Chapter 3 Valuing Information Systems Investments “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

Valuing Information Systems Information systems can be used in three ways to add value to an organization: Automating – Doing things faster, cheaper, and more accurately with more consistency Informating - Doing things better Learn about and improve processes Support organizational learning Strategizing – Doing things smarter Gain or sustain competitive advantage over rivals Turning benefits of automating and informating into strategic advantage

Organizational Strategies Define the way in which a company plans to gain/sustain competitive advantage Five Types of Organizational Strategies Overall Low Cost Leadership Strategy Offer best prices in the industry or product/service category Broad focus: Ex. Wal-Mart Focused Low-Cost Strategy Focus on niche: Ex. Dell

Strategizing: Five Types of Organizational Strategies Broad Differentiation Strategy Offer better products/services than competitors Broad Focus: Ex. Nordstrom, Porsche, IBM Focused Differentiation Strategy Focus on niche: Ex. Apple High-quality computers Home and educational markets Best Cost Provider Strategy Provide products of reasonably good quality at competitive prices Ex. Target

Sources of Competitive Advantage Overall, need a clear vision Best-made product on the market Superior customer service Achieving lower costs than rivals Having proprietary manufacturing technology Having shorter lead times in research and development projects Having a well-known brand name and reputation Giving customers more value for their money

Competitive Analysis Tool used by managers to identify opportunities for gaining competitive advantage Porter’s Competitive Forces Model Value Chain Analysis Use of Internet, Extranet/Intranet

Porter’s Five Forces Model Framework used to analyze competition within an industry

Making the Business Case for an IS Want systems that match organizational strategy Business process management – improved business function Identification of IS benefits Automating, Informating, and Strategic benefits Identification of Costs – Easy Identification of Productivity Gains – Not easy Productivity Paradox – Unintended consequences Web surfing, junk mail, games Difficult to measure and quantify Effectiveness vs. Efficiency Ex. ATM

Productivity Paradox Difficult to measure and quantify Time Lags May measure wrong thing Effectiveness vs. Efficiency Ex. ATM Time Lags Benefits do not always occur at the same time as implementation Some IT implementations require people to gain experience System must be integrated with existing systems Redistribution IS may redistribute the pieces of the pie rather than grow Increases in market share come at the expense of the competitors’ market share Mismanagement - Bad business model not overcome by good IS IS implementation as temporary fix Creation of unanticipated bottlenecks

Making a Successful Business Case Difficult to quantify benefits of IS Money doesn’t grow on trees Need to make a strong business case Based on: Faith Fear Facts

Arguments Based on Fact Data, Quantitative analysis, and Indisputable factors Primary tools: Cost-benefit analysis Identify costs Identify benefits Contrast expected costs and 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 Weighted multicriteria analysis

Cost-Benefit Analysis Identifying Costs Identifying Benefits Total cost of ownership (TCO) Cost of acquisition Cost of use Cost of maintenance Recurring vs. nonrecurring costs Tangible vs. intangible costs 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

Weighted Multicriteria Analysis Method used for deciding between alternative IS investments or alternatives of the same system

Presenting the Business Case Persuade decision makers in the firm Know the audience Identify stakeholder groups

Presenting the Business Case (cont’d) Convert benefits to monetary terms

Presenting the Business Case (cont’d) 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 Present holistic view Economic value * Architectural value Operational value * Regulatory and compliance value View IS as asset rather than necessary expense

Valuing Innovations Which new technology will make or break your business?

IT Innovation Successful Innovation is Difficult Innovation is often fleeting Advantages gained are often short lived Innovation is often risky Superior products may not win race Innovation choices are often difficult Cannot foresee the future (i.e. Internet) Organizational Requirements for Innovation Process requirements—Whatever it takes to implement change Resource requirements—Human capital necessary Risk tolerance requirements—Appropriate tolerance of risk and uncertainty

The Innovator’s Dilemma Disruptive innovations New technologies, products, or services that eventually surpass dominant technologies Automobiles vs. horses Online vs. brick-and-mortar retailing CDs vs. records * MP3 vs. CDs *PCs (DEC) Undermine effective management practices Solution – Disruptive growth engine Helps organizations respond to disruptive innovations more effectively Start early 3. Build a team of expert innovators Educate organization 4. Executive leadership

Implementing the Innovation Process E-Business Innovation Cycle The key to success is the extent of IS use in timely and innovative ways Based on: Wheeler (2002)

E-Business Innovation Cycle Choosing Enabling/Emerging Technologies Group devoted to looking for emerging IT Matching Technologies to Opportunities Most promising new technology matched with current economic opportunities Executing Business Innovation for Growth Stage at which the change is actually implemented Assessing Value Assess value created for customers and internal operations

Three Ways to Think About Investments in Disruptive Innovations 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.

Freeconomics The leveraging of digital technologies to provide free goods and services to customers as a business strategy for gaining competitive advantage From Yahoo! free e-mail service Approaches for Applying Freeconomics Advertising Freemium Cross-Subsidies Zero Marginal Cost Labor Exchange Gift Economy