Electronic Commerce

Tenth Edition

Chapter 12
Planning for Electronic Commerce
 Learning Objectives

In this chapter, you will learn:

• How to identify benefits and estimate costs of
electronic commerce initiatives
• How online business startups are evaluated and
financed
• When and how to outsource online business
initiative development
• How to manage and staff electronic commerce
implementations

Electronic Commerce, Tenth Edition 2

Identifying Benefits and Estimating Costs
of Electronic Commerce Initiatives
• Information technology projects
– Keys to successful implementation
• Planning and execution
• Successful electronic commerce initiative business
plan 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, Tenth Edition 3

 Identifying Objectives

• Typical business electronic commerce objectives

– Increasing existing markets’ 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
• Compare e-commerce risk to inaction risk

Electronic Commerce, Tenth Edition 4

 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 providers
• Web use for businesses
– Attractive sales channel for many firms
– Complement business strategies, improve
competitive positions

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 Linking Objectives to Business
Strategies (cont’d.)
• Electronic commerce activities difficult to measure
• First-wave e-commerce activities
– Existed without setting specific, measurable goals
– Plenty of investors for highly speculative activities
– Successes and failures measured in broad strokes
• Second-wave e-commerce activities
– Businesses took closer look at benefits and costs
– Good implementation plan
• Sets specific objectives for benefits achieved and costs
incurred

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 Linking Objectives to Business
Strategies (cont’d.)
• Third-wave e-commerce activities
– Impacted by smart phones’ and tablet devices’
pervasiveness
• Web access in many more locations
• Changed nature of online communication
– Technology benefits more easily acquired
• Example: Social media tools
– Smaller businesses’ electronic commerce activities
increase anticipated

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 Identifying and Estimating Costs
(cont’d.)
• Total cost of ownership (TCO)
– Includes all costs related to activity
• Electronic commerce implementation TCO includes:
– Hardware costs, software costs, outsourced design
work, employee salaries and benefits, site
maintenance
• Good TCO number
– Includes assumptions about how often site would
need to be redesigned in the future

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 Identifying and Estimating Costs
(cont’d.)
• Opportunity cost
– Cost of not undertaking an initiative
– Largest and most significant costs associated with
electronic commerce initiative
– Foregone benefits that company could have obtained
from electronic commerce initiative not pursued
– Examples: customers never obtained; sales not
made; suppliers not identified; and cost reductions not
achieved in company’s supply chain

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 Identifying and Estimating Costs
(cont’d.)
• Web site costs
– Total dollar amounts required to create and operate a
Web site
• Varied over the years
– Relative proportion of costs remained stable
• 10 percent: computer hardware
• 10 percent: software
• 80 percent: labor
– Annual cost of operating an online business Web site
• Remained stable
• Ranges between 50 and 200 percent of site initial cost
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 Identifying and Estimating Costs
(cont’d.)
– Small online store
• Placed into operations for less than $5000
– Small to midsize online business operation
• With full transaction and payment processing
capabilities
• Initial investment: between $50,000 and $1 million
• Average $80,000

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 © Cengage Learning 2013
FIGURE 12-2 Estimated costs for business Web sites

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 Identifying and Estimating Costs
(cont’d.)
• Web site costs (cont’d.)
– Costs generally heading downward
• Due to lower costs for broadband access and computer
hardware
• Development and maintenance costs decreasing
– Comparison of Netscape with more recent startup
companies
• Netscape (early 1990s): more than $40 million
• Digg (2004): less than $500,000
– Important element of annual Web site operating cost
• Choice of Web hosting service provider
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FIGURE 12-3 Important Web hosting service features

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 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

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 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

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 Funding Online Business Startups
(cont’d.)
• System of financing startup and initial growth of
online businesses
– Benefits
• Access to large amounts of capital early
– Costs
• Investors
• Most profits go to venture capitalists and angel
investors
• Pressure to grow rapidly

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 Funding Online Business Startups
(cont’d.)
• Decrease need for venture capitalists and angel
investors by:
– Relieving pressure to grow rapidly
– Becoming more creative
– Learning from mistakes
• Trending toward more and smaller online ventures
– Online business creation costs falling

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 Comparing Benefits to Costs

• Capital projects (capital investments)

