CH 03

Chapter
3 Valuing Information Systems

Investments
3-1
The most important discoveries

of the next 50 years are likely to
be ones of which we cannot now
even conceive.
Sir John Maddox, 1999
IS Today (Valacich & Schneider) Copyright 2010 Pearson Education, Inc. Published as Prentice Hall 04/03/17
Learning Objectives
3-2
Learning Objectives
3-3
Valuing Information Systems
3-4
Information systems can be used in three

ways to add value to an organization:
1. Automating
2. Informating
3. Strategizing
IS for Automating: Doing Things Faster
3-5
With automation,
tasks can be
completed:
Faster
Cheaper
More accurately
With greater
consistency
Automating: Example
3-6
Loan processing comparison for 3 methods

(from the moment the customer takes the
application until the applicant is notified of
decision)
Manual loan process25 to 40 days
Technology-supported process5 to 20 days
Fully automated process1 hour to 15 days
IS for Organizational Learning: Doing Things
Better
3-7
Information
systems can also
be used to:
Learn about
processes
Improve processes
Support
organizational
learning
Informating: Example
3-8
Computer-based
loan system
identifies peak
times during the
year when
specific loans are
processed
IS for Supporting Strategy: Doing Things
Smarter
3-9
IS used to gain or
sustain
competitive
advantage
Turning benefits
of automating and
informating into
strategic
advantage
Strategizing: Five Types of Organizational Strategies
3-10
Organizational
strategies
define the way
in which a
company plans
to gain/sustain
competitive
advantage Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic
Management: Concepts and Cases, 8th ed. (Homewood, III.:
Richard D. Irwin, 1995).
Overall Low Cost Leadership Strategy
3-11
Offer best prices

in the industry or
product/service
category
Broad focus
Wal-Mart
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic

Focused Low-Cost Strategy
3-12
Offer best prices

in the industry or
product/service
category
Focus on niche
Dell
Broad Differentiation Strategy
3-13
Offer better
products/services
than competitors
Broad Focus
Nordstrom

Focused Differentiation Strategy
3-14
Offer better
products/services
than competitors
Focus on niche
Apple
High-quality
computers
Home and
educational markets
Best-Cost Provider Strategy
3-15
Provide products
of reasonably
good quality at
competitive prices
Target

Sources of Competitive Advantage
3-16
1. Best-made product on the market

2. Superior customer service
3. Achieving lower costs than rivals
4. Having proprietary manufacturing
technology
5. Having shorter lead times in research and
development projects
6. Having a well-known brand name and
reputation
7. Giving customers more value for their money
Competitive Advantage
3-17
How do you identify opportunities to use

information systems for competitive advantage?
Porters Value Chain
Value Chain Analysis
3-18
Tool used by managers to identify opportunities

for gaining competitive advantage
IS and Value Chain Analysis
3-19
Information systems use in adding value:

Use of Internet
Use of Extranet/Intranet
Learning Objectives
3-20
Making the Business Case for an IS
3-21
Identification of benefits that the proposed

information system will bring to the organization
Automating benefits
Informating benefits
Strategic benefits
Productivity Gains
3-22
Easy to identify costs with developing an IS

Difficult to identify productivity gains
There are limitation to productivity gains with development of
an IS
Why hasnt productivity increased at the rate of IS
investments?
The Productivity Paradox
3-23
Information systems may be used

in unintended ways
Web surfing
Junk mail
Games
Measurement Problems
3-24
Benefits difficult to
quantify
Wrong things
measured
efficiency vs.
effectiveness
Example: ATM
Strategic necessity
Time Lags
3-25
Benefits do not
always occur at the
same time IS is
implemented
Some IS/IT
implementation
requires training
System must be
integrated with
existing systems
Redistribution
3-26
IS may redistribute
the pieces of the pie
rather than make
the pie bigger
Increases in market
share come at the
expense of the
competitors market
share
Mismanagement
3-27
Bad business
model cannot be
overcome by good
information
system
IS implementation
as temporary fix
Creation of
unanticipated
bottlenecks
Making a Successful Business Case
3-28
Difficult to quantify
benefits of IS
Money doesnt grow
on trees
Need to make a
strong business case
Based on:
Faith
Fear
Facts
Arguments Based on Faith
3-29
Arguments based on
beliefs about:
Organizational strategy

Competitive advantage
Industry forces
Customer perceptions
Example: Procter &

Gamble
Arguments Based on Fear
3-30
Arguments based on
the notion that if
system is not
implemented:
Company loses to a

competitor
Goes out of business
Example:
Automotive industry
Factors in IS Investment Decisions
3-31
Often
considered
when
presenting
arguments
based on fear
Porters Five Forces Model
3-32
Framework used
to analyze
competition
within an
industry
Arguments Based on Fact
3-33
Arguments based on:

