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IT Can Drive Innovative Strategies

IT Strategy - A presentation from Dr. Lakshmi Mohan's class

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IT Can Drive Innovative Strategies

  1. 1. Outline 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. FedEx Case - IT Drives Innovative Business Model - Used IT for Delivering Value-Adds to Customers - Lurking Threat from the Net 4. IT Strategies of UPS vs. FedEx: “Follower” vs. “First-Mover” 5. McKesson Case - IT was Key to Company’s Growth 6. Cardinal Health Case: Use of “I” to Grow Beyond a “Middleman” 6. Observations from FedEx, UPS & McKesson Cases 7. Wal-Mart Case - “An American Original” 8. Summing Up
  2. 2. 2Dr. Lakshmi Mohan The Business Environment Today - Two Key Factors 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 1. Globalization
  3. 3. 3Dr. Lakshmi Mohan The Business Environment Today - Two Key Factors 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. 2. Knowledge-Based Competition
  4. 4. 4Dr. Lakshmi Mohan Is IT Just a Back-Office Data Processing Function? “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.”
  5. 5. 5Dr. Lakshmi Mohan Much Truth is Said in Jest! 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.”
  6. 6. 6Dr. Lakshmi Mohan The Information Economy - The View from Two Different Lenses “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 Original Management Guru, Peter Drucker 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
  7. 7. 7Dr. Lakshmi Mohan Impact of IT 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
  8. 8. 8Dr. Lakshmi Mohan The “I” versus “T” in IT - Peter Drucker Pinpoints THE Issue 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 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
  9. 9. 9Dr. Lakshmi Mohan Drug Companies Spend Big on Software (“Times of India” – Jan 2, 2004)  The 12 major pharma companies (46% of domestic market) spent Rs.114 crore on IT in 2002-03 … Expected to go up 6% to Rs.121 crore – about 1% of revenue – in 2003-04 (TCS Study)  “With research advancing at a break-neck pace, scientists are looking for way to better manage the vast volumes of data generated Over 60 million pieces of data per molecule each year” - IT-intensive R&D can shave a year off the drug development time - Translates into $70 M for a niche drug and $365 M for a block- buster drug.  Urgent need to transform “data” into “intelligence” -Ranbaxy Labs installed an ERP software from Hummingbird … “Our consolidation of enterprise-wide data including financial, sales and product information, empowered us to make faster and better decisions and real-time extended enterprise”
  10. 10. 10Dr. Lakshmi Mohan The Frito-Lay Case Use of IT to Sustain Competitive Advantage Competitive Advantage of Frito-Lay was NOT IT - It was: Direct Sales to 350,000 Stores - Army of 13,000 salespeople with trucks - Competitors unable to match it 50% share of the $15 billion salty-snacks U.S. market 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
  11. 11. 11Dr. Lakshmi Mohan Value of the Direct Sales Model F/ L Plant - 40 Plants - 200 SKUs Stores F/L Warehouse - 200+ W/ Hs Purchases by Consumers Truck - Load Shipments F/ L Salespeople with Trucks  High Costs - Operations of 200+ Warehouses - Inventory Costs - Cost of “Stales” in Warehouses & Stores  Big Benefit - Know which SKUs are selling in each store - Salesforce can sell the “Right SKU” to the Right Store at the Right Time - Salesforce trained to rotate products – “older-date” packs moved to the front of the shelves – and stack them neatly to attract shoppers in the aisles Annheuser - Busch Plant Stores Third - Party Distributor/ Wholesaler Purchases by Consumers Truck - Load Shipments Salesforce of Distributor  Third – party Salesforce is NOT the same as Company Salesforce !
  12. 12. 12Dr. Lakshmi Mohan IT Target - SUSTAIN the Competitive Advantage FOCUS ON: - Revenue Drivers to Increase Revenues - Cost Drivers to Reduce Costs  Improve Salesforce Productivity - Expand coverage by adding new stores without increasing the salesforce  Reduce “Stales” -Timely information on sales and inventory from stores can trigger corrective action to reduce stales  Micromarketing - Promote the “Right SKU in the Right Store at the Right Time” - Get more bang for the promotional dollars !
  13. 13. 13Dr. Lakshmi Mohan The “T” Had to be Developed  Pioneered hand-held computers for used by 13,000 salespeople  Contracted with Fujitsu in early 1980s to develop the “T”  Rugged hardware had to be developed for use in trucks  Field-tested hardware in Texas and Minnesota to check whether it will work in extreme climatic conditions THAT WAS THE EASY PART! MORE DIFFICULT: How to get the Salesforce to Change?
