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Economic Impact of Information Systems

1149 words (5 pages) Essay in Business

13/09/17 Business Reference this

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Explain the economic impact of information system in the context of Gerbang Furniture. And critically discuss the core activities discussed by Laudon (2015) in the information system development process?

Information system technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the investment on computer technology increases, the amount of labor works in managing the information decreases. Hence, fully adoption to information technology should results in the reduction in number of middle managers and clerical workers as information technology substitutes for their labor (Laudon, 2016) [1].

Business process was defined as logically related set of activities that determined how specific business tasks are performed. It is how an organization coordinate work activities with provided information to produce a valuable product or services. How well the product or services delivered to the customer is much depending on the level or coordination within the organization. Well-designed process can be a source of competitive advantages that gives strength to the company. Usually most companies relies heavily on the advantages of information technology to meet such objectives.

Business process usually can be classified into core process and the support process. The core process are the operational process of business or key activities that required to produce the product or services to the customer (Laudon, 2016) [1]. Example for Gerbang Furniture Sdn. Bhd. (GF) as furniture manufacturing company core activity is the work that involved in producing furniture. To be exact on specific activities are product design, fabrication, assembly, finishing and packaging. These activities must exist in order to meet customer requirement for the set of furniture sales order.

Another category of support process are those activities that enable the core process to exist. Some example of support activities are sales order processing, customer credit control check, production scheduling, materials requirement planning and material purchasing. These support processes are crucial in order the core process to exist and operate smoothly. Before information technology age, data’s were handle in manual way with a lot of human intervention.

According to transaction cost theory, firms and individuals seek to economize on transaction costs as much as they do on other aspect of production costs or operation costs. Information Technology affects the cost and quality of information and changes the economics of information. Traditionally, firms have tried to reduce transaction cost through vertical integration, by getting bigger, hiring more employees and buying their own suppliers and distributors (Laudon, 2016) [1].

In the context of Gerbang Furniture Sdn. Bhd. (GF), Sales information system can helps in consolidating the customer sales orders in more efficient ways. For example, using statistical number, the amount of order based on design, quantity and purchased history can be collected within a fraction of time. The records of customer preference and special order request can be monitored closely thus improved the level of customer satisfaction. And as control check prior to delivery, customer service team can perform customer credit check to ensure no past overdue payment. This can avoid long overdue account receivable getting accumulated and impacting the company cash flows.

Another usage of sales data is the list of historical customer sales order records. By understanding the historical trend, future sales demand requirement can be plotted based on repeated pattern and trend. The information from future demand requirement can be used as a guideline for material requirement forecast. This can avoid the factory from over purchasing of raw materials and buying the not required materials. Over purchasing of raw materials is a sheer waste as it consume warehouse space and company working capital has been tied up with non-moving WIPs’. At the same time, under purchasing is equally bad as it exposed to the risks of material shortages if the demand fluctuates. Therefore a good level of stocks balancing is important for cost effectiveness as the stocks has to be at the lowest whilst keeping the level of supply consistent.

Apart from demand management, MIS would be able to help in connecting sales information from upstream to downstream in order to give the businesses a complete and holistic view. Information from downstream is collated and combined with upstream information to give an understanding on business position and strength. As an example in Gerbang Furniture Sdn. Bhd. (GF), the information on historical customer orders can be projected to understand future expected business growth. It will then can be linked to factory production capacity where future investment decision shall be discussed. With a right information on hand, decision on investment tools, business expansion risk, returns on investment effectiveness can be calculated accurately.

And according to agency cost theory, information technology can reduce internal management costs. A principle also known as owner employs “agents” or employees to perform work to accomplish the company tasks and objectives. As the company grew in size and scope, the coordination costs or called as agency would also growing. The information technology makes the manager’s task easier to oversee and coordinate with a greater number of employee. The employee payroll, performance, duties, roles and responsibilities can be coordinated in much efficient manner with very few clerks and managers (Laudon, 2016) [1].

As much as the company is growing bigger and more complex, human alone can’t handle the amount of manual information circulated in the company. The risks would be too big such as data integrity due to data entry error, information wouldn’t be able to be presented in an effective way and decision making will be slow and not flexible. For a large company, the amount of cost spent on MIS with an integrated information system would definitely a small fraction ratio with the benefit of economics of scales. The benefits obtained from an improved decisions making and risks elimination is definitely worth the ROI.


[01] Kenneth C. Laudon Jane P. Laudon (2016),“Management Information Systems, Managing the Digital Firm”, Global Edition Text Book, Fourteenth Edition pg. 121 – 122

[02] Josh Bendickson Jeff Muldoon Eric W. Liguori Phillip E. Davis, (2016),“Agency theory: background and epistemology “, Journal of Management History, Vol. 22 Iss 4 pp. 437 – 449

[03] Mary S. Logan, (2000),“Using Agency Theory to Design Successful Outsourcing Relationships”, The International Journal of Logistics Management, Vol. 11 Iss 2 pp. 21 – 32

[04] Naomi Wangari Mwai Joseph Kiplang’at David Gichoya , (2014),“Application of resource dependency theory and transaction cost theory in analysing outsourcing information communication services decisions A case of selected public university libraries in Kenya “, The Electronic Library, Vol. 32 Iss 6 pp. 786 – 805

[05] Ogan M. Yigitbasioglu, (2010),”Information sharing with key suppliers: a transaction cost theory

Perspective”, International Journal of Physical Distribution & Logistics Management, Vol. 40 Iss. 7 pp. 550 – 578

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