Electronic Commerce Eighth Edition

Electronic CommerceEighth Edition Chapter 12Planning for Electronic Commerce

Learning Objectives In this chapter, you will learn about: Planning electronic commerce initiatives Strategies for developing electronic commerce Web sites Managing electronic commerce implementations Electronic Commerce, Eighth Edition Electronic Commerce, Eighth Edition 2

Planning Electronic Commerce Initiatives • Information technology projects • Keys to successful implementation • Planning and execution • Electronic commerce initiative business plan • Included activities • Identifying initiative’s specific objectives • Linking objectives to business strategies • Setting electronic commerce initiative objectives • Consider strategic role of project, intended scope, resources available Electronic Commerce, Eighth Edition

Identifying Objectives • Typical business electronic commerce objectives • Increasing existing market’s sales • Opening new markets • Serving existing customers better • Identifying new vendors • Coordinating more efficiently with existing vendors • Recruiting employees more effectively • Objectives vary with organization size Electronic Commerce, Eighth Edition

Identifying Objectives (cont’d.) • Resource allocations for electronic commerce initiatives • Decisions should consider: • Expected benefits and costs of meeting objectives • Risks inherent in electronic commerce initiative • Comparison of inherent risks to risks of inaction Electronic Commerce, Eighth Edition

Linking Objectives to Business Strategies • Downstream strategies • Tactics to improve the value businesses provide to customers • Upstream strategies • Focus on reducing costs or generating value • Working with suppliers or inbound shipping and freight service providers • Web use for businesses • Attractive sales channel for many firms • Complement business strategies, improve competitive positions Electronic Commerce, Eighth Edition

Linking Objectives to Business Strategies (cont’d.) • Electronic commerce activities difficult to measure • First-wave e-commerce activities • Existed without setting specific, measurable goals • Did not face much competition • Successes and failures measured in broad strokes • Second-wave e-commerce activities • Businesses take closer look at benefits and costs • Good implementation plan • Set specific objectives for benefits achieved and costs incurred Electronic Commerce, Eighth Edition

Measuring Benefits • Tangible benefits of electronic commerce initiatives • Easy to measure • Example: increased sales or reduced costs • Intangible benefits of electronic commerce initiatives • More difficult to measure • Example: increased customer satisfaction • Identifying objectives • Set measurable objectives even if for intangible benefits Electronic Commerce, Eighth Edition

Measuring Benefits (cont’d.) • Using Web sites to build brands or enhance existing marketing programs • Set goals in terms of increased brand awareness • Measured by market research surveys, opinion polls • Companies selling goods or services online • Measure sales volume in units or dollars • Complicated to measure brand awareness or sales • Increase may be due to other things company is doing at same time or general improvement in the economy Electronic Commerce, Eighth Edition

Measuring Benefits (cont’d.) • Using Web sites to improve customer service or after-sale support • Set goals of increased customer satisfaction, reduced costs of providing customer service or support • Example: Philips Lighting • Provided Web ordering system for smaller customers • Primary goal: reduce cost of processing smaller orders • Built pilot Web site and had smaller customers try it • Results: customer service phone calls from test group dropped by 80 percent Electronic Commerce, Eighth Edition

Measuring Benefits (cont’d.) • Measurements of other electronic commerce initiatives • Supply chain managers • Measure supply cost reductions, quality improvements, faster deliveries of ordered goods • Auction sites • Set goals for number of auctions, number of bidders and sellers, dollar volume of items sold, number of items sold, number of registered participants • Virtual communities and Web portals • Measure number of visitors • Measure quality of visitors’ experiences Electronic Commerce, Eighth Edition

Measuring Benefits (cont’d.) • Metrics • Measurements companies make to assess value of benefits • Use online surveys • Use estimates: length of time each visitor remains on site, how often visitors return • Benefit unit of measure • Convert raw activity measurements to dollars • Can compare benefits to costs • Can compare net benefit of a particular initiative to net benefits provided by other projects • Difficult to measure value in dollars Electronic Commerce, Eighth Edition