Data
Quantitative analysis
Indisputable factors
Arguments Based on Fact (contd)
3-34
Primary tools:
Cost-benefit analysis
Identify costs
Identify benefits
Contrast expected costs and benefits
Weighted multicriteria analysis
Cost-Benefit Analysis
3-35
Identifying costs
Total cost of ownership (TCO)
Cost of acquisition
Cost of use
Cost of maintenance
Recurring vs. nonrecurring costs
Tangible vs. intangible costs
Cost-Benefit Analysis (contd)
3-36
Identifying Benefits
Tangible benefits
5 percent increase in sales
Reduction of order entry errors
Intangible benefits
Improvement to customer service
Improvement in overall perception of a firm
Cost-Benefit Analysis (contd)
3-37
Contrasts total expected tangible costs with total

tangible benefits
Break-even analysisidentifies the point when tangible
costs equal tangible benefits
Net-present-value analysisidentifies the present value of
future cash flows
Weighted Multicriteria Analysis
3-38
Method used for deciding between alternative

IS investments or alternatives of the same
system
Presenting the Business Case
3-39
Persuade decision makers in the firm

Know the audience
Identify stakeholder groups
Presenting the Business Case (contd)
3-40
Convert benefits to monetary terms
Presenting the Business Case (contd)
3-41
Devise proxy variables

Used when clear-cut assessment is not possible
Measures of perceived value of change
Measure what is important to management

Case becomes more meaningful
Focus on senior managements hot button issues
Assessing Value for IS Infrastructure
3-42
Present holistic view

Economic value
Architectural value
Operational value
Regulatory and compliance value
View IS as asset rather than necessary expense
Learning Objectives
3-43
Valuing Innovations
3-44
Which new technology will make or break your

business?
Successful Innovation Is Difficult
3-45
Innovation is often fleeting

The advantages gained from innovations are often short
lived
Innovation is often risky
Sometimes even superior
products can lose the race
Blu-ray vs. HD DVD
Innovation choices are often difficult

Foreseeing the future is not always possible
In 1994 the Internet was not given much attention
Organizational Requirements for Innovation
3-46
Process requirementsthe organization has to

be willing to do whatever it takes to implement the
change
Resource requirementsneed to have the
human capital necessary for successful deployment of
the system
Risk tolerance requirementsorganizational
members must have appropriate tolerance of risk and
uncertainty
Predicting the Next New Thing
3-47
Deciding which innovations to adopt is very

difficult
Diffusion of
Innovations
Classic view
of adoption of
innovations
The Innovators Dilemma
3-48
Disruptive innovations
New technologies, products, or services that
eventually surpass dominant technologies
Online vs. brick-and-mortar retailing
Automobiles vs. horses
CDs vs. records
MP3 vs. CDs
Undermine effective management practices
Disruptive Innovations
3-49
1970s:
mid- and high-
performance
users were bulk
of the market
Digital
Equipment
Company (DEC)
tried to sell to
those markets
Microcomputers
seen as toys
Disruptive Innovations (contd)
3-50
1980s:
Microcomputers
focusing on low-
performance
users needs
Ignored by DEC
3-51
1990s:
Growing
performance of
Microcomputers,
meeting mid-
performance
users needs
DEC lost biggest
market segment
3-52
Today, micro-
computers
meeting entire
markets needs
DEC out of
business
Next disruptive
innovation: 3G
and 4G mobile
phones?
The Innovators Solution
3-53
Christensen outlines a processdisruptive growth

enginethat helps organizations respond to
disruptive innovations more effectively
1. Start early
2. Executive leadership
3. Build a team of expert innovators
4. Educate the organization
Implementing the Innovation Process
3-54
E-Business
Innovation
Cycle
The key to
success is the
extent of IS use
in timely and
innovative
ways
Based on: Wheeler (2002)
E-Business Innovation Cycle
3-55
Choosing Enabling/Emerging Technologies
Process/ group
devoted to
looking for
emerging IT
E-Business Innovation Cycle (contd)
3-56
Matching Technologies to Opportunities
Most promising
new technology
matched with
current
economic
opportunities
3-57
Executing Business Innovation for Growth
Stage at which
the change is
actually
implemented
3-58
Assessing Value
Value created
for customers
and internal
operations
assessed
Three Ways to Think About Investments in
Disruptive Innovations
3-59
Put technology ahead of strategy

Technology is so important to success it needs to be
considered first.
Strategy is developed afterwards.
Put technology ahead of marketing

