terminal emulation controllers, duplex, communication protocols, multisession networks,...

TELEMATICS end

INFORMATICS

Vol. 10, No. 1, pp. 59-73, 1993 Copyright © 1993 Pergamon Press Ltd. Printed in the USA 0736-5853193 $6.00 + .00

TERMINAL EMULATION CONTROLLERS, DUPLEX, COMMUNICATION PROTOCOLS, MULTISESSION NETWORKS, UP/ DOWN-LOAD, COPY PROTECTION, BAUD-RATE, AND WINDOWS COMPATIBILITY: PROFIT MEASURES AND PRODUCT FEATURES

A vi Rushinek Sara Rushinek

Abstrac t -This study finds that the most profitable short-term, add-on Ter- minal Emulator (TE) products are Data-Stream-To-Disk, Multi-Session, and Net-Work Printer capabilities. In the longer term, as fixed costs become avoidable, the same products remain the most profitable, only their rank changes. In the long term Multi-Session is the first, Net-Work Printer is second, and Data-Stream-To-Disk is the last. The selection of appropriate features for TE products can be very difficult for both manufacturers, as well as for end-users. This study describes an interactive microcomputer based Feature Selection System (FSS). The Feature Price Contribution Margin (FPCM) measures to what degree a specific feature meets end-user needs, and measures how profitable they are for the developer and the manufacturer. FSS produces a segmented income statement of possible future product lines. It also compares the outcome of integrating and bundling a feature into a product, versus marketing this feature as a separate "add-on" product line to a TE. In such context, it could also be used for litigation support to quantify the damages that result from the absence of a feature to either the vendor or the end-user.

OVERVIEW OF TERMINAL EMULATORS (TEs)

TEs are compute r sub-systems that intercept the communica t ion between two comput - ers, a user computer , and a host computer . Such compute r sub-systems usually include both sof tware and hardware parts. The sof tware c o m p o n e n t is loaded after the operating system, searching for the TE hardware componen t , and driving it. The hardware componen t is a boa rd that is inserted in a slot on the mo the r -boa rd o f the users computer , connect ing the user compute r to the host via a cable tha t is either hard-wired or coupled with a communica t ion device to a te lephone line, or other devices. TEs typically compete with dedicated terminals tha t specialize in communica t ing with a single hos t computer . Thus , they appear to the host as t hough they are a dedicated

Avi Rushinek is a professor of accounting at the University of Miami, 317 Jenkins, Coral Gables, Florida 33124. Sara Rushinek is a professor of computer information systems at the University of Miami, 421 Jenkins, Coral Gables, Florida 33124.

59

60 Avi Rushinek and Sara Rushinek

terminal, when in fact they are not a dedicated terminal. Instead, they are inserted and operated inside a general purpose computer, making it operate as though it were a dedicated terminal.

TEs have many advantages over dedicated terminals. TEs are cheaper, many cost well below a $1,000, while some dedicated terminals may cost well over $1,000. One TE sub-system, can emulate several dedicated terminals making it even more cost- effective. TEs enable the operator to complete multi-task jobs, and thus be more efficient. Multi-session and window capabilities frequently let the operator monitor the progress on concurrent jobs, while tending jobs that need attention on an as needed basis. TEs let the user work on his computer while the host is down- or over-loaded and avoid delays due the problems with the host computer. TEs can take advantage of the intelligence of the user's computer to automate repetitive host tasks, such as boot- ing up at a certain time and date, logging in, down- up-loading reports, and logging out. Likewise, TEs can monitor the communication, scan the screen for certain error messages, and provide remedial action, depending on the problem. TEs are also much more easily upgradable and maintainable, (compared to dedicated terminals). You can simply replace the software, hardware, or their components. TEs consume much less desk-top space compared to dedicated terminals.

TEs have also some disadvantages, compared to dedicated terminals. User training is one of the disadvantages of TEs. Some users need additional training to handle a general purpose computer and a TE. Some users of dedicated terminals find it difficult to switch to a TE, and deal with a dozen different possibilities of a general purpose computer, making it more error-prone. The abundance of tasks and sessions may produce software and hardware incompatibilities that are intermittent, and difficult to diagnose and correct. A program that runs well on a dedicated terminal may not run so well on a TE, due to some other concurrent tasks or sessions that were absent in the dedicated mode of execution. A "dumb" dedicated terminal may better suit rigid operators, who are reluctant to be trained and change their ways of working, causing problems and damage that are hard to detect.

INTRODUCTION AND THEORETICAL FOUNDATIONS

Selecting the most profitable features and determining the prices of microcomputer products can be a difficult process. Several factors are involved in this process includ- ing retail strategy, competition, current market price, expense and profit goals, consumer perceptions, psychological issues, leader offerings, and environmental influ- ences (Walker, 1978; Kalish, 1985; Hauser & Simmie, 1981).

Research shows that product features also effect price. Some studies have measured indirect price feature relations (Gabor, 1979; Lawler-Wilson, 1979). However, the direct impact of individual features on price has not been empirically measured. This study focuses on the direct effects of TE features on the retail price, with the aid of segmented income statements.

SEGMENT REPORTING

Segment reporting shows the profitability of one portion of an organizational activity; frequently a product line. It measures product line profitability, promoting the most lucrative product. The usefulness of segment reporting is controversial. Some consider segment reporting to be valuable (Cooke & Whittaker, 1983). Others question the usefulness of segment reporting (Salamon & Dhaliwal, 1980; Ronen & Livnat, 1981).

Terminal emulation 61

Many of these studies used multiple linear regression analysis. Likewise, this study also uses this analysis to be comparable with other studies.

