CLASSROOM OPENER GREAT BUSINESS DECISIONS – Henry Luce Decides to Rank Companies in the Fortune 500 Henry Luce founded Time magazine in 1923 and Fortune magazine in 1929. Luce decided to create a ranking of America’s top 500 companies, called The Fortune 500, which has served as the corporate benchmark for the twentieth century – as well as being a clever marketing tactic for the magazine. The Fortune 500 remains a powerful barometer of who’s up and down in the corporate world. It is also a brilliant marketing tool since every single time its name is mentioned, so is the name of the magazine. However, being ranked on the Fortune 500 does not guarantee that the organization will achieve future success, and its measures of current achievement can also be limited and a bit confusing. BusinessWeek magazine created a similar ranking by introducing its biannual ranking of business schools. The issue routinely outsells all other issues of the magazine in the year.
4.1 Compare efficiency IT metrics and effectiveness IT metrics Efficiency implies doing things right and effectiveness implies doing the right things. Efficiency IT metrics focus on technology and include throughput, which is the amount of information that can travel through a system at any point in time. Efficiency metrics include speed, availability, accuracy, Web traffic, and response time. Effectiveness IT metrics focus on an organization’s goals, strategies, and objectives and include usability, customer satisfaction, conversion rates, and financial metrics. Ideally, an organization wants to operate with significant increases in both efficiency and effectiveness. 4.2 List and describe five common types of efficiency IT metrics Efficiency IT metrics include: Throughput - the amount of information that can travel through a system at any point in time Speed – the amount of time to perform a transaction Availability - the number of hours a system is available Accuracy - the extent to which a system generates correct results Web traffic - includes number of pageviews, number of unique visitors, and time spent on a Web page Response time – time to respond to user interactions
4.3 List and describe four types of effectiveness IT metrics Effectiveness IT metrics include: Usability - the ease with which people perform transactions and/or find information Customer satisfaction - such as the percentage of existing customers retained Conversion rates - the number of customers an organization “touches” for the first time and convinces to purchase products or services Financial metrics - such as return on investment, cost-benefit analysis, etc. 4.4 Explain customer metrics and their importance to an organization Customer metrics assess the management of customer relationships by the organization. These effectiveness metrics typically focus on a set of core measurements including market share, customer acquisition, customer satisfaction, and customer profitability
How would you define success in relation to an IT system? Is it more important to have IT professionals or business professional define success for an IT system? What happens if only one group defines success? IT professionals know how to install and maintain information systems. Business professionals know how to run a successful business. But how does a company decide if an information system helps make a business successful?
Efficiency focuses on the extent to which an organization is using its resources in an optimal way, “Doing things right” Effectiveness focuses on how well an organization is achieving its goals and objectives, “Doing the right things” It is important that your students understand the differences between efficiency and effectiveness if you are going to cover the Business Plug-In for Supply Chain Management. This plug-in deals with efficient vs. effective supply chains.
How would you determine if the system was performing faster or slower than expected if there were not any benchmarks? They could not, it would impossible to determine
What types of things might e-government efficiency and effectiveness measure? E-government efficiency metrics includes the number of computers per 100 citizens, the number of Internet hosts per 10,000 citizens, the percentage of the citizen population online The United States ranks first in terms of e-government efficiency E-government effectiveness metrics include CRM practices, customer-service vision, approaches to offering e-government services through multiple-service delivery channels, and initiatives for identifying services for individual citizen segments Canada ranks number one in terms of e-government satisfaction of its citizens Governments wanting to increase efficiency and effectiveness would benchmark themselves against these sorts of metrics
Efficiency metrics monitor technology Efficiency metrics are easier to measure and monitor than effectiveness metrics Throughput - the amount of information that can travel through a system at any point Transaction speed - the amount of time a system takes to perform a transaction System availability - the number of hours a system is available for users Information accuracy - the extent to which a system generates the correct results when executing the same transaction numerous times Web traffic - includes a host of benchmarks such as the number of page views, the number of unique visitors, and the average time spent viewing a Web page Response time - the time it takes to respond to user interactions such as a mouse click
Effectiveness metrics are more difficult to measure and monitor, for example, how do you measure customer satisfaction? Which metrics are more important to a company like eBay – efficiency or effectiveness? Both - eBay continuously measures both efficiency and effectiveness The company must ensure constant availability and reliability of its systems Usability - The ease with which people perform transactions and/or find information. A popular usability metric on the Internet is degrees of freedom, which measures the number of clicks required to find desired information. Customer satisfaction - Measured by such benchmarks as satisfaction surveys, percentage of existing customers retained, and increases in revenue dollars per customer. Conversion rates - The number of customers an organization “touches” for the first time and persuades to purchase its products or services. This is a popular metric for evaluating the effectiveness of banner, pop-up, and pop-under ads on the Internet. Financial - Such as return on investment (the earning power of an organization’s assets), cost-benefit analysis (the comparison of projected revenues and costs including development, maintenance, fixed, and variable), and break-even analysis (the point at which constant revenues equal ongoing costs).
