IT Can Drive Innovative Strategies. 1. The “I” vs. “T” in IT 2. Frito-Lay Case - Use of IT to Sustain Competitive Advantage - Changes made to the Management Process - Lessons on How to Get Payoff from IT Investment 3. Anheuser Bush: Learns from Frito-Lay
The liberalization of trade and regulatory regimes in many countries and the falling costs of transportation and communication are making the world economy more global.
Markets are so heavily interconnected that ignoring interdependencies can only be at our peril. Advances in telecommunication and digital technology have further shrunk the globe to the point where “geography is now history”.
Source CEO of Ranbaxy’s Address, Business India, Dec 28 – Jan 10, 1999
2. Knowledge-Based Competition
Globalization has changed the rules of the game. Businesses no longer complete in the exclusive comfort of their domestic backyards, using capital and labor imbalances or regulatory perversities to further wealth creation. These approaches and techniques that served us well during the past few decades have now been pushed aside by technology and, increasingly, by knowledge as a basis for competition.
- 40 years ago; Ghana & South Korea had nearly the same per capita income - by the early 1990s, Korea stood at 6 times Ghana, more than half the growth being attributed to Korea’s superior ability to use knowledge for transformations.
“Historically, IS was regarded as a support function and treated as administrative overhead, but now technology has become entwined with all the classic functions of business… to such an extent that understanding its role is necessary for making intelligent and effective decisions about any other function.”
A man is flying in a hot air balloon and realizes he is lost. He reduces height and spots a man down below. He lowers the balloon further and shouts:
“Excuse me, can you tell me where I am?”
Man: “Yes, you’re in a hot air balloon, hovering 30 feet above this field.”
Balloonist: “You must work in Information technology”
Man: “I do. How did you know?”
Balloonist: “Well, everything you have told me is technically correct, but it’s no use to anyone.”
Man: “You must work in business.”
Balloonist: “I do. How did you know?”
Man: “Well, you don’t know where you are, or where you’re going, but you expect me to be able to help. You’re in the same position you were before we met, but now it’s my fault.”
The Original Management Guru, Peter Drucker
“From being organized around the flow of things and the flow of money, the economy is becoming organized around the flow of information.”
Wall Street Journal, September 9, 1992
The Czar of the U.S. Economy, A. Greenspan
IT has “begun to alter, fundamentally, the manner in which we do business and create economic value.” By enabling businesses to remove “large swaths of unnecessary inventory,” real-time information is accelerating productivity growth and raising living standards. This has contributed to the “greatest prosperity the world has ever witnessed.”
Speech to the Gerald R. Ford Foundation in Grand Rapids, as quoted in
Wall Street Journal, September 21, 1999
IT is fundamentally transforming the way companies are run. The new economy is about the specific potential of IT to change the way businesses work and thereby yield a quantum shift in productivity. The computer, and especially now the Internet, can change how companies deal with suppliers and customers…
The Net is helping customers to lower costs dramatically across their supply and demand chains, take their customer service into a different league, enter new markets, create additional revenue streams and redefine their business relationships.
The Economist, June 24, 1999
So far, for 50 years, the information revolution has centered ... on the “T” in IT. The next information revolution asks: What is the MEANING of information, and what is its PURPOSE? And this is redefining the tasks to be done with the help of information, and with it, to redefining the institutions that do these tasks.
Forbes ASAP, August 24, 1998
Information is data endowed with relevance and purpose.
Converting data into information thus requires knowledge… So far, most computer users still use the new technology only to do faster what they have always done before, crunch conventional numbers. But as soon as a company takes the first tentative steps from data to information, its decision processes, management structure and even the way its work gets done begin to be transformed.
Harvard Business Review, January-February, 1988
Staved off the threat from Anheuser-Busch’s Eagle Snacks...“Frito’s a fortress ... don’t try to impinge on Frito’s territory or you’ll get crushed.” Anheuser sold its plants to – who else? – Frito-Lay.
Wall Street Journal, October 27, 1995
F/ L Salespeople with Trucks
- 200+ W/ Hs
Truck - Load Shipments
Salesforce of Distributor
Third - Party
Truck - Load Shipments
THAT WAS THE EASY PART!
MORE DIFFICULT: How to get the Salesforce to Change?
