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Friday, January 22, 2010

Applying NPV, ROI – An example to guide IT strategist to evaluate IT investments

::::::::::Case Study::::::::::::

Opportunity A: Your bank is looking at an optical character recognition (OCR) system to further automate the check processing function. Check processing is a time sensitive function. If outgoing checks miss daily clearing deadlines, the bank looses use of the money for one day. Since your bank clears over one million checks per day, this can be a substantial amount. The current system, based on magnetic ink character recognition (MICR) is reliable, but labor intensive. It requires large numbers of relatively low-level employees to encode each check with magnetic ink. The cost of this process is very high and scheduling the right number of people to meet fluctuating volumes is challenging.

The initial investment for the OCR systems is estimated to be $1,250,000 for hardware, $450,000 for packaged software, $300,000 for customized modifications to the software, and $200,000 for training. Additional ongoing costs over a five (5) year system life are estimated to be: Hardware Maintenance: ($200,000 per year for 5 years); Software Maintenance: ($250,000; $200,000; $175,000; $200,000; $175,000); Supplies: ($200,000 per year for 5 years). Benefits over the five-year system life are estimated to be: Salary Reductions due to Staff Cuts: ($1,000,000; $1,100,000; $1,200,000; $1,300,000; $1,400,000); Increased Revenue Due to Faster Check Collection: ($450,000 per year for each of the 5 years).

Opportunity B: Your bank is looking at installing a new credit card processing system toreplace your aging mainframe system. Not only would the new system be less expensive to operate, but also there appears to be an opportunity to sell processing services to other banks that are looking to outsource this function. Your analysis of the credit card market suggests that there will be a continuing concentration in the industry as many small banks sell their portfolios to larger companies. You feel that a modern credit card processing system is essential if you are to compete effectively in this market.

The initial investment for this credit card system is estimated to be: $1,250,000 for initial software licenses; $200,000 for customization of software; and $250,000 for training. Ongoing costs over a 5 year life are estimated to be: License maintenance fees: ($110,000 per year for 5 years) and Software maintenance: ($550,000; $600,000; $650,000; $650,000; $700,000). Benefits over the 5 year system life are estimated to be: Salary Reductions due to staff cuts: ($450,000; $500,000; $550,000; $600,000; $650,000) and New Revenues from Outsource customers: ($400,000, $450,000, $600,000, $700,000, $3,500,000).

Which alternative will you present to the IT Steering Committee and why?


Under strict project constraints, we need to choose the best alternative between Option A and Option B. The current hurdle rate is 10%. Sections 1 and 2 details the cost benefit analysis matrix for option A and option B respectively. In section 3, we analyze the results and consider three major non-financial factors to finally arrive at the best alternative.

1 Cost Benefit Analysis :: Option A (Click to enlarge image) click to enlarge image

2. Cost Benefit Analysis :: Option B (Click to enlarge image)

3. Justification for the right alternative

Looking at the ROI, option B seems to be appealing. But there is not much difference in the ROI of the two options and both exceeds the hurdle rate. Given such a scenario, we need to really take into consideration other factors such as project risks for each option, employee resistance and ability of each option to resolve current issues.

(a) Project Risk

Option B involves replacing the current mainframe based systems with the new system. The inherent risks involved in this whole process are gaining full management support for migrating systems from the well established and accepted mainframe systems, data migration issues and additional costs associated to data migration which is not counted in the assessment . Option A on the hand will not raise much risk as Option B as it is an addon feature to the existing system which is cumbersome and time-consuming. So, considering project risks, Option A is the best choice.

(b) Employee resistance

Both option A and B will introduce a certain amount of employee resistance to accept the new technology. Fear of losing jobs will be a major reason for resistance for Option A, mainly from the check processing staff. As the benefits assessment shows, there is expectation of huge saving from staff cuts. Option B also faces resistance, mainly from the IT department, in getting rid of the mainframe systems and thus, their competence in that area. Through appropriate training and awareness and employee involvement in the migration process, the resistance can be mitigated to a great extend. Option B seems to be favorable in this regard.