Purely from an efficiency IT metric point of view, security generates some inefficiencies From an organization’s business strategy point of view, security should lead to increases in effectiveness CLASSROOM EXERCISE Measuring Efficiency and Effectiveness Break your students into groups and ask them to create a plan to measure the efficiency and effectiveness of this course and recommendations on how they would improve the course to make it more efficient and more effective. Student answers to this exercise will vary. They will need to determine ways to benchmark current efficiency and effectiveness and ways to continuously monitor and measure against the benchmarks to determine if the course is becoming more or less efficient and effective (class quizzes and exams are the most obvious benchmarks). Ask your students to present their plan and recommendations to the entire class. Be sure students’ plans and recommendations address the following: Design of the classroom Room temperature Lighting and electronic capabilities of the classroom Technology available in the classroom Length of class E-mail and instant messaging Students’ attendance Students’ preparation Students’ arrival time Quizzes and exams (frequency, length, grades)
Ideally, an organization should operate in the upper right-hand corner Operating in the upper left-hand corner or the lower right-hand corner may be in line with an organization's particular strategies No organization would want to operate in the lower left-hand corner
Reviewing the metrics for measuring strategic system initiatives will help your students understand why these critical business systems are important to a running a business. Understanding inventory turnover, customer turnover, and sales opportunities and that these are all measured and managed by IT systems will help them understand why they need this course and need these systems to run their businesses. Ask your students how these strategic initiatives were maintained, managed, and measured prior to IT systems?
Abandoned registrations: Number of visitors who start the process of completing a registration page and then abandon the activity. Abandoned shopping carts: Number of visitors who create a shopping cart and start shopping and then abandon the activity before paying for the merchandise. Click-through: Count of the number of people who visit a site, click on an ad, and are taken to the site of the advertiser. Conversion rate: Percentage of potential customers who visit a site and actually buy something. Cost-per-thousand (CPM): Sales dollars generated per dollar of advertising. This is commonly used to make the case for spending money to appear on a search engine. Page exposures: Average number of page exposures to an individual visitor. Total hits: Number of visits to a Web site, many of which may be by the same visitor. Unique visitors: Number of unique visitors to a site in a given time. This is commonly used by Nielsen/Net ratings to rank the most popular Web sites.
Supply Chain Management Metrics Back order: An unfilled customer order. A back order is demand (immediate or past due) against an item whose current stock level is insufficient to satisfy demand. Customer order promised cycle time: The anticipated or agreed upon cycle time of a purchase order. It is a gap between the purchase order creation date and the requested delivery date. Customer order actual cycle time: The average time it takes to actually fill a customer’s purchase order. This measure can be viewed on an order or an order line level. Inventory replenishment cycle time: Measure of the manufacturing cycle time plus the time included to deploy the product to the appropriate distribution center. Inventory turns (inventory turnover): The number of times that a company’s inventory cycles or turns over per year. It is one of the most commonly used supply chain metrics.