This study extends segment reporting beyond the level of product line, breaking it further down into individual product line features. It advocates using feature segments prior to product line segment reports. Moreover, it segments contemplated future product lines or "add-on" product lines rather than currently existing product lines.

THEORY OF FEATURE PRICE CONTRIBUTION MARGIN (FPCM)

This study contents that the most lucrative features should be built into a product. A Feature Segmented Income Statement will point out these most profitable features. The complete product line segmented report should be considered, only after the most profitable features have been incorporated into the product. Otherwise, a traditional segmented product line report can be very misleading. One product may look more attractive only because more profitable features were included than in another one. This theory contents that each product feature has a price premium or discount value associated with it. This premium or discount is the FPCM feature. Features are characteristics of a product line. Some features are continuous and essential. In contrast, other features are binomial (0 or 1) and optional. The FPCM shows the increase or decrease of the price due to the presence or absence of an optional product feature. This study computes the FPCM using a multiple regression model. Once the FPCM is then known, its expenses can be deducted to show the feature contribution and segment margins.

Having this information, the most profitable features will be incorporated into the product. Such segmented reports will have truly comparable product lines, fulfilling their profitability potential.

It is important to discover which features contribute the most to the price. It reflects the consumer/end-user sentiments and it guides the product designer. If the product contains these high FPCM, it should command the highest possible price. This study provides a methodology for selecting the most profitable features to include n a contemplated future product line or as a separate add-on product supplementing an existing product.

TERMINAL EMULATION (TE) SELECTED FEATURE REVIEW

Vendors have had a dilemma is knowing which features they should incorporate into their products (Mack, 1987; Smith, 1990). The major vendors of TE have responded to user criticism by revising their systems, based on perceived needs (Stephens & Snyder, 1991). The problem is that perceptions are subjective and error prone (Nielsen, 1990). FPCM will be a more objective measure of user satisfaction as well as profitability for that particular feature. This way manufacturers can supplement their subjective perceived user needs by more objective FPCM and profitability information.

However, despite the importance of profitability in TE design, there has been little guidance to the contribution each feature specification has toward the price (McDon- ald, 1991; Borton, 1990). How much should each function add to the total price? This is answered by an interactive Feature Selection System (FSS) (Appendixes A-C).

While designing a TE product or revising an existing product, the vendor should decide which features to include in the new release (Thomas, 1990; Mooney, 1991). Some of the TE features that should be considered include: type of emulation, network printer, multisession capabilities, full duplex, speed, and transfer of binary files, multi-


pie windows, on-disk tutorial, database, and different data formats (Nestor, 1989; Youmans, 1988). This is not an exhaustive list of TE features. It is just a sample of features intended to illustrate FPCM and demonstrate FSS.

DATA COLLECTION, PROCESSING, AND HYPOTHESES

Data are selected from the entire population of TE vendors listed in the Data Sources manual (Ziff-Davis, 1988). Data were collected by inspecting the products and its literature, verifying it and storing it in a database. Each vendor recorded in this database contains a TE product retail price and the specifications of its features. The price is regressed on the features and the resulting X-coefficients are incorporated in a FSS. FSS is fed with the feature specifications, costs, and sales volume data. This produces segmented financial statements.

The true hypothesis of this study is that FPCM exists, although R-square and F- values are used as its statistical surrogates. Retail prices are regressed on selected features of the population of all TE products. Therefore, only the "overall" goodness of fit of the regression equation is tested.

The overall test for goodness of fit is based on the value of the adjusted R-squared. Accordingly, the hypothesis concerning R can be stated formally as follows:

Null hypothesis: R = O; Alternative hypothesis: R not equal O.

The features with the largest R-square contributions and t-values were selected out of an extensive list of initial features (Appendix B).

RESULTS, DISCUSSION, AND ANALYSIS

The price is regressed over the product feature specifications. This is done by a multiple linear regression, since its assumptions have been met (Nie et al., 1975). Since many past studies have used multiple regression, this study will use the same technique for comparability purposes.

Table 1 presents the summary statistics used for the overall test for goodness of fit of the regression model. Accordingly, the adjusted multiple R square (0.41) indicates the variation in price explained by these FPCMs. The rest may be explained by other factors (Figure 1) not included in this model. Standard error of the estimate shows the possible variation in the estimated price ($874.00). Table 1 also shows the standard deviations, averages, T-values, and most importantly, the X-coefficients that form the FPCM. The F-value (4.11) shows that the model is statistically significant at the 0.05 level. While the F-value pertains to the overall model, the T-value depicts the significance of individual coefficients (i.e., multisession is highly significant at 2.44). The X-coefficients reflect the increment (or decrement) in the price due to the presence of a feature. Thus, if multisession capabilities are included, the price should be raised by $986.34.

The Standard Deviation is a measure of dispersion. It shows that there is greater dispersion about Synchronous Data Link Control (SDLC 0.42), an IBM data transfer protocol, than about data stream to disk (0.28).

The average shows the percentage of products in the population having a particular feature. Thus, SDLC is less frequent (78°70) as compared to the presence of data stream


Table1. Multipleregressionsummaryexhibit.

MULTIPLE REGRESSION SUMMARY REPORT

..............................................................................

Constant aeg~:s~t~U~ase- - - - --~- ~ prlce 2140 47

Standard Error of Y Estimate..Base price error .............. 874.00 R Squared (Adjusted) ........................................ 0.41 Number of Observations ........ Manufacturers population ...... 45.00 Degrees of Freedom .......................................... 34.00

Computed F-Value ................. 4.11 ..............................................................................

