MAC4866/502/0/2021

Tutorial Letter 502/0/2021

Information Strategy
MAC4866

Year module

Department of Management Accounting

IMPORTANT INFORMATION
Please register on myUnisa, activate your myLife email address
and make sure that you have regular access to the
myUnisa module website for MAC4866-21-Y1.

Note: This is a fully online module and therefore it is only available on myUnisa.

BARCODE
 CONTENTS

Page

INTRODUCTION ...................................................................................................................................... 4
1 INFORMATION SYSTEMS IN ORGANISATIONS ....................................................................... 4
1.1 Accounting information system (AIS) ............................................................................................ 4
2 BUSINESS APPLICATIONS OF ACCOUNTING INFORMATION SYSTEMS .............................. 4
2.2 Accounting data processing as a system ...................................................................................... 4
2.2.1 Purchasing .................................................................................................................................... 5
2.2.2 Accounts payable ......................................................................................................................... 5
2.2.3 Inventory management ................................................................................................................. 6
2.2.4 Production management ............................................................................................................... 6
2.2.5 Marketing and sales ...................................................................................................................... 6
2.2.6 Accounts receivable ...................................................................................................................... 7
2.2.7 Payroll........................................................................................................................................... 7
2.2.8 General ledger .............................................................................................................................. 7
Summary .................................................................................................................................................. 8
3. TYPES OF INFORMATION SYSTEMS AND COMMUNICATION CHANNELS ........................... 8
3.1 Overall structure of the information system ................................................................................... 8
3.1.1 Transaction processing systems ................................................................................................... 8
3.1.2 Information systems and changing manufacturing systems ........................................................ 10
3.2 Distributed Systems and Communication Networks .................................................................... 10
3.2.1 Distributed systems..................................................................................................................... 10
3.2.2 End-user computing .................................................................................................................... 11
3.2.3 Database .................................................................................................................................... 12
3.2.4 Communication networks and distributed systems ...................................................................... 13
4. INTERNET, INTRANETS, EXTRANETS, ENTERPRISE WIDE SYSTEMS, KNOWLEDGE
MANAGEMENT SYSTEMS AND CRM SYSTEMS .................................................................... 14
4.1 Internet ....................................................................................................................................... 14
4.2 Intranets...................................................................................................................................... 16
4.3 Extranets .................................................................................................................................... 16
4.4 Enterprise-wide systems ............................................................................................................. 17
4.5 Knowledge management systems (KMSs) .................................................................................. 18
4.6 Customer relationship management (CRM) system .................................................................... 19

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5. E-BUSINESS AND E-COMMERCE ............................................................................................ 19

5.1 The nature of e-commerce .......................................................................................................... 19
5.2 Applying e-commerce to the value chain..................................................................................... 20
5.3 Establishing an e-commerce strategy ......................................................................................... 20
Summary ............................................................................................................................................... 20
6 IT AS AN ENABLER OF CHANGE ............................................................................................ 21
6.1 IT implementation ....................................................................................................................... 21
6.2 Downsizing and rightsizing the IT department ............................................................................. 22
Summary ............................................................................................................................................... 23
7. INFORMATION STRATEGY AND THE NEED FOR A STRATEGIC APPROACH .................... 23
7.1 The need for a strategic approach .............................................................................................. 23
7.2 Benefits of a formal strategy ....................................................................................................... 24
7.3 Content of an IS strategy ............................................................................................................ 24
Summary ............................................................................................................................................... 25
8. BUSINESS PROCESS RE-ENGINEERING ............................................................................... 25
8.1 Scope of BPR ............................................................................................................................. 25
8.2 Re-Engineering With Information Technology ............................................................................. 26
8.3 Process identification and analysis ............................................................................................. 26
Summary ............................................................................................................................................... 26
9. ORGANISING AND ASSESSING THE INFORMATION SYSTEM AND IT DEPARTMENT ....... 27
9.1 Choice of system architecture ..................................................................................................... 27
9.2 Assessing the information system and IT department ................................................................. 27
Summary ............................................................................................................................................... 28
10. CENTRALISATION VS DECENTRALISATION ......................................................................... 28
10.1 Centralisation of IS/IT department............................................................................................... 28
10.2 Advantages and disadvantages of a centralised IS/IT department .............................................. 29
10.3 Decentralisation of IS/IT department ........................................................................................... 29
10.4 Advantages and disadvantages of a decentralised IS/IT department .......................................... 29
Summary ............................................................................................................................................... 30
REFERENCES ....................................................................................................................................... 30

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INTRODUCTION
Dear Students
As mentioned in Tutorial 501, there are topics from the old study guide that are still relevant to
MAC4866 from the Enterprise Pillar that you should know and will also help with background
information. These will be discussed in this tutorial letter.

Accountants should participate in the development of information systems that process

transactions and provide management information; they should therefore be knowledgeable
about information systems, various types of computer hardware, databases, programming tools,
decision support systems and expert systems.

Below are some areas that you as the finance professional should know.

1 INFORMATION SYSTEMS IN ORGANISATIONS

Information systems usually provide information for a clear decision-making purpose, and also
to control the activities in an organisation.

1.1 Accounting information system (AIS)

The AIS is one of the subsystems of the management information system (MIS), which in turn is
a subsystem of the broader information system. The AIS processes financial and non-financial
transactions in order to provide financial information for decision-making purposes. An AIS can
be a simple manual system, or a complicated computer-based system, consisting of:
(1) the transaction processing (TPS)
(2) the general ledger/financial reporting system (GL/FRS)
(3) the management reporting system (MRS) (Hall 2008:8)

AIS must be designed in line with the organisational structure. A well-planned AIS should
change the laborious manual preparation, recording and processing of business transactions
into high-speed information processing systems that are very accurate (Eccles et al 2000:439).

2 BUSINESS APPLICATIONS OF ACCOUNTING INFORMATION SYSTEMS

2.2 Accounting data processing as a system
Before looking at the individual business processes, it is important to look at the system as a
whole and understand how the applications and transactions are integrated with one another.