Electronic Commerce, Eighth Edition

Managing Costs • Information technology project costs are difficult to estimate • Web development uses rapidly changing hardware and software technologies • Most changes in hardware costs are downward • Increasing software sophistication • Provides ever-increasing demand for more newer, cheaper hardware • Yields net increase in overall hardware costs • Web technology can quickly destroy manager’s best-laid plans Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Total cost of ownership (TCO) • Includes wide variety of costs related to activity • Electronic commerce implementation TCO includes: • Costs of hardware, software, design work, outsourcing, salaries and benefits for employees involved in project, maintaining site once operational • Good TCO number • Includes assumptions about how often site would need to be redesigned in the future Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Change management • Information system projects involve change • Employee concerns • Ability to cope with changes, ability to continue to do good work, job security • Concerns lead to increased stress • Change management: process of helping employees cope with changes • Includes tactics designed to help employees feel involved with change • Helps employees overcome feelings of powerlessness Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Opportunity costs • Largest and most significant costs associated with electronic commerce initiative • Cost of not undertaking an initiative • Foregone benefits that company could have obtained from electronic commerce initiative not pursued • Lost benefits from action not taken Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Web site costs: based on International Data Corporation and Gartner, Inc. surveys • Estimated cost to build, implement adequate entry-level site (large company): $1 million • 79 percent labor, 10 percent software, 11 percent hardware • Building site comparing favorably to leading sites • $2 million to $5 million • 10 of top 100 e-commerce sites spent over $10 million Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Web site costs (cont’d.) • Small company Web site costs: under $4000 • TCO: site with full transaction and payment processing capabilities • Difficult to keep under $8000 per year • Smaller companies’ surveys indicate that costs of commerce Web sites average $110,000 • Industry estimate: $100,000 • Gartner estimate for basic electronic commerce operation • Between $100,000 and $1 million • Site noticeably ahead of competitors: over $15 million Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Web site costs (cont’d.) • Web technology evolving at rapid pace • To remain competitive, businesses must take advantage of technology • Annual cost to maintain and improve site once up and running • Between 50 percent and 200 percent of initial cost • Implementation decisions’ significant factor • Ongoing maintenance costs • More so than initial cost of building site Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Web site costs (cont’d.) • McKinsey & Company • Estimated start-up and ongoing costs for magazine publishers’ Web sites • Two types of magazine sites • Full portal site served as a destination in itself; cost estimate • $2.4 million to build • $4.3 million per year to maintain • Staff of 35 people Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Web site costs (cont’d.) • More limited magazine companion site complementing printed magazine cost estimate • $150,000 to build • $270,000 per year to maintain • Staff of two people • Both estimates • Exclude site content development costs • Assume existing IT infrastructure for print publishing business • Subscriber base of 300,000 Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Trends in Web site costs • New online businesses • Trending toward lower costs of entry • Operations launched for dollar amounts in low end of range for each category • Reasons • Lower costs for broadband access, equipment • Decreasing cost of developing and maintaining software to run online business • First successful startup (Netscape): $40 million • Newer startups (Digg, Facebook): under $500,000 Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Funding online business startups • Early Web businesses • Started by individuals with knowledge of computers, technology, business • Late 1990s Web businesses • Started by investors wanting to make fast money • Angel investors funded initial startup • Became stockholders hoping business grows rapidly • Sell interest to venture capitalist Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Funding online business startups (cont’d.) • Venture capitalists • Very wealthy individuals, investment firms • Look for small companies about to grow rapidly • Hope for rapid growth and initial public offering • Initial public offering (IPO) • Selling stock to public • System of financing startup and initial growth of online businesses • Benefits: access to large amounts of capital early • Costs: investors, capitalists got most profits, pressure to grow rapidly Electronic Commerce, Eighth Edition

Managing Costs (cont’d.) • Funding online business startups (cont’d.) • Decreasing need for venture capitalists and angel investors • Relieving pressure to grow rapidly • Online entrepreneurs more creative, learn from mistakes • Trending toward more and smaller online ventures • Creating online business: costs falling Electronic Commerce, Eighth Edition

Comparing Benefits to Costs • Capital projects (capital investments) • Major investments in equipment, personnel, other assets • Companies have procedures to evaluate • Range from simple calculations to complex computer simulation models • Always reduces to comparison of benefits and costs • Benefits exceed costs by comfortable margin • Company invests in project Electronic Commerce, Eighth Edition

Comparing Benefits to Costs (cont’d.) • Key part of creating electronic commerce initiatives business plan • Identifying potential benefits • Identifying costs required to generate benefits • Evaluating if benefits exceed costs Electronic Commerce, Eighth Edition

Return on Investment (ROI) • Techniques measuring amount of income (return) provided by specific current expenditure (investment) • Payback method, net present value method, internal rate of return • Provide quantitative expression of comfortable benefit-to-cost margin • Mathematically adjust for future reduced value of benefits Electronic Commerce, Eighth Edition

Return on Investment (ROI) (cont’d.) • Electronic commerce initiatives seen as absolutely necessary investments • Not subject to close examination, rigid requirements • Companies fear being left behind • Great value in new market early positioning • Many companies invest large amounts of money • With few near-term profit prospects • Example: first wave of newspaper Web sites • Calculated opportunity costs not being on the Web • Greater than losses experienced from starting sites Electronic Commerce, Eighth Edition