  14. 14. 14Dr. Lakshmi Mohan The Implementation Strategy - 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
  15. 15. 15Dr. Lakshmi Mohan Impact of Hand-Held Computers  Eliminated Paperwork of Salesforce - Time savings: 3 to 5 hours per week  BUT… Is That a Benefit? Frito-Lay Made It a Benefit! - Allayed salespeople’s fears of downsizing - Used time saved to grow revenues and reduce cost  A Side-Benefit, But Important for Salesforce - End-of-day reconciliation was easier, more accurate - “Over/short” accounting discrepancies were $4 million in 1985 and growing - Source of extreme frustration to salespeople
  16. 16. 16Dr. Lakshmi Mohan “What’s In It for Me?” - Reduces Tedious Arithmetic at End of the Day Salesperson must reconcile each SKU’s daily sales from store invoices with the “Load-Out – Load-In” Sheet. SKU Load-Out from Warehouse Load-In to Warehouse Out minus In Sales to Stores (from invoices) Short/ Over 1 300 200 100 90 -10 2 250 50 200 210 +10 3 400 250 150 150 0 : : 200 200 75 125 120 -5 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
  17. 17. 17Dr. Lakshmi Mohan Management Process Had to be Changed to Capitalize on New Information If a salesperson's stales are running higher than my district goal, we discuss what can be done to decrease them. We analyze sales returns to zero in on the stores and the SKUs with the most stales, and then decide whether to change the mix of products or their location in the store. Availability of timely information at the SKU level for each store enabled weekly one-on-one meetings between first-line district sales managers and their salespeople
  18. 18. 18Dr. Lakshmi Mohan The New “I” Enables Micromarketing 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. Frito-Lay President
  19. 19. 19Dr. Lakshmi Mohan How to Get Payoff from the IT Investment  Hardware investment - $40 million  Software investment - $100 million during 1984 - 88 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
  20. 20. 20Dr. Lakshmi Mohan Decentralization Facilitated By Frito-lay System Information support for 4 geographic regions with P&L responsibility Timely, accurate information for top management - NOT massaged & sanitized information Frito-Lay System Impact: 60% of corporate decisions pushed to regions
  21. 21. 21Dr. Lakshmi Mohan DECENTRALIZATION REQUIRES DECENTRALIZED INFORMATION BEFORE 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. AFTER PC in the Division provides information on: • Comparison of brand / pack sales by type of store • Analysis of weekly performance by districts • Ranking of sales reps’ performance (about 350 in each district) • How Frito-Lay stacks up against competition in market shares, prices, promotion, etc.
  22. 22. 22Dr. Lakshmi Mohan An Invaluable Benefit "Management by Walking Around“ is Feasible  Frito-Lay CEO can make a "computer tour" of operations  “Can view the performance of each of our managers and salespeople around the country“  Can fire off an electronic-mail memo if the view is not good or contact manager to congratulate on the good view
  23. 23. 23Dr. Lakshmi Mohan The Frito-Lay System - An Integrated Everyone’s Information System Delivers timely and consistent information to ALL levels of management and ALL functions: • A sales support system for field personnel • An Executive Information System for the top 200 executives • A market analysis and profitability reporting system for corporate staff • Additional support systems for key functions: purchasing, manufacturing and logistics
  24. 24. 24Dr. Lakshmi Mohan Major Payoffs from The Frito-Lay Enterprise System  Able to tie manufacturing to consumer purchases from the stores  Reduced “stales” by 50%  Micromarketing optimizes margin  Able to target local demand patterns with just the right sales promotion  Domestic revenues: $3B in 1986 $4.2B in 1989 Purchasing Manufacturing Logistics Sales Compress the time taken for information flows…. Sales data from the hand-held computers of salespeople provide the foundation for “time synchronizing” the entire business process:
  25. 25. 25Dr. Lakshmi Mohan Some Lessons 1. Modern IT is a marvel, but to realize the potential, you have to USE it - to make each person more effective and efficient. 2. “Manumation” – mere automation of manual processes – will not generate the anticipated payoff from the IT investment. 3. Focus IT on Revenue Drivers and Cost Drivers. 4. Data by itself is worthless – It has to be converted into Actionable Information. 5. Availability of good quality ‘I” does not automatically guarantee its use. Problem: What do we do with the new “I”? The Management Process has to be changed, including the Performance Measurement and Reward Systems, to capitalize on the new “I”; and Training to implement the new process. 6. Get the Sequencing of IT projects Right !