All information systems need to be viewed within their operating environment. The functional
subsystems based on the operating cycle of a manufacturing concern are as follows (Eccles et
al 2000:449, 451):

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 expenditure cycle – purchase orders and goods received, accounts payable and cash
disbursements
 manufacturing cycle – inventory management, production management and cost
accounting
 revenue cycle – marketing and sales, accounts receivable and cash receipts
 administrative cycle – personnel information and payroll, general ledger, fixed assets and
financial reporting
Other authors, for example Romney and Steinbart (2009:53), split the administrative function
into a human resources/payroll cycle and a financing cycle.

2.2.1 Purchasing
Purchasing is the first application in the expenditure cycle of a business. The purchasing
function usually includes the following (Eccles et al 2000:458–459):
 identifying the need for goods or services
 placing purchase orders
 acceptance of goods delivered
 validation
The data sources used in the purchasing and receiving function include purchase requisitions,
purchase orders, receiving reports and suppliers’ invoices.

2.2.2 Accounts payable

Accounts payable is the second application in the expenditure cycle. Here cash is disbursed to
pay for goods and services received.
The main objective of the accounts payable function is to facilitate the exchange of cash with
suppliers of goods and services, which entails the following (Eccles et al 2000:472):
 determining that invoices are valid, authorised and correct
 recording and classifying expenditures promptly and accurately
 posting obligations and cash disbursements to the appropriate suppliers’ accounts and the
general ledger
 providing management with all information regarding expenditure incurred and cash
outflow

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2.2.3 Inventory management
Inventory management is the first application in the manufacturing cycle. If an organisation does
not do any manufacturing, the inventory management function could be classified under the
expenditure cycle.
The main objective of the inventory management system is to provide logistic support to the
production and marketing functions and this includes the provision of timely and reliable
financial information for decision-making purposes. The particular functions within the inventory
management system are the following (Eccles et al 2000:483):

 issuing purchase requisitions

 receiving purchased goods
 store-keeping and controlling goods
 issuing materials and other goods

2.2.4 Production management

Production management forms the second part of the manufacturing cycle and includes the cost
accounting functions of the AIS.
The main objective of the production management system is to facilitate the conversion of raw
materials into finished goods. The specific functions related to these objectives include the
following (Eccles et al 2000:495):

 entering and processing customer orders

 planning the production process to fill those orders
 controlling the production process
 determining the costs of production orders

2.2.5 Marketing and sales

Although not strictly an accounting function, in a modern information system, marketing plays a
very important role before any sales order processing can be done. This would then form the
first part of the revenue cycle.
The main objective of the marketing system is to satisfy the needs of groups of customers and
to generate sufficient revenue to maximise profits. The specific functions related to these
objectives include obtaining marketing information, producing sales forecasts, recommending

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prices, receiving and processing customer orders, checking the creditworthiness of customers
and arranging for the delivery of ordered goods (Eccles et al 2000:516–517).
E-business and developments in the use of the internet have also had an impact on marketing
and sales.

2.2.6 Accounts receivable

This is the second application of the revenue cycle and includes the processing of cash
receipts.
The various functions to ensure that all amounts payable by customers are collected and
received in good time include preparing sales invoices, maintaining accounts receivable,
receiving and depositing cash payments and posting transactions to the general ledger (Eccles
et al 2000:528–530).

2.2.7 Payroll
In an integrated system, the payroll application should be integrated with the personnel
information system which is not an accounting application as such. Because these functions
serve the organisation as a whole they are included as the first part of the administrative cycle.
The main objective of the personnel information and payroll system is to maintain a firm’s
workforce and this should be done in such a way that both the individual employee and the
organisation will benefit. The main processing functions related to these objectives include
(Eccles et al 2000:542):
 capturing, recording and storing personnel data
 preparing, capturing and processing records on time worked and attendance
 payroll processing and labour cost distribution
 making payments to employees and outside bodies

2.2.8 General ledger

The general ledger application involves the remaining activities of the accounting system and
includes fixed asset control and financial reporting. It forms the final part of the administrative
cycle.
The general ledger, fixed assets and financial reporting system is at the centre of all accounting
cycles within the AIS and it is involved in collecting, classifying, coding, processing, storing and
controlling the transaction data of the AIS (Eccles et al 2000:558).

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Summary

The accuracy and effectiveness of the AIS applications will depend on the initial design of each
application and the control measures put in place with implementation of the system.

3. TYPES OF INFORMATION SYSTEMS AND COMMUNICATION CHANNELS

3.1 Overall structure of the information system
To provide management with the right information at the right time, financial information
systems must link the functional and decision-making activities of an organisation. There are
several types of systems that can support such an organisational structure and they are
classified into centralised systems and distributed systems. In a centralised system all the
financial data processing is performed in one location. With distributed systems, various
subsystems are located at different points within the organisation (discussed in more detail in a
later study unit). These points may be local and/or remote, and they are linked to each other via
a communication network.

In a complex organisational structure, information systems often consist of a number of

components (Lewin 2003:71):
 transaction processing systems
 management information systems
 decision support systems
 executive information systems
 expert systems

3.1.1 Transaction processing systems

The TPS supports the day-to-day operations with numerous financial and non-financial
documents, reports and messages circulating through the organisation. The GL/FRS produces
the journals, general ledger and financial statements. The MRS, on the other hand, produces
internal management reports for operational, tactical and strategic decision-making in the
organisation.

Transactions are the result of agreements between two parties to exchange goods and services
which can be measured in monetary terms. A transaction processing system (TPS) basically
gathers data about transactions and summarises them for routine reporting purposes.

