Tuesday, July 24, 2012

IT Investment Exercise

THE SCENARIO:

Montclair Computer (MC) is a local computer maker specializing in very high end gaming systems.  These computer systems typically have high speed CPUs (from AMD) that are over clocked (tweaked to perform even faster).  In addition, they come with two high end nVidia graphics cards and very large, high speed disk drives (Seagate).  MC is also known for its customization of computer cases.  They paint various designs on the case and use clear panels and fiber optic lighting to create computer systems that have a unique look.  As you might expect MC computers sell for much more than the average system.  A typical MC computer retails for more than $4,500.

MC has served the local market (Montclair area) well, but it is now contemplating opening an online store.  This option is strongly supported by the Chief Information Officer (CIO).  However, the Chief Operating Officer has proposed postponing the Web store and implementing an ERP system, with a strong supply chain management (SCM) module first.  Other proposed modules include: finance, manufacturing, and customer relationship management.  This would push back the Web store for at least another 2 years.  The Web store would take about 3-6 months to fully develop and implement.

The CEO is not sure how to proceed and has hired you to provide advice.  She has four specific questions.  Please write your response in the form of a formal report to the CEO.

1.  Strategic Assessment

Do a Web search to find at least three of MC’s competitors (other high end gaming computer sellers).  For each competitor develop a table that provides the following information – its URL (Web address), information about its least expensive system, most expensive system, and whether they offer custom case designs. 








    ZOOMED IN







    Perform a SWOT analysis for MC and each competitor. 

    -          Montclair Computer (MC)

    o   Strength

    §  Efficiently serve the local customers
    §  Provide better customer service
    §  Help customers face-to-face

    o   Weakness

    §  Services are limited to the people around Montclair
    §  Difficult to expand

    o   Opportunity

    §  Expand the business to global level
    §  Franchising
    §  Making cover design as their main strength

    o   Threat

    §  Other competitors offering better price/product
    §  Economies of scale
    §  New entrants opening a store in Montclair

    -          Alienware

    o   Strength

    §  Advantage of the supply capabilities that Dell brings to the table to streamline its production process and increase productivity
    §  Tremendous brand appeal with consumers and creative business professionals
    §  Sold globally

    o   Weakness

    §  High class brand name – People thinks that Alienware are not particularly good for the money and there is believe that better service is provided by other companies.

    o   Opportunity

    §  Subsidiary of Dell Inc, Alienware may offer variety of gaming computer hardware in a very cheap price to compete against other competitive companies.
    §  Expand their custom made products to monitors, printers, webcam, and other hardware. (Increasing their Brand name)

    o   Threat

    §  New entrants may capture the market by focusing on being cost effective or creating a more attractive brand appeal
    §  Technology change (Substitutions like Xbox and Play Station)

    -          Cyberpower Gaming PCs

    o   Strength

    §  Providing personalized cutting edge technology at wholesale prices
    §  Providing an extensive range of technological support

    o   Weakness

    §  No physical store
    §  No way for the customers to actually test the product before purchase

    o   Opportunity

    §  Enter Non-gaming computer industry
    §  Selling other input and output hardware
    §  Expanding to sell video games and other non-computer consoles

    o   Threat

    §  New entrants may capture the market by focusing on being cost effective or creating a more attractive brand appeal
    §  Copycat

    -          Centaurus Computers

    o   Strength

    §  Fastest assembly time with no extra charge for rush service
    §  Lowest failure rates in industry
    §  Highest overclocks
    §  Focused on customer’s satisfaction
    §  Connects the computers with different types of games

    o   Weakness

    §  Weak Brand name
    §  No physical store
    §  Pricy

    o   Opportunity

    §  Lower their cost to compete against other gaming computer sites
    §  Coming up with a marketing strategy to strengthen their Brand name

    o   Threat

    §  New entrants may capture the market by focusing on being cost effective or creating a more attractive brand appeal


    Reference

    http://www.intangiblebusiness.com/Brand-services/Marketing-services/
    News/Dell-acquires-Alienware-could-this-be-the-end-Stay-tuned~415.html
    http://www.brighthub.com/computing/hardware/articles/69052.aspx

    Perform a 5 Forces analysis for MC.  Think about who has the power in terms of the company’s supplier and customer relationships. 