  26. 26. 26Dr. Lakshmi Mohan Anheuser Busch Learns from Frito-Lay - Becomes a Data-Driven Company  Chairman, August Busch III, changed the rules of the beer industry, a technological laggard, in 1997  Amended contracts with distributors (about 700 in the U.S.) to demand that they start collecting data on: … 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.  Sales reps of distributors equipped with handheld computers for inputting data when they “walk the store” – the handhelds are jacked into the rep’s cell phone for wireless data uploads to the servers in the warehouses
  27. 27. 27Dr. Lakshmi Mohan “ It’s Not Just Collecting Data… …Anheuser Busch is Smart in Figuring Out How to Use It” - Developed BudNet to collect the data in a nightly nation wide sweep of the distributors’ servers … Use the data to draw a picture each morning of what brands are selling in which packages in which stores using which medley of displays, discounts and promotions … Then sends “new marching orders” to its distributors “ 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
  28. 28. 28Dr. Lakshmi Mohan The Federal Express Case - IT Drives Innovative Business Model • Founded in 1971, CEO states: “IT is absolutely the key to our operations” • Unique Value Proposition – Guaranteed overnight package delivery - Time-certain Transportation vs. Holding Inventory • Pioneered airbill bar coding for package tracking - information about the package is as important as the package itself. • CEO’s Quality Goals: “100% on-time deliveries, 100% accurate information on every shipment and 100% customer satisfaction.”Won the 1990 Malcolm Baldridge Quality Award 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.
  29. 29. 29Dr. Lakshmi Mohan Federal Express Error Index • how many packages were delivered on wrong day? • how many late ? • how many damaged ? • how many billing corrections ? The 12 indicators are weighted judgmentally according to their importance to the customer to produce the error index. 12 Service Quality Indicators are monitored daily, e.g.:
  30. 30. 30Dr. Lakshmi Mohan 1979 : COSMOS, the centralized computer system for package tracking on a real-time basis 1980 : Launched a proprietary and then-revolutionary data network called Digitally Assisted Dispatch Systems (DADS) which enables dispatchers to use text messages to change drivers’ routes and pickup requests – still in use, DADS led to a 30% increase in productivity, the first day it was used. 1984 : Standalone DOS-based automated shipping system for customers who ship over 5 packages a day 1986 : Present generation of wireless handhelds to capture package data via a bar-code scan, which is downloaded to COSMOS when the handheld is inserted in the DADS unit in the truck. 1998 : On-Line package tracking at FedEx.com – saw the Net as a low-cost alternative to call centers for reducing costs and improving customer service FedEx was an Aggressive First-Mover In Using IT
  31. 31. 31Dr. Lakshmi Mohan FedEx Gets IT! “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.” 1990 1998 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
  32. 32. 32Dr. Lakshmi Mohan FedEx Used IT to Expand its Core Competence From Moving Boxes to Bytes All major transportation and delivery companies from United Parcel Service to Ryder System are betting big on IT. 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
  33. 33. 33Dr. Lakshmi Mohan A Win-Win Tie-up with National Semi- Conductor 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.
  34. 34. 34Dr. Lakshmi Mohan The Value-Add for 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.
  35. 35. 35Dr. Lakshmi Mohan A Lurking Threat for FedEx … From the Net!  Overnight Delivery: 50% of FedEx revenues - 25% of this business: Letter-size envelopes - Additional 15%: Paper documents such as contracts, legal briefs, etc.  Alternative: Digital Delivery - 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
  36. 36. 36Dr. Lakshmi Mohan UPS: From A Humble Seattle Messenger Service Company Founded in 1907 to “Big Brown” Today  A traditionally insular and conservative enterprise with a 1950s’ style engineering culture well into the 1990s  Still, managed to reinvent itself time and again to keep growing  Started overnight delivery by air only in 1985  Set up a logistics services unit in 1994 to manage the supply chains of customers  Went public only in November 1999 Today: World’s Largest Shipping Carrier -2003 revenue: $33.5B vs. $24B for FedEx, but more profitable than FedEx - Annual Exp. on IT: $1B, same as FedEx, but FedEx revenues are 30% less - Aggressively moving into supply chain management for big companies such as Ford, HP, Nike, … , and deeper into Asia where the fast-growing factory sector is opening new doors for UPS - “What Can Brown Do For You – Synchronizing the World of Commerce”
  37. 37. 37Dr. Lakshmi Mohan UPS Adopted a “Follower” IT Strategy  Started building the IT infrastructure in 1985  Carefully followed FedEx’s tracks - Learned not just how to copy FedEx’s systems, - But often how to make them better and cheaper  Example: Logistics Management Software - UPS took 15 years to build a system comparable to FedEx’s renowned COSMOS systems - 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
  38. 38. 38Dr. Lakshmi Mohan UPS Adopted a “Follower” IT Strategy  Spent more than $20B on IT since 1985  Slow Copycat Approach to IT Paid Off - 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%)
