Transcript Chapter 15 Economics and Justification of Electronic Commerce The WHY and HOW of Justification  Increased Demand for Financial Justification  Addressing accountability is difficult:    65% of.

Chapter 15
Economics and Justification
of Electronic Commerce
The WHY and HOW of Justification
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Increased Demand for Financial Justification
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Addressing accountability is difficult:
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65% of company executives lack the knowledge or tools to
do ROI calculations
75% of company executives have no formal processes or
budgets in place for measuring ROI
68% of company executives do not measure how projects
coincide with promised benefits 6 months after completion
The WHY and HOW of Justification
The WHY and HOW of Justification
The WHY and HOW of Justification
Other Reasons Why EC Justification Is Needed
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Companies now realize that EC is not necessarily the
solution to all problems. Therefore, EC projects compete for
funding and resources with other internal and external
projects. Analysis is needed to determine when funding of an
EC project is appropriate
In some large companies, and in many public organizations,
a formal evaluation of requests for funding is mandated
Companies need to assess the success of EC projects after
they have been completed and then on a periodic basis (see
Chapter 14)
The success of EC projects may be assessed in order to pay
bonuses to those involved with the project
The WHY and HOW of Justification
EC Investment Categories and Benefits
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The IT infrastructure provides the foundation for EC applications in the
enterprise
EC applications are specific systems and programs for achieving
certain objectives
Specific Benefits
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cost reduction (85%)
productivity improvement (7%)
improved customer satisfaction (6%)
improved staffing levels (5%)
higher revenues (4%)
higher earnings (4%)
better customer retention (4%)
more return of equity (3%)
faster time-to-market (3%)
The WHY and HOW of Justification
How Is an EC Investment Justified?
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cost-benefit analysis
A comparison of the costs of a project against the benefits
Justification may not be necessary when:
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The value of the investment is relatively small for the
organization
The relevant data are not available, inaccurate, or too volatile
The EC project is mandated—it must be done regardless of the
costs and benefits involved
The WHY and HOW of Justification
Using Metrics in EC Justification
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metric
A specific, measurable standard against which actual
performance is compared
key performance indicators (KPI)
The quantitative expression of critically important
metrics
The EC Justification Process
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The EC justification process varies depending on the situation
and the methods used
In its extreme, it can be very complex
Exhibit 15.1 A Model for
EC Project Justification
Difficulties in Measuring and Justifying
Difficulties in Measuring Productivity and Performance
Gains
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Data and Analysis Issues
EC Productivity Gains May Be Offset By Losses in Other Areas
Incorrectly Defining What Is Measured
Other Difficulties
Relating IT Expenditures to Organizational Performance
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The relationship between investment and performance is
indirect
Factors such as shared IT assets and how they are used can
impact organizational performance and make it difficult to
assess the value of an IT (or EC) investment
Difficulties in Measuring and Justifying
Difficulties in Measuring Costs and Benefits
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Tangible Costs and Benefits—are those that are easy to
measure and quantify and that relate directly to a specific
investment
Intangible Costs and Benefits
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Costs may involve having to change or adapt other business
processes or information systems
Intangible benefits include faster time-to-market, increased
employee and customer satisfaction, easier distribution, greater
organizational agility, and improved control
Handling Intangible Benefits
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The most straightforward solution to the problem of evaluating
intangible benefits in cost-benefit analysis is to make rough
estimates of the monetary values of all of the intangible benefits
and then conduct a ROI or similar financial analysis
Exhibit 15.2 Process Approach to IT
Organizational Investment and Impact
Methods and Tools for
Evaluating and Justifying EC Investments
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Methodological Aspects of Justifying EC
Investments
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Types of Costs
 Distinguish between initial (up-front) costs and
operating costs
 Direct and indirect costs
 In-kind costs
Break-Even Analyses
Methods and Tools for
Evaluating and Justifying EC Investments
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Methodological Aspects of Justifying EC
Investments
total cost of ownership (TCO)
A formula for calculating the cost of owning,
operating, and controlling an IT system
total benefits of ownership (TBO)
Benefits of ownership that include both tangible and
the intangible benefits
Methods and Tools for
Evaluating and Justifying EC Investments
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Methodological Aspects of Justifying EC
Investments
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Business ROI
Technology ROI
ROI calculator
Calculator that uses metrics and formulas to compute ROI
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Economic Value Added
Methods and Tools for
Evaluating and Justifying EC Investments
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Traditional (Generic) Methods for Evaluating IT
Investments
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Rate of ROI Method
Payback Period
Net Present Value
Methods and Tools for
Evaluating and Justifying EC Investments
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Advanced Methods for Evaluating IT and EC
Investments
value analysis
Method where a company evaluates intangible benefits using a
low-cost, trial EC system before deciding whether to commit a
larger investment to a complete system
dashboard
A single view that provides the status of multiple metrics
Examples of EC Project Justification
E-Procurement
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E-procurement is not limited to just buying and selling
It also encompasses the various processes involved in buying
and selling:
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Selecting suppliers
Submitting formal requests for goods and services to suppliers
Getting approval from buyers
Processing purchase orders
Fulfilling orders
Delivering and receiving items
Processing payments
Examples of EC Project Justification
Justifying a Portal
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Justifying E-Training Projects
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Internal payoff must result in productivity improvements
External value is determined by revenue generation
When comparing e-training and traditional training methods,
several factors, most of which are intangible, must be evaluated
Justifying and Investment in RFID
Although such systems offer many tangible benefits that can be
defined, many measures cannot be developed due to the fact
that the technology is new and that legal requirements (for
privacy protection) are still evolving
Examples of EC Project Justification
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Justifying Security Projects
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More than 85% of viruses enter business networks
via e-mail. Cleaning up infections is labor intensive,
but anti-virus scanning is not
Employee security training is usually poorly done.
