Implementing E-Business Initiatives

MIS205
LECTURE 22 12-APR-17
Learning Outline
Identifying Benefits & Estimating Costs of Electronic Commerce Initiatives
❖ Identifying and Estimating Costs
❖ Funding Online Business Start-ups
❖ Comparing Benefits to Costs
❖ Return on Investment (ROI)

Reading: (Chapter 12 – Schneider)

Identifying and Estimating Costs
Information technology project costs
▪Difficult to estimate and control
Web development
▪Uses rapidly changing hardware and software technologies
◦ Hardware costs are downward
▪Increasing software sophistications
◦ Provides ever-increasing demand for more newer, cheaper hardware
◦ Yields net increase in overall hardware costs
 Identifying and Estimating Costs
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
Identifying and Estimating Costs
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: Customer never obtained, sales not made, suppliers not
identified, cost reduction not achieved
Identifying and Estimating Costs
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
Identifying and Estimating Costs
Web site 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
FIGURE 12-2 Estimated costs for business Web sites
Identifying and Estimating Costs
Web site costs (cont’d.)
◦ Costs generally heading downward
◦ Due to lower costs for broadband access and computer hardware
◦ 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
FIGURE 12-3 Important Web hosting service features
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
◦ Become the stockholders in the business
◦ Often own more of the business than the founder
◦ Typical funding range: $100,000 – Few million dollars
Funding Online Business Startups
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
Funding Online Business Startups
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
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
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

Key parts of creating electronic commerce initiatives business plan

◦ Identify potential benefits
◦ Identify costs required to generate benefits
◦ Evaluate whether benefits exceed costs
FIGURE 12-4 Cost/benefit evaluation of electronic commerce
strategy elements
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, internal rate of return
◦ Provides quantitative expression of comfortable benefit-to-cost margin
◦ Mathematically adjusts for future reduced value of benefits
Return on Investment (ROI)
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
Return on Investment (ROI)
Electronic commerce second wave of Web-related expenditures
◦ Being reviewed for ROI
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
◦ ROI tends to emphasize short-run benefits over long-run benefits
Next Class
▪Review of Final