- Key to Successful IT Innovation
PILOT TEST IN A SELECTED SALES AREA IS A MUST
- especially when the salesforce has to use a new IT tool
TEST WHETHER SALEFORCE BUYS-IN TO THE NEW TOOL
- “GO” Roll it out to All Sales Areas
- “NO GO” Back to the Drawing Board
SELECT MOST HUNGRY AREA: Receptive to Change
- If “No Go”, Buy-In from Rest of Salesforce will be a BIG PROBLEM!
FRITO-LAY CHOSE THE “BEST”: The Los Angeles Sales Area
GOT “GO“ SIGNAL FROM PILOT TEST
- Used LA Sales Staff in rollout to establish credibility with salesforce
TRAIN THE TRAINERS IN EACH SALES AREA
- Minimizes Training Costs: More Effective
Salesperson must reconcile each SKU’s daily sales from store invoices with the “Load-Out – Load-In” Sheet.
A Huge Tangible Benefit:- Time saved in adding the sales figures for each SKU from the individual store invoices to get the total sales of the SKU (the “Sales to Stores” figure above)- No arithmetical errors in the adding process
Availability of timely information at the SKU level for each store enabled weeklyone-on-one meetings between first-line district sales managers and their salespeople
If a salesperson's stales are running higher than mydistrict goal, we discuss what can be done to decrease them. We analyze sales returns to zero in on thestores and the SKUs with the most stales, and then decide whether to change the mix of products or their location in the store.
Recently, I noticed red numbers (indicating reduced market share) for tortilla chips in our central business region. I punched up another screen display and located the problem: Texas. I kept punching up new screens and tracked the red numbers to a specific sales division and, finally, the chain of stores. The numbers pinpointed the problem area and, after additional research, revealed the culprit: the introduction of a generic store-branded product. We quickly formulated a counter-strategy and sales climbed again.
To pay for it, Corporate Sales had to commit to reduce selling expenses from 22 cents on the dollar to 21 cents within a year of the handheld installation – increase sales at constant cost or reduce costs or a combination of the two
By setting this target before the rollout, we focused the attention of each sales area on identifying ways to use the technology to change the way it did business and ensure that we achieved the anticipated benefits. - CEO of Frito-Lay
Information support for 4 geographic regions with P&L responsibility
Timely, accurate information for top management
- NOT massaged & sanitized information
Impact: 60% of corporate decisions pushed to regions
Information took weeks to wend its way back to the 32 Frito-Lay Divisional Sales Managers from the variety of databases in Headquarters, if it got there at all.
PC in the Division provides information on:
Organizations have to be fast, flexible and responsive to be competitive in a dynamic and complex business environment
Decision-making authority has to be passed to the "front lines"
PROVISION OF RELEVANT INFORMATION
TO ALL LEVELS TO EFFECTIVELY FUNCTION
IN THEIR JOBS
What sets us apart is that we train people to be merchants. We let them see all the numbers so they know exactly how they're doing within the store and within the company; they know their cost, their markup, their overhead, and their profits. It's a big responsibility and a big opportunity.
Wal-Mart's "Store within a Store"
Sam Walton, Wal-Mart CEO
that leverages the benefits of both centralized and decentralized decision-making and control systems.
Empowering does not mean wholesale relinquishing of authority to lower levels. There must still be management by higher level executives.
Top management must have access to information that is not massaged and sanitized.
- Cost of NOT Having the “I” at ALL Levels
To Make Smarter Decisions
“We’ve invented… $40 million for hardware and software so for, and $15 million per year to keep it rolling… I believe this will give us real competitive advantage.”
- Frito-Lay CEO
Compress the time taken for information flows….
Sales data from the hand-held computers of salespeople provide the foundation for “time synchronizing” the entire
Purchasing Manufacturing Logistics Sales
… how much shelf-space their retailers devoted to various
beer brands, including competitors’ brands
… which ones had the most visible displays
… which locations had the displays
… etc, etc.
“ It’s Not Just Collecting Data…Anheuser Busch is Smart in Figuring Out How to Use It”
“ Distributor- and store-level data has become the lifeblood of our organization”
“ If Anheuser-Busch loses shelf-space in a store in Clarksville, Tennessee, they know it right away. They’re better at this game than anyone, even Coca-Cola”.
