Expert answer:E-Commerce Strategic Matrix, business and finance
Answer & Explanation:Attached is chapter 15 to help you with the assignment.Prepare a simple matrix in which you compare and contrast the Automotive Industries business-to-business (B2B) and business-to-consumer (B2C) e-commerce.
Include at least three industry examples that support the findings in your analysis.
Consider the following elements:
CostConsumer exposureCustomer serviceDifferences in website structureAccess rightsAudienceSecurity
Cite at least three different sources in addition to the textbooks to support your analysis.chapter_15.pdf
chapter_15.pdf
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CHAPTER
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15
ECONOMICS AND
JUSTIFICATION OF
ELECTRONIC COMMERCE
Learning Objectives
Content
Justifying EC and IT Investments in the
State of Iowa
15.1 Why Justify EC Investments? How Can
They Be Justified?
15.2 The Difficulties in Measuring and
Justifying EC Investments
15.3 Methods and Tools for Evaluating and
Justifying EC Investments
15.4 Examples of EC Project Justification
15.5 The Economics of EC
15.6 Factors That Determine EC Success
15.7 Opportunities for Success in EC and
Avoiding Failure
Managerial Issues
Real-World Case: How Citigroup Measures
Itself
Upon completion of this chapter, you will be
able to:
1. Describe the need for justifying EC
investments, how it is done, and how metrics
are used to determine justification.
2. Understand the difficulties in measuring and
justifying EC investments.
3. Recognize the difficulties in establishing
intangible metrics and describe how to
overcome them.
4. List and briefly describe traditional and
advanced methods of justifying IT investments.
5. Understand how e-CRM, e-learning, and other
EC projects are justified.
6. Describe some economic principles of EC.
7. Understand how product, industry, seller, and
buyer characteristics impact the economics
of EC.
8. Recognize key factors to the success of EC
projects and the major reasons for failures.
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JUSTIFYING EC AND IT INVESTMENT IN THE STATE OF IOWA
The Problem
For years, there was little planning or justification for EC and IT projects by the government of the state of Iowa. Any state agency that
needed money for an EC or IT project slipped it into its budget request. State agencies requested many projects, knowing that only a few
would be funded. Bargaining, political favors, pressures, and other outside influences determined which agencies’ requests were. As a
result, some important projects were not funded, and unimportant ones were. In addition, there was very little incentive to save money.
This was the situation in Iowa until 1999, and it still exists in many other states, countries, cities, and other public institutions.
However, in Iowa, everything changed in 1999 when a request for $22.5 million to resolve the Y2K problem was made.
The Solution
Iowa’s solution to its IT planning and spending program, the
Iowa Return on Investment Program (ROI Program), is an IT
value model. The basic idea is to properformance-based
mote performance-based government, an approach that measures the government
results of government programs. The
An approach that meastate of Iowa developed the ROI
sures the results of govProgram to justify investment in the
ernment programs.
Y2K solution. The basic principles of
the model follow.
First, new investments are funded primarily from a pot
of money called the Pooled Technology Account, which is
appropriated by the legislature and controlled by the state’s
IT department. Pooling of funds makes budget oversight easier and prevents duplications. Second, agencies submit
requests for funding future EC and IT projects from the
pooled account. To support their requests, agency managers
must document the expected costs and benefits of the project based on a set of factors. The maximum score for each
factor ranges from 5 to 15 points, for a maximum total score
of 100 points. In addition, they must specify metrics related
The Results
Iowa’s ROI Program became a national model for documenting
value and prioritizing IT and EC investments in the public sector.
In 2002, the program was named the “Best State IT Management
Initiative” by the National Association of State Chief Information Officers (NASCIO). It saved taxpayers more than $5 million
in less than 4 years (about 16 percent of the spending on new
IT projects).
The process also changed users’ behavior. For example, during fiscal year 2003, 17 EC and IT projects were requested
through the budget approval process, and only 6 were approved.
to those factors in order to determine the project’s success.
The scores are based on 10 criteria that are used to determine value (for details on these criteria, see Varon 2003).