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Transactions can be grouped into five major business or transaction cycles (Romney &
Steinbart 2009:53):
 the revenue cycle, where goods and services are sold for cash or a future promise to
receive cash
 the expenditure cycle, where companies purchase inventory for resale or raw materials to
use in producing products in exchange for cash or a future promise to pay cash
 the production cycle, where raw materials are transformed into finished goods
 the human resources/payroll cycle, where employees are hired, trained, compensated,
evaluated, promoted and services terminated
 the financing cycle, where companies sell shares, in the company to investors and borrow
money and where investors are paid dividends and interest is paid on loans

Keep in mind that these basic transaction cycles are supported by a number of other business
activities and that they relate to one another by way of communicating information to one
another and to both management and other external parties.

The capture and storage of TPS data is often computerised and usually forms a large part of the
organisation’s internal database. Although data produced by the TPS needs further processing
for high-level decision-making, it indirectly supports strategic decisions as depicted in the
following table (BPP Learning Media – CIMA E1 2009):

Transaction processing systems

Sales/ marketing Manufacturing/ Finance/ Human Other types (e.g.
systems marketing systems accounting resource university)
systems systems
 Sales  Scheduling  Budgeting  Personal  Admissions
management  Purchasing/  General records  Student
 Market shipping receiving ledger  Benefits academic
research  Engineering  Billing  Salaries records
 Promotion  Operations  Management  Labour  Course records
pricing  Purchase order accounting relations  Graduates
 New products control  General  Training  Registration
 Etc.  Etc. ledger  Payroll  Etc.
 Etc.  Etc.

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3.1.2 Information systems and changing manufacturing systems

The term advanced manufacturing technology (AMT) refers to computer-aided design (CAD),
computer-aided manufacturing (CAM), flexible manufacturing systems (FMS) and electronic
data interchange (EDI). These are some of the innovative computer systems used in modern
manufacturing.

CAD allows new products to be designed (and old ones to be modified) on a computer screen
and changes in product specifications, quality and costs can be explored. CAM refers to the
control of the physical production process by computers, for example the use of robots,
computer numerically controlled (CNC) machines and the use of automated guided vehicles
(AGVs) to handle material. FMS is an “integrated, computer controlled production system which
is capable of producing any range of parts, and of switching quickly and economically between
them”

3.2 Distributed Systems and Communication Networks

Distributed data processing (DDP), which is an alternative to the centralised model, means that
IT is taken to the user rather than the user to the technology. It means that individual processors
or computers are located at sites remote from the central facility. Management at local and
remote sites are responsible for processing and maintaining their own applications. The more
important characteristics of distributed systems are:
 the use of distributed databases
 local responsibility of data processing and maintenance which is with the end-user

Distributed systems require adequate communication networks. Several types of network

architectures are available. These include non-distributed architecture, client/server distributed
architecture and peer-to-peer distributed architecture. DDP also touches on related topics such
as end-user computing, networking and office automation.

3.2.1 Distributed systems

In a distributed processing structure, local and regional management have more control over
computer hardware and operations and also over data processing applications. Where there is
a distributed database at a remote site, transaction processing, MISs and other decision support
systems may not be dependent on centralised processing facilities.

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In a distributed architecture, the processing power is spread throughout the organisation to a

number of individual or departmental systems. The majority of processing is usually carried out
and controlled by end-users.

Some of the advantages of DDP (or disadvantages of centralised data processing (CDP)) are:
 cheaper hardware, as personal computers (PCs) are used extensively
 user-friendly hardware and software
 privacy of data on stand-alone PCs
 improved cost control responsibility for financial success of individual operations
 improved user satisfaction, morale and productivity
 back-ups being done on different computers
 personal configuration of PC hardware and software, to reflect the user’s preference and
most common activity

Some of the disadvantages of DDP can also be regarded as advantages of a centralised

system. They include:
 mismanagement or misuse of organisational resources
 incompatibility of hardware and software components
 duplication of tasks
 end-user performing all the functions, impacting negatively on controls
 lack of qualified IT specialists in the organisation
 lack of standards for systems development and standardised documentation

Before deciding which system should be used, management must carefully consider both the
advantages and disadvantages of a distributed system and assess which system will best
contribute to the achievement of their organisational goals.

3.2.2 End-user computing

End-user computing is the hands-on use of computers by end-users, who perform their own
information processing activities with the aid of hardware, software and other computer
applications. They can also be linked to other users through communication networks. End-user
computing developed inter alia because of the availability of less expensive PCs, increased
user computer literacy, more user-friendly software programs and office automation.

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End-users such as managers, engineers or accountants should be put in a position to write their
own applications, based on the database of the information system and by using applicable
software such as spreadsheet packages or other high-level programming languages. End-user
computing also plays an important role in providing a user-friendly interface.

There are certain benefits of end-user computing, which include enhanced user control,
reduced communication problems and the increased availability of scarce information systems
resources.
End-user computing can, however, also have the following risks:
 incompatibility because everyone does their own thing
 duplication of work
 errors in developing the system
 lack of centralised control
 insufficient systems

3.2.3 Database
A database is “a set of interrelated, centrally coordinated files” (Romney & Steinbart 2009:127).
Data in the database can be used by the entire organisation and not only by the originating
business section.

Although the database model centralises the organisation’s data into a common central
database, all users have access to the database via a distributed network. A database
management system (DBMS) controls access to the data and acts as an interface between
the database and the application programs used. The DBMS is a special software program
recognising which data elements each user is authorised to access (Hall 2008:29).

The database administrator (DBA) is responsible for organising and coordinating the database
resource. The DBA function may consist of an entire department or may be an individual within
the computer or IT department. The DBA also creates the data dictionary, which describes
every data element in the database.
Advantages of database systems include the following (Romney & Steinbart 2009:128):

 Data is integrated by combining various master files into larger “pools” of data.
 Data can easily be shared with all authorised users.
 Reports can easily be revised and updated by accessing the database.

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 Data redundancy and data inconsistencies are minimised because data items are only
stored once.
 Data is independent of application programs, and changes in one do not affect the other.
 Data is managed more efficiently because the DBA is responsible for its coordination.
 Cross-functional analysis can be done on data for management reporting purposes.

