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									    Electronic Commerce
        Ninth Edition

           Chapter 12
Planning for Electronic Commerce
                        Learning Objectives

In this chapter, you will learn about:
• Planning electronic commerce initiatives
• Strategies for developing electronic commerce Web
• Managing electronic commerce implementations

Electronic Commerce, Ninth Edition                    2
      Identifying Benefits and Estimating
        Costs of Electronic Commerce
• Information technology projects
     – Keys to successful implementation
           • Planning and execution
• Successful electronic commerce initiative business
  plan activities
     – Identifying initiative’s specific objectives
     – Linking objectives to business strategies
• Setting electronic commerce initiative objectives
     – Consider strategic role of project, intended scope,
       resources available

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                      Identifying Objectives

• Typical business electronic commerce objectives
     –   Increasing existing market’s sales
     –   Opening new markets
     –   Serving existing customers better
     –   Identifying new vendors
     –   Coordinating more efficiently with existing vendors
     –   Recruiting employees more effectively
• Objectives vary with organization size
• Compare e-commerce risk to inaction risk

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           Linking Objectives to Business
• Downstream strategies
     – Tactics to improve the value businesses provide to
• Upstream strategies
     – Focus on reducing costs or generating value
• Web use for businesses
     – Attractive sales channel for many firms
     – Complement business strategies, improve
       competitive positions

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           Linking Objectives to Business
                 Strategies (cont’d.)
• Electronic commerce activities difficult to measure
• First-wave e-commerce activities
     – Existed without setting specific, measurable goals
     – Plenty of investors for highly speculative activities
     – Successes and failures measured in broad strokes
• Second-wave e-commerce activities
     – Businesses take closer look at benefits and costs
     – Good implementation plan
           • Sets specific objectives for benefits achieved and costs

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      Identifying and Measuring Benefits

• Some electronic commerce initiatives
     – Obvious, tangible, easy to measure
     – Example: increased sales or reduced costs
• Other electronic commerce initiatives
     – More difficult to measure
     – Example: increased customer satisfaction
• Identifying objectives
     – Set measurable objectives
           • Include intangible benefits

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      Identifying and Measuring Benefits
• Using Web sites to build brands or enhance existing
  marketing programs
     – Set goals in terms of increased brand awareness
           • Measured by market research surveys, opinion polls
• Companies selling goods or services online
     – Measure sales volume in units or dollars
• Complicated to measure brand awareness or sales
     – Increase due to other things company doing
     – Increase due to time or general improvement in the

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      Identifying and Measuring Benefits
• Using Web sites to improve customer service or
  after-sale support
     – Set goals of increased customer satisfaction
     – Reduce customer service or support costs
     – Example: Philips Lighting
           •   Provided Web ordering system for smaller customers
           •   Primary goal: reduce cost of processing smaller orders
           •   Built pilot Web site and had smaller customers try it
           •   Results: customer service phone calls from test group
               dropped by 80 percent

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      Identifying and Measuring Benefits
• Measurements of other electronic commerce
     – Supply chain managers
           • Measure supply cost reductions, quality improvements,
             faster deliveries of ordered goods
     – Auction sites
           • Set goals for number of auctions, number of bidders
             and sellers, dollar volume of items sold, number of
             items sold, number of registered participants

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      Identifying and Measuring Benefits
• Measurements of other electronic commerce
  initiatives (cont’d.)
     – Virtual communities and Web portals
           • Measure number of visitors, quality of visitors’
• Metrics
     – Measurements companies make to assess value of
           • Use online surveys
           • Use estimates: length of time each visitor remains on
             site, how often visitors return
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     FIGURE 12-1 Measuring the benefits of electronic commerce initiatives

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      Identifying and Measuring Benefits
• Benefit unit of measure
     – Convert raw activity measurements to dollars
           • Can compare benefits to costs
           • Can compare net benefit of a particular initiative to net
             benefits provided by other projects
     – Difficult to measure value in dollars