The ROI Program requires agencies to detail their technology
requirements and functional needs. This enforces standards, and
it also helps officials identify duplicate projects and expenditures. For example, in 2001 several agencies proposed building
pieces of an ERP system that would handle e-procurement and
human resources management. The IT department suggested
that the state deploy a single, more cost-effective ERP system
that could be shared by several agencies. The project, which had
an estimated cost of $9.6 million, could easily have cost many
times that amount if agencies were allowed to go it alone. Once
a project is funded, the state saves money by scrutinizing
expenses. Agencies must submit their purchase orders and
invoices to the Enterprise Quality Assurance Office for approval
before they can be reimbursed. This IT value model is universal
and fits EC projects as well. The IT department reimburses agencies for expenses from the Pooled Technology Account only after
verifying that the expenses were necessary. If an agency’s
expenditures are not in line with the project schedule, it presents a red flag for auditors that the project could be in trouble.
For the year 2004, four projects were requested, all of which
were approved. Also, there is considerable collaboration and use
of cross-functional teams to write applications. State agencies
are now thinking through their IT and EC investments more carefully. Another improvement is collaboration among agencies that
submit joint proposals, thereby eliminating duplicate projects.
Finally, the methodology minimizes political pressured. The success of Iowa’s ROI Program led to the Iowa Accountable
Government Act of 2001, which requires establishing a similar
methodology for all state investments, not just EC or IT projects.
Source: Compiled from Varon (2003).
WHAT WE CAN LEARN . . .
Today, one of the most important decisions a company must make is whether an EC project is economically justified. The unique aspects
of EC make its justification and economics different in many respects from the economics of other aspects of business, or even IT.
The opening case demonstrates that by conducting a formal analysis, organizations can improve their ROI in IT as well as eliminate
politics from fund allocation decisions. This chapter examines the difficulties in justifying EC projects and identifies methods that can be
used to overcome these difficulties. In addition, the economics of EC will be discussed, with an explanation of why EC can be very advantageous. The chapter concludes with an examination of EC successes and failures.
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Chapter Fifteen: Economics and Justification of Electronic Commerce
15.1 WHY JUSTIFY EC INVESTMENTS? HOW CAN THEY
BE JUSTIFIED?
Companies need to justify their EC investments for a number of different reasons.
INCREASED DEMAND FOR FINANCIAL JUSTIFICATION
Once upon a time, or so the story goes, the beggars of New York City decided to conduct a
competition as to who could collect the most money in one day. Many innovative ideas were
employed, and several beggars collected almost a thousand dollars each. The winner, however, collected $5 million. When asked how he did it, the beggar replied: “I made a sign that
said ‘EC experts need funding for an innovative electronic marketplace’ and put the sign in
front of the New York Stock Exchange.”
This story symbolizes what happened from 1995 through 2000, when EC projects and
start-up companies were funded with little analysis of their business cases or finances. The
result of the rush to invest was the 2001–2003 “dot-com bust,” when hundreds of EC startups went out of business and the stock market crashed. Some companies and individual
investors lost over 90 to 100 percent of their investments! Furthermore, many companies,
such as Disney, Merrill Lynch, and Sears (see the Chapter 16 Real-World Case), terminated
EC projects after losing considerable amounts of money and realizing few benefits from huge
investments. The positive result of the crash was the “back-to-basics” movement, namely, a
return to carefully checking and scrutinizing any request for EC funding.
Today, companies are holding the line on IT and EC budgets. According to Pisello
(2004), IT executives feel the demand for financial justification and planning from executives, but most face an uphill battle to address this new accountability, as demonstrated by the
following statistics:
◗ Sixty-five percent lack the knowledge or tools to do ROI calculations.
◗ Seventy-five percent have no formal processes or budgets in place for measuring ROI.
◗ Sixty-eight percent do not measure how projects coincide with promised benefits 6 months
after completion.
At the same time, demand for expanding or initiating e-business projects remains
strong. In order to achieve the optimal level of investment, CIOs will need to effectively
communicate the value of proposed EC projects in order to gain approval.
