E-Learning Business Risk Management with Real Options

E-Learning Business Risk Management with Real Options

Georgios N. Angelou (University of Macedonia, Greece)
DOI: 10.4018/978-1-60566-128-5.ch011
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E-learning markets have been expanding very rapidly. As a result, the involved senior managers are increasingly being confronted with the need to make significant investment decisions related to the elearning business activities. Real options applications to risk management and investment evaluation of Information and Communication Technologies (ICT) have mainly focused on a single and a-priori known option. However, these options are not inherent in any ICT investment. Actually, they must be carefully planned and intentionally embedded in the ICT investment in order to mitigate its risks and increase its return. Moreover, when an ICT investment involves multiple risks, by adopting different series of cascading options we may achieve risk mitigation and enhance investment performance. In this paper, we apply real options to the e-learning investments evaluation. Given the investment’s requirements, assumptions and risks, the goal is to maximize the investment’s value by identifying a good way to structure it using carefully chosen real options.
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E-learning is the delivery and management of learning by electronic means. Various devices (workstations, portable computers, handheld devices, smart phones, etc.), networks (wireline, wireless, satellite, etc.) can be used to support e-learning (Wentling et. all., 2000). E-learning may incorporate synchronous or asynchronous communication, multiple senders and receivers (one-to-one, one-to-many, many –to many, etc.), multiple media and format independently of space and time.

Recently the e-learning markets have been expanding very rapidly and led to an unexpected revelation: the forces affecting higher education around the world are strikingly similar. This is true in at least four important areas: expanding enrollments; the growth of new competitors, virtual education and consortia; the global activity of many institutions; and the tendency for policy makers to use market forces as levers for change in higher education. Expansion of enrollments, accompanied by shifts in student demands and expectations, is a global phenomenon. The number of tertiary students worldwide doubled in size in just twenty years, growing from 40.3 million students in 1975 to 80.5 million students in 1995 (Newman and Couturier, 2002).

Previous research on e-learning cost analysis and investment evaluation does not consider the risk inherent in the business activity (Whalen and Wright, 1999; Downes, 1998; Morgan, 2000). In this work we apply a real option model to identify and control the e-learning investments risks in order to achieve a balance between reward and risk.

The real options approach applies methods of financial planning in investment valuation problems. An investment project embeds a real option when it offers to management the opportunity to take some future action (such as abandoning, deferring, or scaling up the project) in response to events occurring within the firm and its business environment (Trigeorgis, 1996). For example, by taking advantage of the option to defer the investment for some time the management can learn whether there are better alternative technologies (Li and Johnson, 2002). This management’s flexibility (called active management) to adapt its future actions in response to altered future business conditions expands an investment opportunity’s value by improving upside potential and limiting downside losses (Trigeorgis, 1999). Business condition either refers to market conditions or firm conditions depending on where the investment is focusing. For example, an investment of an e-learning infrastructure for providing educational services only inside the premises of a big organization mainly refers to firm conditions. On the other hand, an e-learning application, which mainly focuses on providing services in the market (by a university or other institution), refers to market conditions. Figure 1 is a schematic diagram showing the probability distribution of cash flows for a passively versus actively managed project.

Figure 1.

Uncertainty under passive and active management of the investment project, (Trigeorgis, 1996).

By adopting the active management philosophy we decrease the possibility of experiencing losses while increase the possibility of gaining. This is achieved by deffering the investment’s implementation, learning about the changing business conditions, and generally resolving over time part of the overall investment’s risk.

Most previous research considers only ICT investment that embeds a single and a-priori known option. However, real options are not inherent in any ICT investment (Benaroch, 2002), and in any case they are not always easily recognizable (Bräutigam and Esche, 2003). In order to optimally configure an ICT investment it may require considering a series of cascading (compound) options that will help to mitigate risk and enhance economic or strategic performance.

