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7.Understandhowproduct,industry,seller,andbuyercharacteristicsimpacttheeconomicsofEC.
8.RecognizekeyfactorstothesuccessofECprojectsandthemajorreasonsforfailures.
Content
JustifyingInvestmentinITandECat
CaliforniaStateAutomobileAssociation
15.1WhyJustifyE-CommerceInvestments;
HowCanTheyBeJustified?
15.2DifficultiesinMeasuringandJustifyingE-CommerceInvestments
15.3MethodsandToolsforEvaluatingandJustifyingE-CommerceInvestments
15.4ExamplesofE-CommerceProjectJustification
15.5TheEconomicsofE-Commerce
15.6FactorsThatDetermineE-CommerceSuccess
15.7OpportunitiesforSuccessinE-CommerceandAvoidingFailure
ManagerialIssues
Real-WorldCase:
JustifyingECandIT
InvestmentintheStateofIowa
AnswerstoPause/BreakSectionReviewQuestions
Section15.1Review
1.ListsomeofthereasonsforjustifyinganECinvestment.
JustifyinganECinvestmentmeanscomparingthecostsoftheprojectagainstitsbenefitsinwhatisknownasacost-benefitanalysis.
2.DescribetherisksofnotconductinganECjustificationstudy.
However,evenwhenformalanalysisisnotrequired,anorganizationshouldhavesomequalitativeanalysistoexplainthelogicofinvestingintheECproject.
3.DescribehowanECinvestmentisjustified.
Metricsareusedtodescribecosts,benefits,ortheratiobetweenthem.Theyareusednotonlyforjustification,butalsoforothereconomicactivities(e.g.,tocompareemployeeperformanceinordertorewardspecificemployees).
4.ListthemajorECinvestmentcategories.
OnebasicwaytocategorizedifferentECinvestmentsistodistinguishbetweeninvestmentininfrastructureandinvestmentinspecificECapplications.
5.WhenisjustificationofECinvestmentsunnecessary?
∙Whenthevalueoftheinvestmentisrelativelysmallfortheorganization
∙Whentherelevantdataarenotavailable,inaccurate,ortoovolatile
∙WhentheECprojectismandated—itmustbedoneregardlessofthecostsandbenefitsinvolved
6.Whataremetrics?
Whatbenefitsdotheyoffer?
Ametricisaspecific,measurablestandardagainstwhichactualperformanceiscompared.
Section15.2Review
1.Howdoorganizationsmeasureperformanceandproductivity?
Whatarethedifficultiesinmeasuringperformanceandproductivity?
OneofthemajorbenefitsofusingECisincreasedproductivity.However,productivityincreasesmaybedifficulttomeasureforanumberofdifferentreasons.
2.WhyisitdifficulttorelateEC(IT)investmentstoorganizationalperformance?
Listthemajorreasons.
Data,ortheanalysisofthedata,mayhideproductivitygains.Whyisthis?
Formanufacturing,itisfairlyeasytomeasureoutputsandinputs.
3.Definetangiblecostsandbenefits.
Tangiblecostsarethosethatareeasytomeasureandquantifyandthatrelatedirectlytoaspecificinvestment.
4.DefineintangiblecostsandbenefitsandexplainwhytheymustbeconsideredwhenjustifyinganITinvestment.
Intangiblecostsmayincludethelearningcurveofthefirm’scustomerserviceemployeestoincorporateanECsystemtorespondtocustomerinquiries.
5.Whyisitdifficulttomeasurethevalueofintangiblebenefits?
TheproblemsofmeasuringintangiblecostsandbenefitsbecomemorecomplexascompaniestrytojustifylargeinvestmentsinECbecauseofthespecialcharacteristicsofEC.
6.Describeasimpleapproachtotheintangiblesproblem.
Studentresponsesmayvary.
7.Howshouldmanagementhandletheuncertaintiesofbenefits?
Thetextprovidesamodelonpage691fromA(2006)andBaseline(2006).
Section15.3Review
1.ListtheitemsthatconstitutethebusinessROIandthetechnicalROIforanECportalapplication.
BusinessROIrelatestotheECinvestmentbenefitsincurredfortheimprovementofthebusinessanditsoperations.TechnologyROIrelatestotheECinvestmentbenefitsincurredbyimprovementsintheintegrationoftechnologyanditsdeployment.
2.Whatarethecomponentsofthebalancedscorecard?
Thismethodevaluatesthehealthorperformanceoftheorganizationbylookingatabroadsetoffactors,notjustfinancialones.ItisbecomingapopulartoolforassessingECprojects.
3.WhatareROIcalculators?
VendorsandtheconsultingcompanieshaveaccumulatedquiteabitofexperienceindevelopingmetricsandtoolscalledROIcalculatorstoevaluateinvestments.
4.DifferentiatebetweenbusinessandtechnologyROI.
TechnologyROIisgenerallymoredifficulttocalculateasITresourcesgenerallybenefitmultipleinitiatives.
