QUESTION

Activity A: Journal (maximum 500 words)

Prepare a journal which records your activities and progress related to completing this assignment. In date order, clearly list the following:

• Date of research activity/discussion
• Topic researched or discussed
• Time duration
• Brief description of research activity/discussion.

Submit this journal as a separate report. A sample of the journal will be provided in the Study Desk.

Activity B: Presentation to Senior Management

Your company produces electronic book reader, called e-readers, and has occupied a dominant position in the marketplace for many years because of your quality product that included some features that competitors lacked.

But success can breed complacency and in recent years your competitors are starting to catch up with you and encroach on your market share. For this reason, your company is asking questions: Is life too comfortable at the e-reader factory? What would happen if you offered an e-reader that incorporates new capabilities that would awe the market? The objective, however, is not for the new e-reader to completely replace the current product. Instead, with its additional innovative features the enhanced e-reader should command a higher price and establish a new revenue stream for your company. As a result, some of your current distributors might migrate from your current product to the enhanced e-reader, and other distributors would carry both products.

In this assignment you are required to research the background for a project to produce the enhanced e-reader, use Microsoft Excel to model a business case, perform sensitivity analysis to validate assumptions, and create a PowerPoint presentation to seek funding and authorisation from Senior Management to implement the project. If you are unfamiliar with the business case and sensitivity analysis concepts you should make an effort to read up appropriate material, including those from the Internet, to learn about them. You should also have read the note provided in the file: MIS Project #4 – Capital Budgeting Methods for Information System Investments that is found in the Study Desk to understand the various financial methods for evaluating capital investment projects.

Before you commence on this assignment ensure that you have completed Hands-on MIS Project # 1 to 5 in Appendix S.1 in the Study Book. These exercises are designed to familiarise you with the software, techniques and methods used in the assignment.

Part 1: Research the background for the enhanced e-reader project

1.1 Conduct an Internet search to gather relevant background information for the enhanced e-reader project. Some of the questions your research should seek to answer include:

• What is the current status and future directions of the e-reader market?
• Who are the key players in the e-reader market and why are their products popular?
• What is the profile of the typical e-reader user?
• What dissatisfactions have been expressed by owners of e-readers?
• What specific applications and technologies are these owners looking for in future models?

Part 2: Develop the Excel model of the business case

2.1 The spreadsheet below show the total sales forecast for the new e-reader as provided by your marketing department. Note that it assumes that the cost of goods (Row 5) sold will be 50 percent of the projected revenue i.e. total sales (Row 4). Revenue minus the cost of goods sold is the gross profit (Row 6) the company expects to derive from the new product.

After reviewing the product offering with the stakeholders in your organisation you identify the relevant costs and arrive at the spreadsheet below.

The five costs identified are:

• Lost value (Row 7). Some of the current distributors of the existing e-reader prefer the new features and performance enhancements. For this reasons, you can expect that these distributors will stop buying the existing product and start buying the new ones.
• Advertising (Row 8). You need to get the word out about your new product.
• New product management team (Row 9). The new e-reader’s secured book-sharing capabilities mean that you need to hire new a product management team to oversee the new e-reader’s development from its rollout though its life cycle.
• Market research expenses (Row 10). The market research expenses needed to launch the new e-reader.
• Incremental maintenance (Row 11). The maintenance cost for the new equipment and software used in the production of the new e-reader will be incurred from Year 2 onward.

The total costs (Row 13) is the summation of the above identified costs.

EBITDA (Row 15), which stands for Earnings before Interest, Taxes, Depreciation, and Amortization, estimates the earnings from the product before taking other, indirect costs into consideration. Depreciation expense (Row 16) is based on: the new equipment investment (Row 21) of $10 million and fixed depreciation rate of $1 million per year over an assumed useful life of 10 years and salvage value of $0 million. EBITDA minus depreciation results in the income before taxes (Row 17). After figuring in taxes (Row 18; tax rate is taken as 36 percent), the net income (Row 19) is derived by subtracting taxes from income before taxes.