– Major investments in equipment, personnel, other
assets
– Techniques to evaluate proposed capital projects
• Range from simple calculations to complex computer
simulation models
• Reduce to comparison of benefits and costs

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 © Cengage Learning 2013
FIGURE 12-4 Cost/benefit evaluation of electronic commerce strategy elements

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 Return on Investment (ROI)

• Return on investment (ROI) techniques

– Measures amount of income (return) provided by
specific current expenditure (investment)
– Examples:
• Payback method, net present value method, and
internal rate of return
– Provides quantitative expression of comfortable
benefit-to-cost margin
– Mathematically adjusts for future reduced value of
benefits

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 Return on Investment (ROI) (cont’d.)

• Electronic commerce initiatives

– Seen as absolutely necessary investments
– Not always subjected to close examination, rigid
requirements
– Companies fear being left behind
• Perceived value in new market early positioning
allows:
– Many companies to invest large amounts of money
• With few near-term profit prospects
– Example: first wave of newspaper Web sites

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 Return on Investment (ROI) (cont’d.)

• Electronic commerce second wave of Web-related

expenditures
– Being reviewed for ROI
• ROI built-in biases
– ROI requires that all costs and benefits be stated in
dollars
• Gives undue weight to costs
– ROI focuses on predicted benefits
• Initiatives have returned benefits not foreseen

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 Return on Investment (ROI) (cont’d.)

– ROI tends to emphasize short-run benefits over long-

run benefits
– More information
• CIO Budget site
• ROI Knowledge Center Web pages
• Third wave electronic commerce
– Highly sophisticated analyses of planned online
business activities

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 Strategies for Developing Electronic
Commerce Web Sites

© Cengage Learning 2013

FIGURE 12-5 Evolution of Web site functions

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 Internal Development vs. Outsourcing
(cont’d.)
• Few companies launch an electronic commerce
project without some external help
• Key to success
– Finding balance between outside and inside support
• Outsourcing
– Hiring another company to provide outside support for
all or part of project

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

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 Internal Development vs. Outsourcing
(cont’d.)
– Project lead
• Mistake: technical wizard; not knowledgeable about
business; 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 monetary
• Express in terms appropriate to initiative objectives

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 Internal Development vs. Outsourcing
(cont’d.)
– Intellectual capital
• Employees’ knowledge about the business and its
processes
• Ignored in the past
• Value recognized today
– Human capital measures
• Include employee competencies
• Include value of customer loyalty and business
partnerships

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 Internal Development vs. Outsourcing
(cont’d.)
– Responsible for initiative
• From setting objectives to final implementation
– Internal team decides:
• Project parts to outsource
• Outsourcer
• Consultants or partners needed

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 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 as early as possible in project life
• Late outsourcing
– More traditional approach
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 Internal Development vs. Outsourcing
(cont’d.)
• Partial outsourcing (component outsourcing)
– Company identifies specific project portions
• Portion can be completely designed, developed,
implemented, and operated by another firm
• Examples
– Smaller Web sites outsource e-mail handling and
response functions
– Electronic payment system

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 Internal Development vs. Outsourcing
(cont’d.)
– 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

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

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 New Methods for Implementing Partial
Outsourcing (cont’d.)
– Company-created internal incubators
• Develop technologies for use in main business
operations
• Unsuccessful and shut down
– Matsushita Electric’s U.S. Panasonic division
• Started internal incubators to help launch new
companies to become strategic partners
• Incubator development team become managers of new
company
– Strategic partner incubators: more successful

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 New Methods for Implementing Partial
Outsourcing (cont’d.)
• 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 or venture capitalists
• Equity partners sometimes offer money
• Equity partners more likely to offer experience

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 © Cengage Learning 2013
FIGURE 12-6 Elements of fast venturing

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 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

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 Project Management

• Project management
– Collection of formal techniques for planning and
controlling activities undertaken to achieve specific
goal
– Developed by U.S. military and defense contractors
– Project plan criteria
• Cost, schedule, and performance
– Helps management make trade-off decisions
involving the three criteria

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 Project Management (cont’d.)
• Project management software
– Specific application software to help project managers
oversee projects
• Internal team personnel and tasks
– Examples:
• Oracle Primavera, Microsoft Project
• Open Workbench, OpenProj, Redmine: open-source
project management software packages with many of
the same features as the leading commercial products
– Also helps manage tasks assigned to consultants,
technology partners, and outsourced service
providers
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 Project Management (cont’d.)