3.2.4 Communication networks and distributed systems

Many of the distributed systems require the linking of remote workstations or microcomputers to
mainframe or server computers. This is necessary for remote users to access and interact with
large databases, communicate with others on a network and analyse data that is stored locally
by using applicable software, decision support models and maybe even more sophisticated
software to support executive information systems and expert systems

Efficient and effective networks are necessary for successful distributed data processing and
the provision of information. Over the years, different types of networks and networking
techniques have been developed. One of the latest and best-known networks is the internet. A
major focus of network computing has been on client-server technology.

Benefits of an organisation-wide information system include the following (Lewin 2003:76):

 Information on activities of the entire organisation will be available throughout the
organisation, notwithstanding geographical barriers.
 Better customer service may be available, because information is available at all locations.
 Timely management reports on the whole organisation can be obtained in a timely fashion.
 Different departments or locations can be better co-ordinated.

Networks are also classified according to their size or geographic dispersion. Here are some
commonly used networks:

Local area networks (LANs)

These networks are used to connect a number of devices within a limited geographical area,
such as an office block or factory. Computers connected to a LAN are called nodes. LAN nodes
are managed through special-purpose computers called servers and usually share common
resources such as programs, data and printers (Hall 2008:597).

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Wide area networks (WANs)
WANs usually exceed the geographic limitations of LANs. They are normally connected
computers and terminals distributed over a large area. WAN nodes may include microcomputer
workstations, minicomputers, mainframes and other LANs. WANs may be used to link
geographically dispersed segments of a single organisation or connect multiple organisations
(Hall 2008:597).

Others
A metropolitan area network (MAN) is a network infrastructure linking various local businesses
within a large city together. On the other hand, there is a tiny area network (TAN) consisting of
only two to five computers. A virtual private network (VPN) is a private network within a public
network. It is private from the client’s perspective, but physically shares backbone trunks with
other users (Hall 2008:565). Another one is the value-added network (VAN), which is an inter-
organisational network provided by an independent third party that links a large number of
organisations together and is used for the mutual benefit of all subscribers. The VAN users are
mostly within the same industry and these networks usually add value to the organisation’s
products and services. For example, the Association of British Travel Agents (ABTA) operates a
VAN for travel agents to access training courses from their counter-based terminals (Botten
2009a:223).

4. INTERNET, INTRANETS, EXTRANETS, ENTERPRISE WIDE SYSTEMS,

KNOWLEDGE MANAGEMENT SYSTEMS AND CRM SYSTEMS
Electronic networks connect groups of computers together to enable organisations to
conveniently assemble data and distribute information across the globe.

4.1 Internet
The internet interconnects computer networks worldwide. It can be defined as the “world’s
network. It is a voluntary, and almost unregulated, collection of hardware and software owned
by private individuals and organisations” (Lewin 2003:78). The data and the links between these
data sources that are held throughout the internet together are called the World Wide Web
(WWW).

The origin of the internet is debatable. Some authors agree that it was introduced by academic
researchers who shared academic research articles from different universities through networks
such as the Joint Academic Network (JANET) (Lewin 2003:78). Others hold that the internet
was originally developed for the US military and only later became used widely for academic
and government research (Hall 2008:564; Bodnar & Hopwood 2010:82).

The internet has brought about a universal standard of communication to all networks and it is
now possible for any type of computer in any type of network to exchange data and information

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with any other computer in the world. It is an electronic highway by which any kind of
information can be transmitted between two points. The internet supports the client-server
technology mentioned before, and contains different kinds of servers such as mail servers (for
e-mail), file servers (libraries of data files), web servers (to access documents and run
programs) and commerce servers (specialised servers with features such as EDI and
transaction processing) (Bodnar & Hopwood 2010:85).

The use of the internet has changed the way in which many of the larger businesses approach
their operations. It has made the business world so much smaller and as a result organisations
have to integrate internet and other networking applications into their business strategies.

It has brought about several advantages, not only to the business itself, but also to the
customer. Concepts that arise include agility, customer relationships, pro-activity, creation of
niche markets and exploitation of core activities in a virtual environment.

Apart from placing corporate reports and sales catalogues on the internet (indicating that the
organisation has entered into cyberspace), the incorporation of the internet as an integral
component of business strategy, requires careful planning, positioning and determination.

Integrating the internet into the overall business strategy could have the following advantages:

 being early and being innovative

 potential growth in business volume
 predicting the unpredictable
 access to a global marketplace
 predicting internet customers’ needs
 monitoring and responding to customers’ needs
 reinventing the marketing function
 reduction in transaction costs

There are, however, a number of business risks attached to using the internet in an integrated
way. These include (Gascoyne & Ozcubukcu 1997):

 the impulse to become bureaucratic (inflexible)

 lack of trust by customers and vendors
 inadequate internet software and hardware
 securing information
 bad first impressions
 legal obstacles
 technology infrastructure limitations
 underestimating project costs

One of the problems of the internet is that usually the capacity to expand a business’s limits is
much larger than the capacity of its management to explore the new opportunities offered by the
use of the internet. The internet does not wait for an organisation to prepare its strategies, nor

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does it belong to a particular business enterprise, industry or country. Its impact on business
strategy and practices may therefore threaten traditional strongholds and create opportunities
for competitors (Gascoyne & Ozcubukcu 1997).

While internet-related technology enables and influences new business and marketing practices
and system operations, it remains the task of managers to contemplate the various
opportunities and select those with the best chance of success. The way business is done will
inevitably change.

Where the internet is both an enabling tool and a new business environment, the following must
be kept in mind (Gascoyne & Ozcubukcu 1997):

 The internet is the most global, borderless, cost-effective and open business application
and communication infrastructure.
 The openness and platform independence of the internet makes it an efficient application
development environment.
 The internet has changed the way businesses and their customers interact.
 The internet creates new business, systems, marketing, societal and customer models.
 Given the capacity to discover and monitor customers’ habits, needs and expectations,
businesses need to revalue their business strategies.
 With the global capabilities of the internet, customers have far more options than before.