========================================-_=====================================

MULTIPLE REGRESSION 3274/3276 Bisync SDLC STATISTICS Controller ..............................................................................

X Coefficient(s)..Estimated Price Contribution.. -844.06 -215.98 -378.48 Standard Error of Coeficient .................... 372.53 368.51 478.06 Statistical significance of T ................... * T-Statistic ................................... -2.27 -0.59 -0.79 Average .................. Per Feature .......... 0.53 0.71 0.78 Standard Deviation ......... Per Feature .......... 0.50 0.45 0.42 ..............................................................................

MULTIPLE REGRESSION Transfer Full Half Speed Multi- SUMMARY REPORT Binary Duplex Duplex in BPS Session ..............................................................................

X Coefficient(s) ........... -548.14 107.34 -1485.83 -0.00046 986.34 Standard Error Coefficient. 335.38 383.41 329.79 0.00 404.54 Statistical significance of T ................ * * T-Statistic ............. -1.63 0.28 -4.51 -1.71 2.44 Average .................. 0.73 0.64 0.71 638928.89 0.76 Standard Deviation ......... 0.44 0.48 0.45 1031876.12 0.43 .............................................................................

. . . . . . . . . . . . . . . . . . . . . = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

MULTIPLE REGRESSION Data Stream Network SUMMARY REPORT to Disk Printer

........ ;;;?;; ............................

Standard Error Coefficient. 495.70 499.04 Statistical significance of T ....... T-Statistic ............. 1.62 0.60 Average .................. 0.91 0.78 Standard Deviation ......... 0.28 0.42

=====================================

* Significant at the .05 level of statistical significance

to disk (91%). Unlike the binomial features, whose values are either 0 or 1, the average of continuous features represent the industry standards. Thus, the average speed in BPS is about 640,000.

INTERPRETED FPCM RESULTS

Based on the positive or negative values of the X-coefficients, the effects of the features upon the overall price, can be classified as either having expanding (positive) or contracting (negative) effects. The direction of the signs may reflect user perceptions, level of satisfaction, and/or utility.

The features full duplex (107.34) and multisession (986.34) have expanding effects on the overall price, while half duplex has a contracting effect. The negative coefficient of half duplex may be explained by some negative association with this feature.

In contrast, network printer compatibility has a positive FPCM. In general, network printer support allows the user to share a printer with other sources in the network.

Add-on product vendors can use these coefficients to make decisions. Thus, the market reception of add-on network printer compatibility may be more favorable than half duplex capabilities. These are products that do not function alone. Instead, they


Table 2. Calculation of estimated features price contributions.

= = = = = = = = = = = = = = = = = = = = = = = = = =----~=_ = ~ = = ~ = = = w ~ = = = = = ~=-- ~ = = = = = = = = = ~ = = = = = = =

ILLUSTRATED FOR ADDING 3274/3276 Bisync SDLC ADDITIONAL FEATURES Controller

X Coefficlent(s) multiplied by: ......... -844.06 -215.98 -378.48 Feature Specs per product ............... 1.00 1.00 0.00 Feature Price Contribution. - .......................... Margin (FPCM) Product Total...($1,446.69) ($844.06) ($215.98) $0.00 Constant (Base Price) ......... $2,140.47 ========= ..... ===== ........ Total Estimated Price .......... Go to exhibit 3

without extra features $693.78 Column A Add the First Extra Feature .... $986.34 Column C Estimated price with *** ......... One extra feature ............ $1,680.21 Column B

ILLUSTRATED FOR ADDING Transfer Full Half** Speed Multi- ADDITIONAL FEATURES Binary Duplex Duplex zn EPS Session . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Binomial (optional) Feature 7 4 9 * 1 X Coefficient(s) multiplied -548.14 107.34 -1485.83 -.00046 986.34 Feature Specs per product.. 0.00 0.00 1.00 9600.00 0.00 Feature Price Contribution ................................................... Margin (PFCM) Product Total $0.00 $0.00 ($1,485.83) ($4.45) $0.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ILLUSTRATED FOR ADDING Data Stream Network ADDITIONAL FEATURES to Disk Printer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Binomial IOptional) Feature 2 3 X Coefficlent(s) multiplied 803.01 300.62 Feature Specs per product.. 1.00 1.00 Feature Price Contribution ..................... Margin (PFCM) Product Total $803.01 $300.62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

* Essential features (continuous-other than 0 or 1) are not ranked ** The largest value for an optional feature (binomial spec 0 or 1) *** Assumes equal expenses for additional feature

are designed to supplement another product (usually by another vendor). Thus, a network printer utility will enable a user to interface with a network printer from a software package that does not currently support this interface available in a software package. However, it is important to emphasize that all of these are "after-the-fact," unconfirmed conjectures and rationales. Investigating and explaining each one of these coefficients is a future area of research in its own right and deserves its own theoretical and empirical testing. Thus, it is clearly beyond the scope of this study. Our concern is the general approach of interpreting these coefficients as they relate to the segmented income statement model.

STATISTICAL INTERPRETATIONS

The study uses the X-coefficients as FPCM, integrated into the expenses and volume of sales, to measure feature profitability rather than evaluate user needs and standards. This conversion of FPCMs into dollars of a contemplated future product line is included in Table 2. The estimated price is the sum of the FPCM values for all features added to the constant.

Once a current estimated list price has been established, extra features can be considered by adding their FPCM to the initial estimated list price (data stream to disk $803.01).

