IT Can Drive Innovative Strategies

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

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

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

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.”

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.”

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

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

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

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”

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

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 !

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 !

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?

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

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

“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. 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 -5 120 125 75 200 200 : : 0 150 150 250 400 3 +10 210 200 50 250 2 -10 90 100 200 300 1 Short/ Over Sales to Stores (from invoices) Out minus In Load-In to Warehouse Load-Out from Warehouse SKU

Management Process Had to be Changed to Capitalize on New Information

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

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.

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

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

Decentralization Facilitated By Frito-lay System

Timely, accurate information for top management

- NOT massaged & sanitized information

Information support for 4 geographic regions with P&L responsibility Frito-Lay System Impact: 60% of corporate decisions pushed to regions

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.

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

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

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:

Some Lessons

Modern IT is a marvel, but to realize the potential, you have to USE it - to make each person more effective and efficient.

“ Manumation” – mere automation of manual processes – will not generate the anticipated payoff from the IT investment.

Focus IT on Revenue Drivers and Cost Drivers.

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 !

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

“ 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

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.

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.:

: COSMOS, the centralized computer system for package tracking on a real-time basis

: 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

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

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

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.

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 .

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

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”

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

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%)

Some IT Firsts for UPS …After a Late Start

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

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

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

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

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-buting Packaging Selling to drug stores

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

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

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”:

Growing cost pressures for maintaining quality care

Complex task of managing patient and financial information

Source: Harvard Business Review , July 2002

New Businesses Developed by Cardinal - To Meet Customer Needs

Hosted Information Systems for Hospital Pharmacies

- Used its expertise in inventory management and procurement

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

Moved into Hospital Pharmacy Management Services

Staffing, Consulting, Outsourcing of the Pharmaceutical Functions

Introduced a “Franchise” Option for Independent Retail Pharmacists

Offered them Information Systems, Marketing Resources, and

Purchasing Power

New Businesses Developed by Cardinal - To Meet Supplier Needs

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

Aggregated Demand for Less Common Dosage Forms from Multiple Pharma Companies

- Achieved scale production advantages for products like freeze-dried tablets

Produced Custom Packaging of Certain Drugs for Hospitals

A need that pharma companies could not meet with their siloed manufacturing operations

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.

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

Food for Thought

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.

IT Innovation is a Continuous Process

- Capitalize on IT opportunities for reducing pain points of customers and becoming a one-stop shop .

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

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

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

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?

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

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

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

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

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

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

Micromerchandising Pays Off

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. 1995 1999 Sales per employee, $ thousand

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

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

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%.

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

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

Bentonville, Arkansas, Does Not Come to the World - The World Comes to Bentonville! Source: “One Nation Under Wal-Mart; Fortune , Feb. 18, 2003 17% Procter & Gamble 20% PJR Tobacco 20% Revlon 23% Clorox 39% Tandy Brands Accessories % of its total sales to Wal-Mart Company It Buys the Most 21% Pain remedies 26% Toothpaste 30% Photographic film 32% Disposable diapers 36% Dog Food Wal-Mart’s U.S. market share Company It Sells the Most Products

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

41 Years of Nonstop Growth

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

“ 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

How did Wal-Mart Management respond to it?

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.

He brainstormed with execs and store managers about which products to mark down.

A team met over the weekend to finalize the list and contact suppliers.

On Tuesday, stores nationwide offered the new prices.

Source: www.fastcompany.com

How did Wal-Mart Management respond to it?

On Thursday, Wal-Mart broadcast a video for its stores suggesting new displays.

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

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

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

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

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

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

At the End of the Day… It’s How We Use IT That Counts IT is a Means to Executing a Smart Strategy

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

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