Complete Chapter List

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Associate Editors
Table of Contents
Mehdi Khosrow-Pour
Chapter 1
Manuel Mora, Ovsei Gelman, Guisseppi Forgionne, Doncho Petkov, Jeimy Cano
A formal conceptualization of the original concept of system and related concepts—from the original systems approach movement—can facilitate the... Sample PDF
Integrating the Fragmented Pieces of IS Research Paradigms and Frameworks: A Systems Approach
Chapter 2
Steven Alter
The work system method was developed iteratively with the overarching goal of helping business professionals understand IT-reliant systems in... Sample PDF
Could the Work System Method Embrace Systems Concepts More Fully?
Chapter 3
Alfonso Reyes A.
This chapter is concerned with methodological issues. In particular, it addresses the question of how is it possible to align the design of... Sample PDF
The Distribution of a Management Control System in an Organization
Chapter 4
Phillip Dobson
This chapter seeks to address the dearth of practical examples of research in the area by proposing that critical realism be adopted as the... Sample PDF
Making the Case for Critical Realism: Examining the Implementation of Automated Performance Management Systems
Chapter 5
Jo Ann Lane
As organizations strive to expand system capabilities through the development of system-of-systems (SoS) architectures, they want to know “how much... Sample PDF
System-of-Systems Cost Estimation: Analysis of Lead System Integrator Engineering Activities
Chapter 6
Kosheek Sewchurran, Doncho Petkov
The chapter provides an action research account of formulating and applying a new business process modeling framework to a manufacturing processes... Sample PDF
Mixing Soft Systems Methodology and UML in Business Process Modeling
Chapter 7
Aidan Duane, Patrick Finnegan
An email system is a critical business tool and an essential part of organisational communication. Many organisations have experienced negative... Sample PDF
Managing E-Mail Systems: An Exploration of Electronic Monitoring and Control in Practice
Chapter 8
Stephen V. Stephenson, Andrew P. Sage
This chapter provides an overview of perspectives associated with information and knowledge resource management in systems engineering and systems... Sample PDF
Information and Knowledge Perspectives in Systems Engineering and Management for Innovation and Productivity through Enterprise Resource Planning
Chapter 9
Gunilla Widén-Wulff, Reima Suomi
This chapter works out a method on how information resources in organizations can be turned into a knowledge sharing (KS) information culture, which... Sample PDF
The Knowledge Sharing Model: Stressing the Importance of Social Ties and Capital
Chapter 10
Jijie Wang
Escalation is a serious management problem, and sunk costs are believed to be a key factor in promoting escalation behavior. While many laboratory... Sample PDF
A Meta-Analysis Comparing the Sunk Cost Effect for IT and Non-IT Projects
Chapter 11
Georgios N. Angelou
E-learning markets have been expanding very rapidly. As a result, the involved senior managers are increasingly being confronted with the need to... Sample PDF
E-Learning Business Risk Management with Real Options
Chapter 12
C. Ranganathan
Research on online shopping has taken three broad and divergent approaches viz, human-computer interaction, behavioral, and consumerist approaches... Sample PDF
Examining Online Purchase Intentions in B2C E-Commerce: Testing an Integrated Model
Chapter 13
Nicholas C. Georgantzas
This chapter combines disruptive innovation strategy (DIS) theory with the system dynamics (SD) modeling method. It presents a simulation model of... Sample PDF
Information Technology Industry Dynamics: Impact of Disruptive Innovation Strategy
Chapter 14
Shana L. Dardan, Ram L. Kumar, Antonis C. Stylianou
This study develops a diffusion model of customer-related IT (CRIT) based on stock market announcements of investments in those technologies.... Sample PDF
Modeling Customer-Related IT Diffusion
Chapter 15
Bassam Hasan, Jafar M. Ali
The acceptance and use of information technologies by target users remain a key issue in information systems (IS) research and practice. Building on... Sample PDF
The Impact of Computer Self-Efficacy and System Complexity on Acceptance of Information Technologies
Chapter 16
James Jiang, Gary Klein, Eric T.G. Wang
The skills held by information system professionals clearly impact the outcome of a project. However, the perceptions of just what skills are... Sample PDF
Determining User Satisfaction from the Gaps in Skill Expectations Between IS Employees and their Managers
Chapter 17
James Jiang, Gary Klein, Phil Beck, Eric T.G. Wang
To improve the performance of software projects, a number of practices are encouraged that serve to control certain risks in the development... Sample PDF
The Impact of Missing Skills on Learning and Project Performance
Chapter 18
Leigh Jin, Daniel Robey, Marie-Claude Boudreau
Open source software has rapidly become a popular area of study within the information systems research community. Most of the research conducted so... Sample PDF
Beyond Development: A Research Agenda for Investigating Open Source Software User Communities
Chapter 19
Milam Aiken, Linwu Gu, Jianfeng Wang
In the literature of electronic meetings, few studies have investigated the effects of topic-related variables on group processes. This chapter... Sample PDF
Electronic Meeting Topic Effects
Chapter 20
A. Durfee, A. Visa, H. Vanharanta, S. Schneberger, B. Back
Text documents are the most common means for exchanging formal knowledge among people. Text is a rich medium that can contain a vast range of... Sample PDF
Mining Text with the Prototype-Matching Method
Chapter 21
Francis Kofi Andoh-Baidoo, Elizabeth White Baker, Santa R. Susarapu, George M. Kasper
Using March and Smith’s taxonomy of information systems (IS) research activities and outputs and Newman’s method of pro forma abstracting, this... Sample PDF
A Review of IS Research Activities and Outputs Using Pro Forma Abstracts
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