Table 2 shows the X-coefficients from Table 1, and a ranking of the binomial features. It is interesting to note that TE multisession and the data stream to disk


capabilities are top ranked favorites (ranked 1 and 2). In contrast, half duplex is the least favorite among end-users (ranked 9). Though interesting, this is not the focus of this study. But it may be used as a prominent criteria for add-on product development consideration.

The focus of this study is converting the X-coefficients into FPCM, to evaluate the profitability of a feature or a group of features. This is done by multiplying the X-coefficients by the future specifications of this feature. For example, 9600 bps is the specified speed, bisync is included (1), while SDLC and full duplex are excluded (0), etc.

Table 2 shows how the estimated prices are computed. First, X-coefficients are multiplied (3274/76 controller) by their specification (1) forming the FPCM total per feature end-product ( - $844.06). These FPCMs are summed and added to the constant (2140.47), forming the price without an extra feature. Now, the question is how much should be charged for additional graphics features? The charges are equal to its X- coefficient and FPCM ($986.34). We then add it to the initial price to get the price for the product with one extra feature ($1,680.21).

Table 3 shows how the FPCM for "SDLC" is incorporated into the segmented Income Statement. It shows that FPCM ($986.34), its unit CM ($754.38), and total CM ($813,355) are positive. It shows that adding the SDLC feature will increase the volume and ultimately the segment margin ($793,355). Therefore, the data show that it is favorable to add an extra feature. However, another opportunity may be to produce an add-on product line that provides the SDLC feature as a supplement to existing TE products. Such an add-on product line can be sold on its own. The opportunity for the add-on product line is discussed in Table 4.

Table 4 shows that the add-on approach is more profitable than the integrated alternative ($242,196). This short-run scenario results from lower variable costs, sub- stantially larger volume of sales, and larger total CM ($1,670,590), option 2, data stream to disk. The picture changes dramatically in the long-run. In the long-run (when fixed costs are avoidable), the segment and not the contribution margin is the critical factor. It shows that option 1, multisession add-n feature ($1,035,551) is by far the most lucrative.

LIMITATIONS AND FUTURE DIRECTIONS

In this study, the regression model is basically a price equation based on a variety of features. Moreover, since this is a cross-sectional study, covering a single time period, it does not show which variable "causes" another, or whether both are the results of a third factor. However, the model does help in identifying the possibility of causation. The direction of causation needs to be derived by multi-period, cross-section and time-series multi-equation analysis; controlled experimentation, and/or management judgment, not only for prices and features but also for expenses and volumes as well as other factors (Figure 1). In addition to linear relationships, curvilinear relations should be explored.

The formula for any given company should be double-checked against the formulas for its competitors, and against the same company's prior and later data, to verify its reliability. Even within the same microcomputer industry, the formulas are expected to differ significantly among vertical markets and products, as well as years. Therefore, tailoring and updating are mandatory. It would also be important to investigate the multiplicative effects in addition to the additive effects, not only of expenses and volume but also incorporate other factors such as brand recognition, market leader,


Table 3. Product linelfeature contribution and segment margins estimates.

= == ================================ ALPHA SOFTWARE AND COMPUTER INFORMATION SYSTEMS INC. SEGMENTED INCOME STATEMENT FOR THE YEAR ENDING DECEMBER, 198X BY PRODUCT L I N E S & 1 E X T R A A D D E D F E A T U R E

EXTRA FEATURE ADDED:

ESTIMATED UNIT OR FEATURE DATA

PRICES & FPCM from exhibit 2 .......... Times Variable Cost Rate * ......... Less Variable Cost in dollars .......

Unit/Feature Contribution Margin .... Times Volume of Units Sold * ........

Total Contribution Margin ........... Less direct fixed expenses * ........

Segment margin ...................... Common fixed cost ...................

Net Income ..........................

col. C Col. A Col. B Col. A-B

NONE (0) ONE (i) EXTRA NO ADDED ADDED FEATURE FEATURES FEATURE DIFFERENCE =======_-=

$693.78 $1,680.12 $986.34 -15% -20% -5%

($104.07) ($336.02) ($231.96) ............................

$589.71 $1,344.10 $754.38 900 1,000 100

............................ $530,743 $1,344,098 $813,355 (150,000) (170,000) (20,000)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 380,743 1,174,098 793,355 ( 5 0 , 0 0 0 ) ( 5 0 , 0 0 0 ) 0 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3 3 0 , 7 4 3 $ 1 , 1 2 4 , 0 9 8 $ 7 9 3 , 3 5 5 ========== .....

NOTES: * Represents exogenous user entry for sensitivity analysis & evaluation.

To prepare Feature segmented statements it is necessary to keep records of sales and variable expenses by features, as well as totals for the product. Having the information of sales and variable expenses available, a contribution margin figure can be computed for each alternative product design (column A-B). And it can also be computed for an individual feature (column C). This largest PFCM is: .......................... $986.34

The contribution margin means what remains from total sales, or selling price or the feature selling price contribution, after deducting total, unit, or feature variable expenses, to contribute towards the covering of fixed expenses and then towards profits for the period.

To calculate contribution margin we should do the following: A. Calculate the variable expenses for a product or a feature. B. Subtract the variable expenses from the selling price of a product, or Subtract the variable expense from the feature price contribution to get the product or the feature contribution margin. This feature contribution margin is: ............ $813,355 Contribution margin is basically a short-run planning tool. It is especially important in decisions relating to temp- orary uses of capacity, to special orders and to short-term product line promotion. By carefully monitoring segment contribution margln ratios, the mana@er can make short-run decisions that will maximize the contributlon of each segment to the overall profitability of the organization. First select features with the largest contribution & segment margins, leading to a product design with the highest margins, and eventually maximizing overall profitability and hopefully in the same time meeting users needs.