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         Identifying and Estimating Costs

• Information technology project costs
     – Difficult to estimate and control
• Web development
     – Uses rapidly changing hardware and software
           • Hardware costs are downward
     – Increasing software sophistications
           • Provides ever-increasing demand for more newer,
             cheaper hardware
           • Yields net increase in overall hardware costs

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         Identifying and Estimating Costs
• Total cost of ownership (TCO)
   – Includes all costs related to activity
• Electronic commerce implementation TCO includes:
     – Hardware costs, software costs, outsourced design
       work, employee salaries and benefits, site
• Good TCO number
     – Includes assumptions about how often site would
       need to be redesigned in the future

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         Identifying and Estimating Costs
• Opportunity cost
  – Cost of not undertaking an initiative
  – Largest and most significant costs associated with
    electronic commerce initiative
  – Foregone benefits that company could have obtained
    from electronic commerce initiative not pursued

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         Identifying and Estimating Costs
• Web site costs
     – Total dollar amounts required to create and operate a
       Web site
           • Varied over the years
     – Relative proportion of costs remained stable
           • 10 percent: computer hardware
           • 10 percent: software
           • 80 percent: labor
     – Annual cost of operating an online business Web site
           • Remained stable
           • Ranges between 50 and 200 percent of site initial cost

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         Identifying and Estimating Costs
• Web site costs (cont’d.)
     – Small online store
           • Placed into operations for less than $5000
     – Small to midsize online business operation
           • With full transaction and payment processing
           • Initial investment: between $50,000 and $1 million
           • Average $80,000

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               FIGURE 12-2 Estimated costs for business Web sites

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         Identifying and Estimating Costs
• Web site costs (cont’d.)
     – Costs generally heading downward
           • Due to lower costs for broadband access and computer
     – Comparison of Netscape with more recent startup
           • Netscape (early 1990s): more than $40 million
           • Digg (2004): less than $500,000
     – Important element of annual Web site operating cost
           • Choice of Web hosting service provider

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               FIGURE 12-3 Important Web hosting service features

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      Funding Online Business Startups

• Early Web businesses
     – Started by individuals with knowledge of computers,
       technology, business
• Late 1990s Web businesses
     – Started by investors wanting to make fast money
• Angel investors funded initial startup
     – Became stockholders hoping business grows rapidly
     – Sell interest to venture capitalist

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      Funding Online Business Startups
• Venture capitalists
     – Very wealthy individuals, investment firms
     – Look for small companies about to grow rapidly
     – Hope for rapid growth and initial public offering
• Initial public offering (IPO)
     – Selling stock to public

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      Funding Online Business Startups
• System of financing startup and initial growth of
  online businesses
     – Benefits
           • Access to large amounts of capital early
     – Costs
           • Investors, capitalists got most profits, pressure to grow

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      Funding Online Business Startups
• Decrease need for venture capitalists and angel
  investors by:
     – Relieving pressure to grow rapidly
     – Becoming more creative
     – Learning from mistakes
• Trending toward more and smaller online ventures
     – Online business creation costs falling

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             Comparing Benefits to Costs

• Capital projects (capital investments)
     – Major investments in equipment, personnel, other
     – Techniques to evaluate proposed capital projects
           • Range from simple calculations to complex computer
             simulation models
           • Reduce to comparison of benefits and costs

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  Comparing Benefits to Costs (cont’d.)

• Key parts of creating electronic commerce initiatives
  business plan
     – Identify potential benefits
     – Identify costs required to generate benefits
     – Evaluate whether benefits exceed costs

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           FIGURE 12-4 Cost/benefit evaluation of electronic commerce
           strategy elements

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              Return on Investment (ROI)

• Return on investment (ROI) techniques
     – Measures amount of income (return) provided by
       specific current expenditure (investment)
     – Examples:
           • Payback method, net present value method, internal
             rate of return
     – Provides quantitative expression of comfortable
       benefit-to-cost margin
     – Mathematically adjusts for future reduced value of

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   Return on Investment (ROI) (cont’d.)