(c) Ability to solve current issues

The main reason for implementing option A is to reduce the huge time that is wasted in processing checks using the magnetic ink reading method. If company continues with the current technology, huge loss is predicted due to inability to clear daily checks. So, implementing Option A is of high priority, given the current situation, to realize huge gains in terms of faster processing of checks. Option B on the other hand, even though it brings in faster processing time and other benefits in terms of automatic credit card processing, it is not necessary to avoid any current financial loss.

Thus, considering the least project risk factors and the ability to resolve current issues which has great financial implications, Option A is the best alternative to work on.

Thursday, January 21, 2010

Theory of Business (TOB), Business strategy and more - A case study

Bertelsmann AG is the largest media and entertainment group in Europe and the second largest in the world to U.S. based Time Warner, Inc. Bertelsmann has operations in over 40 countries, primarily in North America and Europe. Bertelsmann's Theory of Business is to provide information, entertainment and media services to inspire people's daily lives, make a valuable contribution to society, lead target markets and achieve returns that promote growth, provide working conditions that are equitable and motivating for their employees and commitment to the continuity and progress of the company (Thielen G., 2007). Bertelsmann is structured as a highly decentralized organization consisting of six divisions focusing on a unique feature of the complete media spectrum. Starting as a publisher of hymnbooks, the company has experienced significant growth since its' genesis over 170 years ago, primarily through acquisitions. To build upon their core competency of publishing, in 1998 one of their largest and most significant acquisitions, Random House, Inc. was made for $1.4 billion.

Random House Inc, is the world's largest English-language book publisher. The acquisition by Bertelsmann brought together the imprints of the former Random House, Inc. with those of previously acquired publishing houses including Bantam, Doubleday and Dell. The flagship imprint of Random House Inc., Random House, was founded in 1925. Like Bertelsmann, Random House executed a significant number of acquisitions as a primary growth strategy. Random House has emerged as the only general interest book publisher publishing books in various languages notably English, Spanish, German and Japanese with over 1 million copies sold every day ( Focusing on its vision of continuing to be the global leader in the publishing domain, Random House must execute strategies that allow it to overcome constraints in the form of competition, technology advances, market consolidation, and innovative product offerings. Random House's long term growth strategy should continue to leverage a proven model of acquisitions.

With 55% of the market share split amongst hundreds of small, independent publishers the trend for further consolidation through acquisition of publishers is necessary to avoid a potential emerging competitor (RandomHouse, Inc.). Risks regarding this strategy include the potential dilution of market share by a sudden merge process and disruption to the existing company culture, causing resistance. At a broader level, Bertelsmann should consider the consolidation of the Random House, Direct Group and BMG divisions for a more robust offering in the digital world, leveraging the competencies of each, consistent with the recent acquisition of Time, Inc.'s Bookspan book club. A joint venture with Borders should be considered to exploit upstream selling and revenue sharing opportunities, similar to the Barnes and Noble merger with Sterling Publishing. Random House should continue to emphasize double digit profit margin targets to mitigate increased costs, specifically large author advances, higher volume discounts by retailers, reduced demand for books overall and high return rates (Anand B.N. et al., 2004). Profit growth will become increasingly important as the value chain continues to constrict and as weak economic cycles present themselves. Random House should strengthen relationships with Discounters as an important link in the value chain for exploiting an emerging sales channel. A deliberate strategic (Mintzberg, H. et al., 1985) mix of 'back-listing' should be developed and executed to rejuvenate revenue form previously published Best Sellers. From a geographic footprint perspective, Random House should strengthen its' presence in recently entered markets, including Asia, South America and EMEA to get a more balanced revenue stream and avoid economic vulnerabilities in any one market. Currently, North America represents 75% of Random House revenue.

