1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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

10. 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

11. 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

12. 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

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

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

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

16. 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

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

18. 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

19. 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

20. 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)

21. 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

22. 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.

23. 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 service
Approaches for Applying Freeconomics
Advertising
Freemium
Cross-Subsidies
Zero Marginal Cost
Labor Exchange
Gift Economy