E-Business Eighth Edition Chapter 12 Planning for Electronic Commerce

E-BusinessEighth Edition

Chapter 12Planning for Electronic Commerce

E-Business, Eighth Edition 22

Learning Objectives

In this chapter, you will learn about:

• Planning electronic commerce initiatives

• Strategies for developing electronic commerce Web sites

• Managing electronic commerce implementations


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


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


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

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

positionsE-Business, Eighth Edition 6


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


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

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




• 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


• 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



• 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



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



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


• 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




• 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



• 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


• 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





• 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



• 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



• 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




• 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



• 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


• 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




• 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


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


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



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


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


• 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




• 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

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




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


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

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




• 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



• 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



• 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



• 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



• 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



• 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



• 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


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


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

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


New Methods for Implementing Partial Outsourcing (cont’d.)

• Incubators (cont’d.)– Incubator sells all or part of its interest

• Company grows to obtain venture capital financing, launch stock public offering

– First Internet incubators: Idealab• Helped CarsDirect.com, Overture, Tickets.com

• Today’s focus: own internally generated ideas



• Incubators (cont’d.)– Company created internal incubators

• Develop technologies for use in main business operations

• 1980s programs: unsuccessful and shut down

– Matsushita Electric’s U.S. Panasonic division• Started internal incubators to help launch new

companies to become important strategic partners

• Prospects appear much brighter



• Fast venturing– Existing company wants to launch electronic commerce

initiative• Joins external equity partners and operational partners

offering experience, skills needed

– Equity partners: usually banks, venture capitalists• Sometimes offer money• More likely to offer experience

– Operational partners: firms• Systems integrators, consultants, Web portals• Experienced in moving projects along, scaling up

prototypes



• Fast venturing (cont’d.)– Venture sponsor

• Existing company wanting to launch electronic commerce initiative

• No experience in starting new businesses

– Equity partners• Provided start-up money to new ventures in the past• Developed knowledge about operating new ventures• Provided venture sponsor advice

– Operational partners• People and companies that previously built Web business

sites




Managing Electronic Commerce Implementations

• Best way to manage complex electronic commerce implementation– Use formal management techniques

• Project management

• Project portfolio management

• Specific staffing

• Postimplementation audits


Project Management

• Collection of formal techniques for planning and controlling activities undertaken to achieve specific goal

• Developed by U.S. military, defense contractors

• Project plan criteria– Cost, schedule, performance– Helps management make trade-off decisions

involving three criteria

Project Management (cont’d.)

• Project management software– Specific application software– Helps manage projects– Example: Microsoft Project, Primavera P6

• Provide built-in tools for managing resources, schedules

– Generate charts and tables showing:• Critical parts of project for timely completion• Parts that can be rescheduled, delayed without

changing the project completion date• Where additional resources might be most effective in

speeding up project



Project Management (cont’d.)

• Software management tasks– People and tasks of the internal team– Tasks assigned to consultants, technology partners,

outsourced service providers

• Examining costs and completion times– Learn about project progression– Revise future estimated costs, completion times

• Risks of information systems’ development projects – Running out of control, ultimately failing– Causes: rapidly changing technologies, long

development times, changing customer expectations



Project Portfolio Management

• Teams rely on project management software to help achieve project goals

• Electronic commerce uses rapidly changing technologies– Relatively short development times

• Technology, user expectations have less time to change

• Initiatives more successful (in general)

• More information– Project Management Institute


Staffing for Electronic Commerce

• Business manager– Member of internal team setting project objectives– Responsible for implementing business plan

elements, reaching objectives set by internal team

• Project manager– Person with specific training, skills in tracking costs

and accomplishment of specific project objectives

• Account manager– Keeps track of multiple Web sites in use or keeps

track of projects combining into larger Web site


Staffing for Electronic Commerce (cont’d.)

• Applications specialists– Maintain accounting, human resources, logistics

software

• Web programmers– Design and write underlying code for dynamic

database-driven Web pages

• Web graphics designer– Trained in art, layout, composition– Understands how Web pages are constructed



• Customer service personnel– Design and implement customer relationship

management activities in electronic commerce operation

• Call center– Company handling incoming customer telephone

calls, e-mails for other companies– Makes sense for smaller companies

• Systems administrator– Responsible for system’s reliable, secure operation



• Database administration function– Support activities

• Transaction processing, order entry, inquiry management, shipment logistics

– Activities require:• An existing database into which site being integrated

• Separate database established for electronic commerce initiative

Postimplementation Audits

• Formal review of project– After up and running

• Examine project items established in planning stage– Compare to what actually happened

• Objectives, performance specifications, cost estimates, scheduled delivery dates

• Blame identification approach– Used more in the past– Focused on identifying individuals to blame for cost

overruns, missed delivery dates


Postimplementation Audits (cont’d.)

• Feedback on strategies– Used more today– Obtains valuable information

• Useful in planning future projects

• Gives participants meaningful learning experience

• Comprehensive audit report– Analyzes project’s overall performance

• How well project administered

• Appropriate project organizational structure in place

• Specific project team(s) performance

– Should compare actual results to objectives


Summary

• Key elements included in e-commerce business plans

• Setting objectives in measurable terms– Derived from initiative’s overall goals– Include planned benefits and planned costs

• ROI evaluation technique– Past, present, and future uses

• Outsourcing the electronic commerce project

• Project management overview and importance

• Postimplementation audit valueE-Business, Eighth Edition 68

Documents

E-Business Eighth Edition Chapter 12 Planning for Electronic Commerce