The net cash flow (Row 22) is obtained by taking into consideration two items: the new equipment investment (Row 21; only for Year 1) and its depreciation (Row 20). The depreciation expense from Row 16 is added back in Row 20 because it is not an actual cash outlay but an accrued expense. As an expense, depreciation can be used to reduce income for the purpose of calculating tax liabilities. As a non-cash expense, it should not count as a cost reducing the net cash flow.

Using the information provided in the above two spreadsheets and taking the discount rate as 10 percent, perform the following analysis to ascertain the financial viability of the enhanced e-reader project:

• Payback period
• Net present value (NPV)
• Internal rate of return (IRR), and
• Profitability index

HINTS: To obtain the payback period you would first need to calculate the cumulative net cash flow. Use the NPV and IRR functions provided in Microsoft Excel.

Interpret your results. Use the note in MIS Project #4 – Capital Budgeting Methods for Information System Investments to guide you.

Part 3: Perform a sensitivity analysis for the business case

3.1 Using the results you obtained in Part 2 as the base case, conduct a sensitivity analysis to examine the impact of the critical cost and benefit variables on the viability of the enhanced e-reader project. You do this by developing various ‘what-if’ scenarios to see how the profitability of the new product would be affected if the value of these critical variables are changed. In particular, your scenarios should focus on those variables that you have least control over e.g. incremental sales and lost sales.

Some of the scenarios you can consider in your analysis are:

• Incremental sales are twice of the base case.
• Incremental sales are half of the base case.
• Advertising expense is doubled, causing incremental sales to increase by 20%.
• Advertising expense is halved, causing incremental sales to decline by 30%.
• Discount rate (also known as the cost of capital) is 20%.

Carefully analyse your results and make appropriate recommendations to the company’s senior management as to how the critical cost variables should be managed to ensure that the new line of enhanced e-reader device is profitable.

Part 4: Create a PowerPoint presentation to senior management

4.1 Consolidate and cross-analyse your results and findings from Part 1, 2 and 3. Then prepare a PowerPoint presentation to the company’s senior management to seek their financial support and authorisation to embark on the enhanced e-reader project.

Your PowerPoint presentation, which should comprise no more than 20 slides, should be developed and structured according to the following guidelines.

SOLUTION

Current status and future directions of the e-reader market

Amazon has been the dominant player in the ebook reader market. This was made possible after Mobipocket a French company was acquired by Amzon. The next in the league come Barnes & Noble Nook, Kobo books & iPad. Of these iPad gained significant popularity because of its capability to read the material of Kindle, Kobo and Nook and had the comparable functions. Thus iPad gained the competitive advantage.

The ebook reader market is characterized as technology driven and competitive pricing strategy market. This can be seen by the incentives being given to have the significant market share.  The key segment that has been targeted is of students and education institutes where the production will be linked to mass requirement thereby increasing the profits. However to boost masses the shift has been made towards electronic bookstores.

Key players in the e-reader market and why are their products popular

The ebook reader is flooded with a huge number of manufacturers providing quite similar products. But there are some identified companies that are providing good quality products along with company specific products. The major competitors in this market are Amazon, Barnes & Noble Nook, Kobo books & iPad from iPad. Each have their own characteristics. Amazon being the veteran in the industry as compared to others in the market has been the most known brand over the years. However the features of ebooks have been changing rapidly with technology driven companies such as Sony also entering the market (Global Industry Analysts Inc. 2011). The popularity of the ebook reader has increased vary from product to product. Amazon is popular with the range of ebooks it offers. The companies like Apple and Sony are popular because of technological changes they have brought in like, LCD Display, Compatibility with other ebooks, internet connectivity and sophisticated features like touch and type. The companies like Barnes & Noble and Kobo have been popular because of the memory space they offer although Amazon with its wide range also has the similar memory backup.

There are a large number of players in the market. The other players in the market that are increasing the competition are Bookeen, Pocketbook and Havon and most importantly Sony.  Sony being major player in other segments of electronics has the edge over other but these are still early days and the time has to come for the matured e-reader market.

