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Accounting & Financial Management
AFM 341
Jee Hae- Lim

\Module 1 Readings Chapter 1: IT Business Value Proposition ○ The technology involving the development, maintenance, and use of computer systems, software, and networks for the processing and distribution of data is known as information technology ■ Combines technical components, human activities and describes process of managing life cycle of organizational practices ■ Includes information technology infrastructure, data, application systems, and personnel that employ information technology to deliver information and communications services in an organization ○ Information System: management of the organizational function in charge of planning, designing, developing, implementing, and operating the systems and providing services ○ Use IT to capture, store, manipulate, and present data in order to support firm’s business processes and value adding activities ○ Example: Sale ■ Point of sale information system ■ Inventory management system ■ Assist with planning, budgeting, marketing, purchasing of more supplies ○ Sign of well function IS is that users take it for granted – it is there when and where we need it (don’t think about who is maintaining it or paying for it) ○ IT Spending ■ IT investment is one of the largest capital spending items for most firms (IT budget represents a sizeable component of overall budget) ■ On average, IT budget of large NA companies range between $300-500M per year (2-4% of revenue) ■ Too small of a budget constrains it ability to meet new service request and leverage installed technology ■ Budget for IT: Staff salaries, payments to vendors and service firms, hardware/software upgrades and replacements, training of IT staff and system users, and new development associated with systems software and application software portfolios ■ Average IT spending – between 2.5% and 4.3% ■ Highest IT spending industries (known as more IT intensive industries) – banking and financial services, media and entertainment, consulting and business services ■ Lowest IT spending industries – metals and natural resources, construction and engineering, and automobile ■ Significant decrease seen in IT budgets during recession and increase with industry specific events ■ Highest IT budgets – banking and financial services sector ■ Reasons for spikes around 2000-2001 and 2005-2006 ● 2000-2001: after Y2K ● 2005-2006: ■ Main IT investments recently made: ● Cloud Computing – delivery of computing as a service rather than a product and encompasses any subscription-based or pay per use service that, in real time over the internet, extends IT’s existing capabilities ○ Saving files not in laptop but on servers of company 1 ○ Interest influenced by economic crisis, does not require significant expenditure, firms do not have to worry about excess IT capacity when demand is slow, do not need to make provisions when demand is high ○ Three main manifestation of cloud computing: ■ Cloud computing – infrastructure as a service (ex. Amazon, Microsoft and VMWare) ■ While the client does not manage or control the underlying IT infrastructure, it has control over operating systems, applications, and possibly limited control of select networking components (e.g. host firewalls) ■ Use computing resource to deploy and run their operating systems and applications ■ Cloud computing – platform as a service (ex. Amazon, Microsoft Windows Azure, Google Apps, Oracle, VMWare) ■ The client can use the cloud platform to deploy their own applications and application hosting environment configurations. ■ Cloud computing – software as a service (ex. Amazon, Microsoft, Google, Apple, Oracle) ■ The applications are accessible through thin client interface such as a web browser. The client does not manage or control the underlying cloud infrastructure or application. Clients have the ability to change certain configuration settings to tailor the application to their needs. ● Web 2.0 (wikis, blogs, social networking) ○ Can be used for marketing and maintaining interactive relationship with customers ○ Enables companies to integrate various aspects of business and stay on top of current trends ● GPS enabled web applications ○ Locate users and suggest discounts based on location ○ Recommends social events and find other people that user may be interested in ○ Good investment because of the integration it can create with other services as well as connections it can foster with potential customers ○ Highest enterprise software priority: mobile applications ■ Operational IT Spending Vs. Capital Expenditure (IT Spending for New Technology) ● Operational: ○ Maintaining current IT infrastructure and ensure that it is running efficiently ● Capital: ○ New investments are about exploring new opportunities ○ Potential to transform the way a business functions by introducing new IT ○ Justifying IT Spending ■ Company that wants to gain a competitive advantage must either: 2 ● Perform activities at a cost which is same or below competitors ● Or, perform value activities in a way that leads to more value creation ■ Justify IT spending as aiming to reduce cost or to add value (increase sales) ■ Ex. Payroll and Inventory management system – imagine firms with and without the use of IT ● Reduced time, human errors, cost of hiring, increase employee satisfaction and productivity ● Better view of what is selling, what is in stock, no excess inventory (reduce inventory cost), more customer satisfaction (more sales), no assets tied down, ■ When IT spending is processed within the firm, it leads to higher profit either through higher revenue or lower cost ○ Payoffs for IT Spending – Part 1 ■ Productivity Paradox – weak correlation between IT expenditure and profitability ■ Strassmann concludes no identifiable associate between expenditure on IT and profitability ● “Computers are only tools. They are not an unqualified blessing. Identical machines with identical software will perform admirably in one company but will make things worse in an enterprise that has inferior management. They enhance sound business practices. They also aggravate inefficiencies whenever the people who use them are disorganized and unresponsive to customers' needs. The best computer technologies will always add unnecessary costs to a poorly managed firm. The problem seems to rest not with the inherent capabilities of the technologies, which are awesome, but with the managerial inability to use them effectively. ... Unless robots end up running completely automated businesses, the relationship between computerization and profitability will remain a random scatter diagram for many years to come.” ○ Input-Process-Output (I-P-O) Model ■ Input: business decisions and investments ■ Process ● Black box represents the idea that is not very obvious or clear all the time and comes into limelight when outputs are dissatisfac
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