4.2 Intranets
An intranet, which is essentially a private mini-internet, is owned and run by a single
organisation. The intranet links the organisation’s internal documents and databases into a
system that is accessible through web browsers or, increasingly, through internally developed
software (Gelinas & Dull 2008:77). Intranets are used for in-house communications of any type
of information within an organisation.

To be able to provide an intranet the organisation will need the following facilities (Lewin
2003:81):
 a network with fast transmission rates to link all users and servers within the organisation
to the intranet
 web browser software such as Navigator or Explorer for all users
 e-mail software such as Lotus Notes or Outlook Express

The development of flexible network architectures and the hypertext facilities of the internet
made intranets possible. An example that you should be familiar with is myUnisa.

4.3 Extranets
Extranets are a variation of the intranet. Extranets exist when the intranets of two or more
organisations are linked together allowing customers, vendors and other interested parties
access to their intranet. An extranet can be defined as “a collaborative network that uses

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intranet technology to link businesses with their suppliers, customers, and other business that
share common goals” (Botten 2009a:224). The term “extranet” is being replaced by intronet and
supranet. Intronets are extranets where external parties will gain access to unique information
contained in the initiator’s intranet. Supranets, on the other hand, ”are consortium sponsored
and controlled, many to many, networks set up for the mutual benefit of all members in the
consortium whose long-term objective is consortium competitiveness” (Botten 2009a:225).

Take note: Extranets changes the organisation’s business-to-business relationships and it is

therefore important that you recognise the difference between the two types of extranets.
Extranets can, for instance, involve the linking of an organisation’s intranet with the intranets of
its suppliers or customers. This might include information on, for example, stock availability and
online technical support.
Although the extranet is a useful communication medium, it does have some restrictions (Lewin
2003:82):
 Sharing of information with other organisations, especially competitors, may result in a loss
of competitive position.
 Confidential information should not be shared.

4.4 Enterprise-wide systems

Enterprise-wide systems co-ordinate all business functions, resources and information. At the
core of an enterprise-wide system lies a common database which can be accessed by each
business area within its authorisation limits.

Enterprise resource planning (ERP) software is an example of an enterprise-wide system. ERP

“breaks down traditional functional barriers by facilitating data sharing, information flows, and
the introduction of common business practices among all organisational users” (Hall 2008:34).

Because the development and implementation of an in-house ERP system can be a massive
and costly undertaking, most ERPs are commercial products. Examples of ERP systems
currently available are Oracle, JD Edwards and SAP.

ERP packages usually consist of different modules that support standard business processes.
These modules include asset management, financial accounting, human resources, plant
maintenance, inventory management and sales. Data acquired from ERP systems can also be

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used “to update performance measures in a Balanced Scorecard system and can be used for
activity-based costing, shareholder value, strategic planning, customer relationship
management and supply chain management” (Botten 2009a:246). ERP systems are being
developed in three directions (Botten 2009a:246):

(1) suppliers facing to meet the needs of supply chains

(2) customers facing with a customer relationship management (CRM) function
(3) management facing to support the information and decision-making needs of managers
through strategic enterprise management (SEM)

4.5 Knowledge management systems (KMSs)

A KMS can be used to create a “group memory”, that is to store the knowledge held within an
organisation. “Examples of information held in a KMS include facts, solutions to problems,
relevant legislation and intellectual property” (BPP Learning Media - CIMA E1 2009:62).

The objective of organisational knowledge management is to capture the knowledge of facts

(know what), to understand processes (know how) and to recognise how the process fits with
others (know why), and to turn them into a resource that is available to everyone in the
organisation. The value of knowledge is that it is probably the closest that we can get to the
ultimate source of competitive advantage.

Benefits of a KMS include the following (BPP Learning Media – CIMA E1 2009:62):
 Valuable data is preserved for the future.
 The data is easily shared.
 Data duplication (or redundancy) is avoided.
 It allows employees to get up to speed on organisational knowledge and this may reduce
training time.

According to Lewin (2003:45), there are five main steps in the development and implementation
of a knowledge management strategy:
(1) gaining top management support
(2) creating the technological infrastructure
(3) creating the database structures
(4) creating a ‘sharing’ culture
(5) populating the database and using the knowledge

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4.6 Customer relationship management (CRM) system

CRM systems are specifically designed for providing information concerning an organisation’s
services, products and customers. Most CRM systems are based on a database, which allows a
personal service to customers as well as a swift reply to their queries (BPP Learning Media –
CIMA E1 2009:63). These systems provide, inter alia, customer self-service capabilities,
electronic catalogues and the tracking of shipment update information. They also assist the
salesperson by storing customer history (Gelinas & Dull 2008:93).

To enhance the power and capability of the CRM system it has to interact with and share the
data available in the ERP system. The integration of CRM systems, Web 2.0 applications and e-
commerce enables the customer to feel part of the organisation and allows the organisation to
interact freely with the customer. Examples of Web 2.0 applications, blogs, RSS, widgets, wikis
and even social networking sites, such as FaceBook and MySpace may play a key role in an
organisations future business strategy.

5. E-BUSINESS AND E-COMMERCE

The shift towards increasingly electronic business processes and communications led to the
concept of e-commerce and the wider concept of e-business. Driven by advances in internet
communication, e-commerce has expanded and undergone radical changes in recent years.

5.1 The nature of e-commerce

Broadly speaking, e-commerce involves the electronic processing and transmission of data,
including the electronic buying and selling of goods and services, online delivery of digital
products, electronic funds transfer (EFT), electronic trading of shares and direct consumer
marketing (Hall 2008:564).

Apart from the benefits listed in you textbook, some potentially significant benefits of e-
commerce include (Hall 2008:577):

 access to a worldwide customer and/or supplier base

 reduction in inventory investment and carrying costs
 the rapid creation of business partnerships to fill market niches as they emerge
 reduction in retail prices through lower marketing costs
 reduction in procurement costs
 better customer service

It is important to study the features of the internet which make it radically different from the way
business was done before. Also keep in mind that e-commerce can result in potential exposures
and risks. These risks and how to control it will be discussed in a later study unit.

