
• The three components in MIS
o System suggests integration and holistic view.
o Information stands for processed data.
o Management is the ultimate user, the decision makers.
Management covers the planning, control, and administration of the operations of a concern. The top management handles planning; the middle management concentrates on controlling; and the lower management is concerned with actual administration.
Information, in MIS, means the processed data that helps the management in planning, controlling and operations. Data means all the facts arising out of the operations of the concern. Data is processed i.e. recorded, summarized, compared and finally presented to the management in the form of MIS report.
Data is processed into information with the help of a system. A system is made up of inputs, processing, output and feedback or control.
Scope of MIS
Objectives of MIS
Capturing contextual data, or operational information that will contribute in decision making from various internal and external sources of organization
The captured data is processed into information needed for planning, organizing, coordinating, directing and controlling functionalities at strategic, tactical and operational level. Processing data means:
• making calculations with the data
• sorting data
• classifying data and
• summarizing data
Information or processed data need to be stored for future use.
The system should be able to retrieve this information from the storage as and when required by various users.
Information or the finished product of the MIS should be circulated to its users periodically using the organizational network.
Characteristics of MIS:
• It should be based on a long-term planning.
• It should provide a holistic view of the dynamics and structure of the organization.
• It should work as a complete and comprehensive system covering all interconnecting sub-systems within the organization.
• It should be planned in a top-down way, as the decision makers or the management should actively take part and provide clear direction at the development stage of the MIS.
• It should be based on need of strategic, operational and tactical information of managers of an organization.
• It should also take care of exceptional situations by reporting such situations.
• It should be able to make forecasts and estimates, and generate advanced information, thus providing a competitive advantage. Decision makers can take actions on the basis of such predictions.
• It should create linkage between all sub-systems within the organization, so that the decision makers can take the right decision based on integrated view.
• It should allow easy flow of information through various sub-systems, thus avoiding redundancy and duplicity of data. It should simplify the operations with as much practicability as possible.
• Although the MIS is an integrated, complete system, it should be made in such a flexible way that it could be easily split into smaller sub-systems as and when required.
• A central database is the backbone of a well-built MIS.
#Transaction Processing System
• A transaction process system (TPS) is an information processing system for business transactions involving the collection, modification and retrieval of all transaction data.
• Characteristics of a TPS include performance, reliability and consistency.
• TPS is also known as transaction processing or real-time processing.
Transaction processing systems provide three functional areas:
System runtime functions
Transaction processing systems provide an execution environment that ensures the integrity, availability, and security of data. It also ensures fast response time and high transaction throughput.
System administration functions
Transaction processing systems provide administrative support that lets users configure, monitor, and manage their transaction systems.
Application development functions
Transaction processing systems provide functions for use in custom business applications, including functions to access data, to perform inter-computer communications, and to design and manage the user interface.
Types of transaction processing
Batch transaction processing
This is information that is gathered and stored but not processed immediately i.e. the processing of an invoice or cheques in a banking system.
Real time transaction processing
This is a transaction which is processed immediately and the operator has access to on-line database i.e. withdrawal from a bank account, Library loans.
• Carrying out the day-to-day transactions of the organization on a regular basis.
• Collecting, processing, editing, updating, storing the data, and generating the required reports or documents.
• Supplying the necessary information to the organization, which would enable proper functioning of the business.
• Providing reports and documents which would help in making timely decisions.
• Supplying data to other information systems.
#Functional Information System
Production / Operations
- Manufacture Resource Planning (MRP)
- Manufacturing Execution Systems (MES)
- Process Control System (PCS)
- Interactive Marketing
- Salesforce Automation
Human Resource Management
- Compensation Analysis
- Employee Skills Inventory
- Personnel Requirement Forecasting
- Order Processing System (OPS)
- Accounts Receivable
- Accounts Payable
- Inventory Control
- General Ledger
- Cash Management
- Credit Management
- Investment Management
- Capital Budgeting
- Financial Forecasting
#Types of Decisions
Based on Structure
Based on Goals
Based on Time
Based on Management
Based on Conditions
#Models of Decision-Making
- Based on risks
Herbert Simon Model
- Intelligence —> Design —> Choice
#Herbert Simon Model
#Components of DSS
Data Management Sub-system
Knowledge Management Sub-system
User Interface Sub-system
Model Management Sub-system
#Functions / Activities of DSS
- Trial and Error
#Approaches of Developing DSS
Systems Development Life Cycle
Air Traffic Control
ARTIFICIAL INTELLIGENCE (AI)
• It refers to computers with the ability to mimic or duplicate the functions of the human brain.
• It is field of study that deals with making a computer that thinks like a human, to be able to learn and to have new ideas.
ARTIFICIAL INTELLIGENCE SYSTEMS
The people, procedures, hardware, software, data, and knowledge needed to develop computer systems and machines that demonstrate the characteristics of intelligence.