• Electronic commerce initiatives
     – Seen as absolutely necessary investments
     – Not always subjected to close examination, rigid
     – Companies fear being left behind
• Perceived value in new market early positioning
     – Many companies to invest large amounts of money
           • With few near-term profit prospects
     – Example: first wave of newspaper Web sites

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   Return on Investment (ROI) (cont’d.)

• Electronic commerce second wave of Web-related
     – Being reviewed for ROI
• ROI built-in biases
     – ROI requires all costs, benefits be stated in dollars
           • Gives undue weight to costs
     – ROI focuses on predicted benefits
           • Initiatives have returned benefits not foreseen

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   Return on Investment (ROI) (cont’d.)

• ROI built-in biases (cont’d.)
     – ROI tends to emphasize short-run benefits over long-
       run benefits
     – More information
           • CIO Budget site
           • ROI Knowledge Center Web pages

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    Strategies for Developing Electronic
           Commerce Web Sites

                     FIGURE 12-5 Evolution of Web site functions

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    Strategies for Developing Electronic
       Commerce Web Sites (cont’d.)
• Transformation occurred rapidly
     – Web site development and management: slower
• Today: Web site seen as collections of software
     – Companies using tools to manage site

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  Internal Development vs. Outsourcing

• Initiative’s success dependency
     – How well initiative integrates into and supports
       business activities
• Internal people leading projects ensures:
     – Company’s specific needs are addressed
     – Initiative congruent with organization goals, culture
• Outside consultants
     – Seldom able to learn enough about organization’s
       culture to accomplish objectives

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  Internal Development vs. Outsourcing
• Few companies launch an electronic commerce
  project without some external help
• Key to success
     – Finding balance between outside and inside support
• Outsourcing
     – Hiring another company to provide outside support for
       all or part of project

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  Internal Development vs. Outsourcing
• The internal team
     – First step in outsourcing decision making
           • Create internal team
     – Team members
           • People knowledgeable about the Internet and its
           • Creative thinkers
           • Distinguished within the company

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  Internal Development vs. Outsourcing
• The internal team (cont’d.)
     – Project lead
           • Mistake: technical wizard, not business knowledgeable,
             not well known
           • Better choice: person with business knowledge,
             creativity, respect of firm’s operating function
             managers, good sense of goals and culture
     – Measuring team achievement: important
           • Not necessarily monetarily
           • Express in terms appropriate to initiative objectives

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  Internal Development vs. Outsourcing
• The internal team (cont’d.)
     – Intellectual capital
           • Employees’ knowledge about the business and its
           • Ignored in the past
           • Value recognized today
     – Human capital measures
           • Include employee competencies
           • Include value of customer loyalty and business

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  Internal Development vs. Outsourcing
• The internal team (cont’d.)
     – Responsible for initiative
           • From setting objectives to final implementation
     – Internal team decides:
           • Project parts to outsource
           • Outsourcer
           • Consultants or partners needed

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  Internal Development vs. Outsourcing
• Early outsourcing
     – Company outsources initial site design and
       development to launch project quickly
     – Outsourcing team trains company’s information
       systems professionals before handing site operation
       to them
     – Company’s own information systems people work
       closely with outsourcing team
           • Develop ideas for improvements as early as possible in
             project life

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  Internal Development vs. Outsourcing
• Late outsourcing
     – More traditional approach
• Company’s information systems professionals
     – Perform initial design and development work,
       implement system, and operate system until stable
       part of business operation
• Once competitive advantage gained
     – Electronic commerce system maintenance
     – Company’s information systems professionals turn
       attention and talents to developing new technologies,
       providing further competitive advantage
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  Internal Development vs. Outsourcing
• Partial outsourcing
     – Also called component outsourcing
     – Company identifies specific project portions
     – Can be completely designed, developed,
       implemented, and operated by another firm
       specializing in a particular function
• Examples
     – Smaller Web sites outsource e-mail handling and
       response functions
     – Electronic payment system