  39. 39. 39Dr. Lakshmi Mohan Some IT Firsts for UPS …After a Late Start 1.Offer vital shipping information to customers via a wireless device - Customers can track packages, find the nearest UPS drop-off location, calculate shipping rate and find transit times via virtually any web-enabled cell phone, PDA or pager 2. Extend wireless tracking around the globe in their native languages, including traditional and simplified Chinese, Korean and Japanese, as well as in English – the largest private wireless network in the world 3.Provide a range of online financial services tools to companies involved in global trade! - Track the flow of funds - Serve both exporters and importers by electronically automating the creation, execution and management of Letters of Credit - Track online the daily movement of C.O.D payments into their bank accounts
  40. 40. 40Dr. Lakshmi Mohan UPS Reinventing Itself Again - As a Logistics Outsourcer  About 75% of UPS’ business still comes from small-package deliveries in the U.S. - But, by the mid-1990s, plain-vanilla parcel delivery was a mature business  “The small package market is about $60 B in the U.S. whereas the world-wide supply chain market is about $3 T. So that’s where we see much of our growth… Let our customers focus on their core business and let us run the distribution networks”. …UPS CEO  Spent more than $1 B since the year 2000 to buy 25 companies involved in freight-forwarding, customs clearance, finance and other logistics services
  41. 41. 41Dr. Lakshmi Mohan UPS Reinventing Itself Again - As a Logistics Outsourcer  Able to help companies to manage all three flows of commerce: goods, information and funds  Boosted investment in IT 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
  42. 42. 42Dr. Lakshmi Mohan The McKesson Case - IT was Key to Company’s Growth • Look at IT from the perspective of the Value-Added Chain • Use IT to execute each step efficiently and effectively • Foremost McKesson: A Pharmaceutical Wholesaler-Distributor • Payoff from using IT: More accurate tracking of its principal asset: inventory, More effective use of employees - they can handle more items. Cash turned over more frequently. Purchasing from Mfrs Receiving Ware- housing Distri- butingPackaging Selling to drug stores
  43. 43. 43Dr. Lakshmi Mohan Next: Used IT to Link with Customers • Put computer terminals in drug stores • Customers entered orders directly in return for which McKesson guaranteed delivery within a certain specified time • Customers did order-entry for McKesson but their inventory levels were lower now Purchasing Receiving Ware- housing Distri- buting Packaging Selling Drug Stores
  44. 44. 44Dr. Lakshmi Mohan Real Strategic Use of IT came... (1) When the product line was broadened by adding new items requested by customers - In addition, locking in the customers because of high switching costs to a new supplier - training personnel on a new system (2) When a whole new business was created for McKesson through IT - Claims processing and collection for McKesson’s customers from third-party insurance companies, saving the drug stores the cost of doing that job and speeded up the collection time - Developed a whole new product based on IT: Claims processing and collection - a middleman in the financial processing business
  45. 45. 45Dr. Lakshmi Mohan Cardinal Health: A Pharma Distributor - Use of “I” to Grow Beyond A “Middleman” Pharma Mfrs. Cardinal Health 26,000 Retail Pharmacies, Hospital Groups, Managed Care Providers Product “I” Product Customer’s “Pain Points”: 1. Growing cost pressures for maintaining quality care 2. Complex task of managing patient and financial information Source: Harvard Business Review, July 2002
  46. 46. 46Dr. Lakshmi Mohan New Businesses Developed by Cardinal - To Meet Customer Needs 1. Hosted Information Systems for Hospital Pharmacies - Used its expertise in inventory management and procurement 2. Automated Transaction Systems for ordering and dispensing medications, and distributing them to hospital patients - Reduced loss and theft, improved accuracy and captured valuable operational data 3. Moved into Hospital Pharmacy Management Services - Staffing, Consulting, Outsourcing of the Pharmaceutical Functions 4. Introduced a “Franchise” Option for Independent Retail Pharmacists - Offered them Information Systems, Marketing Resources, and Purchasing Power
  47. 47. 47Dr. Lakshmi Mohan New Businesses Developed by Cardinal - To Meet Supplier Needs 1. Design and Produce Customized Packaging for Drugs - Used the “I” about the market - Reduced manufacturing and distribution costs by linking the two costs for JIT replenishment and smaller inventories 2. Aggregated Demand for Less Common Dosage Forms from Multiple Pharma Companies - Achieved scale production advantages for products like freeze-dried tablets 3. Produced Custom Packaging of Certain Drugs for Hospitals - A need that pharma companies could not meet with their siloed manufacturing operations
  48. 48. 48Dr. Lakshmi Mohan Created a New “I” Product To package and sell real-time information about wholesale and retail sales to pharmaceutical marketers - A byproduct of its distribution and pharmacy management services 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.