5.DescribetheTCOandTBO.
TotalCostofOwnershipevaluatesthesumofthecostsofowning,operatingandcontrollinganITsystemwhereastheTotalBenefitsofOwnershipsumsthetangibleandintangiblebenefitsofanITsystem.
Section15.4Review
1.Listfivesuccessfactorsfore-procurement.
E-procurement(seeChapter5)isnotlimitedtojustbuyingandselling;
italsoencompassesthevariousprocessesinvolvedinbuyingandselling:
selectingsuppliers,submittingformalrequestsforgoodsandservicestosuppliers,gettingapprovalfrombuyers,processingpurchaseorders,fulfillingorders,deliveringandreceivingitems,andprocessingpayments.
2.Listfiveperformancemetricsfore-procurement
Seetable15.1.
3.Listthreetangibleandthreeintangiblebenefitsofe-CRM.
∙Reducethecostofsales.
∙Reducesalesadministrationoverhead.
∙Improvethelead-to-saleclosureratio.
∙Increasecustomerretention.
∙Improvecustomersatisfactionandloyalty.
4.Listsomemetricsthatcanbeusedtojustifye-training.
End-usertrainingthathelpsemployeesacquireorimprovetheirITskillsplaysakeyrole
inensuringthesmoothoperationoforganizationsintheinformationeconomy.
5.HowisthecostofSOXcalculated?
Baselinecalculatesthiscostbyexaminingindividualcomponents.AnexampleisavailableinExhibit15.9
Section15.5Review
1.HowcanECenhanceincreasingreturnsinabusiness?
(Hint:
consultroi-.)
Althoughproducersmayhaveinitialincreasingeconomiesofscale,theyeventuallyreachapointwherecostsincreasefasterthanrevenueswhentheyproducemoreoftheproduct,andadditionalproductionbecomeslessandlessprofitable
2.HowdoesECimpacttheproductioncostcurve?
Theproductionfunction,showninExhibit15.11,representsamathematicalformulathatindicatesthatforthesamequantityofproduction,Q,companieseithercanuseacertainamountoflabororinvestinmoreautomation
3.Definetransactioncosts.ListsomeexamplesandexplainhowECcanreducesuchcosts.
Transactioncostscoverawiderangeofcoststhatareassociatedwiththedistribution(sale)and/orexchangeofproductsandservices.
4.HowcanECbeusedtoincreaserevenues?
AnorganizationcanuseECtoincreaserevenuesthroughonlinestorefronts,auctions,cross-sellingopportunities,multichanneldistributionarrangements,andsoon.
5.Whatarethebenefitsofincreasingreach?
HowcanEChelp?
Themorecustomersacompanywantstoreach,thefewerservicesitcanprovidetothem.WithEC,thecurvecanbeshiftedoutward.
6.Howcanorganizationsreducepsychologicalrisk?
PsychologicalriskscanbereducedbyallowingthecustomertoutilizeanEC-basedcalculatorandavoidpotentiallyembarrassingsituations.
7.ExplaintheimpactofEConproductdifferentiationandagility.
ECcanbeexploitedtoprovidegreatervaluetocustomersbyenablingproductdifferentiation.
8.Definevaluation.WhyisitsohighforsomeECstartups?
Valuationistheprocessoftryingtodeterminethevalueorworthofacompany.Itisdoneforthepurposeofsellingacompanyordeterminingitsvalueforaproposedmerger.IntheECcontext,valuationoftenisconductedtodetermineareasonableIPOpricewhenacompanygoespublic.
9.Howcanacompanydecidewhiche-marketplacetojoin?
Hopkins&
Kehoe(2006)suggestaneconomicsbasedapproachtoevaluatethebenefitsandpotentialentrantstoamarketplace.
Section15.6Review
1.DescribeproductcharacteristicsinEC.
Digitizableproducts,suchassoftware,documents,music,andvideos,areparticularlywellsuitedfore-marketsbecausetheycanbedistributedtocustomerselectronically,resultingininstantdeliveryandverylowdistributioncosts.
2.DescribepricingissuesinEC.
Aproduct’spricemayalsobeanimportantdeterminantofitssuccess.Thehighertheproductprice,thegreaterthelevelofriskinvolvedinthemarkettransactionbetweenbuyersandsellerswhoaregeographicallyseparatedandwhomayhaveneverdealtwitheachotherbefore.
3.WhatareindustrycharacteristicsinEC?
Electronicmarketsaremostusefulwhentheyareabletomatchbuyersandsellersdirectly.
4.WhataresellercharacteristicsinEC?
Electronicmarketsreducesearchcosts,allowingconsumerstofindsellersthatofferlowerpricesand/orbetterservice.
5.WhatareconsumercharacteristicsinEC?
Consumerscanbeclassifiedasimpulse,patient,oranalytical.Electronicmarketsmayhavelittleimpactonindustriesinwhichasizablepercentageofpurchasesarem