Valuing Information Systems InvestmentsMIS 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.

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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

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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

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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

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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

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Informing: Example

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

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Strategizing: Five Types of Organizational Strategies

Organizational strategies define the way in which a company plans to gain/sustain competitive advantage

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Overall Low Cost Leadership Strategy

Offer best prices in the industry or product/service category

Broad focus Wal-Mart

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Focused Low-Cost Strategy

Offer best prices in the industry or product/service category

Focus on niche Dell

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Broad Differentiation Strategy

Offer better products/services than the competitors

Broad Focus Nordstrom

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Focused Differentiation Strategy

Offer better products/services than the competitors

Focus on niche Apple

• High-quality computers

• Home and educational markets

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Best-Cost Provider Strategy

Provide products of reasonably good quality at competitive pricesTarget

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Sources of Competitive Advantage

1. Best-made product on the market2. Superior customer service3. Achieving lower costs than rivals4. Having proprietary manufacturing technology5. Having shorter lead times in research and

development projects6. Having a well-known brand name and reputation7. Giving customers more value for their money

Can you think of other examples?Where does SouthWest Airlines fit?

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Competitive Advantage

How do you identify opportunities to use information systems for competitive advantage?

Porter’s Value Chain Porter’s Five Forces Model

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Value Chain Analysis Tool used by managers to identify

opportunities for gaining competitive advantage

CoreValueActivities

SupportValueActivities

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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 supportingthese activities to function at an enterprise level?

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The Five Forces Model – Evaluating Business Segments

Organizations use Porter’s Five Forces Model to determine the relative attractiveness of an industry

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Buyer Power

Buyer power – high when buyers have many choices of whom to buy from and low when their choices are fewLoyalty programs – reward

customers based on the amount of business they do with a particular organization

Examples of situations where IT has increased buyer power?

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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?

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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

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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 chooseSwitching 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?

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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?

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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

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Making the Business Case for an IS

Identification of benefits that the proposed information system will bring to the organizationAutomating benefitsInforming benefitsStrategic benefits

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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?

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The Productivity Paradox

Information systems may be used in unintended waysWeb surfingJunk mailGames

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Measurement Problems

Benefits difficult to quantifyWrong things

measured . . . For example volume of transactions vs cost savings

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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

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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

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Mismanagement

Bad business model can not be overcome by good information system IS

implementation as temporary fix

Creation of unanticipated bottlenecks

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Making a Successful Business Case

Based on• Faith• Fear• Facts

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Arguments Based on Faith

Arguments based on beliefs about: Organizational

strategy Competitive

advantage Industry forces Customer

perceptions

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Arguments Based on Fear

Arguments based on the notion that if system is not implemented: Company loses to a

competitor Goes out of business

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Arguments Based on Fact

Arguments based on:DataIndisputable

factors

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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?

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Cost-Benefit Analysis

Identifying costsTotal cost of ownership (TCO)

• Cost of acquisition• Cost of use• Cost of maintenance

Recurring vs. Non-recurring costsTangible vs. Intangible costs

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Cost-Benefit Analysis

Identifying BenefitsTangible benefits

• 5% increase in sales• Reduction of order entry errors

Intangible benefits• Improvement to customer service• Improvement in overall perception of a

firm

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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

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Why is evaluation important?

Systems should address a business need Otherwise

You waste money on what you buyYou still will have an unresolved “business

problem”

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How do you evaluate systems?

Understand what you need Understand what the system does Match the two up

Businessneeds

Applicationfunctionality

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Understanding what you need

We talked about this way back Talk to

People involved in the business processTechnical staff who have to implement the

system …to determine key features

MIS Analyst

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Understanding what the application does

Once you have the key features… Talk to

VendorsPeople who have bought or built similar

products Now you have a basis for comparing

alternatives

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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?

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An Evaluation Matrix for an E-Mail System

Weighted average of feature ratings

Feature

Option

Creates mailing

lists

(10%)

Overall cost

(30%)

Web access

(20%)

Reliability

(40%)

Total Score

Option A

7 1 8 5 4.6

Option B

3 9 4 5 5.8

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Comparing evaluation methods

Looking atSystem evaluation questionsEvaluation matrix

What purpose does each fulfill? What is the strengths of each method? What are the weaknesses of each method?

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How to evaluate something “new”

How would you evaluateBlogger.com (http://www.blogger.com)Orb.com (http://www.orb.com)Platial.com (http://www.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?

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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?)

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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?)

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Cases: How would youdetermine the value of the

following services?

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Blogger.com

Free tool to create weblogs

An online diary or something more?

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Orb.com

Tool to record TV and stream it over the Internet (free so far)

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Platial.com

Annotates maps (from Google) with a set of places defined by the user