    -          Threat of New Entry

    o   MC really does not have a barriers to entry since any company can copy MC’s product and services
    o   Since MC does not make their own product except doing a custom case design, they do not have any technology protection
    o   Right now they have no control of Economies of scale

    -          Competitive Rivalry

    o   There is a large number of competitors
    o   Since MC is just starting their online store, MC does not have any customer loyalty outside their local area
    o   Other companies can provide better quality and price than MC

    -          Supplier Power

    o   No real power against the suppliers (in cost)
    o   Some customers may know exactly what they want, meaning it is hard to switch suppliers
    o   Not too many suppliers. More you need supplier’s help, the more power suppliers are

    -          Buyer Power

    o   Buyers may drive prices down
    o   Limited number of customers
    o   Buyers have a lot of substitution
    o   A lot of individual customers (No group purchases)

    -          Threat of Substitution

    o   Other companies
    o   Ability for the customers to build computers themselves
    o   Change in technology in gaming industry (Computer vs Xbox)

    Reference


    1. Which generic strategy would you recommend MC use in order to gain a competitive advantage?  Why?
    -          Strategic scope (Demand-side dimension)

    o   The size and composition of the market MC intend to target is already popular and crowded

    -          Strategic strength (Supply-side dimension and core competency of the firm)

    o   Product differentiation

    §  Except for the customize cover design, it is hard for MC to differentiate itself from the other competitors

    o   Product cost

    §  It is hard for MC to compete against other competitors on price since they have no control of economies of scale

    Recommendation: I would advise MC to concentrate their generic strategy on differentiating themselves from the others. I would advise them to build a brand name that represents the MC Company. For example, if MC can expand their cover designs to keyboard, mouse, speakers, and other devices in a designs that customers wants, I believe this may help MC differentiate themselves from the others. This also would allow new customers to buy only MC’s product that is pure blank (no design) devices so that MC can put the designs exactly how customers would want it. From there, MC can expand to customizing the looks and the shape of the products to give exactly what the customers want.
    Reference


    2.  Strategy Analysis of Options
    How well do each of the proposed options fit with the generic strategy identified?

                I feel that opening an online web store would fit in the product differentiation category. The website can allow them to show their customers why they should do business with MC. Every major gaming computer companies have their own web site; however each individual website has their own culture and themes. Sometimes we judge people by their first impression. And for computer industries that does business only by website, only first impression they can get from customers are the main page of their website.

                Implementing the ERP system before the website would fit into the product cost category. Having the right ERP system with good SCM module for their business would help them be cost effective. Also, a successful ERP system would give MC a strong back bone to support their business. In today’s volatile electronics manufacturing industry, efficiency is the key to success.



    What are the main benefits and drawbacks of each proposed system? 

    -          Website

    o   Pros

    §  Can start expanding globally right away
    §  Create a stronger brand name
    §  Give options to customer (they don’t always have to make the drive)

    o   Cons

    §  If successful, they have no system to handle this project efficiently
    §  May create many redundant activities

    -          ERP system

    o   Pros

    §  Design Control
    §  Maintain an accurate and up-to-date system
    §  Manage your vendor list, trend analysis, audit trail, and etc…
    §  Better Inventory management
    §  Better recall processes

    o   Cons

    §  ERP system might fail
    §  Costly
    §  Pushes the web store plan to 2 years (Technology is changing so fast that we don’t know where computer games will stand at that period)


     Based on your analysis, which project provides the best strategic fit and why?

    -          Short term – For a short strategic fit, I believe making the website could be a better option. If they wait 2 years, MC cannot predict how the gaming industry will be like. Gaming industry is a fast growing industry. Going with the website might lack efficiency, but at least they can keep up with the technology and grow their market and their brand name.

    -          Long term – If MC has the financial capability and is looking to invest long term, going with the ERP system would be the best strategic fit. It might push their online sales for 2 years, but it would defiantly be the safest way. ERP system not only would help MC’s online store, but it would also help the company itself. It will help them monitor every process from product design to purchasing to traceability.

    Reference

    http://sysprousa.com/us/marketoweb/industry-electrorics.asp?res=18860

    [Complete this section after you complete everything else] – Provide your overall recommendation to the CEO.  Which project should she choose?  Why?

                My overall recommendation to the CEO of MC is to proceed with the ERP system. Even though, Web Site has its positive impact on the company short run, it is determined that in long run the web site will not be efficient. I believe eventually MC will have a web site up and running. But to be efficient and have a strong foundation in the company, the MC Company should take the CIO’s advice and start by implementing ERP system to the company. Also, since MC is a small company, I would recommend working with companies like Syspro who are experienced in ERP system in the computer industry who handles small businesses.