Sales Metrics Number of prospective customers Number of new customers Number of retained customers Number of open leads Number of sales calls Number of sales call per lead Amount of new revenue Amount of recurring revenue Number of proposals given Service Metrics Cases closed same day Number of cases handled by agent Number of service calls Average number of service requests by type Average time to resolution Average number of service calls per day Percentage compliance with service-level agreement Percentage of service renewals Customer satisfaction level Marketing Metrics Number of marketing campaigns New customer retention rates Number of responses by marketing campaign Number of purchases by marketing campaign Revenue generated by marketing campaign Cost per interaction by marketing campaign Number of new customers acquired by marketing campaign Customer retention rate Number of new leads by product Ask your students if they can think of any additional sales, service, or marketing metrics not mentioned in the text
The balanced scorecard is a management system, (in addition to a measurement system) , that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise The balanced scorecard views the organization from four perspectives, and users should develop metrics, collect data, and analyze their business relative to each of these perspectives: The learning and growth perspective. The internal business process perspective. The customer perspective. The financial perspective
1. Formulate a strategy describing how Apple can use efficiency IT metrics to improve its business Apple can use efficiency IT metrics to focus on its current technology. Apple could benchmark its existing applications to create baselines. It could then continuously monitor and measure against these benchmarks to ensure its IT applications are functioning correctly. This would be particularly important in the area of its Web applications (such as iTunes) that customers and suppliers are using. 2. Formulate a strategy describing how Apple can use effectiveness IT metrics to improve its business Apple could use effectiveness IT metrics to determine if its customers, suppliers, and even employees are satisfied with the applications. It could determine if the application is easy to use and if first-time customers are converting due to a banner ad or a pop-up ad. These would be particularly useful for the iTunes Web site.
3. List three CRM metrics Apple should track, along with the reasons these metrics will add value to Apple’s business strategy. Apple could track any number of metrics including CRM sales metrics, CRM service metrics, to CRM marketing metrics. These could include: Number of prospective customers Number of new customers Amount of new revenue Cases closed same day Average time to resolution Percentage compliance with service-level agreement New customer retention rates Number of purchases by marketing campaign 4. List three SCM metrics Apple should track, along with the reasons these metrics will add value to Apple’s business strategy. SCM metrics could include back order, customer order promised cycle time, customer order actual cycle time, inventory replenishment cycle time, and inventory turns (inventory turnover). All of these metrics will add value to Apple by giving them insight into current production and order fulfillment issues. 5. How can Apply use the balanced scorecard to make its business more efficient? The balanced scorecard can provide tremendous value to Apple by helping the company to monitor the success of enterprise wide initiatives such as business process reengineering and enterprise resource planning. The balanced scorecard can help Apple clarify its vision and strategy and translate them into action. It can provide feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.
Additional Case Material It is worthwhile to compare Friendster and eBay. Why? Because both by a not-very-painful stretch of the imagination are in the “social software” business, both rely on the economics of large user bases, and at some point Friendster will need to capitalize on the connections between its users as eBay does. Friendster - close to $0 revenue, $53,000,000 market cap, 1,500,000 registered users, close to $0 revenue per registered user, $35.33 market value per registered user eBay - $2.1 billion expected revenue in 2003, $36.1 billion market cap, 85.5 million registered users, $24.56 revenue per registered user, $422.46 market value per registered user
1. How could you use efficiency IT metrics to help place a value on Friendster? Efficiency IT metrics can focus on Friendster’s current technology. You could benchmark Friendster’s existing applications to create baselines. You could then continuously monitor and measure against these benchmarks to ensure that Friendster’s applications are functioning correctly. This would be particularly important in the area of its Web interface that its customers are using. 2. How could you use effectiveness IT metrics to help place a value on Friendster? You could use effectiveness IT metrics to determine if Friendster’s customers, suppliers, and even employees are satisfied with the application. You could determine if the application is easy to use, are first-time customers converting due to a banner ad or pop-up ad, and in general are customers satisfied with the Friendster experience. 3. Explain how a venture capital company can value Friendster at $53 million when the company has yet to generate any revenue. Since the company has yet to generate a dime in revenue, it is impossible to determine how the VC company estimated Friendster at $53 million. Be sure to ask your students if they would invest in a company that has yet to earn any revenues.
4. Explain why Google would be interested in buying Friendster for $30 million when the company has yet to generate any revenue. Again, since the company has yet to generate a dime in revenue, it is impossible to determine how Google has estimated the value of Friendster at $30 million. 5. Google purchased YouTube for $1.65 billion. Do you think it was a smart investment? Why or why not? Student answers to this question will vary. Purchasing a company that doesn’t produce any revenue for $1.65 billion goes against all business rules. However, the advertising and marketing advantages that could be gained from YouTube (just like Google’s Ad Words) makes it a potential gold mine. For an interesting classroom debate break your students into groups and ask them to debate this issue.