Total Feature Contribution Margin is positive:.. $813,355 Therefore, in the short run we should include this feature because of its total contribution margin, due to changes in volume:.. I00 The largest total contribution is provided by adding this extra feature.

The feature segment margin represents the margin available after a feature has covered all of its own variable costs and its direct fixed costs, after that the product common cost and towards profits. Common feature costs are costs that remain even if the the feature is eliminated, or are unavoidable with respect to the feature.

The segment margin is viewed as bein@ the best gauge of the long run profitability of the segment. This is because only those costs directly traceable to the segment are used in its comp- utation. For managers, the segment margin is most useful in those decisions relating to long-run needs and performance, such as capacity changes, long-run pricing policy, and segment return on investment.

The largest segment margin is provided by the product with added extra features, this is: ....................... $793,355 Likewise, it also has the largest net income:... $793,355


Table 3. (Continued)

Therefore, its the most profitable long term alternative. Similarly, the extra added feature has a positive feature segment margin and net income effect. Therefore, it definitely should be implemented for the long-run.

In order to compute the segment margin we need fixed expenses. As we can see from the exhibit, the fixed costs are divided in two parts on a segmented statement. One part labeled direct and the other part labeled common(indirect).

DIRECT FIXED EXPENSES: The fixed costs that can be identified with a particular feature and that arise because of the addition of the feature. In the problem, the direct fixed expenses for the Home Product division increased due to added features.

VARIABLE PRODUCTION COSTS: in total, in direct proportion to changes in the features & activity. In this case study, variable production costs are a percentage of sales are expected to change.

Table 4. New "add-on" produ~ lineffe~ure contribution and segment margins.

SEGMENTED INCOME STATEMENT FOR THE YEAR ENDING DECEMBER, 198X

BY P O T E N T I A L " A D D - O N " P R O D U C T LINES

EACH ONE MADE OUT OF A P R O D U C T F E A T U R E

Add-on new product lines made out of product Multi- Data Stream Network features with the highest PFCM ranklngs: Session to Disk Printer ============================================== PFCM Rank for optional features (0 or i) 1 2 3 PFCM difference between features in $ ($183.33) ($502.39) PFCM decline rate = PFCM difference/PFCM -19% -63%

............................ Top Ranked FPCM from exhibit 2 ................. $986.34 $803.01 $300.62 Times Variable Cost Rate ..................... -19% -8% -1% Less Variable Cost in dollars ................ ($182.64) ($60.53) ($4.24)

Unit/Feature Contribution Margin ............. $803.70 $742.48 $296.38 Times Additional Volume of Units Sold. 1,500 2,250 3,375

............................. Total Contribution Marqin (Short Term) ....... 1,205,551 $1,670,590 $1,000,293 Less direct fixed expenses ................... (170,000) (731,597) (19,768)

.............................. Segment margin for ADD-ON

product/features..(Long Term I .............. 1,035,551 ~938,992 $980,524 Less segment margin from exhiblt 3 * . . . . (793,355) ..... ===3= - .......... Net Add-on Advantage or (disadvantage) ------- - Over Integrated option (Overall solution) .... $242,196-

==========

NOTES: • Figure taken from Exhibit 3, Column C, Net Income

COMPARISON BETWEEN MARKETING IT AS A SEPARATE ADD-ON PRODUCT LINE VERSUS INTEGRATING IT AS AN EXTRAFEATURE IN ANEXISTING PRODUCT LINE?

DIFFERENCE BETWEEN EXHIBIT 4, col. 1 & EXHIBIT 3 Col. C. : The Add-on option is more attractive by ......................... $242,196 because of reduced variable costs per unit ........................... ($49.32) and increase in volume of sales to competltor's customers ........ 500.00

ADD-ON RANKING ACCORDING TO SHORT AND LONG RUN PROFITABILITY:

Add-on new product lines made out of product Multi- Data Stream Network features with the highest PFCM rankings: Session to Disk Printer

~====~_~======== SHORT TEEM RANKING BASED ON: Total Contribution Margin .................... 2 1 3 LONG TEEM RANKING BASED ON: Segment margin for ADD-ON product/features... 1 3 2 BECAUSE OF Less direct fixed expenses ................... (170,000) (731,597) (19,768)


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Figure 1. Factors affecting price and the scope of the current study. * * * *Starred box indicates the limited scope of the current study. Only the direct relationships between feature specifications and current prices

are investigated. Future research will focus on the integration of additional factors into this model.

etc. ( Figure 1). In the microcomputer industry, this information may be difficult to obtain and verify for accuracy. The multiplicative effect should be added to the additive effect used in this study.

S U M M A R Y , C O N C L U S I O N S , A N D I M P L I C A T I O N S

In summary, multiple regression has been used to measure the FPCM for several TE features. This model can be used not only to value the degree of meeting end-user needs, but also to evaluate manufacturer's profitability of alternative future TE designs.

This investigation concludes that FPCM coefficients can be ranked and can reflect user desires. Multisession and data stream to disk were top ranked, while half duplex and 3274/76 controller were ranked lowest. Moreover, the integration of FPCM into the FSS has been demonstrated, producing comparative segmented income statements by future product line, by feature, and add-on products. The short- and long-run indicators have clearly been distinguished and illustrated. The integrated and add-on alternatives have been compared and evaluated.

The implication of this study is that future segmented reports may incorporate the concept of FPCM, and describe future products and features rather than only existing whole product lines. This may raise the usefulness of segmented reports, reduce the


controversy that surrounds them, and make them more widely spread. With the advent of microcomputer software, such sensitivity analysis could be done more easily. Like- wise, more research interest should be stimulated in these areas.

