Theory P2
Due to the lack of suitable models for valuation of an Internet service such as VolvoNet, we found it necessary to develop a model for valuation of IT investments in the first part of this thesis; The GRT Model – A New Valuation Tool for IT Investments. Accordingly, we are using the GRT model in this second part of the thesis for identifying benefits and utilities with VolvoNet and to value these utilities. The results of this valuation could be used by Volvo as decision support when deciding whether tolaunch VolvoNet in Sweden or not.
As we mentioned in the first part of the thesis, we have used two already existing models as bases for our GRT model. The two models are the PENG-model (Dahlgren et al, 1997) and the Balloon-model (Enstam et al, 1995). (To find out more about these models please click the links above.)
Below we will present a slightly adapted GRT model suitable for a valuation of VolvoNet.
This model is constructed to be used as a valuation and a decision support tool for deciding whether VolvoNet should be implemented or not, as well as for helping valuation of VolvoNet when and if already in use. The model consists of six steps.
1. Determine the purpose
In the opening stage we define the purpose of the report, what we want to achieve, e.g. telling if a service ought to be implemented. We identify the problem and make a description of the problem area. (A more thorough discussion of the Problem area is given in that section.)
2. Choose the area of investigation
The purpose of this part is to clearly define which parts of the company are to be investigated, e.g. an Internet service, and from whose perspective it should be investigated. We also determine which areas that should not be included in order to fulfil the purpose defined in the first step. In other words defining the prerequisites under which the study is made. (See Purpose and Limitations for details.)
3. Define and describe the market situation
In this part we describe the market situation, the actors in the automotive Internet business, as well as the parties affected by this investment. We also define the framework in which the investment’s consequences will be compared. That is, in order to identify the benefits and utilities of VolvoNet, the service must be compared with something. This comparison is also discussed in this part. (See section Definition and description of the market situation and Identifying the benefits and utilities of VolvoNet for details.)
4. Identify the benefits and utilities of VolvoNet
Through interviews with dealers, Volvo, and Framtidsfabriken and by using other sources of information we identify the relevant benefits and utilities of VolvoNet for the parties in concern. In this step they are not only identified but further discussed and given an in depth analysis. (See sections Direct benefits and utilities for Volvo from launching VolvoNet, Benefits and utilities for the Volvo dealers from launching VolvoNet, Indirect utilities for Volvo from dealer benefits, Benefits and utilities for the customers from launching VolvoNet, and Indirect utilities for Volvo from customer benefits for details.)
To derive the utilities from the benefits we consider how cost cuts and increased revenues could be achieved with the identified benefit. We are making use of terms as for instance alternative costs, increase in brand name value, decrease in labour, increased customer loyalty/satisfaction, and saved money to identify the utilities and to view them in different perspectives to find out which perspective is most relevant for each specific utility.
5. Quantify the utilities
To be able to measure the identified utilities we quantify them by coming up with suitable and relevant formulas and measures, e.g. saved labour hours and increase in number of customers. This is necessary in order to be able to relate the utilities to figures. Some of the utilities will be difficult or even impossible to measure. The utilities that we find economically important, yet to complex and uncertain to measure, will however be considered in a discussion. That way, the meaning and importance of these benefits can be conveyed. (See linked sections in the former step for details.)
6. Create a model for valuation of the quantified benefits
When the utilities have been quantified, the measures used will be related to an economic value, i.e. an economic value per unit of measurement. When this is done, the theoretical economical value can easily be calculated. For the
purpose we create a model for calculation of the total income of the identified utilities. (Download the Excel-model for calculation. If you do not have Excel, you may download a viewer [here].)
For an estimation of VolvoNet’s profitability it will also be necessary to identify and make an assessment of the costs involved. The costs are not described further as they can more easily and accurately be assessed by Volvo. The incomes can then easily be subtracted from the costs to get the result of the investment.
Discussion of the reliability and validity of the model and measurements used
In order to make more proper estimations and calculations on the consequences of an investment, a model is necessary to use. In this thesis we have adapted two relevant models, the Balloon and PENG models, to suit the purpose of this thesis and the object of investigation. The model will assist the work of identifying and quantifying variables that are of a qualitative nature by giving a theoretical analysis and insight into possible benefits and utilities. As a result the model raises the reliability and accuracy of the estimations of the values of the utilities. As VolvoNet has not yet been launched we are still talking about estimations, but if the service is launched the formulas presented for calculation of the value of the utilities can be used to for a more accurate calculation of the contribution of the utilities. A certain risk exists that the same benefit will be measured in more than one utility. By careful cross-checking we have tried to minimise this risk.
The formulas presented in the Direct benefits and utilities for Volvo from launching VolvoNet section are examples of how one may calculate the value of a certain utility. As it is difficult to find accurate economic measurements to variables of a qualitative nature it also affects the validity of the formulas used. The validity will also be affected in a later stage when the formulas are used by Volvo, depending on how accurate the input variables are. The validity can be raised if results from e.g. surveys and questionnaires are used as input variables instead of estimated
numbers.
The reader’s focus should however be on the analysis of the web service and its utilities from different perspectives, giving the reader a comprehensive view of the service, its possibilities and role in the overall business operation.
