Chapter 15 Economics and Justification of Electronic Commerce Learning Objectives Describe the need for justifying EC investments, how it is done, and how metrics are used to determine justification Understand the difficulties in measuring and justifying EC investments Recognize the difficulties in establishing intangible metrics and describe how to overcome them List and briefly describe traditional and advanced methods of justifying IT investments Electronic Com merce Prentice Hall © 2006 Learning Objectives Understand how e-CRM, e-learning, and other EC projects are justified Describe some economic principles of EC Understand how product, industry, seller, and buyer characteristics impact the economics of EC Recognize key factors to the success of EC projects and the major reasons for failures Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • Increased Demand for Financial Justification – Addressing accountability is difficult: • • • 65% of company executives lack the knowledge or tools to ROI calculations 75% of company executives have no formal processes or budgets in place for measuring ROI 68% of company executives not measure how projects coincide with promised benefits months after completion Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • Other Reasons Why EC Justification Is Needed – – 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 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 Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • Other Reasons Why EC Justification Is Needed – – 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 Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • EC Investment Categories and Benefits – – The IT infrastructure provides the foundation for EC applications in the enterprise EC applications are specific systems and programs for achieving certain objectives Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • Specific Benefits – – – – – – – – – cost reduction (85%) productivity improvement (7%) improved customer satisfaction (6%) improved staffing levels (5%) higher revenues (4%) higher earnings (4%) better customer retention (4%) more return of equity (3%) faster time-to-market (3%) Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • How Is an EC Investment Justified? cost-benefit analysis A comparison of the costs of a project against the benefits Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How Can They Be Justified? • Justification may not be necessary when: – – – The value of the investment is relatively small for the organization The relevant data are not available, inaccurate, or too volatile The EC project is mandated—it must be done regardless of the costs and benefits involved Electronic Com merce Prentice Hall © 2006 10 Exhibit 15.10 The Economic Effects of EC Electronic Com merce Prentice Hall © 2006 34 The Economics of EC • Production Costs transaction costs Costs that are associated with the distribution (sale) and/or exchange of products and services including the cost of searching for buyers and sellers, gathering information, negotiating, decision-making, monitoring the exchange of goods, and legal fees Electronic Com merce Prentice Hall © 2006 35 Exhibit 15.11 The Economic Effects of EC: Transaction Costs Electronic Com merce Prentice Hall © 2006 36 Exhibit 15.12 Reach Versus Richness Electronic Com merce Prentice Hall © 2006 37 The Economics of EC • Reducing Transaction Friction or Risk product differentiation Exploiting EC to provide products with special features to add greater value to customers Electronic Com merce Prentice Hall © 2006 38 The Economics of EC agility An EC firm’s ability to capture, report and quickly respond to changes happening in the marketplace Electronic Com merce Prentice Hall © 2006 39 The Economics of EC • valuation The fair market value of a business or the price at which a property would change hands between a willing buyer and a willing seller who are both informed and under no compulsion to act For a publicly traded company, the value can be readily obtained by the price the stock is selling over the exchange Valuation Methods – The comparable method – The financial performance method – The venture capital method Electronic Com merce Prentice Hall © 2006 40 Factors That Determine EC Success • • • • Product Characteristics Industry Characteristics Seller Characteristics Consumer Characteristics Electronic Com merce Prentice Hall © 2006 41 Factors That Determine EC Success • The Levels of EC Management Ultimately, the level of measurement relates to what is of value to the various constituents at each level Electronic Com merce Prentice Hall © 2006 42 Opportunities for Success in EC and Avoiding Failure • E-Commerce Failures – – – At a macroeconomic level, technological revolutions have had a boom–bust–consolidation cycle At a mid-economic level, the bursting of the dot-com bubble in 2000–2003 is consistent with periodic economic downturns At a microeconomic level, the “Web rush” reflected an over allocation of scarce resources—venture capital and technical personnel—and too many advertising-driven business models Electronic Com merce Prentice Hall © 2006 43 Opportunities for Success in EC and Avoiding Failure • Top three factors for EC success – B2C EC • • • – B2B EC • • • – effective marketing management an attractive Web site building strong connections with the customers readiness of trading partners information integration inside the company and in the supply chain completeness of the EC system Overall success • • • proper business model readiness of the firm to become an e-business internal enterprise integration Electronic Com merce Prentice Hall © 2006 44 Opportunities for Success in EC and Avoiding Failure digital options A set of IT-enabled capabilities in the form of digitized enterprise work processes and knowledge systems complementary investments Additional investments, such as training, made to maximize the returns from EC investments Electronic Com merce Prentice Hall © 2006 45 Opportunities for Success in EC and Avoiding Failure • Cultural Differences Critical elements that can affect the value of EC across cultures are perceived trust, consumer loyalty, regulation, political influences • EC in Developing Economies Developing economies often face power blackouts, unreliable telecommunications infrastructure, undependable delivery mechanisms, and the fact that only a few customers own credit cards Electronic Com merce Prentice Hall © 2006 46 Managerial Issues How we measure the value of EC investment? What complementary investments will be needed? How we shift from tangible to intangible benefits? Who should conduct a justification? Should we use the ROI calculator provided by a vendor who wants to sell us an EC system? Electronic Com merce Prentice Hall © 2006 47 Summary The need for EC justification The difficulties in justifying EC investment Difficulties in established intangible metrics Traditional methods for evaluating EC investments Understand how specific EC projects are justified EC investment evaluation E-marketplace economics Reasons for EC success and failure Electronic Com merce Prentice Hall © 2006 48 ... characteristics impact the economics of EC Recognize key factors to the success of EC projects and the major reasons for failures Electronic Com merce Prentice Hall © 2006 Why Justify EC Investments? How... administrative costs) Electronic Com merce Prentice Hall © 2006 33 Exhibit 15. 10 The Economic Effects of EC Electronic Com merce Prentice Hall â 2006 34 The Economics of EC ã Production Costs transaction... The Economics of EC agility An EC firm’s ability to capture, report and quickly respond to changes happening in the marketplace Electronic Com merce Prentice Hall © 2006 39 The Economics of EC