1. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart1 of 85 C HAPTER 1 Accounting Information Systems: An Overview

2. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart2 of 85 INTRODUCTION Questions to be addressed in this chapter include: –What is the meaning of system, data, and information? –What is an accounting information system (AIS)? –Why is the AIS an important topic to study? –What is the role of the AIS in the value chain? –How does the AIS provide information for decision making? –What are the basic strategies and strategic positions an organization can pursue?

3. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart3 of 85 SYSTEMS, DATA, AND INFORMATION A system is: –A set of interrelated components –That interact –To achieve a goal

4. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart4 of 85 SYSTEMS, DATA, AND INFORMATION Most systems are composed of smaller subsystems...... and vice versa!

5. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart5 of 85 SYSTEMS, DATA, AND INFORMATION Every organization has goals. –The subsystems should be designed to maximize achievement of the organization’s goals. –Even to the detriment of the subsystem itself. –EXAMPLE: The production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time.

6. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart6 of 85 SYSTEMS, DATA, AND INFORMATION Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem or with the larger system. Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals. The larger and more complicated a system, the more difficult it is to achieve goal congruence.

7. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart7 of 85 SYSTEMS, DATA, AND INFORMATION The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting, and processing). Data are facts that are collected, recorded, stored, and processed by an information system. Organizations collect data about: –Events that occur –Resources that are affected by those events –Agents who participate in the events

8. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart8 of 85 SYSTEMS, DATA, AND INFORMATION Information is different from data. Information is data that have been organized and processed to provide meaning to a user. Usually, more information and better information translates into better decisions.

9. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart9 of 85 SYSTEMS, DATA, AND INFORMATION However, when you get more information than you can effectively assimilate, you suffer from information overload. –Example: Final exams week! When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases.

10. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart10 of 85 SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Benefits of information may include: Reduction of uncertainty Improved decisions Improved ability to plan and schedule activities

11. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart11 of 85 SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Costs may include time and resources spent: Collecting data Processing data Storing data Distributing information to users

12. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart12 of 85 SYSTEMS, DATA, AND INFORMATION Benefits of information - Cost of producing information Value of information Costs and benefits of information are often difficult to quantify, but you need to try when you’re making decisions about whether to provide information.

13. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart13 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance It reduces uncertainty by helping you predict what will happen or confirm what already has happened.

14. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart14 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability It’s dependable, i.e., free from error or bias and faithfully portrays events and activities.

15. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart15 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness It doesn’t leave out anything that’s important.

16. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart16 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness –Timeliness You get it in time to make your decision.

17. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart17 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness –Timeliness –Understandability It’s presented in a manner you can comprehend and use.

18. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart18 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness –Timeliness –Understandability –Verifiability A consensus notion—the nature of the information is such that different people would tend to produce the same result.

19. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart19 of 85 SYSTEMS, DATA, AND INFORMATION Characteristics that make information useful: –Relevance –Reliability –Completeness –Timeliness –Understandability –Verifiability –Accessibility You can get to it when you need it and in a format you can use.

20. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart20 of 85 Information is provided to both: –External users –Internal users SYSTEMS, DATA, AND INFORMATION

21. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart21 of 85 Information is provided to both: –External users –Internal users SYSTEMS, DATA, AND INFORMATION

22. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart22 of 85 External users primarily use information that is either: –MANDATORY INFORMATION—required by a governmental entity, such as Form 10-K required by the SEC; or –ESSENTIAL INFORMATION—required to conduct business with external parties, such as purchase orders. SYSTEMS, DATA, AND INFORMATION

23. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart23 of 85 In providing mandatory or essential information, the focus should be on: –Minimizing costs. –Meeting regulatory requirements. –Meeting minimum standards of reliability and usefulness. SYSTEMS, DATA, AND INFORMATION

24. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart24 of 85 Information is provided to both: –External users –Internal users SYSTEMS, DATA, AND INFORMATION

25. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart25 of 85 Internal users primarily use discretionary information. The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the information has positive value. SYSTEMS, DATA, AND INFORMATION

26. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart26 of 85 An AIS is a system that collects, records, stores, and processes data to produce information for decision makers. It can: –Use advanced technology; or –Be a simple paper-and-pencil system; or –Be something in between. Technology is simply a tool to create, maintain, or improve a system. WHAT IS AN AIS?

27. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart27 of 85 The functions of an AIS are to: –Collect and store data about events, resources, and agents. –Transform that data into information that management can use to make decisions about events, resources, and agents. –Provide adequate controls to ensure that the entity’s resources (including data) are: Available when needed Accurate and reliable WHAT IS AN AIS?

28. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart28 of 85 It’s fundamental to accounting. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Accounting is an information-providing activity, so accountants need to understand: –How the system that provides that information is designed, implemented, and used. –How financial information is reported. –How information is used to make decisions.

29. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart29 of 85 It’s fundamental to accounting. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Other accounting courses focus on how the information is provided and used. An AIS course places greater emphasis on: –How the data is collected and transformed. –How the availability, reliability, and accuracy of the data is ensured. AIS courses are not number-crunching courses.

30. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart30 of 85 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Auditors need to evaluate the accuracy and reliability of information produced by the AIS.

31. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart31 of 85 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work.

32. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart32 of 85 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? In private industry and not-for-profit, systems work is considered the most important activity performed by accountants.

33. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart33 of 85 It’s fundamental to accounting. The skills are critical to career success. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

34. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart34 of 85 It’s fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Other systems courses focus on design and implementation of information systems, databases, expert systems, and telecommunications. AIS courses focus on accountability and control.

35. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart35 of 85 It’s fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. AIS topics are tested on the new CPA exam. WHY STUDY ACCOUNTING INFORMATION SYSTEMS? Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

36. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart36 of 85 It’s fundamental to accounting. The skills are critical to career success. The AIS course complements other systems courses. AIS topics are tested on the new CPA exam. AIS topics impact corporate strategy and culture. WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

37. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart37 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology AIS design is affected by information technology, the organization’s strategy, and the organization’s culture.

38. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart38 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy.

39. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart39 of 85 WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology Although culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information.

40. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart40 of 85 The objective of most organizations is to provide value to their customers. What does it mean to deliver value? Let’s peek in on a conversation at Joe’s pharmacy... ROLE OF THE AIS IN THE VALUE CHAIN

41. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart41 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors.

42. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart42 of 85 ROLE OF THE AIS IN THE VALUE CHAIN That’s true, but we’re comfortable with that because of the value- added that we bring to this arrangement.

43. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart43 of 85 ROLE OF THE AIS IN THE VALUE CHAIN What is that “value-added,” and how do you convert it into dollars?

44. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart44 of 85 ROLE OF THE AIS IN THE VALUE CHAIN Blah—blah—blah– customer service– blah—blah — blah

45. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart45 of 85 Although “adding value” is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts. It may mean: –Making it faster –Making it more reliable –Providing better service or advice –Providing something in limited supply (like O-negative blood or rare gems) –Providing enhanced features –Customizing it ROLE OF THE AIS IN THE VALUE CHAIN

46. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart46 of 85 Value is provided by performing a series of activities referred to as the value chain. These include: –Primary activities –Support activities These activities are sometimes referred to as “line” and “staff” activities respectively. ROLE OF THE AIS IN THE VALUE CHAIN

47. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart47 of 85 Value is provided by performing a series of activities referred to as the value chain. These include: –Primary activities –Support activities These activities are sometimes referred to as “line” and “staff” activities respectively. ROLE OF THE AIS IN THE VALUE CHAIN

48. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart48 of 85 Primary activities include: –Inbound logistics ROLE OF THE AIS IN THE VALUE CHAIN Receiving, storing, and distributing the materials that are inputs to the organization’s product or service. For a pharmaceutical company, this activity might involve handling incoming chemicals and elements that will be used to make their drugs.

49. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart49 of 85 Primary activities include: –Inbound logistics –Operations ROLE OF THE AIS IN THE VALUE CHAIN Transforming those inputs into products or services. For the pharmaceutical company, this step involves combining the raw chemicals and elements with the work of people and equipment to produce the finished drug product that will be sold to customers.

50. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart50 of 85 Primary activities include: –Inbound logistics –Operations –Outbound logistics ROLE OF THE AIS IN THE VALUE CHAIN Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals.

51. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart51 of 85 Primary activities include: –Inbound logistics –Operations –Outbound logistics –Marketing and sales ROLE OF THE AIS IN THE VALUE CHAIN Helping customers to buy the organization’s products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders.

52. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart52 of 85 Primary activities include: –Inbound logistics –Operations –Outbound logistics –Marketing and sales –Service ROLE OF THE AIS IN THE VALUE CHAIN Post-sale support provided to customers such as repair and maintenance function. A pharmaceutical firm will typically not be repairing it’s product (though the product may be periodically reformulated). The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc.

53. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart53 of 85 Value is provided by performing a series of activities referred to as the value chain. These include: –Primary activities –Support activities These activities are sometimes referred to as “line” and “staff” activities respectively. ROLE OF THE AIS IN THE VALUE CHAIN

54. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart54 of 85 Support activities include: –Firm infrastructure ROLE OF THE AIS IN THE VALUE CHAIN Accountants, lawyers, and administration. Includes the company’s accounting information system.

55. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart55 of 85 Support activities include: –Firm infrastructure –Human resources ROLE OF THE AIS IN THE VALUE CHAIN Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.

56. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart56 of 85 Support activities include: –Firm infrastructure –Human resources –Technology ROLE OF THE AIS IN THE VALUE CHAIN Activities to improve the products or services (e.g., R&D, Web site development). For the pharmaceutical company, these activities would include research and development to create new drugs and modify existing ones.

57. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart57 of 85 Support activities include: –Firm infrastructure –Human resources –Technology –Purchasing ROLE OF THE AIS IN THE VALUE CHAIN Buying the resources (e.g., materials, inventory, fixed assets) needed to carry out the entity’s primary activities. In the pharmaceutical company, the purchasing folks are trying to get the best combination of cost and quality in buying chemicals, supplies, and other assets the company needs to run its operations.

58. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart58 of 85 Information technology can significantly impact the efficiency and effectiveness with which the preceding activities are carried out. An organization’s value chain can be connected with the value chains of its customers, suppliers, and distributors. ROLE OF THE AIS IN THE VALUE CHAIN Good AIS value chain: UPS spends over $1 billion a year on information systems resulting in greater customer control over delivery, higher driver productivity, and lower costs. Bad AIS value chain: –Limited Brands tangled integration of over 60 incompatible information systems resulted in 400 trailers trying to jam into a 150 trailer lot.

59. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart59 of 85 Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service For example, the inbound logistics of Pharmaceuticals, Inc., links to the outbound logistics of its suppliers.

60. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart60 of 85 Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service And the outbound logistics of Pharmaceuticals, Inc., links to the inbound logistics of its customers.

61. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart61 of 85 Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service The linking of these separate value chains creates a larger system known as a supply chain.

62. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart62 of 85 Pharmaceuticals, Inc. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service The linking of these separate value chains creates a larger system known as a supply chain. Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.

63. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart63 of 85 There is variation in the degree of structure used to make decisions: –Structured decisions ROLE OF THE AIS IN THE VALUE CHAIN Repetitive and routine. Can be delegated to lower-level employees. EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean driving history.

64. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart64 of 85 There is variation in the degree of structure used to make decisions: –Structured decisions –Semistructured decisions ROLE OF THE AIS IN THE VALUE CHAIN Incomplete rules. Require subjective assessments. EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history.

65. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart65 of 85 There is variation in the degree of structure used to make decisions: –Structured decisions –Semistructured decisions –Structured decisions ROLE OF THE AIS IN THE VALUE CHAIN Non-recurring and non-routine. Require a great deal of subjective assessment. EXAMPLE: Deciding whether to begin selling a new type of insurance policy.

66. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart66 of 85 There is also variation in the scope of a decision’s effect: –Occupational control decisions ROLE OF THE AIS IN THE VALUE CHAIN Relate to performance of specific tasks Often of a day-to-day nature. EXAMPLE: Deciding whether to order inventory.

67. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart67 of 85 There is also variation in the scope of a decision’s effect: –Occupational control decisions –Management control decisions ROLE OF THE AIS IN THE VALUE CHAIN Relate to utilizing resources to accomplish organizational objectives. EXAMPLE: Budgeting.

68. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart68 of 85 There is also variation in the scope of a decision’s effect: –Occupational control decisions –Management control decisions –Strategic planning decisions ROLE OF THE AIS IN THE VALUE CHAIN The “what do we want to be when we grow up” types of questions. Involves establishing: –Organizational objectives –Policies to achieve those objectives EXAMPLE: Deciding whether to diversify the company into other product lines.

69. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart69 of 85 In general, the higher a manager is in the organization, the more likely he/she is to be engaging in: –Less structured decisions –Broader scope (i.e., strategic planning) decisions ROLE OF THE AIS IN THE VALUE CHAIN

70. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart70 of 85 Corporations have: –Unlimited opportunities to invest in technology. –Limited resources to invest in technology. Consequently, they must identify the improvements likely to yield the highest return. This decision requires an understanding of the entity’s overall business strategy. THE AIS AND CORPORATE STRATEGY

71. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart71 of 85 Michael Porter suggests that there are two basic business strategies companies can follow: –Product-differentiation strategy –Low-cost strategy THE AIS AND CORPORATE STRATEGY

72. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart72 of 85 Michael Porter suggests that there are two basic business strategies companies can follow: –Product-differentiation strategy –Low-cost strategy THE AIS AND CORPORATE STRATEGY

73. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart73 of 85 A product-differentiation strategy involves setting your product apart from those of your competitors, i.e., building a “better” mousetrap by offering one that’s faster, has enhanced features, etc. THE AIS AND CORPORATE STRATEGY

74. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart74 of 85 Michael Porter suggests that there are two basic business strategies companies can follow: –Product-differentiation strategy –Low-cost strategy THE AIS AND CORPORATE STRATEGY

75. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart75 of 85 A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently. THE AIS AND CORPORATE STRATEGY

76. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart76 of 85 Sometimes a company can do both, but they normally have to choose. THE AIS AND CORPORATE STRATEGY

77. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart77 of 85 Porter also argues that companies must choose a strategic position among three choices: –Variety-based strategic position THE AIS AND CORPORATE STRATEGY Offer a subset of the industry’s products or services. EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, property- casualty, etc.

78. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart78 of 85 Porter also argues that companies must choose a strategic position among three choices: –Variety-based strategic position –Needs-based strategic position THE AIS AND CORPORATE STRATEGY Serve most or all of the needs of a particular group of customers in a target market. EXAMPLE: The original Farm Bureau-based insurance companies provided a portfolio of insurance and financial services tailored to the specific needs of farmers.

79. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart79 of 85 Porter also argues that companies must choose a strategic position among three choices: –Variety-based strategic position –Needs-based strategic position –Access-based strategic position THE AIS AND CORPORATE STRATEGY Serve a subset of customers who differ from others in terms of factors such as geographic location or size. EXAMPLE: Satellite Internet services are intended primarily for customers in rural areas who cannot get DSL or cable services.

80. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart80 of 85 Porter also argues that companies must choose a strategic position among three choices: –Variety-based strategic position –Needs-based strategic position –Access-based strategic position These strategic positions are not mutually exclusive and can overlap. THE AIS AND CORPORATE STRATEGY

81. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart81 of 85 Choosing a strategic position is important because it helps a company focus its efforts as opposed to trying to be everything to everybody. –EXAMPLE: A radio station that tries to play all types of music will probably fail. It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate. THE AIS AND CORPORATE STRATEGY

82. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart82 of 85 The growth of the Internet has profoundly affected the way value chain activities are performed: –Inbound and outbound logistics can be streamlined for products that can be digitized, like books and music. –The Internet allows companies to cut costs, which impacts strategy and strategic position. –Because the Internet is available to everyone, intense price competition can result. The outcome may be that many companies shift from low-cost to product- differentiation strategies. –The Internet may impede access-based strategic positions. THE AIS AND CORPORATE STRATEGY

83. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart83 of 85 The AIS should help a company adopt and maintain its strategic position. –Requires that data be collected about each activity. –Requires the collection and integration of both financial and nonfinancial data. THE AIS AND CORPORATE STRATEGY Predictive data analysis (data warehousing/mining) adds to competitive advantage by forecasting future events based on historical trends. EXAMPLE: You can view forecasts of airfares between major airports based on historical trends at www.farecast.com.www.farecast.com

84. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart84 of 85 The authors believe: –Accounting and information systems should be closely integrated. –The AIS should be the primary information system to provide users with information they need to perform their jobs. THE AIS AND CORPORATE STRATEGY

85. © 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart85 of 85 SUMMARY What we’ve learned so far: –The meaning of system, data, and information. –What an AIS is. –Why it’s an important topic to study. –What its role is in the value chain. –How it provides information for decision making. –What are the basic strategies and strategic positions an organization can pursue. How these interact with the AIS.