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5.2 Applying e-commerce to the value chain
E-commerce technology enables organisations to become part of innovative new value chains.
The shift towards increasingly automated business processes and communications contributed
to more efficient ways of conducting business.

Illustration

For the quarter ending March 31, 1996, Amazon.com reported sales of $875 000. Fast-
forward 10 years ... for the quarter ending March 31, 2006, amazon.com reported sales of
over $2.2 BILLION. The amazing part of the story is that in 1996, very little retail business
was taking place on the Internet. Amazon.com began business with only a few
workstations and no physical sales locations (i.e., no “bricks and mortar”). Because it
began early in the era of business-to-consumer (B2C) e-business, many customers were
sceptical of providing credit card information online. To provide comfort to these customers,
Amazon.com processed credit card orders by receiving orders on one computer, writing
the information to a floppy disk and physically walking the order to a separate computer.
Amazon.com could not have grown to nearly $8.5 billion in annual sales on such primitive
systems. Instead, Amazon.com grew by developing and implementing secure transaction
software, online shopping carts, and sophisticated data-analysis programs.

Amazon.com’s e-business model would not be feasible without this software. The model is
based on Amazon.com’s “almost-in-time” inventory concept, which supplements the B2C
interface that you see as a customer with an innovative business-to-business (B2B)
interface for quick acquisition and shipment of non-stocked items. (Gelinas & Dull 2008:62–
63)

With reference to the Amazon.com example, their primary innovation was not selling books, but
offering a vast selection of books that were not necessarily in stock. The electronic system also
allowed them to collect and analyse customer purchase data in order to identify trends in
customer preferences. E-commerce technology enhanced their value chain and gave them a
competitive advantage over those businesses that had to carry a vast amount of inventory.

5.3 Establishing an e-commerce strategy

It is vital that e-commerce, i.e. conducting business electronically, is first about business and
then about technology. An e-commerce strategy is therefore similar to a strategy of any other
area of the business. The IT strategy, including an e-commerce or internet strategy, must
support the overall business strategy of the organisation as established by the board.

The establishment of an e-commerce strategy is likely to impact on most areas of the business
and should thus involve the highest level of management input.

Summary
The internet enables businesses to conduct e-commerce by conveniently transmitting
transactions and information across many physical locations. E-commerce, if properly
implemented, should result in a reduction in business transactions performed by human
operators and a reduction in paper-output from information systems.
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6 IT AS AN ENABLER OF CHANGE
IT had a significant influence on how organisations changed during the past two decades.
Zuboff, as quoted in Lewin (2003:240), suggests that the first introductions of IT into
organisations involved the automation of repetitive (and costly) manual processes. According to
him, these processes were not redesigned, but the computer was used as a tool to directly
replace the human.

6.1 IT implementation
The first stage of IT implementation tends to lead to improvements in economy and efficiency.
The second stage of IT development comes when the organisation’s managers start to request
more, better or faster information. As they begin to realise the potential of the computer,
processes are redesigned to exploit that potential. The result is that, with information,
computers start to do things that the humans have never managed to do.

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IT can be the driving force behind organisational change, as depicted in the following table
(BPP Learning Media – CIMA E1 2009:65):

IT’s possible role in Comment

organisational change

The type of services or Technological changes affect many products, for example
products that are made and companies like Sony manufacture home computers, Virgin have
sold an Internet Service Provider business.

The way in which products There is a continuing trend towards the use of automation and
are made computer aided design and manufacture (e.g. CAM & CAD).

The way in which The use of IT encourages de-layering of organisational

employees are mobilised hierarchies and greater workforce empowerment and skills.

The way in which services Larger shops now use computerised point of sale terminals at
are provided cash desks; e-commerce is also used to sell products on the
internet.

To enable change IT can be both a cause of major changes in doing business and
a response to them. E.g. competition in the airline industry has
intensified due to information systems that allow easy fare
comparison and booking.

To aid communication and IT can, through the use of e-mail, project management software,
co-ordination and intranets facilitate co-ordination when change is introduced.

As a source of unity and E.g. an organisation-wide network provides evidence of and

structure encourages acceptance of the new situation.

6.2 Downsizing and rightsizing the IT department

The changes brought about by new technology applications have been associated with the
concepts of downsizing, upsizing and rightsizing. From a financial information perspective,
these concepts may be defined as follows:

 Downsizing: The movement of accounting systems from proprietary computer systems to

open computer platforms, to attain better cost efficiency. In other words, data processing
and problem-solving are shifted from mainframes to smaller computer units. End-users are
more involved when an organisation uses smaller computers.
 Upsizing: The movement of accounting systems from a local area network onto a more
scalable server platform (open system), and the movement of accounting data from flat file
systems to relational database systems. Although expensive in the short term, upsizing
may save costs in the medium to long term.
 Rightsizing: This is the most important of the three terms because it focuses on the
question: What is the right computer platform for my business applications? It endeavours

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to find the right balance between issues such as software needs, number of users,
processing loads, ease of use, system integration and hardware price or performance.

Summary
IT enables dramatic changes in the business world and it impacts on everyone in the
organisation because it is no longer only used by IT specialists. The challenge for management
is, however, to ensure that the organisation can react swiftly to changes in technology and use it
to obtain a competitive advantage.

7. INFORMATION STRATEGY AND THE NEED FOR A STRATEGIC APPROACH

Information strategy refers to “the long-term plan concerned with exploiting IS and IT either to
support business strategies or create new strategic options” (BPP LM-CIMA P3 2009:359).
From the definition you can see that the information system (IS) strategy is supported by the
information technology strategy and information management (IM) strategy.