In the future, Random House will need to continue to innovate as a key strategy to keep pace with advanced technologies. Today, people have less time to read books in a traditional setting. Random House must look for alternative, innovative ways to deliver its' content in an interesting and non-intrusive manner. An initiative which would give Random House a competitive advantage would be to partner with content providers to provide customers with an opportunity to read their vast offering of publications 'on the run' through a mobile service offering utilizing ICUE. A 'push' method could be used via an SMS message to generate interest and stimulate a purchase. Personalizing the Publisher's online 'store' beyond basic search engine capability to include audio and video streaming with customer service representatives to enhance the customer experience would be a great way to preserve existing revenue. Self publishing is currently experimental with mixed results. Random House should enhance its business model to attract and secure business with this emerging self-publishing community in the form of offering brand recognition for a nominal fee. All of the technical innovations undertaken by the company will possess some level of risk. The biggest risk is acceptance and rate of adoption by the public.
Responding to the technology changes and developments in the area of e-commerce is of great strategic importance for Random House. There is extreme competition in digitizing content and presenting e-books for download due to the ubiquitous nature of Internet. This calls for completely automating the existing value stream to allow for selection and categorization of books, the conversion of hard copy artifacts to digital, mass storage and retrieval methods, improved presentation and highly secured transactions. From an adoption perspective, the price of handheld electronic book reading devices is coming down, to deem this type of endeavor feasible form an end user perspective. Continual enhancement of Random’s existing web presence,, is vital and should be more tightly linked to the business portal. Refining and maintaining the multi-service business services portal is a top priority and efforts need to be taken to establish separate domains for each service to effectively control and monitor online traffic. The web services should be extensively reused to build web based ondemand printing services, where the consumer can search in the digitized book database and customize his pages for final printing.

Challenges attributed to realizing the technology strategy, in general, include balancing the appeal of online as well as hard copy books, controlling and managing reengineering efforts, arriving at a single service business model, mitigating security threats and privacy issues and substitution threats from competitors. Random House need to refine its current systems, preferably by outsourcing, to leverage its centralized database model to support efficient data categorization, storage and retrieval of content with capability to support bulk volumes of data in text, image and audio. The resulting architecture should be capable of linking various business services of the portal, support content fragmentation and online customer personalization services, and provide online renting and purchasing of e-books.

Overall, Random House's strategic plan must consider building upon its market leader position through geographic expansion, mergers and acquisitions, redefining their position in the value chain to be more pervasive throughout, innovating technical and nontechnical products and services and leveraging technology advances to support more efficient content availability and delivery for the end consumer. Core focus areas to work on, as reflected in the above sections, are thus change and innovation, as well as process controls and management. Focus on business process improvement is essential considering the need to implement tactical plans to refine, integrate and continuously improve the ever growing and changing business model. Managing change and innovation will be critical for Random house to realize its strategy as the focus shifts to pondering new innovative ideas for remaining competitive, mainly, creative book ideas, author retention, and the shift towards web based commerce web services and enhanced customer experience.

To support innovation from an organizational perspective, virtual work environments should be considered to foster creativity from widely varied, dispersed cultures. Additional merging and acquiring will require effective organizational change management and process integration to avoid disruption to the existing business model and preserve functional independence. Random House should consider changing its current service offering and enhancing overall performance through pay-per-view and on-demand print services, SOA based web-services, digitized warehouses to support e-sales and e-distribution, web-based Publishing, and Educational and Library services. It is predicted that within the very near future, writers will outnumber readers (Dyszel B., 2005); therefore Random House must continue to reinvent itself since its traditional publishing roots will not be enough to sustain it, let alone grow.

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Preparing Marketing Plans - Sample one for - A handy tool for strategic IT managers

Overview offers Earth’s largest selection of online products. Being the #1 online retailer, it offers the most advanced and innovative ways of e-commerce that is capable to continuously deliver fastest, reliable, cheapest and most user-friendly online shopping experience for the customer.

Marketing Strategy Focus and Market Segments
Company’s mission is to become extremely customer-centric where customers can come and discover anything they want to buy online at lowest possible prices (Business Wire, 2007, April 24). The strategic focus of the company that can influence its marketing plan will thus be improving customer satisfaction via better customer-service, easily navigable website with greater focus on personalized services and learning customer behavior, expanding its international market to increase its customer base and thus annual revenues, expanding its affiliates program to increase web-site traffic and continuing to work on alliances to expand its product line to become a one-stop online retail store.’s market segments are consumer-centric and are categorized based on geography, demography and customer behavior. Geography based market include the North American market and the international market. Demography based market segments targets income levels, age and sex. Behavior based market segments include existing customer bases with varied buying or selling characteristics. The key issues faced related to market segmentation are fluctuations in foreign exchange rates, global trade regulations and economic conditions, changing consumer tastes and demands, adapting the personalization services to new behavioral patterns and product expansion.