Employees told what to do, with little or no time
devoted to why specific security rules are in place
The Economics of EC
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Production Costs
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Increasing Returns to Scale
network effects
Effects created when leading products in an industry
attract a base of users, which leads to the development of
complementary products, further strengthening the
position of the dominant product
lock-in effect
Effect created when users do not switch to another site
because of barriers posed by having to learn new site
navigation systems and transaction processes
The Economics of EC
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Production Costs
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Product Cost Curves
average-cost curve (AVC)
Behavior of average costs as quantity changes;
generally, as quantity increases, average costs
decline
Exhibit 15.9 Cost Curve of (a) Regular
and (b) Digital Products
The Economics of EC
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Production Function
production function
An equation indicating that for the same quantity of
production, Q, companies either can use a certain
amount of labor or invest in more automation
agency costs
Costs incurred in ensuring that the agent performs
tasks as expected (also called administrative costs)
Exhibit 15.10 The Economic Effects of EC
The Economics of EC
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Production Costs
transaction costs
Costs that are associated with the distribution (sale) and/or
exchange of products and services including the cost of
searching for buyers and sellers, gathering information,
negotiating, decision-making, monitoring the exchange of
goods, and legal fees
Exhibit 15.11 The Economic Effects of EC:
Transaction Costs
Exhibit 15.12 Reach Versus Richness
The Economics of EC
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Reducing Transaction Friction or Risk
product differentiation
Exploiting EC to provide products with special features
to add greater value to customers
The Economics of EC
agility
An EC firm’s ability to capture, report and quickly respond to changes
happening in the marketplace
valuation
The fair market value of a business or the price at which a property
would change hands between a willing buyer and a willing seller who
are both informed and under no compulsion to act. For a publicly
traded company, the value can be readily obtained by the price the
stock is selling over the exchange
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Valuation Methods
The comparable method
The financial performance method
The venture capital method
Factors That Determine EC Success
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Product Characteristics
Industry Characteristics
Seller Characteristics
Consumer Characteristics
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The Levels of EC Management
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Ultimately, the level of measurement relates to what is of value
to the various constituents at each level
Opportunities for Success in EC
and Avoiding Failure
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E-Commerce Failures
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At a macroeconomic level, technological revolutions
have had a boom–bust–consolidation cycle
At a mid-economic level, the bursting of the dot-com
bubble in 2000–2003 is consistent with periodic
economic downturns
At a microeconomic level, the “Web rush” reflected an
over allocation of scarce resources—venture capital
and technical personnel—and too many advertisingdriven business models
Opportunities for Success in EC
and Avoiding Failure
Top three factors for EC success
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B2C EC
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B2B EC
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effective marketing management
an attractive Web site
building strong connections with the customers
readiness of trading partners
information integration inside the company and in the supply chain
completeness of the EC system
Overall success
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proper business model
readiness of the firm to become an e-business
internal enterprise integration
Opportunities for Success in EC
and Avoiding Failure
digital options
A set of IT-enabled capabilities in the form of digitized
enterprise work processes and knowledge systems
complementary investments
Additional investments, such as training, made to
maximize the returns from EC investments
Opportunities for Success in EC
and Avoiding Failure
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Cultural Differences
Critical elements that can affect the value of EC across cultures
are perceived trust, consumer loyalty, regulation, political
influences
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EC in Developing Economies
Developing economies often face power blackouts, unreliable
telecommunications infrastructure, undependable delivery
mechanisms, and the fact that only a few customers own credit
cards