Within an organisation there are normally three different strategies relating to the information
being used. These are (Botten 2009a:214):
(1) IS strategy, which refers to the long-term plan concerning the use of IT within the
organisation
(2) IT strategy, which looks at the technology infrastructure that an organisation requires to
transfer information
(3) IM strategy, which refers to how data and information are stored and accessed to support
management processes

7.1 The need for a strategic approach

Many organisations have not, until recently, regarded information systems as a resource of
strategic significance. However, there are many reasons why ISs should have their own strategy
as part of the overall strategy of the organisation. Some of the reasons are that:
 IS/IT affects all levels of organisational management
 IS/IT affects both internal and external stakeholders
 IS/IT involves high capital investment
 IS/IT, especially the IT part, exists in a constantly changing environment
 information needs are continuously changing
 IS/IT is critical for achieving a competitive advantage
 management buy-in is critical for introducing an IS or IT system

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7.2 Benefits of a formal strategy
According to Lewin (2003:204), the major benefits of formal IS strategies are the following:
 Goal congruence between the information system objectives and the corporate objectives
can be achieved
 The organisation is more likely to be able to create and sustain a competitive advantage
 The high level of expenditure on systems will be more focused on supporting key aspects
of the business
 Developments in IT can be exploited at the most appropriate time

7.3 Content of an IS strategy

The IS strategy should take the form of a formal written document that incorporates both short
and long-term objectives. The following key elements should be included in such a strategy
(Bodnar & Hopwood 2010:387):
 an overall statement relating to the key success factors of the organisation and its overall
objectives
 a description of systems within the organisation for which development efforts are needed
 a statement of priorities indicating which areas are to be given the highest priority
 tentative timetables for developing specific systems

Because of the dynamic nature of IS, IT and IM, their strategies cannot remain unchanged over
any extended period. The reasons why strategies will change over time include the following
(Collier & Agyei-Ampomah 2009:243):
 change in the overall objective of the organisation
 development of new information technologies
 update of existing hardware and software
 business growth and diversification

When amending the strategy it is essential to keep in mind that the IS/IT strategy must support
the organisational strategy and not drive it. Amendments must therefore be checked against the
organisational needs, and their compatibility with the overall structure and information needs
must be assessed.

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Summary
In summary, IS strategies are focused on the business unit, enabling it to satisfy internal and
external user demand. IT strategies are focused on activities and the technology needed to
support those activities and IM strategies are management focused (Collier & Agyei-Ampomah
2009:243).

8. BUSINESS PROCESS RE-ENGINEERING

New approaches in the 1990s to challenge and improve the efficiency of organisational
processes were initiated mostly by Hammer and Champy. Business process re-engineering
(BPR) “was introduced as a methodology for continually improving the efficiency of
organisations” (Lewin 2003:115).

8.1 Scope of BPR

CIMA defines BPR as the “selection of areas of business activity in which repeatable and
repeatable sets of activities are undertaken, and the development of improved understanding of
how they operate and of the scope for radical redesign with a view to creating and delivering
better customer value” (Botten 2009a:362).

The main stages in BPR are as follows (Lewin 2003:116; Botten 2009a:364–365):
Process identification
Each task performed within the organisation or department being re-engineered is broken down
into a series of processes.
Process rationalisation
Those processes that are not adding value are discarded.
Process redesign
The remaining processes are redesigned so that they work in the most efficient way possible.
Process reassembly
The re-engineered processes are implemented, resulting in tasks, departments and an
organisation that work in the most efficient manner.

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Hammer and Champy suggest various methods that could be used to make processes more
efficient within organisations. Their suggested principles of BPR are summarised below (Lewin
2003:116–117):
 Several jobs are combined into one.
 Workers throughout the organisation make decisions.
 The steps in the process are performed in a natural order, and where steps in a process
can be performed at the same time, this is done in preference to performing the steps in
linear sequence.
 Multiple versions of processes exist, which means that some processes may be modified,
depending on what inputs are made.
 Work is performed where it is most needed.
 Checks and controls are reduced.
 Systems are linked where possible.
 There should be a single point of contact. This will reduce the time the client spends
contacting the company.

8.2 Re-Engineering With Information Technology

Information systems play a major role in most BPR exercises. An analysis of the information
required for BPR is first conducted, and then the use of IT in the performance of processes is
considered. There is increasing concern at management level about the returns on the vast
amounts organisations invest in IT.

8.3 Process identification and analysis

The following steps are involved (Lewin 2003:117):
 The process must be identified and analysed, which implies that a complex model of
organisational activity will be developed.
 Detailed operational procedures for the redesigned processes must be produced.
 The use of technology of all kinds to automate processes must be implemented.
Summary
Developing new systems or re-engineering existing ones involves a process. A process is a
collection of activities designed to transform input into output. BPR can be regarded as
describing, designing and planning various processes. It is therefore necessary to analyse
existing information needs, identify any IT related problems that exist and define the processes
required to satisfy information needs.

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9. ORGANISING AND ASSESSING THE INFORMATION SYSTEM AND IT

DEPARTMENT
The choice of which IS to adopt depends on many different factors. The way ISs are structured
can improve organisational effectiveness. Below we examine the effectiveness of different IT
configurations or architecture in an organisation, specifically centralised and decentralised
systems.

9.1 Choice of system architecture

When choosing the type of IS appropriate for the organisation the planning process set out
below should be followed (Lewin 2003:111):
 Decide on or check the overall objectives of the organisation.
 Decide on or check the critical success factors (CSFs) and performance indicators (PIs)
required to meet those objectives.
 Define the information systems needed to provide the necessary information on the CSFs
and PIs.
 Check what information is actually available from existing ISs.
 Compare the information available to what is required to identify the information gap.
 Investigate possible systems to close that gap.
 Choose the appropriate system.
 Produce detailed specifications for this system.
 Implement the system.
 Review all ISs to ensure that the information gap has been closed.