Future studies are already under way to incorporate more TE features, and investigate not only the additive FPCM, but also the interaction and multiplicative effects among more features as well as combinations of other factors. Retail strategy, competition, consumer perceptions, psychological issues, leader offering, demand supply, and general time-series and eventually cross-sectional economic trends are other factors that should be integrated into this model.

REFERENCES

Borton, G. F. (1990). Switch-to-host links: Developing the business case. Business Communications Review, 20, 66-70.

Cooke, T. & Whittaker, J, (1983). Segment reporting--Directors' discretion of SSAP? Accountancy, 94, 77-81.

Gabor, A. (1979). Pricing in theory and practice. Management Decision, 17, 635-648. Hauser, J. R., & Simmi¢, P. (1981). Profit maximizing perceptual positions: An integrated theory for the

selection of product features and price. Management Science, 27, 33-56. Kalish, S. (1985). A new product adoption model with price, advertising, and uncertainty. Management

Science, 31, 1569-1585. Lawler-Wilson, C. (1979). Pricing new products: The application of a multi-attribute model. Management

Decision, 17, 304-316. Mack, R. (1987). Communications: Talking to the host. Systems International, 15, 55-58. McDonald, D. F. (1991). Getting personal: Mainframe, Mini, Micro links versus a common user database.

Cost Engineering, 33, 30-31. Mooney, M. T. (1991). PC-Mainframe interface: An innovative use of online catalog records for automated

control of state documents collections. Information Technology & Libraries, I0, 58-61. Nestor, J. H. (1989). An introduction of the Micro-to-Mainframe connection. Journal of Accounting &

EDP, 4, 4-9. Nie, H. N. Hull, C. H., Jenkins, J. F., Steinbrenner, K., & Bentl, D. H. (1975). Statisticalpackagefor the

social sciences (pp. 468-514). New York: McGraw-Hill. Nielsen, B. (1990). Micro or mainframe: Design and performance. Database, 13, 90-92. Ronen, J., & Livnat, J. (1981). Incentives for segment reporting. Journal Of Accounting Research, 19, 459-

481. Salamon, G. L., & Dhaiiwal, D. S. (1980). Company size and financial disclosure requirements with evidence

from the segmental reporting issue. Journal of Business Finance & Accounting, 7, 555-568. Smith, L. M. (1990). Using Micro-to-Mainframe links. Journal of Accounting & EDP, 5, 38-42. Stephens, C. S., & Synder, C. A. (1991). An alternative to emulation for micro-mainframe data exchange.

Information & Management, 20, 105-116. Thomas, C. C. (1990). Hosts and PCs profit by sharing. Data Communications, 19, 121-130. Walker, B. J. (1978). A decision sequence for retail pricing. Retail Control 46,, 2-20. Youmans, M. A. (1988). The truth about Micro-Mainframe links. Business Software Review, 7, 42-54. Ziff-Davis (1988). Data sources manual. New York: Author.


APPENDIX A: SAMPLE USER INTERFACE SCREEN PROMPTS AND RESPONSE DISPLAY

WELCOME TO THE INTERACTIVE ON-LINE FEATURE SELECTION SYSTEM (FSS) FOR TERMINAL EMULATION (TE)

The objective of this questionnaire is to identify your TE price characteristics. Your responses will be fed into a multiple regression pricing and budgeting model and data base. The results will be used to construct alternative TE product and price designs.

ENTER YOUR RESPONSES ABOUT YOUR TE PRODUCT WITHIN THE COLON MARKS : : (If the question requires a yes/no response, please enter a 1 for yes and a 0 for no. Enter a "?" for help, "??" for an example, and "???" for more detailed help message.)

PASSWORD ............... :XXXXXXXXXX: PRODUCT..: BIS-3270 VENDOR...: IE Systems

SYSTEM FEATURES & SPECIFICATIONS Which features do you want included?

(l=yes, 0=no)

The output includes (Exhibits 2 & 3) Feature Price Contribution Margins & Feature Segmented Income Statement.

FINANCIAL INFORMATION

1. 3274/76 Controller ........ : 1: INITIAL PRICE ESTIMATES 2. Bisync .................... : 1: The system characteristics you have 3. SDLC Communications ....... : 0: just entered on the left portion of 4. Transfer Binary Files ..... : 0: the screen, will be used to estimate 5. Full Duplex ............... : 0: the price of such a system. 6. Half Duplex ............... : 1: 7. Multi-Session ............. : 0 8. Data Stream to Disk ....... : 1: 9. Network Printer ........... : 1:

SPECIFICATIONS Enter the desired amount 10.Speed in BPS ............ : 9600:

INSTRUCTION FOR SENSITIVITY ANALYSIS AND ALTERNATIVE PRICE ESTIMATES TO measure the sensitivity of your Profits to new feature, the features with the highest FPCM will be selected. You will have to enter estimates of expenses and sales.

OUTPUT & RERUN INSTRUCTION Any changes to be made (Y/N)? :N: Where do you want the output to go? Screen, Disk, or Printer, Please enter S, D or P :P: The output is currently being sent to the printer please waitl! Thank you for using FSS. To rerun this, type FSS at the A> prompt and press the ENTER key

APPENDIX B: ON-SCREEN CONTEXT SENSITIVE HELP FILE MESSAGES

USER HELP DISPLAY INFORMATION OVERLAY PROMPTED BY FSS ENTRY IN RESPONSE TO USER ENTRY OF "9". , "9~",.. OR "~9"...