  49. 49. 49Dr. Lakshmi Mohan Cardinal Moved Beyond Delivering Pills from Point A to Point B - Huge new revenues stream with higher profit margins - Revenues - $2B in 1995 to $75B in 2005 - Operating Earnings - $60M to $3B Now:  A major player in a dramatically larger market … Consulting, IT, Drug-packaging Design and Manufacture, Pharmacy Management  Manages more pharmacies than all its competitors put together … Handles prescription benefits for nearly 3M individuals … Provides automated drug deliveries to 4M patients a day
  50. 50. 50Dr. Lakshmi Mohan Food for Thought 1. IT Innovation is NOT Just About Technology - It must deliver a significant “value-add” to customers. 2. First-Mover Advantage on IT Innovation - Does not last long since competitors will catch up. 3. IT Innovation is a Continuous Process - Capitalize on IT opportunities for reducing pain points of customers and becoming a one-stop shop. 4. Using IT to Lock Customers In - High switching costs deters customers from switching to competitors - Should be wary though of competitors trying to steal customers with irresistible value-adds 5. A “Follower” Strategy May Be Better - Can learn from the successes and mistakes of early movers - Not only can unnecessary costs be avoided but the learning may enable building of better systems
  51. 51. 51Dr. Lakshmi Mohan Wal-Mart: An American Original  1962: Sam Walton launched his first store  Location: Bentonville, a backwater in Arkansas, “a state where chickens outnumber people” Different Business Model: − Located stores in small towns since big retailers such as Kmart and Sears dominated large towns − Kept overhead low − Offered incentives - Profit-sharing for staff − Partnerships for suppliers − Large investment in IT … To keep inventory low − Customers got friendly service − AND, “Everyday Low Prices”  Today: World’s Largest Retailer − Second-largest Company after ExxonMobil
  52. 52. 52Dr. Lakshmi Mohan Wal-Mart after 40 years ……. Lord of the Things • Annual 2001 sales: $220 billion – Pre-text Profits: $9.3 Million ….. 60% of U. S. Retail Sales • #1 Food Retailer in the U.S.: $56 billion in 2001 ….. Opened since 1985 over 1000 massive dept./grocery supercenters, at 200,000 sq. ft., bigger than 4 football fields • # of employees worldwide: 1.28 million …. More than the US Postal service ; # in China : 4,000 • # of Suppliers : 30,000 ….. In every continent but Antarctica • Value of 100 shares bought in 1970 @ $16.50 per share: $11.5 million • Wal-Mart’s % of P&G's $40 billion in annual sales : 15% P&G has a 150-strong Bentonville office & Senior EVP dedicated to Wal-Mart • Typical starting hourly wage: $6.50 Source: Business 2.0, March 2002
  53. 53. 53Dr. Lakshmi Mohan A Simple But Powerful Idea: Minimize the “Bad I” - Inventory Walton figured out that most of the costs gets added after the product leaves the factory and moves through the supply chain: Mfg. → Wholesaler → Retailer - 20% - 30% of retail price spent on keeping inventory in 3 warehouses - Walton eliminated the wholesaler - He instituted JIT inventory practices using “real-time” flow of information from a store’s sales floors to the supplier’s plants that dictated: What to produce? When to ship? To which stores?