Profile of the typical e-reader user

The profile of a typical e-reader user as reported by the survey done by various companies show that e-reader users are well educated and belongs to high income family. According to Mediamark more than 50% of users are men and in the age group of 35-54 years (Jennifer. 2010). It has been observed that the e-reader users are almost those who have access to internet and the working hours on internet ranging from more than 6 hours to 1 hour in a day. Thus it can be seen that the market for e-reader will those who are comfortable with the modern technological changes or are exposed to technology on a frequent basis.

Other factor that may govern the profile of e-reader is the profession. It is likely that the major contribution to the e-reader market will be of education sector. This includes students, researchers, teachers, professors, schools, colleges and institutes. This can be known from the fact that survey that has been done. It does show that the e-reader is not restricted to young age but is common among a wide range.

Dissatisfactions expressed by owners of e-readers

Although there have been big names that have entered the e-reader market but there have been concerns shown for the products of these companies. The major factor of dissatisfaction has been the processing speed. Most of the e-readers lack on this front. This makes the e-reader lose interest. Other major factor has been the compatibility (Jefferson. 2010). Most of the e-readers have the company specific software thus if a user wants to shift to other e-reader the issue of compatibility comes up (Jennifer. 2010). Thus if someone has Amazon e-reader it will not be compatible with Apple e-reader. However this issue has been resolved by Apple and it does show the compatibility with other e-readers.

The pricing has been the concern of a few users. As the e-reader market is not yet matured thus the prices are on the higher side. This is expected to reduce as the market grows but it will take some time. However the companies like Apple and Sony who are giants in the sector and have expertise in developing electronic products have brought the prices down.

Another major issue with e-readers is the complexity. Some of the e-readers are complex enough to confuse the users thus at times it becomes difficult for users to surf and know the common features which are actually very helpful. The complexity can be with the software of the e-reader or the physical characteristics of the e-reader like inaccessible buttons and may be sometimes the size of the button. The size of the screen and the on screen features in case of touch screen type e-reader also add to the complexity.

Lastly although not a major issue but a genuine one, the users have shown concern on the content available. Since as discussed earlier most of the e-readers are not compatible the content available for users is limited. Thus the option available to the users is limited thereby resulting in reduced popularity.

Specific applications and technologies owners are looking for

The technology has vastly changed the world of e-reader. Still, the users want that more applications and technology advancement be made. Sometimes these are major costly requirements and sometimes these are basic requirements that add to the comfort of the user.

The major developments that e-reader user look for in the e-reader are (Jennifer. 2010).

Touch Screen: This is the most common feature in new models of e-reader that are coming up in the market. Availability of this feature has been appreciated by the users.

Wireless Network: It is the requirement to get connected to the available networks and utilize it along with the e-reader.

Text to Speech (Voice reader): This is an important and technology driven application that has been desired by the e-reader users wherein the application will be able to recognize the voice of the user and will search and surf material.

Dictionary: Dictionary has been the basic feature in the e-readers from the start itself however there are few new companies that still highlight it as the major feature in the e-reader they supply

Card Reader Facility: It will assist in transferring the content from one e-reader to another provided the compatibility is there.

Internet Browser: It is primary requirement in e-readers now days. The user would like to browse the web and look for relevant material and then work on the e-reader. This will add value to the e-reader and at the same time increase the utility of it.

USB Peripherals: This is another important feature that is desired in the e-reader. If provided the e-reader user can transfer the material and access that on the e-reader.

References

Dean Takahashi . (2011). E-book reader sales are tripling every year. Available: http://venturebeat.com/2011/08/17/ebook-reader-sales-are-tripling-every-year/. Last accessed 17th Apr 2012

Jennifer. (2010). Demographics of Kindle and Other eReader Users. Available: http://floridaresearchgroup.wordpress.com/2010/02/16/demographics-of-kindle-and-other-ereader-users/. Last accessed 18th Apr2012.

Thomas Jefferson. (2010). Barnes & Noble NOOK Reader . Available: http://www.e-reader-reviews.com/barnes-noble-nookcolor/#comments. Last accessed 17th Apr 2012.

Global Industry Analysts Inc. (2011). E-Readers – Global Strategic Business Report. Available: http://www.researchandmarkets.com/reportinfo.asp?report_id=1882069&t=e. Last accessed 17th Apr 2012.

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