Transcript IST4e Chapter 3 - USC Upstate: Faculty

Chapter 3
Valuing Information Systems
Investments
3-1
“The most important discoveries
of the next 50 years are likely to
be ones of which we cannot now
even conceive.”
Sir John Maddox, 1999
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Learning Objectives
3-2
1. Discuss how organizations can use information
systems for automation, organizational learning, and
strategic advantage.
2. Describe how to formulate and present the
business case for an information system.
3. Explain why and how companies are continually
looking for innovative ways to use information systems
for competitive advantage.
4. Describe freeconomics and how organizations can
leverage digital technologies to provide free goods and
services to customers as a business strategy for gaining
a competitive advantage.
IS Today (Valacich & Schneider)
2/13/2015
Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall
Learning Objectives
3-3
1. Discuss how organizations can use information
systems for automation, organizational learning, and
strategic advantage.
2. Describe how to formulate and present the
business case for an information system.
3. Explain why and how companies are continually
looking for innovative ways to use information systems
for competitive advantage.
4. Describe freeconomics and how organizations can
leverage digital technologies to provide free goods and
services to customers as a business strategy for gaining
a competitive advantage.
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2/13/2015
Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall
Valuing Information Systems
3-4

Information systems can be used in three
ways to add value to an organization:
1.
2.
3.
Automating
Informating
Strategizing
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IS for Automating: Doing Things Faster
3-5
 With automation,
tasks can be
completed:
Faster
 Cheaper
 More accurately
 With greater
consistency

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Automating: Example
3-6
 Loan processing comparison for 3 methods
(from the moment the customer takes the
application until the applicant is notified of
decision)
Manual loan process—25 to 40 days
 Technology-supported process—5 to 20 days
 Fully automated process—1 hour to 15 days

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IS for Organizational Learning: Doing Things
Better
3-7
 Information
systems can also
be used to:
Learn about
processes
 Improve processes
 Support
organizational
learning

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Informating: Example
3-8
 Computer-based
loan system
identifies peak
times during the
year when
specific loans are
processed
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IS for Supporting Strategy: Doing Things
Smarter
3-9
 IS used to gain or
sustain
competitive
advantage

Turning benefits
of automating and
informating into
strategic
advantage
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Strategizing: Five Types of Organizational Strategies
3-10
 Organizational
strategies
define the way
in which a
company plans
to gain/sustain
competitive
advantage
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Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
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Overall Low Cost Leadership Strategy
3-11
 Offer best prices
in the industry or
product/service
category
 Broad focus

Wal-Mart
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
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Focused Low-Cost Strategy
3-12
 Offer best prices
in the industry or
product/service
category
 Focus on niche

Dell
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
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Broad Differentiation Strategy
3-13
 Offer better
products/services
than competitors
 Broad Focus

Nordstrom
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
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Focused Differentiation Strategy
3-14
 Offer better
products/services
than competitors
 Focus on niche

Apple
High-quality
computers
 Home and
educational markets

Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
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Best-Cost Provider Strategy
3-15
 Provide products
of reasonably
good quality at
competitive prices

Target
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
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Sources of Competitive Advantage
3-16
Best-made product on the market
Superior customer service
Achieving lower costs than rivals
Having proprietary manufacturing
technology
5. Having shorter lead times in research and
development projects
6. Having a well-known brand name and
reputation
7. Giving customers more value for their money
1.
2.
3.
4.
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Competitive Advantage
3-17
 How do you identify opportunities to use
information systems for competitive advantage?
 Porter’s Value Chain
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Value Chain Analysis
3-18
 Tool used by managers to identify opportunities
for gaining competitive advantage
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IS and Value Chain Analysis
3-19
 Information systems use in adding value:
 Use of Internet
 Use of Extranet/Intranet
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Learning Objectives
3-20
1. Discuss how organizations can use information
systems for automation, organizational learning, and
strategic advantage.
2. Describe how to formulate and present the
business case for an information system.
3. Explain why and how companies are continually
looking for innovative ways to use information systems
for competitive advantage.
4. Describe freeconomics and how organizations can
leverage digital technologies to provide free goods and
services to customers as a business strategy for gaining
a competitive advantage.
IS Today (Valacich & Schneider)
2/13/2015
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Making the Business Case for an IS
3-21
 Identification of benefits that the proposed
information system will bring to the organization