Bottom-Line: Anheuser has posted double-digit profit gains for 20 straight quarters, while its nearest competitors, Miller and Coors, have flattened
“ Brewers and distributors with a clear data- driven focus will have a distinct competitive advantage”. August Busch IV, President for Domestic Operations
“Every weekday, some 38,000 sales reps fan out around the globe. Armed with briefcases full of free drug samples, reams of clinical data, and lavish expense accounts for wining and dining their quarry, the reps infiltrate doctors’ offices and hospitals.
Their goal: to persuade doctors to make Pfizer drugs the treatment of choice for their patients’ aches and pains.
Equally important: Pfizer’s $3B Annual Ad Budget – behind only GM, P&G and Time Warner.
A pricey array of prime-time commercials and glossy magazine ads show vibrant people freed from the threats of heart disease, hay fever, and a dismal sex life. Sure, consumers can’t go out and buy this stuff. It has to be prescribed by a doctor. But Pfizer and the industry have learned that stoking demand among consumers puts irresistible pressure on doctors. That’s why Pfizer is now the fourth-largest advertiser in the land.”
Source: Business Week, Feb 28, 2005
- 11,000 people in the U.S.,
38,000 worldwide (roughly the size of 3 army divisions !)
- Including car, computer and benefits
- A big-selling drug can generate fantastic margins as sales
e.g., Celebrex: 90% Margin; $3B Gross Profits
- If Celebrex gets yanked from the market, like VIOXX, profit per
Sales Rep drops to $1.1 M … a 7% decline in productivity
- Sales estimated to DECLINE by 1.5% per year through 2010
Source: Business Week, Feb. 28, 2005
Source: Wall Street Journal, Nov. 29, 2006
The measurement system is the key to our quality effort ... We had to come up with a system that actually measured our performance on every transaction - regardless of the fact that we are talking of hundreds of thousands of transactions.
12 Service Quality Indicators are monitored daily, e.g.:
The 12 indicators are weighted judgmentallyaccording to their importance to the customer to produce the error index.
“We consider our IT division a line organization; it’s an operating unit that is absolutely involved in the day-to-day operation of the company. We measure its performance. I’m just as close to the IT division as to our sales division -- and the salespeople are the ones who bring in all the bacon.”
Revenues $8 B $ 13.25 B
Daily Package Volume 1.5 M 3.0 M
Employees 94,000 143,000
IT Expenditure $243 M $ 1 B
All major transportation and delivery companies from United Parcel Service to Ryder System are betting big onIT. The U.S. Postal Service has just announced a partner-ship with DHL for express deliveries from 11 cities in the U.S. to Europe. The package tracking information capa-bilities pioneered by FedEx have become industry norms rather than a competitive advantage.
FedEx shifted to new pastures
- Used IT to provide logistics services, for big manufacturers and retailers around the world
Nat Semi’s products from 3 factories and 3 subcontractors in Asia are shipped to a FedEx distribution warehouse in Singapore.
Nat Semi’s order-processing system on an IBM mainframe in Santa Clara, California, sends a daily batch of orders over a dedicated line directly to FedEx’s inventory manage-ment system running on a Tandem machine in Memphis.
FedEx essentially takes over and fulfills the order from the Singapore warehouse, and sends an execution record to Nat Semi.
National Semi-Conductor reduced...
... Average Customer Delivery Cycle from 4 weeks to 7 days
... Distribution costs from 2.9% of sales to 1.2%
National Semi-Conductor eliminated...
... 7 regional warehouses in the U.S., Europe and Asia
FedEx has helped us prove that quicker cycle times and reduced costs are not mutually exclusive. It’s been five years of hard work and a painful change process, but we’ve succeeded. We used to have to deal with so many different nodes in the process -- freight forwarders, customs agents, handling companies, delivery companies, airlines. Now FedEx is our one-stop shop.
- 25% of this business: Letter-size envelopes
- Additional 15%: Paper documents such as contracts, legal briefs, etc.
- Transmit documents electronically, or
- Post them online; download when needed
“For now, the impact on FedEx is less than catastrophic. But online security is improving. And businesses are starting to adopt contractual devices such as digital signatures. As these technologies mature, the electronic transit of everything from real-estate closings to legal settlements is poised to explode – at the expense of shipping”
Source: Business Week, May 21, 2001, pp. 67-68
UPS: From A Humble Seattle Messenger ServiceCompany Founded in 1907 to “Big Brown” Today
- Learned not just how to copy FedEx’s systems,
- But often how to make them better and cheaper
- UPS took 15 years to build a system comparable to FedEx’s renowned
- But UPS chose a wiser approach:
Built a more open system that made it easier for customers to incorporate into their existing systems than FedEx’s proprietary software that customers were forced to adopt
- By late 1990s, some big suppliers had begun to shift their logistics contracts from FedEx to UPS
- One company in particular: National Semiconductor!