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  Internal Development vs. Outsourcing
• Partial outsourcing examples (cont’d.)
     – Web hosting activity
           • Service providers usually willing to accommodate
             requests for variety of service levels
           • Service provider has continuous staffing and expertise
           • 24/7 operation: running 24 hours a day, seven days a
           • Service providers offer wide range of services
           • Some service providers specialize

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 New Methods for Implementing Partial
• New ways of implementing partial outsourcing
  strategy evolved specifically for Web businesses
• Incubator
     – Offers start-up companies physical location with
       offices, accounting and legal assistance, computers,
       Internet connections
     – Very low monthly cost
     – May offer seed money, management advice,
       marketing assistance
     – Receives ownership interest in company

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 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Incubators (cont’d.)
     – Incubator sells all or part of its interest
           • Company grows to obtain venture capital financing,
             launch stock public offering
     – First Internet incubators: Idealab
           • Helped, Overture,
           • Today’s focus: own internally generated ideas

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 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Incubators (cont’d.)
     – Company created internal incubators
           • Develop technologies for use in main business
           • 1980s programs: unsuccessful and shut down
     – Matsushita Electric’s U.S. Panasonic division
           • Started internal incubators to help launch new
             companies to become important strategic partners
           • Individual management teams retained
                – More successful

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 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Fast venturing
     – Existing company wants to launch electronic
       commerce initiative
           • Joins external equity partners and operational partners
             offering experience, skills needed
     – Equity partners: usually banks, venture capitalists
           • Equity partners sometimes offer money
           • Equity partners more likely to offer experience

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 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Fast venturing (cont’d.)
     – Operational partners: firms
           • Systems integrators, consultants, Web portals
           • Experienced in moving projects along, scaling up

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                        FIGURE 12-6 Elements of fast venturing

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         Managing Electronic Commerce
• Best way to manage complex electronic commerce
     – Use formal management techniques
           •   Project management
           •   Project portfolio management
           •   Specific staffing
           •   Postimplementation audits

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                       Project Management

• Project management
     – Collection of formal techniques for planning and
       controlling activities undertaken to achieve specific
     – Developed by U.S. military, defense contractors
     – Project plan criteria
           • Cost, schedule, performance
     – Helps management make trade-off decisions
       involving the three criteria

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            Project Management (cont’d.)

• Project management software
     – Specific application software to help project managers
       oversee projects
     – Examples:
           • Primavera P6, Microsoft Project
           • Open Workbench: open-source project management
             software package offering many of the same features
             as the leading commercial products
     – Helps team manage tasks assigned to consultants,
       technology partners, outsourced service providers

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            Project Management (cont’d.)

• Examining costs and completion times
     – Learn about project progression
     – Revise future estimated costs, completion times
• Risks of information systems’ development projects
     – Running out of control, ultimately failing
     – Causes: rapidly changing technologies, long
       development times, changing customer expectations
• Teams rely on project management software
     – Helps achieve project goals

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            Project Management (cont’d.)

• Electronic commerce uses rapidly changing
     – Relatively short development times
           • Technology, user expectations have less time to
           • Initiatives more successful (in general)
• More information
     – Project Management Institute

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            Project Portfolio Management

• Project portfolio management
     – Technique whereby project is monitored like an
       investment in a financial portfolio
           • Allows tradeoffs between cost, schedule, and quality
             across projects as well as within individual projects
           • Provides more flexibility in allocating resources to
             achieve the best set of benefits from all projects in the
             most timely manner
• Project management software
     – Designed to handle individual projects
     – Not suited for consolidating activities
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 Project Portfolio Management (cont’d.)