Automating benefits
Informating benefits
Strategic benefits
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Productivity Gains
3-22
 Easy to identify costs with developing an IS
 Difficult to identify productivity gains
 There are limitation to productivity gains with development of
an IS
 Why hasn’t productivity increased at the rate of IS
investments?
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The Productivity Paradox
3-23
 Information systems may be used
in unintended ways



Web surfing
Junk mail
Games
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Measurement Problems
3-24
 Benefits difficult to
quantify

Wrong things
measured

efficiency vs.
effectiveness
 Example: ATM
 Strategic necessity
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Time Lags
3-25
 Benefits do not
always occur at
the same time IS is
implemented
Some IS/IT
implementation
requires training
 System must be
integrated with
existing systems

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Redistribution
3-26
 IS may redistribute
the pieces of the pie
rather than make
the pie bigger

Increases in market
share come at the
expense of the
competitors’ market
share
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Mismanagement
3-27
 Bad business
model cannot be
overcome by good
information
system
IS implementation
as temporary fix
 Creation of
unanticipated
bottlenecks

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Making a Successful Business Case
3-28
 Difficult to quantify
benefits of IS
 Money doesn’t grow
on trees
 Need to make a
strong business case

Based on:
Faith
 Fear
 Facts

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Arguments Based on Faith
3-29
 Arguments based on
beliefs about:
Organizational strategy
 Competitive advantage
 Industry forces
 Customer perceptions

 Example: Procter &
Gamble
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Arguments Based on Fear
3-30
 Arguments based on
the notion that if
system is not
implemented:
Company loses to a
competitor
 Goes out of business

 Example: Automotive
industry
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Factors in IS Investment Decisions
3-31
 Often
considered
when
presenting
arguments
based on fear
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Porter’s Five Forces Model
3-32
 Framework used
to analyze
competition
within an
industry
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Arguments Based on Fact
3-33
 Arguments based on:
 Data
 Quantitative analysis
 Indisputable factors
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Arguments Based on Fact (cont’d)
3-34
 Primary tools:
 Cost-benefit analysis
Identify costs
 Identify benefits
 Contrast expected costs and benefits


Weighted multicriteria analysis
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Cost-Benefit Analysis
3-35
 Identifying costs
 Total cost of ownership (TCO)
Cost of acquisition
 Cost of use
 Cost of maintenance



Recurring vs. nonrecurring costs
Tangible vs. intangible costs
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Cost-Benefit Analysis (cont’d)
3-36
 Identifying Benefits
 Tangible benefits
5 percent increase in sales
 Reduction of order entry errors


Intangible benefits
Improvement to customer service
 Improvement in overall perception of a firm

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Cost-Benefit Analysis (cont’d)
3-37
 Contrasts total expected tangible costs with total
tangible benefits


Break-even analysis—identifies the point when tangible
costs equal tangible benefits
Net-present-value analysis—identifies the present value of
future cash flows
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Weighted Multicriteria Analysis
3-38
 Method used for deciding between alternative
IS investments or alternatives of the same
system
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Presenting the Business Case
3-39
 Persuade decision makers in the firm
 Know the audience
 Identify stakeholder groups
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Presenting the Business Case (cont’d)
3-40
 Convert benefits to monetary terms
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Presenting the Business Case (cont’d)
3-41
 Devise proxy variables
 Used when clear-cut assessment is not possible

