Electronic Commerce
Eighth Edition
Chapter 12
Planning 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
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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
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Identifying Objectives
• Typical business electronic commerce objectives
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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
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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
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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
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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
– 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Managing Costs (cont’d.)
• Web site costs: based on International Data
Corporation and Gartner, Inc. surveys
– Estimated cost to build, implement adequate entrylevel 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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 longrun benefits
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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
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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
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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
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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
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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 the Internet and its
technologies
• Creative thinkers
• Distinguished within the company
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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
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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
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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
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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 for improvements as early as possible
in project life
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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
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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
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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
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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
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Selecting a Hosting Service (cont’d.)
• Important factors when selecting hosting service
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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
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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
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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
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New Methods for Implementing Partial
Outsourcing (cont’d.)
• 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
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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, 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
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New Methods for Implementing Partial
Outsourcing (cont’d.)
• 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
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Managing Electronic Commerce
Implementations
• Best way to manage complex electronic commerce
implementation
– Use formal management techniques
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Project management
Project portfolio management
Specific staffing
Postimplementation audits
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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
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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
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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
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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
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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
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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
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Staffing for Electronic Commerce
(cont’d.)
• 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
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Staffing for Electronic Commerce
(cont’d.)
• 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
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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
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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
• How well project administered
• Appropriate project organizational structure in place
• Specific project team(s) performance
– Should compare actual results to objectives
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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 value
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