The actual system implemented will depend on the information requirements of the specific
organisation, as well as the topology of the organisation. For example, an organisation with only
one location will not require a WAN, but an organisation with branches in many countries will
need to choose how those branches communicate. The communication method in this case
may be a WAN, or simply an e-mail on the internet if there are few international
communications, which are not particularly important. (Lewin 2003:112)

9.2 Assessing the information system and IT department

After a new system has been implemented it must be assessed to establish whether it is
operating as intended and to confirm that user needs have been satisfied. The outcomes of the
assessment or post-implementation review are to (Collier & Agyei-Ampomah 2009:252):

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 establish whether the new system satisfies users’ needs
 evaluate the actual performance of the system compared with its specifications
 recommend improvements or alterations
 ascertain the quality of the project management for the systems implementation and any
learning points for future projects
 recommend improvements to system development procedures
 compare actual costs with budgeted project costs and ascertain whether planned benefits
have been achieved

Summary
Selecting architectures for organisations may require an assessment of the advantages and
disadvantages of either a centralised or a decentralised architecture.

10. CENTRALISATION VS DECENTRALISATION

When considering changes in the IS/IT department, a decision has to be made (based on
problem statements, initial analysis, or initial planning) whether to implement a new system. The
main consideration for a new system usually includes a choice between the centralisation and
decentralisation of the IT department.

Note: There is a difference between the centralisation or decentralisation of the IT department

on the one hand, and the centralisation or decentralisation of the IT system on the other.

10.1 Centralisation of IS/IT department

“A centralised IS/IT department involves all IS/IT staff and functions being based at a single
central location, such as head office” (BPP LM-CIMA E3 2009:269).

Centralisation of the information system uses centralised architecture. Centralised architecture

is where all the computing of an organisation is concentrated on a single, central processor,
which is usually a mainframe or minicomputer (Lewin 2003:112). Centralised architectures can
run over either a LAN or a WAN.

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10.2 Advantages and disadvantages of a centralised IS/IT department

Advantages of a centralised IS/IT department includes (BPP LM-CIMA E3 2009):
 Assuming centralised processing is used, there is only one set of files so everyone uses
the same data and information.
 It gives better security/control over data and files so it is easier to enforce standards.
 Head office is in a better position to know what is going on.
 There may be economies of scale available in purchasing computer equipment and
supplies.
 Computer staff members are in a single location, more expert staff members are likely to
be employed and career paths may be more clearly defined.

Disadvantages of a centralised IS/IT department includes (BPP LM-CIMA E3 2009):

 Local offices might have to wait for IS/IT services and assistance.
 Reliance on head office, so local offices are less self-sufficient.
 A system fault at head office will impact the entire organisation.

10.3 Decentralisation of IS/IT department

“A decentralised IS/IT department involves IS/IT staff and functions being spread out throughout
the organisation” (BPP LM-CIMA E3 2009:269).
Decentralisation of the IS can be achieved by using distributed architectures. In a distributed
architecture, the processing power is spread throughout the organisation on a number of
individual or departmental systems. Personal computers throughout the organisation are usually
used to process the information (Lewin 2003:113).

10.4 Advantages and disadvantages of a decentralised IS/IT department

Advantages of a decentralised IS/IT department includes (BPP LM-CIMA E3 2009):
 Each office can introduce an information system specially tailored for its individual needs
so local changes in business requirements can be taken into account.
 Each office is more self-sufficient.
 Offices are likely to have quicker access to IS/IT support/advice.
 A decentralised structure is more likely to facilitate accurate IS/IT cost/overhead
allocations.

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Disadvantages of a decentralised IS/IT department includes (BPP LM-CIMA E3 2009):
 Control may be more difficult – different and uncoordinated information systems may be
introduced.
 Self-sufficiency may encourage a lack of coordination between departments.
 Increased risk of data duplication, with different offices holding the same data on their own
separate files.

Organisations often use client-server architecture when decentralising their IS. Client-server
architectures also consist of different hardware elements (Lewin 2003:114):
 client PCs or workstations – used by individual users to perform “client applications” and to
access “server applications”
 local or departmental servers – shared by a few users with the same computing needs,
often within a department or workgroup
 a central or corporate server – shared by all users throughout the organisation

Summary
The advantages and disadvantages of the different system architectures should be considered
before a specific IT architecture is recommended to fit with the operations of the specific
organisation.
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Bodnar, GH & Hopwood, WS. 2010. Accounting information systems. 10th edition. Upper
Saddle River, NJ: Pearson.

Botten, N. 2009a. Enterprise strategy: the official CIMA learning system. Paper E3. London:
Elsevier, CIMA.

BPP LM-CIMA E1. 2009. Enterprise paper E1: enterprise operations. London: BPP Learning
Media.

BPP LM-CIMA E3. 2009. Enterprise paper E3: enterprise strategy. London: BPP Learning
Media.

BPP LM-CIMA P3. 2009. Strategic paper P3: performance strategy. London: BPP Learning
Media.

Collier, P & Agyei-Ampomah, S. 2009. Performance strategy: the official CIMA learning system.
Paper P3. London: Elsevier, CIMA.

Eccles, MG, Julyan, FW, Boot, G & Van Belle, JP. 2000. The principles of business computing.
5th edition. Kenwyn: Juta.

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Gascoyne, RJ & Ozcubukcu, K. 1997. Corporate internet planning guide. New York:
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Gelinas Jr, UJ & Dull, RB. 2008. Accounting information systems. 7th edition. Mason, OH:
Thomson South-Western.

Hall, J. 2007. Accounting information systems. 5th edition. Mason, OH: Thomson South
Western.

Hall, J. 2008. Accounting information systems. 6th edition. Mason, OH: Cengage Learning.

Leitch, RA & Davis, KR. 2001. Accounting information systems: theory and practice. 2nd
edition. Englewood Cliffs, NJ: Prentice-Hall.

Lewin, A. 2003. Management accounting: information strategy. London: CIMA.

Romney, MB & Steinbart, PJ. 2009. Accounting information systems. 11th edition. London:
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