Measures of perceived value of change
 Measure what is important to management
 Case becomes more meaningful
 Focus on senior management’s “hot button” issues
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Assessing Value for IS Infrastructure
3-42
 Present holistic view
 Economic value
 Architectural value
 Operational value
 Regulatory and compliance value
 View IS as asset rather than necessary expense
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Learning Objectives
3-43
1. Discuss how organizations can use information
systems for automation, organizational learning, and
strategic advantage.
2. Describe how to formulate and present the
business case for an information system.
3. Explain why and how companies are continually
looking for innovative ways to use information systems
for competitive advantage.
4. Describe freeconomics and how organizations can
leverage digital technologies to provide free goods and
services to customers as a business strategy for gaining
a competitive advantage.
IS Today (Valacich & Schneider)
2/13/2015
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Valuing Innovations
3-44
 Which new technology will make or break your
business?
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Successful Innovation Is Difficult
3-45
 Innovation is often fleeting
 The advantages gained from innovations are often
short lived
 Innovation is often risky
 Sometimes even superior
products can lose the race

Blu-ray vs. HD DVD
 Innovation choices are often difficult
 Foreseeing the future is not always possible

In 1994 the Internet was not given much attention
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Organizational Requirements for Innovation
3-46
 Process requirements—the organization has to
be willing to do whatever it takes to implement the
change
 Resource requirements—need to have the
human capital necessary for successful deployment of
the system
 Risk tolerance requirements—organizational
members must have appropriate tolerance of risk and
uncertainty
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Predicting the Next New Thing
3-47
 Deciding which innovations to adopt is very
difficult
 Diffusion of
Innovations

Classic view
of adoption of
innovations
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The Innovator’s Dilemma
3-48
 Disruptive innovations
 New technologies, products, or services that
eventually surpass dominant technologies
Online vs. brick-and-mortar retailing
 Automobiles vs. horses
 CDs vs. records
 MP3 vs. CDs


Undermine effective management practices
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Disruptive Innovations
3-49
 1970s:
mid- and highperformance
users were bulk
of the market
 Digital
Equipment
Company (DEC)
tried to sell to
those markets
 Microcomputers
seen as “toys”
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Disruptive Innovations (cont’d)
3-50
 1980s:
Microcomputers
focusing on lowperformance
users’ needs
 Ignored by DEC
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Disruptive Innovations (cont’d)
3-51
 1990s:
Growing
performance of
Microcomputers,
meeting midperformance
users’ needs
 DEC lost biggest
market segment
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Disruptive Innovations (cont’d)
3-52
 Today, micro-
computers
meeting entire
market’s needs
 DEC out of
business
 Next disruptive
innovation: 3G
and 4G mobile
phones?
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The Innovator’s Solution
3-53

Christensen outlines a process—disruptive growth
engine—that helps organizations respond to
disruptive innovations more effectively
1.
2.
3.
4.
Start early
Executive leadership
Build a team of expert innovators
Educate the organization
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Implementing the Innovation Process
3-54
 E-Business
Innovation
Cycle

The key to
success is the
extent of IS use
in timely and
innovative
ways
Based on: Wheeler (2002)
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E-Business Innovation Cycle
3-55
Choosing Enabling/Emerging Technologies
 Process/ group
devoted to
looking for
emerging IT
Based on: Wheeler (2002)
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E-Business Innovation Cycle (cont’d)
3-56
Matching Technologies to Opportunities
 Most promising
new technology
matched with
current
economic
opportunities
Based on: Wheeler (2002)
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E-Business Innovation Cycle (cont’d)
3-57
Executing Business Innovation for Growth
 Stage at which
the change is
actually
implemented
Based on: Wheeler (2002)
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E-Business Innovation Cycle (cont’d)
3-58
Assessing Value
 Value created
for customers
and internal
operations
assessed
Based on: Wheeler (2002)
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Three Ways to Think About Investments in
Disruptive Innovations
3-59
 Put technology ahead of strategy
 Technology is so important to success it needs to be
considered first.
 Strategy is developed afterwards.
 Put technology ahead of marketing
 Rapid development of technology makes it impossible
for people to know what they want.
 Innovation is continuous
 New technologies are constantly being developed.
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Learning Objectives
3-60
1. Discuss how organizations can use information
systems for automation, organizational learning, and
strategic advantage.
2. Describe how to formulate and present the
business case for an information system.
3. Explain why and how companies are continually
looking for innovative ways to use information systems
for competitive advantage.
4. Describe freeconomics and how organizations can
leverage digital technologies to provide free goods and
services to customers as a business strategy for gaining
a competitive advantage.
IS Today (Valacich & Schneider)
2/13/2015
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Freeconomics
3-61
 Freeconomics—The leveraging of digital technologies
to provide free goods and services to customers as a
business strategy for gaining competitive advantage
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How Does Freeconomics Work (for Yahoo!)
3-62
 Price is set by a
product/service’s
marginal costs
 Marginal costs for
digital services
decrease
tremendously
 Yahoo! Makes
millions with free
e-mail service (by
placing ads)
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The Freeconomic Value Proposition
3-63
 Someone, somewhere is paying for a services
 Value proposition includes more than just buyers
and sellers