Marketing Mix - The 4 P’s
Product:’s product line falls under 3 broad categories - Media, Electronics and Other General Merchandise, and Others. Media includes books, DVD rentals, music etc. Electronics and Other General Merchandise includes all electronic items, toys, apparel, kitchen and house-wares, health care etc. Others includes mainly co-branded credit card programs.
Place: Company concentrates on fully online business where products will be displayed and sold directly via company’s global website versions (country specific) or through affiliates.
Price: For retaining its vast customer base, company applies Penetration pricing strategy offering lowest price possible for high quality products and services. Promotion: Company’s major mass-promotional medium will be internet itself via affiliate programs, gift cards, promotion codes and strategic alliances for cross sector product selling via partner websites, . The company can look forward to establishing a general purpose email service, similar to Yahoo! Mail and use it as a medium for advertisement.

Measuring customer satisfaction
Realization of’s marketing strategy and its success in e-commerce business depends on its ability to satisfy and retain its vast customer base. The question that needs to be asked is - Does the current product offerings, price, customer service and website content, search and ease of use imparts the expected value to the customer. Collecting and analyzing external satisfaction data can be successfully used to measure customer satisfaction in this case since the customer need to be heard directly in order to improve the current services. Quantitative techniques such as customer surveys, questionnaires, customer reviews and ratings and customer personalization data collected from the customer behavior on the website, can be used to measure whether the marketing goals are met.

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Theory Of Constraints - A Case study (AOL, FCC, Verizon) based analysis

All organizations strive for excellence. The Theory of Business (TOB) of any company is considered the deciding factor, which determines the degree of excellence and ultimately defines the fundamental assumptions that the business is built on. The main thought process that leads to a well-defined TOB is an organization's own experience and its openness to its fundamental reason for existence. It is very important for every organization to conduct systematic analysis and monitoring of the operating environments, market situations and competencies in order to identify the constraints and undertake plausible solutions to overcome them. Constraints are not static, but rather dynamic in nature. This approach is found to be very powerful since it ensures a TOB that is meaningful according to changing realities (Drucker, 1989). In this paper, we examine three organizations - AOL, FCC and Verizon, their respective TOB's and how various constraints affect them. We conclude by doing a contrast analysis to identify those constraints that are common and those unique across them.

America Online (AOL) is the leading Internet service provider (ISP) and instant messaging network in the United States. Since America Online went public in 1992, the Company has grown from 250 employees and $30 million in annual revenues to more than 15,000 employees and over $33 billion in revenues in 2003. Despite their success, AOL recently retired its' decade old goal of "Building a Global Medium as Central to People's Lives as the Telephone and Television...and Even More Valuable" and established a new one as "Serving the World's Largest and Most Engaged Community" as an acknowledgement that times had changed in their industry and that they had essentially fulfilled the original TOB overall.

In AOL's case, several constraints were encountered, primarily market and policy related. From a market perspective, three primary constraints became evident. First, a highly competitive high-speed network based ISP landscape was emerging, specifically telecommunication providers morphing into ISP's and providing a superior infrastructure for delivery and access, at very competitive prices. Secondly, AOL's outdated dial up infrastructure quickly became obsolete and the low cost model was no longer successful since dozens of viable, low cost ISP's emerged as alternatives. Finally, AOL failed to leverage the emerging technologies and competitive landscape of providers with a cross platform strategy which somewhat minimized their service offering delivery and isolated AOL as extremely proprietary and ‘closed’.
From a regulatory perspective, ISP policy began to emerge as a constraint. In the late 90's for example, increased emphasis on copyright infringement laws for service providers involved in content development and licensing created a new sense of vulnerability for content providers, like AOL. ISP's who, for the most part focused on data access and transport and leveraged content from third parties, were not. As a content provider, AOL realized additional constraints in the form of anti-spam and inappropriate content laws that emerged in the late 90’s and the current decade.