  54. 54. 54Dr. Lakshmi Mohan IT is Critical for Wal-Mart’s “Everyday Low Price” Strategy Invested in most of the waves of retail IT systems earlier and more aggressively than its competitors - Set industry standards in IT 1969 : Used computers to track store inventory 1980 : Adopted bar codes 1985 : Electronic Data Interchange (EDI) with suppliers Late 80’s : Wireless scanning guns 2003 : Mandated its 100 largest suppliers to place RFID (Radio Frequency Identification) tags on the boxes and pallets shipped to Wal-mart stores by January 2005 Focus of IT Investments: Applications that directly enhanced its core value proposition – EDLP – and increase sales through micromerchandising
  55. 55. 55Dr. Lakshmi Mohan Sharing Sales Data With Suppliers - Key to Low-Price Leadership  Treat Suppliers as Partners, NOT Adversaries  Implemented a Collaborative Planning, Forecasting and Replenishment (CPFR) Program  JIT Inventory Program Reduced Carrying Costs - for Both Wal-Mart AND Its Suppliers  Wal-Mart’s Cost of Goods : 5% - 10% Less Than Competitors “CPFR has blurred the lines between Wal-Mart and the Supplier: You’re both working to the same end: To sell as much product as possible without either of us having too much inventory” Source: Computerworld, Sept. 30, 2002
  56. 56. 56Dr. Lakshmi Mohan Wal-Mart’s Data Warehouse Current Level of Storage Capacity : 570 Terabytes * – Second only to the U.S. Government’s – More than all of the Internet’s fixed pages BUT ALL THAT DATA IS USELESS UNLESS IT IS USED Information is shared with its own buyers AND suppliers – 100,000 queries a week on purchase patterns or checking on a product * Wall Street Journal, Dec 3-4, 2005
  57. 57. 57Dr. Lakshmi Mohan Help to time merchandise deliveries - Its shelves stay stocked, but NOT overstocked “Predict what is going to happen, instead of waiting for it to happen” Example : Analysis of purchases during Hurricane Charley indicated products to be stocked in Florida’s Wal-Mart ahead of Hurricane Frances that hit a few weeks later “Not just the usual flash-lights, but, for example, strawberry Pop-Tarts whose sales rates is 7 times the normal rate. The Pre-Hurricane top-selling item was beer! ” Value of the Data Warehouse - Wal-Mart’s Buyers Source: New York Times, Nov 14, 2004
  58. 58. 58Dr. Lakshmi Mohan Wal-Mart opened its data vault in January 1999 to its suppliers – Cements Wal-Mart’s power over them Extranet built by Wal-Mart, Retail Link, allows suppliers to see how their products are selling in different stores Vast and detailed data on sales and inventory exceeds what many manufacturers know about their own products Value of the Data Warehouse - Suppliers
  59. 59. 59Dr. Lakshmi Mohan All That Data Is Mined! - Doing it since 1990 Analysis of its 90 million shopping cart transactions per week - To see how the purchases of the different items are related. - Company can then better identify items to market together. Obvious examples: - Charcoal and tongs go alongside the barbecue grills - Tiny baggies next to the pretzel boxes so Mom can pack snacks for the kids A not so obvious example! - Customers who buy Barbie dolls (it sells one every 20 seconds) have a 60% likelihood of buying one of three types of candy bars Source: Forbes, Sep 5, 1997
  60. 60. 60Dr. Lakshmi Mohan Micromerchandising Pays Off Sales per square foot 0 100 200 300 400 500 2000 2001 2002 Year Dollars($) Kmart Target Wal-Mart
  61. 61. 61Dr. Lakshmi Mohan Wal-Mart Stays Ahead of Competition! Competitors began to adopt many of Wal-Mart’s IT innovations including EDI and wireless bar code scanning in earnest in the mid-1990s. Target’s vice-chairman acknowledges that his company is “the world’s premier student of Wal-Mart”. Still Wal- Mart’s productivity measured by real sales per employee is higher than competitors. 118 133 181 Sears Kmart Wal-Mart 87 109 148 Sears Kmart Wal-Mart 1995 1999 Sales per employee, $ thousand
  62. 62. 62Dr. Lakshmi Mohan The Wal-Mart Effect on Retail 1987: - Wal-Mart’s Market Share: 9% - But 40% more productive than its competitors 1995: - Wal-Mart’s Market Share: 27% - Productivity advantage widened to 48% 1995-99: - Competitors reacted by adopting Wal-Mart’s innovations - Managed to increase their productivity by 28% - Wal-Mart raised the bar further by increasing its own efficiency by another 20% Source: “Retail: The Wal-Mart Effect”, The McKinsey Quarterly, 2002, No. 1
  63. 63. 63Dr. Lakshmi Mohan Wal-Mart Changed Retailing Economics Company (Latest 12 months in 1994-95) Wal-Mart Circuit City K-Mart* Caldor* Bradlees* Federated Dept. Stores Selling, General & Admin. Costs As a % of Sales 15.8% (19.4% in 1984) 19.0% 22.2% 24.4% 29.4% 33.3% *Now in Chapter 11 bankruptcy proceedings Source: Business Week, Nov 27, 1995
  64. 64. 64Dr. Lakshmi Mohan IT Innovation Is NOT Enough… … At least half of Wal-Mart’s productivity edge stems from managerial innovations that improve the efficiency of stores and have nothing to do with IT. For Example: Cross-training of employees allows them to function effectively in more than one department at a time. Better training of cashiers and monitoring of utilization can increase productivity rates at checkout counters by 10% to 20%.
