Valuing Information Systems Investments MIS 2101: Management Information Systems Based on material from Information Systems Today: Managing in the Digital World, Leonard Jessup and Joseph Valacich, Pearson Prentice Hall, 2007 Also includes material by David Schuff, Paul Weinberg, and Cindy Joy Marselis.

2 Learning Objectives Discuss how organizations can use information systems to help create a strategic advantage Describe how to create a business case for an information system Explain how to evaluate an information system

3 Learning Objectives Discuss how organizations can use information systems to help create a strategic advantage Describe how to create a business case for an information system Explain how to evaluate an information system

4 Valuing Information Systems Information systems can be used in three ways to add value to an organization: 1. Automating 2. Informing 3. Supporting strategizing Automating Informing Strategy Support

5 Automating: Example 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

6 Informing: Example Computer- based loan system identifies peak times during the year when specific loans are processed

7 Strategizing: Five Types of Organizational Strategies Organizational strategies define the way in which a company plans to gain/sustain competitive advantage

8 Overall Low Cost Leadership Strategy Offer best prices in the industry or product/service category Broad focus Wal-Mart

9 Focused Low-Cost Strategy Offer best prices in the industry or product/service category Focus on niche Dell

10 Broad Differentiation Strategy Offer better products/services than the competitors Broad Focus Nordstrom

11 Focused Differentiation Strategy Offer better products/services than the competitors Focus on niche Apple High-quality computers Home and educational markets

12 Best-Cost Provider Strategy Provide products of reasonably good quality at competitive prices Target

13 Sources of Competitive Advantage 1. Best-made product on the market 2. Superior customer service 3. Achieving lower costs than rivals 4. 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 Can you think of other examples? Where does SouthWest Airlines fit?

14 Competitive Advantage How do you identify opportunities to use information systems for competitive advantage? Porter’s Value Chain Porter’s Five Forces Model

15 Value Chain Analysis Tool used by managers to identify opportunities for gaining competitive advantage CoreValueActivities SupportValueActivities

16 IS and Value Chain Analysis What are specific examples of how these IS functions add value and help create competitive advantages? Why might it be important for systems supporting these activities to function at an enterprise level?

17 The Five Forces Model – Evaluating Business Segments Organizations use Porter’s Five Forces Model to determine the relative attractiveness of an industry

18 Buyer Power Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few Loyalty programs – reward customers based on the amount of business they do with a particular organization Examples of situations where IT has increased buyer power?

19 Supplier Power Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many Supply chain – consists of all parties involved, directly or indirectly, in the procurement of a product or raw material Examples of situations where IT has increased supplier power?

20 Electronic Marketplaces Two types of Business-to-Business (B2B) marketplaces Private exchange – a single buyer posts its needs and then opens the bidding to any supplier who would care to bid Reverse auction – An auction format in which increasingly lower bids are solicited from organizations willing to supply the desired product or service at an increasingly lower price

21 Threat of Substitute Products or Services Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose Switching costs – costs that can make customers reluctant to switch to another product or service Examples of situations where IT has increased the threat of substitutes?

22 Threat of New Entrants Threat of new entrants – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market Entry barrier – a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive Examples of situations where IT has affected the threat of new entrants?

23 Learning Objectives Discuss how organizations can use information systems to help create a strategic advantage Describe how to create a business case for an information system Explain how to evaluate an information system

24 Making the Business Case for an IS Identification of benefits that the proposed information system will bring to the organization Automating benefits Informing benefits Strategic benefits

25 Productivity Gains Easy to identify costs with developing an IS Difficult to identify productivity gains Why hasn’t productivity increased at the rate of IS investments?

26 The Productivity Paradox Information systems may be used in unintended ways Web surfing Junk mail Games

27 Measurement Problems Benefits difficult to quantify Wrong things measured... For example volume of transactions vs cost savings

28 Time Lags Benefits do not always occur at the same time IS is implemented Some IS/IT implementation requires people to gain experience System must be integrated with existing systems

29 Redistribution IS may redistribute the pieces of the pie rather than make the pie bigger Increases in market share come at the expense of other company products

30 Mismanagement Bad business model can not be overcome by good information system IS implementation as temporary fix Creation of unanticipated bottlenecks

31 Making a Successful Business Case Based on Faith Fear Facts

32 Arguments Based on Faith Arguments based on beliefs about: Organizational strategy Competitive advantage Industry forces Customer perceptions

33 Arguments Based on Fear Arguments based on the notion that if system is not implemented: Company loses to a competitor Goes out of business

34 Arguments Based on Fact Arguments based on: Data Indisputable factors

35 Arguments Based on Fact Cost-benefit analysis Identify costs Identify benefits Contrast expected costs and benefits Consider the timing of costs and benefits Why does timing matter?

36 Cost-Benefit Analysis Identifying costs Total cost of ownership (TCO) Cost of acquisition Cost of use Cost of maintenance Recurring vs. Non-recurring costs Tangible vs. Intangible costs

37 Cost-Benefit Analysis Identifying Benefits Tangible benefits 5% increase in sales Reduction of order entry errors Intangible benefits Improvement to customer service Improvement in overall perception of a firm

38 Learning Objectives Discuss how organizations can use information systems to help create a strategic advantage Describe how to create a business case for an information system Explain how to evaluate an information system

39 Why is evaluation important? Systems should address a business need Otherwise You waste money on what you buy You still will have an unresolved “business problem”

40 How do you evaluate systems? Understand what you need Understand what the system does Match the two up Business needs Application functionality

41 Understanding what you need We talked about this way back Talk to People involved in the business process Technical staff who have to implement the system …to determine key features MIS Analyst

42 Understanding what the application does Once you have the key features… Talk to Vendors People who have bought or built similar products Now you have a basis for comparing alternatives

43 System Evaluation Questions Who are the customers?What are the business drivers (the business case)? Who are the participants?Can the system create competitive advantage? What does the system do?Are there risks with implementing the system? What type(s) of information system is it? What has to go “right” for the adopting company? What are the processes it performs? Are they well-structured? Are they well-integrated? What are the key evaluation measures for success? How do you know if the system is working?

44 An Evaluation Matrix for an System Weighted average of feature ratings Feature Option Creates mailing lists (10%) Overall cost (30%) Web access (20%) Reliability (40%) Total Score Option A Option B

45 Comparing evaluation methods Looking at System evaluation questions Evaluation matrix What purpose does each fulfill? What is the strengths of each method? What are the weaknesses of each method?

46 How to evaluate something “new” How would you evaluate Blogger.com ( Orb.com ( Platial.com ( What would you compare them to? What is their business value? What do you do when the business value is hard to define?

47 Evaluating Information Systems - Summary 1. Who are the Customers? Participants? 2. What are its products and services? What does it do? For whom? 3. What are the major processes? 4. What is the context? (Context diagram?)

48 Evaluating Information Systems - Summary 5. What are the business drivers? (How is it justified?) 6. What type of information system is it? (Or types?) 7. What are the advantages and disadvantages? 8. What has to go right to make the system work for a company? 9. What are the process characteristics (e.g. how structured? How integrated?)

49 Cases: How would you determine the value of the following services?

50 Blogger.com Free tool to create weblogs An online diary or something more?

51 Orb.com Tool to record TV and stream it over the Internet (free so far)

52 Platial.com Annotates maps (from Google) with a set of places defined by the user