FCC, the largest independent US Government agency, was established in 1934 with a TOB of "ensuring that the American people have available, at reasonable costs and without discrimination, rapid, efficient, national and world-wide communication services; whether by radio, television, wire, satellite, or cable" (FCC.). Its executive board and commission staff have clearly defined responsibilities that are goal oriented rather than just used on making a profit. Looking at FCC's TOB, its board structure and its responsibilities, it shows that FCC focuses on a meaningful societal cause. In its path to serving the American society, FCC constantly faces four major constraints.

Keeping up with the ever-advancing communication technology makes it difficult to design a standard strategy to make it universally available. This constraint is very crucial and FCC overcomes it by controlled change of its policies and regulations. Changing economies bought by the transition to constantly changing digital delivery modes, has required significant up-front financial investment from content providers, service outlets, and equipment suppliers prior to full rollout of the technology and this delayed their ROI (FCC.). This constraint, in turn affects FCC’s TOB to reach the technology to the common man.

Constantly changing regulations often poses various legal constraints that require constant changes to the legal proceedings that implement the regulations. Congress has mandated continued review of these rules, which results in further court challenges and reduced motivation. This leads to increased operations cost and delays in policy making. There also exist various Organizational constraints, notably, need for specialized staff to meet changing requirements backed by constant learning and training. Considering the volatility of its TOB, FCC considers redefining its mission and strategy every 5 years to accommodate for the constraint variations.

Verizon Wireless is the joint venture of Verizon Communications and Vodafone, both large telecom companies which a large customer base worldwide. Verizon Wireless was formed in the year 2000 and has grown to become one of the largest wireless mobile service providers in the U.S.A. With a customer base of 56.7 million, Verizon has matured into the most reliable wireless network in the country.

The primary constraints that Verizon has faced have been infrastructure and resource related. Infrastructure incompatibilities between the networks of the two companies have created a dispute. The significant economic considerations, in the form of capital outlay, for making the systems compatible is prohibitive and may end up splitting the new venture. The emergence of new infrastructure capabilities, in the form of the 4G technology, only complicates the situation relative to where to invest. From a resource perspective Verizon faced a pretty significant constraint as a result of trying to drive costs out due to market pressures.

Verizon enacted policy that would cause its employees to pay much higher fees for health care services. This was responded to in the form of heavy disputes. Since the 2003, even though the employees have been guaranteed a job for the next 5 years, questions about employee loyalty still remain. From a regulatory perspective, as a wireless provider, Verizon faces a variety of legal issues when it comes to spectrum usage, wireless service areas of operation, etc., simply legal restrictions concerning network usage. From a customer facing perspective, that could translate to limitations of service. This particular constraint directly affects Verizon’s Theory of Business, which is to build a reliable, fast and trusted wireless network across the United States.

Constraint Analysis
The FCC and AOL seem to share a similar constraint, probably related to the nature of the technology sector, which is how to dynamically respond to the rapidly changing sector especially as it relates to new/emerging technologies. AOL faced this with their late entry into the high speed Internet market while FCC faces the dilemma of developing and aligning appropriate policies and strategies with rapidly evolving technologies. Verizon and AOL share a common constraint relative to the inability and lack of desire to form strategic partnerships and adapt technology offerings, which has sub-optimized their effectiveness and created lost revenues.
AOL's failure to adopt an open systems approach and integrate and collaborate on a broader scale with strategic partners to bring more robust offerings to the marketplace has to a large extent positioned them in a proprietary 'box' which they are only now beginning to break down and exploit. In Verizon's case, they had a very similar constraint to deal with. The constraint that they have regarding the compatibility or lack thereof, with their 3G network between Europe and the United States is very similar to the compatibility constraint that AOL faced with their closed systems operating model. FCC and Verizon also appear to have similar constraints in the area of resources and the ability to re-skill to meet the demands of the rapidly changing environments that they participate in.