Return on Investment (ROI) (cont’d.) • Companies turning to ROI measurement tool for evaluating new electronic commerce projects • ROI used in the past • ROI built-in biases • ROI requires all costs, benefits be stated in dollars • Gives undue weight to costs • ROI focuses on predicted benefits • Initiatives have returned benefits not foreseen • Cisco user forums assisted engineers (unexpected) • ROI tends to emphasize short-run benefits over long-run benefits Electronic Commerce, Eighth Edition

Return on Investment (ROI) (cont’d.) • ROI built-in biases (cont’d.) • Short-term benefits easier to foresee • Get included in ROI calculations • Long-term benefits harder to imagine and quantify • Not always included in ROI calculation • ROI calculations weigh short-term costs/benefits more heavily than long-term costs/benefits • More information • CIO Budget, Computerworld ROI Knowledge Center Web pages Electronic Commerce, Eighth Edition

Strategies for Developing Electronic Commerce Web Sites • Evolution of Web site functions • From static brochures (early days) • To transaction-processing tools • To today’s automated homes; all kinds of business processes • Transformation occurred rapidly • Change in site management did not occur quickly • Now companies are seeing Web sites as collections of software applications • To manage development and maintenance Electronic Commerce, Eighth Edition

Strategies for Developing Electronic Commerce Websites (cont’d.) • The Internet has changed markets and marketing channels quickly • Creating difficulties in industry value chains • No luxury of time • Must explore alternatives to traditional systems development methods to succeed Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing • Internal people leading projects ensures: • Company’s specific needs are addressed • Initiative congruent with organization goals, culture • Outside consultants • Seldom able to learn enough about organization’s culture to accomplish objectives • Key to success • Finding balance between outside and inside support • Outsourcing • Hiring another company to provide outside support for all or part of project Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • The internal team • First step in outsourcing decision making • Create internal team • Team members • People knowledgeable about the Internet and its technologies • Creative thinkers • Distinguished within the company Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • The internal team (cont’d.) • Project lead • Mistake: technical wizard, not business knowledgeable, not well known • Better choice: person with business knowledge, creativity, respect of firm’s operating function managers, good sense of goals and culture • Measuring team achievement: important • Not necessarily monetarily • Express in terms appropriate to initiative objectives Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • The internal team (cont’d.) • Intellectual capital • Employees’ knowledge about the business and its processes • Ignored in the past • Value recognized today • Human capital measurement networking approach • Includes employee competencies • Includes value of customer loyalty and business partnerships Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • The internal team (cont’d.) • Holds responsibility for initiative from setting objectives to final implementation • Internal team decides project parts to outsource, outsourcer, consultants or partners needed Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • Early outsourcing • Company outsources initial site design and development to launch project quickly • Outsourcing team trains company’s information systems professionals before handing site operation to them • Company’s own information systems people work closely with outsourcing team • Develop ideas for improvements as early as possible in project life Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • Late outsourcing • More traditional approach • Company’s information systems professionals • Perform initial design and development work, implement system, and operate system until stable part of business operation • Once competitive advantage gained • Electronic commerce system maintenance outsourced • Company’s information systems professionals turn attention and talents to developing new technologies, providing further competitive advantage Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • Partial outsourcing • Also called component outsourcing • Company identifies specific project portions • Can be completely designed, developed, implemented, and operated by another firm specializing in a particular function • Examples • Smaller Web sites outsource e-mail handling and response functions • Electronic payment system Electronic Commerce, Eighth Edition

Internal Development vs. Outsourcing (cont’d.) • Partial outsourcing (cont’d.) • Example: Web hosting activity • Service providers usually willing to accommodate requests for variety of service levels • Service provider has continuous staffing and expertise • 24/7 operation: running 24 hours a day, seven days a week • Service providers offer wide range of services • Some service providers specialize Electronic Commerce, Eighth Edition

Selecting a Hosting Service • Internal team responsible for selecting ISP • Smaller electronic commerce projects • Consult ISP directory (The List) • Larger electronic commerce projects • Obtain advice of consultants, other firms rating service providers • HostCompare.com, Keynote Systems Electronic Commerce, Eighth Edition

Selecting a Hosting Service (cont’d.) • Important factors when selecting hosting service • Functionality • Reliability • Bandwidth and server scalability • Security • Backup and disaster recovery • Cost • Vendor’s security policies, practices: very important • Business information placed in hands of service provider Electronic Commerce, Eighth Edition

New Methods for Implementing Partial Outsourcing • New ways of implementing partial outsourcing strategy evolved specifically for Web businesses • Incubators • Offer start-up companies physical location with offices, accounting and legal assistance, computers, Internet connections • Very low monthly cost • May offer seed money, management advice, marketing assistance • Receive ownership interest in company Electronic Commerce, Eighth Edition

Electronic Commerce Eighth Edition