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Consider Uncertainty and Implementation in Evaluating Market Information Systems

Elliot Maltz and Rajendra K. Srivastava, 1994 [94-113]

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A New Method for Evaluating Information Technology
Increasingly, businesses are recognizing that to respond effectively to a fast-changing marketplace they must involve multiple functions in strategy development and implementation. In addition, both the popular press and academic journals suggest that in order to survive, companies will also have to emphasize a core competency (e.g., manufacturing) and develop alliances with firms having other core competencies (e.g., marketing). Thus information will have to travel efficiently and effectively across both functional and organizational boundaries, making essential the ability to develop, implement, and measure the effectiveness of the information systems that span these boundaries.

This report describes a methodology for quantifying the value of interorganizational information systems. An important benefit of our approach is that it addresses the critical issue of implementation effectiveness. It may be used to:

1. Identify the conditions under which interorganizational information systems are most likely to provide significant value to participating firms.

2. Identify the potential and realized values of the system. By comparing these two values, users can determine the amount of value lost due to flawed implementation of the system.

3. Identify which organization(s) in an interorganizational system are having implementation problems.

4. Suggest additional firm-level investments needed to increase the realized value of the system.

Assessing Potential and Realized Value: A Case Example
To show how our methodology works, we first describe its five steps and then evaluate an interorganizational system used by a retailer for adjusting merchandise stock levels weekly based on actual sales. We identified 19 products sold by the retailer and used preseason expectations of sales without the information system as a baseline for productivity. With the system in place, we then tracked the performance of the 19 products weekly and compared preseason expectations with actual sales to assess realized productivity gains. At the same time, we developed a computer model to mimic optimal use of the information provided by the system. By comparing the model with preseason expectations, we were able to assess the system's potential value.

Key Findings

• The realized value (actual productivity gains) of the system was insignificant.

• The potential value (productivity gains possible if the system is implemented perfectly) was very high, suggesting that in this case implementation was flawed.

• The realized value of the system depends to a great extent on the potential value of the system.

• The greater the environmental uncertainty, the greater the potential value of the system. Retailers have traditionally used such systems to automate the ordering of easy-to-forecast items having predictable sales patterns. Our analysis suggests that the potential payoffs from these systems are higher in volatile markets in which sales patterns are unpredictable.

Lessons for Managers

• Merely looking at actual productivity gains will not provide an accurate evaluation of an information system, particularly early in the system's life; both the potential and realized value of the technology must be measured. Performance depends to a great degree on the quality of implementation. Implementation in turn depends on the user's motivation and ability to use the information provided by the system, which are likely to increase over time. If a firm looks only at early performance gains, it is likely to underestimate the potential value of the system.

• Many firms use information systems to improve performance in stable markets. Yet our findings suggest that the technology is most beneficial in the dynamic environments in which firms today are increasingly operating. Thus larger investments in these systems may be warranted.

• The value of an information system can be raised significantly (in this case about 70%) by improving implementation. Investments such as increased training for end users, hardware and software upgrades to maximize usability, and complementary technologies may be money well spent.

Elliot Maltz is Assistant Professor of Marketing, University of Southern California. Rajendra K. Srivastava is Chairman and Sam Barshop Professor of Marketing, The University of Texas at Austin.

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