Changing economies seems to be a unique constraint that affects FCC's efforts to extend technology to all classes of society. A key difference in the constraints that the 3 companies faced was related to the market. For both AOL and Verizon, the competitive nature that is prevalent in the technology sector presented constraints in the form of integration, collaboration and emerging technology, FCC, on the other hand does not have the same constraint in terms of the urgency of response in particular to remain competitive.

The concept of Goldratt's theory of constraints is evidenced clearly in each of the companies researched. Each of the companies faced at least one significant constraint in their recent history, which had a profound impact on their stated TOB's. Recognizing this, each of them had to revise their TOB's to address the constraint itself and articulate a vision for moving the business forward. The type and nature of constraints varied amongst the 3 companies, since they were experienced in very unique ways in very different environments. Ultimately, however, all of them demonstrated agility in the form of defining the constraint, determining the impact, refining the TOB and articulating the newly stated goal in an effective manner, albeit with some consequence.

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M-Commerce - How could your company take liverage out of it?

Its my pleasure to introduce you to the emerging world of m-commerce and how your company can take a competitive edge by harnessing this technology. The industry has already seen a huge shift towards increasing end user value by enabling commercial transactions such as comparison shopping and directory services via handheld devices. Mobile phones and such devices are becoming so ubiquitous and technologically powerful that in the near future, all transactions that was possible via internet will be made available via these devices. “Sprint-Nextel is moving forward to build nation’s first WiMax broadband wireless network while IEEE is working on building the 802.11n broadband wireless networking standards by 2008” - (Burger A.K., 2007, January 31). Even though there has been an uncertainty in the m-commerce field, especially the standardization area, these developments has proven to be a wake up call for every wireless provider to take a strategic action.

One of the most successful m-commerce applications of the future will be mobile gaming and multimedia entertainment. There will be possible cross sector alliances between major companies in the mobile, television, cable, music and movie industry. Other promising products and services include m-valets (used for one click payment via handheld devices), music and ring tone downloads, streaming media, purchase of movie/concert tickets, GPS enabled travel/tourism guides, pushed promotions, vending machine purchases etc. There have been a variety of handheld devices in the market that supports different file/coding/compression formats, and this makes it difficult to arrive at a uniform standard.

Another hurdle is the lack of knowledge/coordination between the banks and carriers to work out agreeable m-commerce payment model. Digital distribution rights management (DRM) continues to be one of the major forces of darkness in the full-fledged use of multimedia based m-commerce. DRM rules and regulations should be relaxed to suite the m-commerce model data/voice streams and the user interfaces. Telecom carriers, who are challenged by internet-based wireless technology, continue to resist and restrict opening of their network to third party content. Awareness needs to be created among the carriers about the potential of the new technology to generate revenues via merchant commissions. Establishing a universal micro-payment model is necessary which can direct the m-commerce usage to the existing phone bills.

High reliance on Internet is another negative factor that affects wide usage of m-commerce. Instead of counting on number of purchases made from the hand-held device, methods needs to be devised that leverages the existing Internet medium to complete the transaction via WAP. RF consulting has proven record of expertise in establishing mcommerce support in wireless networks, as well as designing and implementing mcommerce applications and standards, and we are pleased to work on the constraints that your company is facing to emerge as a leader in providing m-commerce based

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Article Copyright - Deepesh Joseph (2002-2015)

Tuesday, January 19, 2010

Force Field Analysis - How could IT managers use it?

Force field analysis is a tool used for analyzing the supporting and opposing forces behind a change process. Managers use it to identify the stakeholders who support or oppose the proposed change, analyze the forces or motivating factors behind each supporting or opposing behavior and then take action so as to reduce the opposing forces. After performing Force
Field Analysis, manager will be able to decide whether he can go ahead with the proposed change. For eg., if he is sure that the opposing change will always be greater than the supporting forces by any means, he can decide to abandon the proposed change.

Article Copyright - Deepesh Joseph (2003-2020)

Research Reference:
1. Williams C. (2007). Management (4th ed., ). Thomson South Western.