Advertisers (see Google)
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Approaches for Applying Freeconomics
3-64
 Advertising
 Freemium
 Cross-Subsidies
 Zero Marginal Cost
 Labor Exchange
 Gift Economy
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End of Chapter Content
3-65
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Opening Case: Managing in the Digital World: TiVo
3-66
 Need to stay ahead of
competition:

Then:
Automatic recording
 Scheduling using the Web
 Pausing a show
 Searching by actors or type of
show


Now:
Receive RSS feeds
 Watch YouTube videos on TV
 Program TiVo from cell phone

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The IT Department Often Knows
3-67
 Imagine you are in the IT department of a large
company, and discover that a senior executive has
visited pornographic sites.

How do you deal with this?
 Strategies to grapple with ethical decisions
 IT equipment and data use policy



Whistle-blower provision
Report violations, then let company handle it
IT professionals should develop “Code of Ethics”
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Rootkits: Sony’s Secret
3-68
 Sony BMG Music Entertainment was using
“rootkit” to copyright protect CDs



Rootkit was installed on users’ hard drives without their
knowledge
Left computers vulnerable to malicious Rootkit was
discontinued and uninstall instructions were given to
affected customers
Sony paid $1.5 million in penalties
 2007: Rootkit in thumbdrives
 Sony argued they “didn’t” know
 Which side of the debate could you argue?
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Microsoft’s Bill Gates and Paul Allen
3-69
 Both dropped out of college
to run Microsoft in 1975
 Partnership with IBM to
install MS-DOS on all PCs set
the stage
 Gates’ worth—$58 Billion
 Allen’s worth—$16.8 Billion
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Who Is Sharing Files?
3-70
 Active consumers
 Accustomed to on-demand lifestyle
 Informed about current events
 Internet is primary source
 Conversations focused on tech gadgets, car
accessories, home theater setups
 Many were Mac users
 Gamers
 Frustrated with music and entertainment
industries for punishing them
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For Sale by Owner: Your Company’s
Name.com
3-71
 Domainers—buy and sell domain names
 2006—$9 billion business
 2009—projected to be worth $23 billion
 Ad space renting
 Domainer registers URL such as Amazon.com
 Webpage with advertisements is displayed
 Search engine owner pays money to the domainer for
each click on an ad
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What Were You Thinking? Brain Sensor
Research for Market Research
3-72
 What did you feel when you watched that Super Bowl
commercial?
 EmSense



EEG sensor headset
Data on EEG, monitors breathing and heart rate, head motion,
blink rate, and skin temperature
Algorithms translate physiological data from the sensors into
information about emotions that marketers can use
 Game designers can tell when players are bored
 However: Scientists argue that EEG is not as reliable
as MRI
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Photo Industry
3-73
 In only four years (2002-2006) photography
moved from film to digital
Canon, Konica Minolta no longer make film models
 Nikon makes two film models:

One for professional photographers
 One for beginners

 Business models changed rapidly
 Digital technology was a disruptive innovation for the
photo industry
IS Today (Valacich & Schneider)
2/13/2015
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