OTHER REASONS WHY EC JUSTIFICATION IS NEEDED
The following are some additional reasons for conducting EC justification:
◗ 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, as described in Chapter 14. 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.
According to a study by CIO Insight (2004), the major reasons that companies conduct
IT and EC justification are pressure from top management, internal competition for funding, the large amount of money involved, and weak business conditions. The same study
found that justification forces EC and IT into better alignment with the corporate business
strategy. Finally, justification increases the credibility of an EC project.
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Part 6: EC Strategy and Implementation
EC INVESTMENT CATEGORIES AND BENEFITS
Before we look at how to justify EC investments, let’s examine the nature of such investments. One basic way to categorize different EC investments is to distinguish between
investment in infrastructure and investment in specific EC applications.
The IT infrastructure provides the foundation for EC applications in the enterprise. The
IT infrastructure includes intranets, extranets, data centers, data warehouses, and knowledge
bases, and the infrastructure is shared by many applications throughout the enterprise (see
Broadbent and Weill 1997). Infrastructure investments are made for the long-term.
EC applications are specific systems and programs for achieving certain objectives, for
example, taking a customer order online or providing e-CRM. The number of EC applications is large. They may be in one functional department or they may be shared by several
departments, which makes evaluation of their costs and benefits more complex.
Another way to look at EC and investment categories is proposed by Ross and Beath
(2002). Their categories are based on the purpose of the investment. They also suggest a cost
justification (funding) approach as well as the probable owner of each application (e.g., specific department or corporate ownership). Still other investment categories are offered by
Devaraj and Kohli (2002), who divide EC investments into operational, managerial, and
strategic types. The variety of EC investment categories demonstrates the complex nature of
IT investment.
Specific Benefits
According to a CIO Insight (2004) survey, companies want to get the following benefits from
an IT investment: cost reduction (84 percent); productivity improvement (77 percent);
improved customer satisfaction (66 percent); improved staffing levels (57 percent); higher
revenues (45 percent); higher earnings (43 percent); better customer retention (42 percent);
more return of equity (33 percent); and faster time-to-market (31 percent). (Note: Separate
data for EC are not available.)
HOW IS AN EC INVESTMENT JUSTIFIED?
cost-benefit analysis
A comparison of the costs
of a project against the
benefits.
Justifying an EC investment means comparing the costs of the project against its benefits in
what is known as a cost-benefit analysis. To conduct such an analysis, it is necessary to
define and measure the relevant EC benefits and costs. Cost-benefit analysis is frequently
referred to as return of investment (ROI), which is also the name of a specific method for
evaluating investments (see Paton and Troppito 2004).
A number of different methods are used to measure the business value of EC and IT
investments. Traditional methods that support such analyses are net present value (NPV)
and return on investment (ROI) (see Online File W15.1). More advanced methods also can
be used to justify these investments. Traditional and more advanced justification methods are
discussed in Section 15.3.
Our discussion here is limited mostly to individual EC projects or initiatives. EC projects deal mostly with the automation of business processes, and as such, they are capital
investment decisions. Investment in a start-up company is discussed in Chapter 16.
WHAT NEEDS TO BE JUSTIFIED? WHEN SHOULD JUSTIFICATION
TAKE PLACE?
Not all EC investments need to be formally justified. In some cases, a simple one-page justification will do. The following are cases where formal evaluation may not be needed:
◗ When the value of the investment is relatively small for the organization
◗ When the relevant data are not available, inaccurate, or too volatile
◗ When the EC project is mandated—it must be done regardless of the costs and benefits
involved
However, even when formal analysis is not required, an organization should have some
qualitative analysis to explain the logic of investing in the EC project. For more details, see
Seddon et al. (2002) and Sawhney (2002a).
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Chapter Fifteen: Economics and Justification of Electronic Commerce
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USING METRICS IN EC JUSTIFICATION
A metric is a specific, measurable standard against which actual performance is compared.
Metrics are used to describe costs, benefits, or the ratio between them. They are used not only for
justification, but also for other economic activities (e.g., to compare employee performance in
order to reward specific employees). Metrics can produce very positive results in organizations by
driving behavior in a number of ways. According to Rayport and Jaworski (2002), metrics can:
metric
A specific, measurable
standard against which
actual performance is
compared.