  65. 65. 65Dr. Lakshmi Mohan Wal-Mart’s Management Process Key Features 1. Low Wages… But “Golden Cuffs” --All employees have stock options “After nearly 25 years at the company, Shirley Cox, a cashier, still earned barely $7.00 an hour. But she retired in her 40s on $250,000 of company stock…. the stock is a prevailing theme for everyone at Wal-Mart… if you hang around long enough, you can make a fortune on the stock.” 2. Employees hence have a stake in the company doing well 3. No class system, thus fending off all attempts at unionization -- ALL employees are called “associates” drumming home the notion that managers and workers are partners 4. Promote from within -- In 1996, 5,900 workers moved up to management jobs -- 60% of the 30,000 managers are former hourly workers
  66. 66. 66Dr. Lakshmi Mohan Wal-Mart’s Management Process Key Features 5. Empowering of Front-Lines -- Wal-Mart gives them information at their finger-tips and the freedom to act. “If someone asks me how we manage a $100 billion company, I tell them a store at a time, and we constantly challenge that unit to make it the best.” – CEO 6. Management will not tolerate “shrinkage” Loss, theft and damage of inventory is capped at around 1% Other retailers settle for 3% - 5% 7. Keeping Track of Competitors’ Prices “Later that afternoon, she leaves the store for an hour to compare prices at nearby Kmart and Target stores. She is reimbursed mileage. If a competitor’s prices are the same or lower than Wal-Mart’s, she consults with her supervisor about cutting her own prices up to 5 %.” 8. Work Ethic, Disdain for Extravagance and Customer-Centric Wal-Mart’s corporate offices are cramped, dingy and cheaply furnished. Walton believed that executives should spend more time on the selling floor than behind desks
  67. 67. 67Dr. Lakshmi Mohan Bentonville, Arkansas, Does Not Come to the World - The World Comes to Bentonville! It Buys the Most Company % of its total sales to Wal-Mart Tandy Brands Accessories 39% Clorox 23% Revlon 20% PJR Tobacco 20% Procter & Gamble 17% It Sells the Most Products Company Wal-Mart’s U.S. market share Dog Food 36% Disposable diapers 32% Photographic film 30% Toothpaste 26% Pain remedies 21% Source: “One Nation Under Wal-Mart; Fortune, Feb. 18, 2003
  68. 68. 68Dr. Lakshmi Mohan A Telling Example of Wal-Mart’s Growth - Went Past Toys “R” Us by 1998 Toys “R” Us: Largest Toy Retailer in the U.S. --- Value Proposition: Choice, Quality, Reasonable Price --- Displaced Dept. Stores and small specialist toy retailers --- 25% share of the market – Before Wal-Mart! Today: Wal-Mart: Largest Toy Retailer: 25% market share --- Toys “R” Us Share: 15% (2003 Sales: $11B) --- Value Proposition: One better than Toys “R” Us: Rock-Bottom PRICES WAL-MART STRENGTHS: --- Super-efficient supply chain --- Mass retailer, with a broad diverse array of products --- Can afford to use toys as a loss-leader (lose money on toy sales) to lure in customers who then purchase higher-margin goods - Toys “R” Us just doesn’t have that luxury Source: Wall Street Journal, August 31, 2004
  69. 69. 69Dr. Lakshmi Mohan 41 Years of Nonstop Growth
  70. 70. 70Dr. Lakshmi Mohan Wal-Mart’s Numbers  5,482 stores in 14 countries as of Oct 31, 2005  Revenues : $285B, #2 ExxonMobil : $298B, #1 GE: $152B, #5  Workforce: 1.3 M Target: 292 K & K-Mart: 133K Biggest private-sector employer in the world
  71. 71. 71Dr. Lakshmi Mohan “Sense & Respond” Management Process of Wal-Mart : Why They are Unbeatable Disappointing sales on Friday, Nov 26, 2004 (the day after Thanksgiving), Traditionally the biggest shopping day of the year - Wal-Mart knows it literally at the end of the day Because of their state-of-the-art information system
  72. 72. 72Dr. Lakshmi Mohan How did Wal-Mart Management respond to it? 1. Within a couple of hours, Michael Duke, the president of Wal-Mart, had gotten messages on his Blackberry that sales were off at stores around the country. 2. He brainstormed with execs and store managers about which products to mark down. 3. A team met over the weekend to finalize the list and contact suppliers. 4. On Tuesday, stores nationwide offered the new prices. Source: www.fastcompany.com