???? For more help, please call Softran at (305) 666-7890

? 3270 SERIES TERMINAL EMULATION The product supports emulation of the indicated IBM 3270 series terminals.

?? For example, the XT/370 functions as a PC and it allows the programmer to link up with mainframes in a 3270 communications mode.

? 3274/3276 CONTROLLER EMULATION The emulator can function in both 3274 and 3276 communications environments.


?? For example, two different terminals (the 3274 & 3276) can talk to the same mainframe through this computer.

? OTHER FORMS OF TERMINAL EMULATION These are other terminals such as the DEC VT52 or i00 and the TEKTRONICS 4010 graphics terminal, which the package emulates.

?? For example, these are additional types of terminals that can be emulated.

? BISYNC The emulator transfers data in a binary synchronous fashion, which is half duplex, 1 character at a time.

?? For example, information travels over a communication line in one direction, one character at a time.

? SDLC The emulator transfers under IBM's SDLC protocol, which is full duplex and transfers data one bit at a time.

?? For example, IBM System Network Architecture uses SDLC communications.

? BI-DIRECTIONAL FILE TRANSFERS The emulator supports file transfer from the PC to the mainframe, as well as from the mainframe to the PC.

?? For example, a letter can be sent to the Host machine, modified, and sent back to the PC.

? SUPPORTS ALL VT i00 SCREEN ATTRIBUTES The emulator enables the PC to produce on the screen all of the effects that the VT i00 screen can produce (with the exception of 132 character columns).

?? For example, this is another display that is emulated.

? 132-CHARACTER COLUMNS SUPPORTED The screen can display lines of text that are 132 characters wide, as well as 80 character lines that are generally displayed on the PC. This feature may require a special graphics board.

?? For example, you could use this to create a graph 130 characters wide instead of the usual 80 characters.

? RANGE OF DATA RATE (BITS PER SECOND, BPS) This refers to the speed at which data can be transmitted using the emulator. It is a function of either a modem or cable connection to the host computer.

?? For example, it takes a minimum of 1200 bps to be able to use a full screen editor.

? HALF DUPLEX Data can be transferred in only one direction at a given time.

?? For example, if you send something from the PC to the Host system, the Host cannot send something to the PC at the same time.

? FULL DUPLEX Data can be transferred in both directions at the same time.

?? For example, data can be sent simultaneously between the Host and the PC.

? SPEED The speed at which the emulator can transmit data. Speed is expressed in bits per second (BPS).

?? For example, emulator software products that attach to the mainframe via a coaxial cable have a standard transmission of 2.35 megabits per second.

? MULTISESSION CAPABILITY The emulator can work in a multisession or multitasking environment, handling more than one application at a time.

?? For example, different programs can be running simultaneously.

? DATA STREAM TO DISK The emulator can take the data stream coming into the PC and write it out to disk for storage.

?? For example, when you download a program from the Host it will be written to a disk.

? NETWORK-ADDRESSABLE PRINTER SUPPORT The emulator has a feature that allows a user at a PC to initiate the printing of mainframe applications on any printer that is under the mainframe's control.


?? For example, if you issue a print command at a PC it can be printed on the mainframe's printer, possibly at a remote location.

? UPLOAD The process of copying data from the PC environment to the host system environment.

?? For example: A memo is written using wordstar on a PC, it is then UPLOADED to the host system where it can be sent to anyone on the system.

? DOWNLOAD The process of copying data from the host system environment to the PC environment.

?? For example: A program is distributed over the host system for all employees to use on their PCs. Each employee will DOWNLOAD the program in order to used it on their PC.

? EMULATION Hardware or software that can change a PC into a workstation for a Host mainframe or minicomputer.

?? For example, PC3278 is an IBM software terminal emulator.

? PROTOCOL A system of structures describing how devices interact with each other.

?? For example, bisync is a type of emulation protocol.

? MEMORY REQUIRED describes the amount of internal memory (in Kilobytes or K) needed to successfully load and run the program.

?? For example, if the available memory is 64K, and the required memory is 128k, then the program will not load.

? MAXIMUM MEMORY USED is the combined internal memory that can be used by both the program and the data.

?? For example, if the maxlmum memory is 640k, and the minimum memory is 340k, then the data cannot occupy more than 300K (640K-340K).

? COPY PROTECTED is an attempt by the vendor to prevent the duplication of the software by disabling standard Disk Operating System (DOS) copying programs.

?? For example, if you attempt to copy a "copy protected" disk, the duplicate may be unusable, issue "unauthorized copy" messages during execution, or work abnormally. The original disk and/or hard disk may be damaged as well.

? MULTIPLE WINDOWS partition the display screen into 2 or more parts, each one containing different information.

?? For example, one part of the screen shows a spreadsheet budget, a second part displays a bar graph, while the third part displays word processing letter.

? COMMUNICATIONS BAUD RATE describes the speed of transfer of information from a computer in one location to another. For microcomputers it ranges from 50-9600.

?? If you have to read the information on a display monitor while it is being transferred, you should not exceed 300 baud, otherwise it will be too fast.

? TERMINAL EMULATION is the ability of a computer to disguise itself as another com~uter.

?? For example, if you wish to use your IBM PC as a terminal for the DEC PDPll or VAX, then you need a program to imitate a DEC terminal.

? PRICE is the suggested retail price to end-users, list price. ?? For example, this price does not include discounts, or dealer

prices.


