Introduction to data, information, knowledge and IT

1 Introduction

Strategy is made out of information. Every technique in this paper – environmental analysis, competitor analysis, performance measurement, strategic control – depends on the organisation being able to collect data, turn it into information and convert that information into knowledge that managers actually use. Organisations that do this better than their rivals make better and faster strategic decisions.

This chapter sets out the foundations: what data, information and knowledge are; how knowledge is managed; the main types of business information system; and how computers are connected together in networks. Chapter 16 then examines the modern digital technologies built on these foundations, and Chapter 17 considers how technology should be woven into strategy itself.

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2 Data, information and knowledge

Three related terms need to be distinguished:

• Data – raw facts. A list of every entry in the sales ledger is data. On its own, data is not particularly useful or informative: before it becomes useful it normally needs some processing, which might be simple summarisation or something far more sophisticated.

• Information – data with meaning. The receivables ledger total, the balance for each customer and an aged receivables listing are information. Information lets us make decisions that would be difficult if the data had remained raw facts, and it is often visualised graphically to make it easier to absorb.

• Knowledge – information in people's minds. Information sitting unread in a file is next to useless. It becomes valuable when people read it, think about it and combine it with their experience and judgement. Knowledge is what people bring to bear when they interpret a report, spot an anomaly or sense an opportunity.

The strategic value rises as you move along the chain. Raw data is cheap and increasingly abundant; competitors can often buy the same data. Information depends on the quality of the organisation's systems and analysis. Knowledge – the accumulated understanding of markets, customers and processes held by the organisation's people – is the hardest of the three for competitors to copy, which is precisely what makes it a potential source of competitive advantage (compare the discussion of resources and competences in Chapter 6).

2.1 Explicit and tacit knowledge

• Explicit knowledge is knowledge that has been captured – generally, written down. We know where to find it and what it is: customer addresses and order histories on a database, procedure manuals, product specifications.

• Tacit (or silent) knowledge is knowledge people carry in their heads, often without realising they possess it. A good sales representative knows which customers like an unexpected call and which do not, who decides quickly and who slowly, and what each customer is quietly planning. None of that is written down, yet it is exactly what separates an excellent sales representative from an average one.

Tacit knowledge matters strategically because it walks out of the door when its holder leaves. If it is not uncovered and shared it is lost – and in the meantime only one person can use it.

3 Knowledge management

Knowledge management is the process of:

• uncovering or discovering knowledge – in particular, coaxing out tacit knowledge

• recording (capturing) it

• distributing it to those who may need it

• leveraging it, so that knowledge acquired for one purpose becomes useful for another

• keeping it updated so that it remains current.

Knowledge management has grown in importance as economies have become dominated by service industries, where what makes a service good – how staff get on with clients, what customers actually appreciate – is far more likely to be tacit than explicit.

Technology helps: intranets, searchable knowledge bases, document collaboration tools and, increasingly, AI assistants that can answer staff questions by drawing on the organisation's own accumulated documents and records. But technology only captures what people are willing to share. Many practitioners maintain that the most effective way to surface tacit knowledge is still the telling of stories and anecdotes in a relatively informal atmosphere: chatting with colleagues is important.

4 Types of business information system

Transaction processing systems (TPS). The first business computer applications recorded transactions: wages and salaries, sales invoicing, receivables ledger accounting. These systems automate existing operations, giving greater accuracy, more speed and cheaper processing.

Management information systems (MIS). Once transactions are held on computer it is easy to analyse them into information useful to management – an aged receivables listing, sales analyses by product or customer. MIS can also be programmed to make simple, structured decisions automatically, such as re-ordering inventory when levels fall below a set point, or accepting a new order only if it keeps the customer within their credit limit.

Decision support systems (DSS). Not all decisions are structured: there is no definitively correct way to draft next year's budget or to price a new product. DSS help managers make such decisions without making the decision for them. The classic example is a financial model built on a spreadsheet, where managers run 'what if?' experiments with different combinations of assumptions to home in on a credible answer.

Executive information systems (EIS). Aimed at senior managers, with particular emphasis on flexible access to summarised internal data (with the ability to 'drill down' to detail when needed) and to the external information – competitor, market and economic data – that strategic planning requires.

Enterprise resource planning (ERP) systems. ERP systems (well-known suppliers include SAP and Oracle) aim to tie the whole organisation together in one integrated system: sales orders, purchasing, inventory, production scheduling, human resources, payroll and cash flow all draw on a single shared database. An order entered by a salesperson automatically drives component ordering, production planning, invoicing and the cash-flow forecast. The strategic attractions are consistency (everyone sees the same, current data) and integration across functions; the risks are cost, complexity and heavy dependence on a single system.

4.1 Information needs at different levels

People at different levels of the organisation have very different information needs, and the systems above serve different levels:

The pattern matters for exam answers: a board trying to set five-year strategy needs external, forward-looking, summarised information – not the accurate-to-the-cent internal history that satisfies operational control.

5 IT across the value chain

To show how pervasive IT can be in a modern business, consider Porter's value chain (Chapter 7) and examples of how each activity can exploit technology:

Enterprise resource planning systems then try to tie all of these together, so that a sales order flows automatically through purchasing, scheduling, invoicing and the cash-flow forecast.

6 Networks and connectivity

Only the very smallest businesses run stand-alone computers. Employees need to share data, so computers are connected in networks:

• Local area network (LAN) – a network over a relatively small area such as an office, a university campus or a hospital, using dedicated cabling or local wireless.

• Wide area network (WAN) – a network extending between cities and countries. Each site's LAN is connected to the others over public communications systems, typically through a virtual private network (VPN) that encrypts data so it can travel securely over the internet. Because data crosses public systems it is vulnerable to interception, so strong security is essential.

• Intranet – an organisation's internal 'internet', accessed with a web browser. Extremely useful for distributing internal information, policies and bulletins to everyone quickly.

• Extranet – controlled access to another organisation's intranet. For example, a supplier given access to a customer's inventory records can see stock running low and despatch replenishment without waiting for an order – cutting delay out of the whole supply process.

Connectivity is also an exposure. Every connection – between sites, to suppliers, to the cloud – widens the surface a cyber attacker can probe. Cyber-security oversight is discussed as a board responsibility in Chapter 17 (and the management of cyber risk is examined in depth in the Risk Management paper).

7 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.