Learning Outcomes4.1 Compare efficiency IT metrics and effectiveness IT metrics4.2 List and describe five common types of efficiency IT metrics 4-2
Learning Outcomes4.3 List and describe four types of effectiveness IT metrics4.4 Explain customer metrics and their importance to an organization 4-3
Measuring Information Technology’s Success• Key performance indicator – measures that are tied to business drivers• Metrics are detailed measures that feed KPIs• Performance metrics fall into the nebulous area of business intelligence that is neither technology, nor business centered, but requires input from both IT and business professionals 4-4
Efficiency and Effectiveness• Efficiency IT metric – measures the performance of the IT system itself including throughput, speed, and availability• Effectiveness IT metric – measures the impact IT has on business processes and activities including customer satisfaction, conversion rates, and sell-through increases 4-5
Benchmarking – Baselining Metrics• Regardless of what is measured, how it is measured, and whether it is for the sake of efficiency or effectiveness, there must be benchmarks – baseline values the system seeks to attain• Benchmarking – a process of continuously measuring system results, comparing those results to optimal system performance (benchmark values), and identifying steps and procedures to improve system performance 4-6
The Interrelationships of Efficiency and Effectiveness IT Metrics • Efficiency IT metrics focus on technology and include: – Throughput – Transaction speed – System availability – Information accuracy – Web traffic – Response time 4-8
The Interrelationships of Efficiency and Effectiveness IT Metrics • Effectiveness IT metrics focus on an organization’s goals, strategies, and objectives and include: – Usability – Customer satisfaction – Conversion rates – Financial 4-9
The Interrelationships of Efficiency and Effectiveness IT Metrics • Security is an issue for any organization offering products or services over the Internet • It is inefficient for an organization to implement Internet security, since it slows down processing – However, to be effective it must implement Internet security – Secure Internet connections must offer encryption and Secure Sockets Layers (SSL denoted by the lock symbol in the lower right corner of a browser) 4-10
The Interrelationships of Efficiency and Effectiveness IT Metrics• Interrelationships between efficiency and effectiveness 4-11
Metrics for Strategic Initiatives• Metrics for measuring and managing strategic initiatives include: – Web site metrics – Supply chain management (SCM) metrics – Customer relationship management (CRM) metrics – Business process reengineering (BPR) metrics – Enterprise resource planning (ERP) metrics 4-12
WEB SITE METRICS• Web site metrics include: – Abandoned registrations – Abandoned shopping cards – Click-through – Conversion rate – Cost-per-thousand – Page exposures – Total hits – Unique visitors 4-13
SUPPLY CHAIN MANAGEMENT METRICS • Back order • Customer order promised cycle time • Customer order actual cycle time • Inventory replenishment cycle time • Inventory turns (inventory turnover) 4-14
CUSTOMER RELATIONSHIP MANAGEMENT METRICS• Customer relationship management metrics measure user satisfaction and interaction and include – Sales metrics – Service metrics – Marketing metrics 4-15
BPR AND ERP METRICS• The balanced scorecard enables organizations to measure and manage strategic initiatives 4-16
OPENING CASE STUDY QUESTIONSApple – Merging Technology, Business, and Entertainment 1. Formulate a strategy describing how Apple can use efficiency IT metrics to improve its business 2. Formulate a strategy describing how Apple can use effectiveness IT metrics to improve its business 4-17
OPENING CASE STUDY QUESTIONSApple – Merging Technology, Business, and Entertainment 3. List three CRM metrics Apple should track, along with the reasons these metrics will add value to Apple’s business strategy 4. List three SCM metrics Apple should track, along with the reasons these metrics will add value to Apple’s business strategy 5. How can Apply use the balanced scorecard to make its business more efficient? 4-18
CHAPTER FOUR CASE How Do You Value Friendster?• Friendster specializes in social networking• Friendster received over $13 million in VC capital• Google recently offered to buy Friendster for $30 million• A venture capital company recently valued Friendster at $53 million• Friendster has yet to generate any revenue 4-19
Chapter Four Case Questions1. How could you use efficiency IT metrics to help place a value on Friendster?2. How could you use effectiveness IT metrics to help place a value on Friendster?3. Explain how a venture capital company can value Friendster at $53 million when the company has yet to generate any revenue 4-20
Chapter Four Case Questions4. Explain why Google would be interested in buying Friendster for $30 million when the company has yet to generate any revenue5. Google purchased YouTube for $1.65 billion. Do you think it was a smart investment? Why or why not? 4-21