APPENDIX C: SELECTED LOTUS 1-2-3 CELL FORMULAS AND EXPLANATIONS FOR EXHIBIT 1-3 (TABLES 1-3)

(Program source code will be provided upon written request)

AI: [W33] 'EXHIBIT I: MULTIPLE REGRESSION SUMMARY EXHIBIT B9: [Wl0] 'adjusted first Variables legend: C9: [wg] +$D$9-($D$10-$D$11-1)/$D$11*(I-$D$9) $D$9= R-square BI2: [WI0] 'F-Value SD$10=No. of Observations DI2: +$D$9/(I-$D$9)*$D$11/(SD$10-$D$11-1) $D$11=Degrees of Freedom AI6: [W33] 'T-Statistic C13= X Coefficient(s) C16: [W9] +C13/C14 C14=Std Err of Coef C17: [Wg] @AVG(C20..C45) C20..C45= Data ~er feature AI8: [W33] 'Standard Deviation each column is a feature C18: [W9] @STD(C20..C45) each line is a vendor

A48: [W33] 'EXHIBIT 2: CALCULATION OF ESTIMATED FEATURES PRICE CONTRIBUTIONS

A57: [W33] 'Total Contributions B57: (C2) [W10] @SUM(CS7..R57) C57: (C2) [Wg] +C54,C55 D57: (C2) +D54*D55 A60: [W33] 'without extra features B60: (C2) [W10] +B57+B58

A70:

A86: D86: E86: A87: E87: A88: B88: E88: A90: B90: Eg0: A91: A93: B93: E93: A94: E94: A96: B96: C96: D96: E96: A99: B99: E99:

MARGINS (FPCM=X Coefficients)

C57..R57=X Coefficients C55-Current feature values C57-Feature Price Contribution Margin

=X Coefficients*Feature values C58=Regression constant before

adding any features

[W33] 'EXHIBIT 3: CALCULATION OF ESTIMATED FEATURE CONTRIBUTIONS AND SEGMENT MARGINS (C.M. & S.M) [W33] 'Price/Prlce Contribution (C2) +B66 B66=Estimated price with 2 extra added features. (C2) +D86-C86 E86-FPCM, Price Difference between 1 & 2 extra [W33] 'Times variable Cost Rate * added features. (P0) +D87-C87 E87=Variable Cost Rate Difference between 1 & 2 [W33] 'Less Variable Cost in dollars extra added features. (C2) [WI0] +B86*B87 B88=$ Variable Cost= Price * Vat Cost Rate. (C2) +D88-C88 E88=Extra Feature Variable Cost in $. [W33] 'Unit/Feature Contribution Margin= Price-$ Variable Expenses. (C2) [Wl0] +B86-B88 Bg0=Initial Unit Contribution Margin in $. (C2) +D90-C90 Eg0=Extra Feature Contribution Margin $, [W33] 'Times Volume of Units Sold * difference of 1 & 2 extras. [W33] 'Total Contribution Margin (T.C.M) (CO) [WI0] +B90*B91 B93=Product A Total C.M.=Unit C.M.*Units. (CO) +D93-C93 E93=Extra feature Total C.M.= T.C.M.2-1 [W33] 'Less direct fixed expenses (D.F.E. or D.F.C) (,0) +D94-C94 E94=Extra Feature Direct Fixed Cost=D.F.C.2-1 [W33] 'Segment margin (C.M.) (,0) [Wl0] +B93+B94 B96=Segment Margin without extra features. (,0) [wg] +C93+C94 C96=Segment Margin with 1 added extra feature. (,0) +D93+D94 D96=Segment Margin with 2 added extra features. (,0) +D96-C96 E96=Extra Feature Segment Margin=difference U [W33] 'Net Income between S.M. with 1 & 2 extra features. (CO) [WIO] +B96+B97 B99=Net Income of current product & 0 features. (CO) +D99-C99 E99=Extra Feature Net Income=C.M.

APPENDIX D; PRODUCT/VENDOR LIST

PRODUCT, VENDOR, ADDRESS, CITY, STATE, ZIP, PHONE

Coefficient Systems Corp.,611 Broadway,N.Y.,N.Y.,10012,VTERM 4010 Diversified Computer Sys.,3775 Iris Ave.,Boulder,Col.,80301,EM4010 Emerald Tech Grp Inc.,160 ll6th Ave. St 102,Bellevue,Wash.,98004,PC/5251 ICOT Corp.,830 Maude Ave.,Mtn. View,Calif.,94039,Virtual Term Sys 36X IE Systems,112 Main St.,Newmarket,N.H.,03857,Micro-SNA/3270 Micro Plus,3200 N. Federal,Boca Raton,FI.,33431,MP01 3278/79 EMULATOR Persoft Inc.,2740 Ski Lane,Madison,Wis.,53713,Smor Term 125 Phaze Inf. Machines,7650 Redfield Rd.,Scottsdale,Ariz.,85260,Brigitte Polygon Associates,1024 Executive Parkway,St. Louis,Mo.,63141,Poly-COM/240 Quadram Corp.,One Quad Way,Norcross,Ga.,30093-2913,Quad3278 Rabbit Software,One Great Valley Parkway E.,Malvern,Pa.,19355,3270-PLUS SAS Institute Inc.,Box 8000 SAS Cir.,Cary,N.C.,27511-8000,SAS/RTERM TeleVideo Sys Inc.,Sys Div.,550 E. Brokaw Rd.,San Jose,Calif.,95112,PM/SNA X~v Personal Computing, 6 Germantwn Rd., Danbury, Conn., 06810,RELAY/3270 RELAY yplex, 100 Domino Dr.,Concord,Mass.,O1742,XP-3270

terminal emulation controllers, duplex, communication protocols, multisession networks,...

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