    3.  Schedule Analysis


    1. Use the attached work breakdown structure to develop a PERT chart for the ERP project (you can use a project management tool, such as MS Project or you can do this neatly by hand). 

    1. Determine the critical path for the project.  Is the estimated 2 year timeline accurate? 


      A1 -> A2 -> B2 -> B4 -> C2 -> D2 -> D4 -> E1 -> E3 -> E4 -> F3 -> F4
    Yes, the estimated 2 year timeline is accurate. The project will be done within the timeline.

    1. What is the impact on the project’s schedule if it takes twice as long to determine which processes to customize (task E2)?
    Since E2 is not part of the critical path, E2 will be twice as long but will not delay the project itself.

    1. What if it takes twice as long to install the basic modules (task E1). 
    Since E1 is part of the critical path, E1 will become twice the duration which will impact the project to go over deadline.
    4.  Investment Analysis
    MC’s CIO has determined that the up front costs of developing their new Web site will be $54,000.  The site will take 6 months to become operational.  Once operating, the monthly cost for running the site is $5,000 (this includes hosting fees, data entry, marketing, fulfillment, and a Web master).  The company expects the site to result in $6,500 per month in additional after tax revenue. 
    The cost for the ERP project is $100,000 the first year and $50,000 in years 2 and 3.  After year 3 the annual cost of maintaining and upgrading the system will be $40,000.  The company expects to begin reaping the benefits of the project in year 2 when it will save $50,000.  Beginning in year 3 and continuing into the future the annual projected savings is $90,000.

    1. Develop a spreadsheet to perform a cost benefit analysis to determine how much the company will make or lose over the next five years for each project.  What is the company’s annual return on investment for each project?  Based solely on this analysis which project would you recommend? 

    Recommendation: Even though the website project has a shorter payback period, I recommend the ERP system. Looking as a long term project, ERP system brings more annual cash inflow. ($32,000 more) Also, comparing the total benefit in 5 years, ERP system project exceeds the Web site project by $13,000.




    1. Determine the net present value (NPV) for each project (use a discount rate of 10%).  What is the company’s annual return on investment?  Based solely on this analysis which project would you recommend?  How would your analysis change if the discount rate increased to 13%?  How would you revise your recommendation?





    Recommendation @ 10% Discount rate: Go with ERP System since it has a higher NPV.
    Recommendation @ 13% Discount rate: Go with Web Site since it has a higher NPV.







    Work Breakdown for ERP

    Task ID
    Task Description
    Predecessor(s)
    Duration (pessimistic)
    Duration (optimistic)
    Duration (likely)
    A
    Preliminary Analysis and Scope




    A1
    Discuss needs with senior management
    None
    10
    3
    5
    A2
    Determine preliminary budget and timeline
    A1
    8
    4
    5
    A3
    Identify key personnel
    A1
    4
    1
    3
    B
    Process Analysis




    B1
    Administer questionnaires
    A2, A3
    20
    12
    15
    B2
    Conduct interviews
    A2, A3
    25
    18
    20
    B3
    Examine reports and forms
    A2, A3
    14
    7
    10
    B4
    Develop data flow diagrams
    B1, B2, B3
    25
    15
    20
    C
    Request for Proposals




    C1
    Identify potential bidders
    A1
    15
    8
    10
    C2
    Develop requirements list
    B4
    14
    8
    10
    C3
    Develop proposal evaluation criteria
    C2
    20
    12
    15
    C4
    Identify budget and schedule constraints
    A1
    8
    3
    5
    C5
    Publish RFP
    C1 – C4
    20
    12
    15
    D
    Proposal Evaluation




    D1
    Receive proposals
    C5
    40
    35
    40
    D2
    Perform delta analysis (requirements versus features)
    D1
    25
    18
    20
    D3
    Evaluate budget and schedule proposals
    D1
    18
    12
    15
    D4
    Choose a bid
    D2, D3
    12
    8
    10
    E
    Customization




    E1
    Install basic modules
    D4
    75
    50
    60
    E2
    Determine which processes to customize
    D4
    25
    18
    20
    E3
    Perform customization
    E1, E2
    180
    100
    120
    E4
    Test system
    E3
    120
    50
    60
    F
    Implementation




    F1
    Develop a change management plan
    A2, A3
    25
    18
    20
    F2
    Deliver training to all personnel
    E4
    15
    15
    15
    F3
    Install system in working environment
    E4
    30
    15
    20
    F4
    Test system in working environment
    F3
    60
    15
    20
    F5
    Cutover to new system
    F2, F4
    10
    3
    5











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