TRAITS OF AI
• Intelligent behavior
• Learn from experience
• Apply knowledge acquired from experience
• Handle complex situations
• Solve problems when important information is missing
• Determine what is important
• React quickly and correctly to a new situation
• Understand visual images
• Process and manipulate symbols
• Be creative and imaginative
• Use heuristics
APPLICATIONS OF AI
AI is used in the following,
• Computer Science
• Hospitals and Medicine
• Heavy Industry
• Online and telephone customer service
• Telecommunications maintenance
• Toys and games
• News, publishing and writing
• National defense
• Unknown patterns/relationships in sales data
• Customer buying habits
• Complex problem-solving and decision-support techniques in real-time business applications.
• AI techniques are spread across functions ranging from finance management to forecasting and product.
• Credit authorization screening
• Mortgage risk assessment
• Project management and bidding strategy
• Financial and economic forecasting
• Risk rating of exchange-traded, fixed income investments
• Detection of regularities in security price movements
• Prediction of default and bankruptcy
• Security/and or Asset Portfolio Management
• Computerized neural networks
• Customer relationship management (CRM)
• High-tech data mining can give companies a precise view of how particular segments of the customer base react to a product or service.
• Buying patterns, analytics could help companies react much more quickly to the marketplace.
• Use of neural networks and fuzzy logic in Human Resource Information System (HRIS).
• Fuzzy neural network, to construct a new model for evaluation of managerial talent, and accordingly to develop a decision support system in human resource selection.
ADVANTAGES OF AI
• Can take on stressful and complex work that humans may struggle/cannot do
• Can complete task faster than a human can most likely
• To discover unexplored things, i.e. outer space
• Less errors and defects
• Function is infinite
• Easier spreading of knowledge
• Decisions are based on facts rather than emotions
DISADVANTAGES OF AI
• Lacks the “human touch”
• Has the ability to replace human jobs
• Over reliance on AI can lead to problems due to errors when no solution is available
• Can malfunction and do the opposite of what they are programmed to do
• Can be misused leading to mass scale destruction
• May corrupt younger generation
• Lack of creativity in responses
• Inability to explain the logic and reasoning behind a certain decision
• Lack of common sense in reasoning can also cause major problems
• It is considered as ethically wrong
- Learning System
- Expert System
- Fuzzy Logic
- Neural Network
- Intelligent Agent
- Genetic Algorithms
- Visual Perception
- Natural Languages
- Speech Recognition
- Multi-Sensory Interface
- Virtual Reality
BRANCHES OF AI
• Neural networks are used for solving complex, poorly understood problems for which large amounts of data have been collected.
• They find patterns and relationships in massive amounts of data that would be too complicated and difficult for a human being to analyze.
• Neural networks discover this knowledge by using hardware and software that parallel the processing patterns of the biological or human brain.
TYPES OF NEURAL NETWORKS
Neural Network types can be classified based on following attributes:
• Connection Type
o Static (feed forward)
o Dynamic (feedback)
o Single layer
• Learning Methods
NEURAL NETWORKS COMPONENTS:
Neuron consists of three basic components.
• Activation function
ARCHITECTURE OF NEURAL NETWORK
• The input layer
o Introduces input values into the network
o No activation function or other processing
• The hidden layer
o Perform classification of features
o Two hidden layers are sufficient to solve any problem
o Features imply more layers may be better
• The output layer
o Functionally just like the hidden layers
o Outputs are passed on to the world outside the neural network.
• A neural network can perform tasks that a linear program cannot.
• When an element of the neural network fails, it can continue without any problem by their parallel nature.
• A neural network learns and does not need to be reprogrammed.
• It can be implemented in any application.
• It can be implemented without any problem.
• The neural network needs training to operate.
• The architecture of a neural network is different from the architecture of microprocessors therefore needs to be emulated.
• Requires high processing time for large neural networks.
USE OF NEURAL NETWORKS
Neural networks, with their remarkable ability to derive meaning from complicated or imprecise data, can be used to extract patterns and detect trends that are too complex to be noticed by either humans or other computer techniques. A trained neural network can be thought of as an “expert” in the category of information it has been given to analyze. This expert can then be used to provide projections given new situations of interest and answer “what if” questions.
APPLICATIONS OF NEURAL NETWORKS
• Character Recognition - The idea of character recognition has become very important as handheld devices like the Palm Pilot are becoming increasingly popular. Neural networks can be used to recognize handwritten characters.
• Image Compression - Neural networks can receive and process vast amounts of information at once, making them useful in image compression. With the Internet explosion and more sites using more images on their sites, using neural networks for image compression is worth a look.
• Stock Market Prediction - The day-to-day business of the stock market is extremely complicated. Many factors weigh in whether a given stock will go up or down on any given day. Since neural networks can examine a lot of information quickly and sort it all out, they can be used to predict stock prices.