Rapid development of technology makes it impossible
for people to know what they want.
Innovation is continuous
New technologies are constantly being developed.
Learning Objectives
3-60
Freeconomics
3-61
FreeconomicsThe leveraging of digital

technologies to provide free goods and services to
customers as a business strategy for gaining
competitive advantage
How Does Freeconomics Work (for Yahoo!)
3-62
Price is set by a
product/services
marginal costs
Marginal costs for
digital services
decrease
tremendously
Yahoo! Makes
millions with free
e-mail service (by
placing ads)
The Freeconomic Value Proposition
3-63
Someone, somewhere is paying for a services

Value proposition includes more than just buyers
and sellers
Advertisers (see Google)
Approaches for Applying Freeconomics
3-64
Advertising
Freemium
Cross-Subsidies
Zero Marginal Cost
Labor Exchange
Gift Economy
End of Chapter Content
3-65
Opening Case: Managing in the Digital World: TiVo
3-66
Need to stay ahead of

competition:
Then:
Automatic recording
Scheduling using the Web
Pausing a show
Searching by actors or type of
show
Now:
Receive RSS feeds
Watch YouTube videos on TV
Program TiVo from cell phone
The IT Department Often Knows
3-67
Imagine you are in the IT department of a large

company, and discover that a senior executive has
visited pornographic sites.
How do you deal with this?
Strategies to grapple with ethical decisions
IT equipment and data use policy
Whistle-blower provision
Report violations, then let company handle it
IT professionals should develop Code of Ethics
Rootkits: Sonys Secret
3-68
Sony BMG Music Entertainment was using

rootkit to copyright protect CDs
Rootkit was installed on users hard drives without their
knowledge
Left computers vulnerable to malicious Rootkit was
discontinued and uninstall instructions were given to
affected customers
Sony paid $1.5 million in penalties
2007: Rootkit in thumbdrives
Sony argued they didnt know
Which side of the debate could you argue?
Microsofts Bill Gates and Paul Allen
3-69
Both dropped out of college

to run Microsoft in 1975
Partnership with IBM to
install MS-DOS on all PCs set
the stage
Gates worth$58 Billion
Allens worth$16.8 Billion
Who Is Sharing Files?
3-70
Active consumers
Accustomed to on-demand lifestyle
Informed about current events

Internet is primary source
Conversations focused on tech gadgets, car

accessories, home theater setups
Many were Mac users
Gamers
Frustrated with music and entertainment
industries for punishing them
For Sale by Owner: Your Companys
Name.com
3-71
Domainersbuy and sell domain names

2006$9 billion business
2009projected to be worth $23 billion
Ad space renting
Domainer registers URL such as Amazon.com
Webpage with advertisements is displayed
Search engine owner pays money to the domainer for
each click on an ad
What Were You Thinking? Brain Sensor
Research for Market Research
3-72
What did you feel when you watched that Super Bowl
commercial?
EmSense
EEG sensor headset
Data on EEG, monitors breathing and heart rate, head motion,
blink rate, and skin temperature
Algorithms translate physiological data from the sensors into
information about emotions that marketers can use
Game designers can tell when players are bored
However: Scientists argue that EEG is not as reliable as
MRI
Photo Industry
3-73
In only four years (2002-2006) photography

moved from film to digital
Canon, Konica Minolta no longer make film models
Nikon makes two film models:
One for professional photographers
One for beginners
Business models changed rapidly
Digital technology was a disruptive innovation for the
photo industry

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Chapter

3 Valuing Information Systems

The most important discoveries

Sir John Maddox, 1999

Information systems can be used in three

Loan processing comparison for 3 methods

Fully automated process1 hour to 15 days

Offer best prices

Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic

Offer best prices

Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic

Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic

1. Best-made product on the market

How do you identify opportunities to use

Porters Value Chain

Tool used by managers to identify opportunities

Information systems use in adding value:

Identification of benefits that the proposed

Easy to identify costs with developing an IS

Information systems may be used

Example: Procter &

Arguments based on:

Contrasts total expected tangible costs with total

Method used for deciding between alternative

Persuade decision makers in the firm

Convert benefits to monetary terms

Devise proxy variables

Measure what is important to management

Present holistic view

View IS as asset rather than necessary expense

Which new technology will make or break your

Innovation is often fleeting

Innovation choices are often difficult

Process requirementsthe organization has to

Deciding which innovations to adopt is very

Christensen outlines a processdisruptive growth

Choosing Enabling/Emerging Technologies

Based on: Wheeler (2002)

Matching Technologies to Opportunities

Executing Business Innovation for Growth

Based on: Wheeler (2002)

Based on: Wheeler (2002)

Put technology ahead of strategy

Put technology ahead of marketing

FreeconomicsThe leveraging of digital

Someone, somewhere is paying for a services

Need to stay ahead of

Imagine you are in the IT department of a large

Sony BMG Music Entertainment was using

Both dropped out of college

Informed about current events

Conversations focused on tech gadgets, car

Domainersbuy and sell domain names

In only four years (2002-2006) photography

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