◗
◗
◗
◗
Define the value proposition of business models
Communicate a business strategy to the workforce through performance targets
Increase accountability when metrics are linked with performance-appraisal programs
Align the objectives of individuals, departments, and divisions to the enterprise’s strategic objectives
◗ Track the performance of EC systems, including usage, types of visitors, page visits, conversion rate, etc.
◗ Assess the health of companies by using tools such as balanced scorecards and performance dashboards
An example of IT metrics implementation can be found in a white paper on the impact
of a new online service on the profitability of Axon Computertime, a small computer services
business in New Zealand (Green 2002). Axon used the following metrics: revenue growth, cost
reduction, cost avoidance, customer fulfillment, customer service, and customer communications.
The last few metrics in this list highlight the importance of including nonfinancial measures
in the measurement of organizational performance.
In many cases, such measures involve intangible benefits; a topic we will discuss later.
Also, note that metrics require the definition of a particular measure.
Metrics, Measurements, and Key Performance Indicators
Metrics need to be defined properly with a clear way to measure them. For example, revenue
growth can be measured in total dollars, in percentage change over time, or in percentage
growth as compared to the larger industry. Cost avoidance, for example, can be achieved in
many ways, one of which may be “decrease obsolete stock write-offs as percentage of revenue.” Defining the specific measures is critical; otherwise, what the metrics actually measure
may be open to interpretation.
The balanced scorecard method uses customer metrics, financial metrics, internal business processes metrics, and learning and growth metrics. Metrics are related to the goals,
objectives, vision, and plans of the organization. Metrics that deal directly with performance
(e.g., sales, profits) are frequently measured by key performance indicators (KPI), which are
the quantitative expression of critically important metrics (known as critical success factors).
Frequently, one metric has several KPIs.
Metrics can be used in any organization, private or public. Let’s look at an example. In
Australia, the government of Victoria (vic.gov.au) is one of the leaders in exploiting the
Internet to provide a one-stop service center called “Do It Online.” In the United States,
MyCalifornia (my.ca.gov) offers many services for the citizens of California. In either case,
the service of renewing drivers’ licenses is justified by the metric of “wait time” for the citizens who would otherwise have to visit a physical office.
Now that we understand the need for conducting EC justification and the use of metrics, let’s see why it is difficult to EC justification is so difficult to accomplish.
Section 15.1 ◗ REVIEW QUESTIONS
1.
2.
3.
4.
5.
6.
List some of the reasons for justifying an EC investment.
Describe the risks of not conducting an EC justification study.
Describe how an EC investment is justified.
List the major EC investment categories.
When is justification of EC investments unnecessary?
What are metrics? What benefits do they offer?
key performance
indicators (KPI)
The quantitative expression of critically important metrics.
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Part 6: EC Strategy and Implementation
15.2 DIFFICULTIES IN MEASURING AND JUSTIFYING
EC INVESTMENTS
Justifying EC (and IT) projects can be a complex, and therefore difficult, process. Let’s see why.
THE EC JUSTIFICATION PROCESS
The EC justification process varies depending on the situation and the methods used.
However, in its extreme, it can be very complex, as shown by Gunasekaran et al. (2001). They
identified five areas that must be considered in the justification of IT projects, as shown in
Exhibit 15.1. In this section, we will discuss intangibles and tangibles. In Chapter 14, we discussed some strategic and tactical considerations.
We will see later in this section that one major difficulty with EC justification is measuring intangible benefits and costs, which are a major component in the model just presented. Other difficulties in conducting justifications are provided next.
DIFFICULTIES IN MEASURING PRODUCTIVITY
AND PERFORMANCE GAINS
One of the major benefits of using EC is increased productivity. However, productivity increases
may be difficult to measure for a number of different reasons, which are discussed below.
Data and Analysis Issues
Data, or the analysis of the data, may hide productivity gains. Why is this? For manufacturing, it is fairly easy to measure out …
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