Week 10: Valuing Information Systems Investments

1. Week 10: Valuing Information Systems Investments MIS 2101: Management Information Systems

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. What is Value? • Shareholder Value • Customer Value • Employee Value • Societal Value

4. How does IT create value? Information systems can be used in three ways to add value to an organization: Automating Informing Strategizing

5. Automating: Doing Things Faster 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 days Technology-supported process – 5 days Fully automated process – 1 hour

6. Informing: Doing Things Better 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. Where is the greatest value add?

9. Competitive Advantage 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 Can you think of other examples? Where does SouthWest Airlines fit?

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

11. Value Chain Analysis Tool used by managers to identify opportunities for gaining competitive advantage Core Value Activities Support Value Activities

12. 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?

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

14. 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?

15. 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?

16. 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

17. 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?

18. 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?

19. 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

20. If you cant measure IT, you cannot manage IT • Andy Grove, CEO Intel

21. 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

22. 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?

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

24. Productivity Paradox

25. Making a Successful Business Case Based on Faith Fear Facts

26. ArgumentsBased on Faith Qualitative Arguments about: Organizational strategy Competitive advantage Industry forces Customer perceptions No consideration for costs

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

28. Arguments Based on Fact Arguments based on: Data Indisputable factors

29. 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?

30. 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

31. 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

32. 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

33. Evaluating Information Systems • Identify Stakeholders • Identify business drivers • Quantify benefits • Evaluate Risks • Technical, Non-technical • Fit-Feature Comparison

34. Fit – Feature Comparison • Understand what you need • Understand what the system does • Match the two up Application functionality Business needs

35. 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

36. 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

37. Evaluating Innovations • How would you evaluate • Blogger.com (http://www.blogger.com) • Facebook.com (http://www.facebook.com) • What would you compare them to? • No pre-exiting benchmarks • What is their business value?

38. Key Learnings • What is value? • How does IT create value • Automating • Informating • Strategizing • IT and Strategy • Five Forces Model • Value Chain Model

39. Key Learnings • Productivity Paradox • 4 reasons • Making a Business Case using • Faith, Fact and Fact • Quantifying Business Value • Valuing Innovations

40. Questions!