• CIO assigns ranking for each project based on:
     – Its importance to the strategic goals of the business
     – Its level of risk (probability of failure)
• CIO uses any methods financial managers use to
  evaluate risk of making investments in business

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        Staffing for Electronic Commerce

• Chief information officer (CIO)
     – Organization’s top technology manager
     – Responsibilities
           • Overseeing all information systems and related
             technological elements required to undertake and
             operate online business activities
• Business manager
     – Member of internal team setting project objectives
     – Responsible for implementing business plan
       elements, reaching objectives set by internal team

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        Staffing for Electronic Commerce
• Project manager
     – Person with specific training, skills in tracking costs
       and accomplishment of specific project objectives
• Project portfolio manager
     – Usually promoted from the ranks of the project
     – Responsible for tracking all ongoing projects and
       managing them as a portfolio
• Account manager
     – Keeps track of multiple Web sites in use or keeps
       track of projects combining into larger Web site

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        Staffing for Electronic Commerce
• Applications specialists
     – Maintain accounting, human resources, logistics
• Web programmers
     – Design and write underlying code for dynamic
       database-driven Web pages
• Web graphics designer
     – Trained in art, layout, composition
     – Understands how Web pages are constructed

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        Staffing for Electronic Commerce
• Content creators
     – Write original content
• Content managers or content editors
     – Purchase existing material and adapt it for use on the
• Social networking administrator
     – Responsible for managing virtual community
       elements of the Web operation

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        Staffing for Electronic Commerce
• Online marketing manager
     – Specializes in specific techniques used to build
       brands and increase market share
           • Uses Web site and other online tools: e-mail marketing
• Customer service personnel
     – Design and implement customer relationship
       management activities in electronic commerce

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        Staffing for Electronic Commerce
• Call center
     – Company handling incoming customer telephone
       calls, e-mails for other companies
     – Makes sense for smaller companies
• Systems administrator
     – Responsible for system’s reliable, secure operation

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        Staffing for Electronic Commerce
• Network operations staff functions include:
     – Load estimation and load monitoring
     – Resolving network problems as they arise
     – Designing and implementing fault-resistant
     – Managing any network operations outsourced to
       service providers or telephone companies

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        Staffing for Electronic Commerce
• Database administration function support activities
     – Transaction processing, order entry, inquiry
       management, shipment logistics
     – Activity requirements:
           • Existing database into which site being integrated
           • Separate database established for electronic
             commerce initiative

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               Postimplementation Audits
• Postimplementation audit (postaudit review)
     – Formal review of project
           • After up and running
• Examine project items established in planning stage
     – Compare to what actually happened
           • Objectives, performance specifications, cost estimates,
             scheduled delivery dates
• Blame identification approach
     – Used more in the past
     – Focused on identifying individuals to blame for cost
       overruns, missed delivery dates

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     Postimplementation Audits (cont’d.)

• Feedback on strategies used more today
     – Obtains valuable information
           • Useful in planning future projects
           • Gives participants meaningful learning experience
• Comprehensive audit report
     – Analyzes project’s overall performance
           • How well project administered
           • Appropriate project organizational structure in place
           • Specific project team(s) performance
     – Should compare actual results to objectives

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                      Change Management

• Information system projects involve change
• Employee concerns
     – Ability to cope with changes, ability to continue to do
       good work, job security
• Concerns lead to increased stress
• Change management
     – Process of helping employees cope with changes
           • Includes tactics designed to help employees feel
             involved with change
           • Helps employees overcome feelings of powerlessness

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• Key elements of e-commerce business plans
     – Setting objectives in measurable terms
           • Derived from initiative’s overall goals
           • Include planned benefits and planned costs
     – Evaluate cost-benefit
           • ROI evaluation technique
     – Determine outsourcing strategy, staffing
     – Project management
           • Postimplementation audit
           • Managing change

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