• Examining costs and completion times

– Learn about project progression
– Revise future estimated costs and completion times
• Risks of information systems’ development projects
– Running out of control, ultimately failing
– Causes: rapidly changing technologies, long
development times, and changing customer
expectations
• Teams rely on project management software
– Helps achieve project goals

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 Project Portfolio Management

• Used by chief information officer (CIO)

– Top technology manager
• Project portfolio management
– Technique whereby CIO monitors project like an
investment in a financial portfolio
• Allows tradeoffs between cost, schedule, and quality
across projects as well as within individual projects
• Provides more flexibility in allocating resources to
achieve the best set of benefits from all projects in the
most timely manner

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 Project Portfolio Management (cont’d.)

• Project management software

– Designed to handle individual projects
– Not suited for consolidating activities
• CIO assigns ranking for each project based on:
– Importance to the strategic goals of the business
– Level of risk (probability of failure)
• CIO uses any methods financial managers use to
evaluate risk of making investments in business
assets

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 Staffing for Electronic Commerce

• Chief information officer (CIO)

– Responsibilities
• Overseeing all information systems and related
technological elements required to undertake and
operate online business activities
• Business manager
– Member of internal team setting project objectives
– Responsible for implementing business plan elements
and reaching objectives set by internal team

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 Staffing for Electronic Commerce
(cont’d.)
• Project manager
– Person with specific training, skills in tracking costs
and accomplishment of specific project objectives
• Project portfolio manager
– Usually promoted from the ranks of the project
managers
– Responsible for tracking all ongoing projects and
managing them as a portfolio
• Account manager
– Keeps track of multiple Web sites in use or keeps
track of projects combining into larger Web site

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 Staffing for Electronic Commerce
(cont’d.)
• Applications specialists
– Maintain accounting, human resources, logistics
software, electronic commerce site software
• Web programmers
– Design and write underlying code for dynamic
database-driven Web pages
• Web graphics designer
– Trained in art, layout, and composition
– Understands how Web pages are constructed

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 Staffing for Electronic Commerce
(cont’d.)
• Content creators
– Write original content
• Content managers or content editors
– Purchase existing material and adapt it for use on the
site
• Social networking administrator
– Responsible for managing virtual community
elements of the Web operation

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 Staffing for Electronic Commerce
(cont’d.)
• Online marketing manager
– Specializes in specific techniques used to build
brands and increase market share
• Uses Web site and other online tools: e-mail marketing
• Customer service personnel
– Design and implement customer relationship
management activities in electronic commerce
operation

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 Staffing for Electronic Commerce
(cont’d.)
• 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 and secure
operation

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 Staffing for Electronic Commerce
(cont’d.)
• Network operations staff functions include:
– Load estimation and load monitoring
– Resolving network problems as they arise
– Designing and implementing fault-resistant
technologies
– Managing any network operations outsourced to
service providers or telephone companies

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 Staffing for Electronic Commerce
(cont’d.)
• Database administration function support activities
include:
– Transaction processing, order entry, inquiry
management, shipment logistics
– Activity requirements:
• Existing database into which site being integrated
• Separate database established for electronic
commerce initiative

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 Postimplementation Audits
• Postimplementation audit (postaudit review)
– 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,
and scheduled delivery dates
• Blame identification approach
– Used more in the past
– Focused on identifying individuals to blame for cost
overruns and missed delivery dates

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 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
• Administration of project
• Appropriate project organizational structure in place
• Specific project team(s) performance
– Should compare actual results to objectives

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 Change Management

• Information system projects involve change

• Employee concerns
– Ability to cope with changes, ability to continue to do
good work, and 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

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 Summary

• Key elements of e-commerce business plans

– Setting objectives in measurable terms
• Derived from initiative’s overall goals
• Include planned benefits and planned costs
– Evaluate cost-benefit
• ROI evaluation technique
– Determine outsourcing strategy, staffing
– Learn from project experiences
• Postimplementation audit

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