Introduction
Introduction
During the last decade, the world has seen information technology (IT) develop at an ever increasing rate up
to the point where we talk about an information society. In this society the traditional factors of production – labour, capital, and production facilities – become secondary and the main resources of the organisations and the society as a whole are information and knowledge. With the rapid increase of number of computer users and the fast technology development, the computer’s role has changed from being a personal tool for calculation and word processing into being a tool for communication. (Wikström, 1998, p. 31) This enables fast and interactive communication between members in the organisation as well as with business
partners and customers.
The Internet is the communication channel which has experienced the greatest increase in numbers of users during the last decade. It has great advantages compared to traditional communication channels such as radio and television in spreading information to a large number of users at a low cost. This development has of course had its impact on business. We have seen new forms of organisations develop and traditional companies invest heavily in IT, finding new strategies and ways of doing business with this new technology.
One of the main problems when investing in IT is to estimate the profitability of the investment. The traditional business calculation methods that exist are not applicable to an IT investment that involves long term and soft
variables like increased customer satisfaction and goodwill. Today, there is no established method for valuation of
investments in IT. This can seem to be quite a striking fact since IT has been around for a while. The reason for
this is not perfectly clear, but IT investments are often being seen as necessary and obvious investments. As a result the profitability of an investment is most often not looked into with great carefulness, quite the opposite, the profitability is all to often merely roughly and quickly estimated.
The costs of an investment are relatively easy to calculate, encompassing among others start-up costs and
education of employees. The return on investment, on the other hand, which is accomplished through increased sales or cost cuts, is generally much more difficult to measure. Many companies have realised the necessity of investing in IT but few have actually made efforts to value the profitability of their investments. Why so few value the profitability of their IT investments is mainly due to the lack of adequate tools to help valuing the investments.
In this thesis, we will construct a model for valuation of IT investments, whether already existing or merely planned. The model, called the GRT model, will be used to value an Internet service in the second part of this thesis; Should Volvo’s Car Buying Service Be Launched in Sweden? A Valuation Made With the GRT Model.
Since we are going to use our model for valuation of an Internet service in the second part of this thesis, we will concentrate on Internet investments and will thus not consider all kinds of IT investments. Although the model will
be constructed to be as general as possible, it might not be suitable for all kinds of IT investments.
There is always a risk connected to making an investment and often the risk is even higher with IT investments.
It is important to recognise the risk attached to a certain investment and to bear it in mind when planning for an
investment. We will however not be concerned with any risk analysis in our model although one might argue that the introductory stages of the GRT model encompasses a kind of risk analysis aiming to reduce the risk by getting to know the problem area. Whether one sees the introductory stages as a risk analysis or not, this field will not be developed any further in this thesis.
This thesis is trying to measure the effects of an Internet investment. To be able to distinguish between the effects of the investment and the economical contribution brought by the investment we use two terms; benefit and utility.
In this thesis we use the word benefit to describe a positive effect that is generated by the investment. In other words, a benefit is something enabled by the investment that provides a value added. For instance, a benefit with a
service on the Internet might be that customers get comprehensive information online.
We are using the word utility to describe the economical effect of a specific benefit. In the example above, one of the utilities derived from the benefit could be reduced distribution costs, due to less requirements of printed material. Utility is however perceived differently by different parties. It is hence important to keep in mind from whose perspective it shall be a utility.
The Internet and the World Wide Web
We are aware of the difference between the two terms, but we have chosen not to make any difference between
the two in this thesis. We will henceforward use the Internet term to describe both of them.
