Chapter 3 Valuing Information Systems Investments 3 -1

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) 3/19/2018 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. IS Today (Valacich & Schneider) 3/19/2018 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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

IS for Automating: Doing Things Faster 3 -5 With automation, tasks can be completed: Faster Cheaper More accurately With greater consistency IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

IS for Organizational Learning: Doing Things Better 3 -7 Information systems can also be used to: Learn about processes Improve processes Support organizational learning IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Informating: Example 3 -8 Computer-based loan system identifies peak times during the year when specific loans are processed IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Strategizing: Five Types of Organizational Strategies 3 -10 Organizational strategies define the way in which a company plans to gain/sustain competitive advantage IS Today (Valacich & Schneider) 3/19/2018 Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8 th ed. (Homewood, III. : Richard D. Irwin, 1995). Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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, 8 th ed. (Homewood, III. : Richard D. Irwin, 1995). IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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, 8 th ed. (Homewood, III. : Richard D. Irwin, 1995). IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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, 8 th ed. (Homewood, III. : Richard D. Irwin, 1995). IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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, 8 th ed. (Homewood, III. : Richard D. Irwin, 1995). IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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, 8 th ed. (Homewood, III. : Richard D. Irwin, 1995). IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Sources of Competitive Advantage 3 -16 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 6. Having a well-known brand name and reputation 7. Giving customers more value for their money 1. 2. 3. 4. 5. IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Competitive Advantage 3 -17 How do you identify opportunities to use information systems for competitive advantage? Porter’s Value Chain IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Value Chain Analysis 3 -18 Tool used by managers to identify opportunities for gaining competitive advantage IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

IS and Value Chain Analysis 3 -19 Information systems use in adding value: Use of Internet Use of Extranet/Intranet IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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? IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

The Productivity Paradox 3 -23 Information systems may be used in unintended ways Web surfing Junk mail Games IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Measurement Problems 3 -24 Benefits difficult to quantify Wrong things measured efficiency vs. effectiveness Example: ATM Strategic necessity IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Mismanagement 3 -27 Bad business model cannot be overcome by good information system IS implementation as temporary fix Creation of unanticipated bottlenecks IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Arguments Based on Faith 3 -29 Arguments based on beliefs about: Organizational strategy Competitive advantage Industry forces Customer perceptions Example: Procter & Gamble IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Factors in IS Investment Decisions 3 -31 Often considered when presenting arguments based on fear IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Porter’s Five Forces Model 3 -32 Framework used to analyze competition within an industry IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Arguments Based on Fact 3 -33 Arguments based on: Data Quantitative analysis Indisputable factors IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Weighted Multicriteria Analysis 3 -38 Method used for deciding between alternative IS investments or alternatives of the same system IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Presenting the Business Case 3 -39 Persuade decision makers in the firm Know the audience Identify stakeholder groups IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Presenting the Business Case (cont’d) 3 -40 Convert benefits to monetary terms IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Valuing Innovations 3 -44 Which new technology will make or break your business? IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Predicting the Next New Thing 3 -47 Deciding which innovations to adopt is very difficult Diffusion of Innovations Classic view of adoption of innovations IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 MP 3 vs. CDs Undermine effective management practices IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Disruptive Innovations 3 -49 1970 s: mid- and highperformance users were bulk of the market Digital Equipment Company (DEC) tried to sell to those markets Microcomputers seen as “toys” IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Disruptive Innovations (cont’d) 3 -50 1980 s: Microcomputers focusing on lowperformance users’ needs Ignored by DEC IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Disruptive Innovations (cont’d) 3 -51 1990 s: Growing performance of Microcomputers, meeting midperformance users’ needs DEC lost biggest market segment IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Disruptive Innovations (cont’d) 3 -52 Today, micro- computers meeting entire market’s needs DEC out of business Next disruptive innovation: 3 G and 4 G mobile phones? IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

E-Business Innovation Cycle 3 -55 Choosing Enabling/Emerging Technologies Process/ group devoted to looking for emerging IT Based on: Wheeler (2002) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

E-Business Innovation Cycle (cont’d) 3 -58 Assessing Value created for customers and internal operations assessed Based on: Wheeler (2002) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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. IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Approaches for Applying Freeconomics 3 -64 Advertising Freemium Cross-Subsidies Zero Marginal Cost Labor Exchange Gift Economy IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

End of Chapter Content 3 -65 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

Opening Case: Managing in the Digital World: Ti. Vo 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 You. Tube videos on TV Program Ti. Vo from cell phone IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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” IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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? IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

What Were You Thinking? Brain Sensor Research for Market Research 3 -72 What did you feel when you watched that Super Bowl commercial? Em. Sense 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 IS Today (Valacich & Schneider) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall

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) 3/19/2018 Copyright © 2010 Pearson Education, Inc. Published as Prentice Hall