- UPS also handles more shipments from Internet retailers (55%)
vs. FedEx (10%)
-But, by the mid-1990s, plain-vanilla parcel delivery was a mature business
goods, information and funds
Completed a 7-year, $1 B expansion of tech-driven air-hub in Louisville, KY. In 2002, the most expensive project in the company’s history
Doubled the size of the hub to 4M square feet (the equivalent of more than 80 football fields) and automated the express package sorting process with advanced customized technology - 304,000 packages per hour or over 84 packages per second
Selling to drug stores
(1)When the product line was broadened by adding new items requested by customers
- In addition, locked the customers because of high switching costs to a new supplier, e.g. training personnel on a new system
(2)When a whole new business was created for McKesson through IT to address the pain point of drug stores
- Claims processing and collection for McKesson’s customers, the drug stores, from third-party insurance
companies, saving them the cost of doing that job
and speeded up the collection time
- Developed a whole new product based on IT:Software for claims processing and collection
- A middleman in the financial processing business
Cardinal Health: A Pharma Distributor- Use of “I” to Grow Beyond A “Middleman”
26,000 Retail Pharmacies,
Managed Care Providers
Customer’s “Pain Points”:
A Huge Opportunity for Companies to Leverage their “I” Asset
… Although information systems are expensive and time-consuming to build, once the software has been developed and the information has been captured, they can be reused at very low marginal cost.
… Consulting, IT, Drug-packaging Design and Manufacture, Pharmacy Management
… Handles prescription benefits for nearly 3M individuals
… Provides automated drug deliveries to 4M patients a day
$450M in 1998
CEO’s Annual Letter to Shareholders -
1998: No mention of E-Business
1999: “E-Business, which entered the operating system at the January (1999) Managers Meeting … is changing this Company to its core … (has) changed the DNA of GE forever”
2000: “Digitization is transforming everything we do, energizing every corner of the Company, making us faster, leaner and smarter even as we become bigger. In 2000, these words began to turn into numbers:”
* Founded in 1878 by Thomas Edison
… Suddenly, he “got” the Net!
“to overcome the discomfort” of top executives to the Web… A corporation-wide mandate for the top 1,000 managers to be mentored by 1,000 “with it” very bright e-Business mentors, many brand new to GE - to work with them 3 to 4 hours a week surfing the Web, evaluating competitor sites and learning to organize their computers, and their minds, for work on the Net
… Globalization - more than a dozen cycles
… Services - in its 6th cycle
… Six Sigma - in its 5th cycle
… E-Business - in its 3rd cycle
… Case for New Initiative
… Outside Company Initiative Experience
… One Year Stretch Targets
… Role Model Presentations
… Re-Launch of Current Initiatives
… Early Learning?
… Customer Reaction?
… Initiative Resources Sufficient?
… Business Management Course (BMC) Recommendations
… Do you “Feel” Initiatives yet?
… Do Customers Feel It?
… Sufficient Resources to Execute?
… Message Clear and Credible
… Initiative Leadership Review
… Level of Commitment/Quality of Talent on Initiatives
… Differentiation (20%/70%/10%)
… Initiative Best Practices
… Review of Initiative Leadership
… Customer Impact
… BMC Recommendations
… Economic/Competitive Environment
… General Earnings Outlook
… Initiatives Update/Strategy
… Initiative Resource Requirements
… BMC Recommendations
… Clear Role Models Identified
… Outside Company Best Practices Presented
… Initiative Best Practices (All Businesses)
… Customer Impact of Initiatives
… Next Year Operating Plan Focus
… Role Models Present Initiative Successes
… Executive Development Course (EDC) Recommendations
… All Business Dialogue: What Have We Learned?
… Initiatives Stretch Targets
… Individual Business Operating Plans
… Economic Outlook
… Agenda for “Boca”
… Individual Business Initiative Highlights
… BMC Course Recommendations
AND Higher Margins