• Traveling Salesman’s Problem - Interestingly enough, neural networks can solve the traveling salesman problem, but only to a certain degree of approximation.
• Medicine, Electronic Nose, Security, and Loan Applications - These are some applications that are in their proof-of-concept stage, with the acceptation of a neural network that will decide whether or not to grant a loan, something that has already been used more successfully than many humans.
• Miscellaneous Applications - These are some very interesting (although at times a little absurd) applications of neural networks.
• Neural networks are suitable for predicting time series mainly because of learning only from examples, without any need to add additional information that can bring more confusion than prediction effect.
• Neural networks are able to generalize and are resistant to noise.
• It is generally not possible to determine exactly what a neural network learned and it is also hard to estimate possible prediction error.
Knowledge subsystem (Base + Acquisition + Refining)
- Business + IT strategies = CEO + CIO
- Application development + technology = CIO + CTO
- IT organization + structure = CIO + IT managers
#Business/IT planning process
- discovering innovative approaches - to satisfy customers
- development of strategies and business models
- development of IT strategies and architecture
- Development of complementary business and IT strategies
Customer value (Innovative approaches) —> Business strategies and models —> IT strategy and architecture —> Application development and deployment —> Complementary Business/IT strategy (CEO/CIO)
#3 Major components of planning process
- Strategy Development
- Resource Management
- Technology Architecture
#Managing IS functions (AI-TOUCH)
- Application development management
- IS operations management
- Technology management
- Organizing IT
- User services management
- CIO / IT executives management
- Human resource management
- Utilize resource effectively
- Design model to improve communication within and outside organization
- Monitoring all resources used to create, store, process, disseminate information
- Helps reuse of information
- Helps retain information
#Functions of IRM
- Data Processing
- Computer operations
- Applications development
- Technical services
- Corporate database
- Data communications
- Data communications
- Voice communications
- External data services
- Office automation
- VOice communications
- External data services
- Word processing
- Intelligent workstations
#IRM Dimensions (RTDFS)
- Resource management
- Technology management
- Distributed management
- Functional management
- Strategic management
- Staff professionalism
- Corporate database control
- Technical competence and research
- Comparative cost advantage
- Low cost technology availability
- Backlog of development work
- User control over operations
- Organizational Behavior
- Transfer of structured data
- by agreed message standards
- from one computer to another
- by electronic means
#Functions/Services of EDI (ATC)
- EDIFACT (EDI For Administration, Commerce and Transport)
- ANSI (American National Standards Committee)
- ASC X12 (Accredited Standards Committee)
- ODETTE (Organisation for Data Exchange by Tele Transmission in Europe)
- TDCC (Transport Data Coordination Committee)
- VAN (Value Added Networks)
- FTP (File Transfer Protocol)
- SFTP ( Secure File Transfer Protocol)
- VPN (Virtual Private Networks)
- LAN (Local Area Networks)
- Shortened ordering time
- Cost cutting
- Elimination of errors
- Fast response
- Accurate invoicing
- EDI payment
- Reduced stock holding
- Cash flow
- Business opportunities
- Customer lock-in
- Operating procedures
- Production and purchasing decisions
- Less transparent
- Varying flexibility
- High costs
- Limited accessibility
- Rigid requirements
- Involvement of trading partners
- Complicated message standards selection
- Management deviation
- Errors in processing, application and communication
- Relying on 3rd parties
- Security threats
- Dependence on system
- International trade
- Financial EDI
- Bank cheques
- Electronic Funds Transfer (EFT)
- NEFT (National Electronic Funds Transfer)
- RTGS (Real Time Gross Settlement)
- IMPS (Immediate Payment Service)
- Automated Clearing House (ACH) transfers
- Health care
- Retail procurement
#Scope of SCM (FD-PICS)
- Financial Management
- Distribution Management
- Payment Management
- Inventory Management
- Channel Management
- Supplier Management
- Sales force Management
- Information Flow
- Product Flow
- Financial (Money/Funds)Flow
#Components of SCM
- Material planning
- Material scheduling
- Procurement method
- Capacity planning
- Production scheduling
- Flexibility, volumes and varieties
- Demand planning
- Distribution networking
- Cyber theft
- Unauthorized use at work
- Computer virus
- Computer worms
- Anti-virus softwares
- DoS defenses
- E-mail monitoring
- Security Codes
- Token-based authentication
- Backup files
- Security monitors
- Biometric security
- Disaster recovery plans
- ISP logging
- Data logging
- Working conditions
#Ethics for IT
- Stock-holder theory
- Stake-holders theory
- Social contract theory
- New technology development
- Growth of technology
- Input (Security codes, encryption, etc.)
- Output (IP, security codes, encryption)
- Process (Firewalls, IP, checkpoint, computer match)
- Storage (Security codes, encryption, backup)
- Standard procedures and documentation
- Computer Failure
-DDOS (Distributed Denial of Service)
- Individual (Targeted)
- Widespread (Common)