According to Kenneth C. Laudon and Jane Price Laudon in their book Management Information Systems: A Contemporary Perspective, an information system is "a set of procedures that collects (or retrieves), processes, stores, and disseminates information to support decision making and control." In most cases, information systems are formal, computerbased systems that play an integral role in organizations. Although information systems are computerbased, it is important to note that any old computer or software program is not necessarily an information system. "Electronic computers and related software programs are the technical foundation, the tools and materials, of modern information systems, " Laudon and Laudon wrote. "Understanding information systems, however, requires one to understand the problems they are designed to solve, the architectural and design solutions, and the organizational processes that lead to these solutions."
Though it is sometimes applied to all types of information systems used in businesses, the term "management information systems, " or MIS, actually describes specific systems that "provide managers with reports and, in some cases, on-line access to the organization's current performance and historical records, " Laudon and Laudon noted. "MIS primarily serve the functions of planning, controlling, and decision making at the management level." MIS are one of a number of different types of information systems that can serve the needs of different levels in an organization. For example, information systems might be developed to support upper management in planning the company's strategic direction or to help manufacturing in controlling a plant's operations. Some of the other types of information systems include: transaction processing systems, which simply record the routine transactions needed to conduct business, like payroll, shipping, or sales orders; and office automation systems, which are intended to increase the productivity of office workers and include such systems as word processing, electronic mail, and digital filing. Ideally, the various types of information systems in an organization are interconnected to allow for information sharing.
The development of effective information systems holds a number of challenges for small businesses. "Despite, or perhaps because of, the rapid development of computer technology, there is nothing easy or mechanical about building workable information systems, " Laudon and Laudon stated. "Building, operating, and maintaining information systems are challenging for a number of reasons." For example, some information cannot be captured and put into a system. Computers often cannot be programmed to take into account competitor responses to marketing tactics or changes in economic conditions, among other things. In addition, the value of information erodes over time, and rapid changes in technology can make systems become obsolete very quickly. Finally, many companies find systems development to be problematic because the services of skilled programmers are at a premium.
Despite the challenges inherent in systems development, however, MIS also offer businesses a number of advantages. "Today, leading companies and organizations are using information technology as a competitive tool to develop new products and services, forge new relationships with suppliers, edge out competitors, and radically change their internal operations and organizations, " Laudon and Laudon explained. For example, using MIS strategically can help a company to become a market innovator. By providing a unique product or service to meet the needs of customers, a company can raise the cost of market entry for potential competitors and thus gain a competitive advantage. Another strategic use of MIS involves forging electronic linkages to customers and suppliers. This can help companies to lock in business and increase switching costs. Finally, it is possible to use MIS to change the overall basis of competition in an industry. For example, in an industry characterized by price wars, a business with a new means of processing customer data may be able to create unique product features that change the basis of competition to differentiation.
The impetus to develop a new information system can grow out of end-user demands, the availability of new technology, or management strategy. A variety of tools exist for analyzing a company's information needs and designing systems to support them. The basic process of systems development involves defining the project, creating a model of the current system, deriving a model for the new system, measuring the costs and benefits of all alternatives, selecting the best option, designing the new system, completing the specific programming functions, installing and testing the new system, and completing a post-implementation audit.
Information systems designers, whether internal to the company or part of an outside firm, are generally responsible for assuring the technical quality of the new system and the ease of the user interface. They also oversee the process of system design and implementation, assess the impact of the new system on the organization, and develop ways to protect the system from abuse after it is installed. But it is the responsibility of small business owners and managers to plan what systems to implement and to ensure that the underlying data are accurate and useful. "The organization must develop a technique for ensuring that the most important systems are attended to first, that unnecessary systems are not built, and that end users have a full and meaningful role in determining which new systems will be built and how, " according to Laudon and Laudon.
Knowledge management (KM) is a relatively new form of MIS that expands the concept to include information systems that provide decision-making tools and data to people at all levels of a company. The idea behind KM is to facilitate the sharing of information within a company in order to eliminate redundant work and improve decision-making. KM becomes particularly important as a small business grows. When there are only a few employees, they can remain in constant contact with one another and share knowledge directly. But as the number of employees increases and they are divided into teams or functional units, it becomes more difficult to keep the lines of communication open and encourage the sharing of ideas.
Knowledge management is a way of using technology to facilitate the process of collaboration across an organization. A small business might begin sharing information between groups of employees by creating a best-practices database or designing an electronic company directory indicating who holds what knowledge. Larger companies, as David Coleman wrote in Computer Reseller News, can implement KM systems through targeted pilot projects or through a broader strategy involving the firm's technical infrastructure. Many companies have installed intranets—or enterprise-wide computer networks with databases all employees can access—as a form of KM. A number of software programs exist to facilitate KM efforts. Some of the leaders in the field include Lotus Notes, Microsoft Exchange Server, and a variety of systems based on XML.