  73. 73. 73Dr. Lakshmi Mohan How did Wal-Mart Management respond to it? 5. On Thursday, Wal-Mart broadcast a video for its stores suggesting new displays. 6. The next day, the displays were up, and a new ad campaign was underway. 7. On Saturday, the company conducted a meeting with 500 employees asking for more ideas -- and acted on 21 of their recommendations. The result? The retailer expects December sales to be up three percent. Although it's not the holiday season it had initially hoped for, it represents a heck of a comeback. Source: www.fastcompany.com
  74. 74. 74Dr. Lakshmi Mohan Wal-Mart’s Exception Management – Driven by IT “At Wal-Mart, problems are referred to as “exceptions”. We keep watching everything that just happened. We are pretty near real- time. We can tell people that they need to go do something, and we are within hours, depending on the event.” “The event may be a truck’s failure to drop off or pick up something. It could be the absence of an important product in the store’s backroom or in the distribution centre that serves the store. Or, it could be an act of nature like the hurricanes that descended, one after another, on Florida in 2004” Source: New York Times, Nov. 14, 2004
  75. 75. 75Dr. Lakshmi Mohan A PARADOX ! Wal-Mart Retreats from Germany in July 2006  Entered Germany in 1997 − Bought two struggling German retail chains − 95 stores in 1999  Spent 8 years before admitting defeat − Too afraid to tarnish its image … by pulling out of the world’s third largest economy  Fiscal 2006 Sales: $ 2.5 B; Loses: $ 127.5 M − Total International Sales: $ 63 B; Global Sales: $ 312 B  Struggled from the outset against stuff local competition − Closed 10 of the initial 95 stores − “Tried German managers, US managers, and a combination of the two”  Sold its 85 stores to Germany’s largest retailer, Metro  Pre-tax Loss: $ 1 B on the Deal Source: Financial Times, July 29-30, 2006
  76. 76. 76Dr. Lakshmi Mohan Germany’s Discount Retail Market - A Tough One to Crack  German shoppers are frugal … “People in this country only ever look out for one thing – PRICE”  This trait should have been a boon for Wal-Mart - the guardian of EDLP  But Germany already had a number of homegrown discounters  Regulations restrict store hours and other retailing basics  Carrefour, Wal-Mart’s biggest global competitor, operates in 29 countries … But has steered clear of Germany “It is clearly a very challenging market for us that we have not figured out.” – Wal-Mart CEO, April 2006
  77. 77. 77Dr. Lakshmi Mohan German Retail Discounters - Proved to be A Real Match for Wal-Mart  Power of Privately-held Discounters – Aldi & Lidl − Grown their market share to 40% vs. < 2% for Wal-Mart − Had discovered the efficiency of drab out-of-town store sites and economies of scale that made their suppliers sweat − Kept costs AND prices low Underpriced Wal-Mart − Sell a limited selection in each store … 850 to 1,000 items vs. 100,000 at Wal-Mart − Stock mainly their own brands − 80% of German consumers are 20 minutes from an Aldi Aldi has invaded Wal-Mart’s home turf – opened more than 700 stores in the U.S. Source: Asian Wall Street Journal, July 31, 2006
  78. 78. 78Dr. Lakshmi Mohan BIG Mistake Made by Wal-Mart - Exported Its Culture Wholesale … Did NOT Adapt to the German Market  Little feel for German shoppers, − They care more about price than having their bags packed − “The German consumer does not like extra service as he’s worried that he’ll have to pay for it.” − Bag-packers were reassigned !  Little feel for German staff as well − “They hid in the toilets to escape the morning Wal-Mart cheer.” “We screwed up in Germany. Our biggest mistake was putting our name up before we had the service and low prices” - Head of Wal-Mart International, The Economist, Dec 6, 2001
  79. 79. 79Dr. Lakshmi Mohan At the End of the Day… It’s How We Use IT That Counts IT is a Means to Executing a Smart Strategy 1. Simply following IT trends can backfire. Smart companies analyze their economics carefully and spend aggressively on IT applications targeted at those levers that have the greatest impact on productivity 2. A prerequisite for getting returns from IT investments is managerial innovation. Business managers should lead the way, reshaping their companies’ processes and practices so that the full benefits of new information systems could be realized 3. Focus on value-adds for the customer “There is only one valid definition of a business purpose: to create a satisfied customer”. Peter Drucker, The Practice of Management, 1954
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IT Strategy - A presentation from Dr. Lakshmi Mohan's class


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