Using IT as a Competitive Advantage

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Using IT as a Competitive Advantage
By Marisa Anekratchadaporn Nolan Bayliss Bill
Burgard Tony Mercadante
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How can IT create a competitive advantage?

• IT can differentiate a product or service.
• IT can improve business processes.
• IT can change a business structure.
• IT can spawn new business.

• Source Lecture and notes, Mary Lacity, 2002

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Critical Commodities Critical Differentiators
Useful Commodities Eliminate/Migrate
Critical
Useful
Commodity
Differentiator
Source Lecture and notes, Mary Lacity, 2002
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Outstanding case studies

• American Airlines SABRE
• Bergen Brunswig
• Walmart

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SABRE

• Semi
• Automated
• Business
• Research
• Environment

Source American Airlines, Simon Forty, 1997
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SABRE What is it?

• SABRE is a completely automatic , centralized ,
  electronic airlines reservations system developed
  by IBM for American Airlines.

Source IBM Corporate Archives, New York
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Overview

• Size of company 2.1 billion revenue in 2001
• Employee Approximately 5,500 employees in 45
  countries
• Major Product Airline ticket
• Customers Travelers and Travel agents
• Headquartered Southlake, Texas
• SABRE connects more than 59,000 travel agents
  around the world, providing content from 450
  airlines, 53,000 hotels, 54 car rental companies,
  eight cruise lines, 33 railroads and 228 tour
  operators

Source www.sabre.com and Business and Company
Resource Center, www.infotrac.galegroup.com
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Revenue from SABRE Inc. declined 19 from 2000 to
2001 and has grown a total of 18 since 1997
Data as of March 14, 2002
Source Goldman Sachs, PrimeAccess Research
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Organization Chart
William J. Hannigan CEO
Sam Gilliand CMO
Carol Kelly CIO
Michael Haefner HR
Jeffery Jackson CFO
Source www.sabre.com
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What prompted change?

• Needed a system to regulate the flow of
  passengers due to the increasing number of people
  who want to travel by plane.
• Lost millions of dollars due to the manual
  reservation system.

Source High Technology Business, Wheeler Helen,
Boston, 1987 Historical Dictionary
of Data Processing Technology p.331-332, James W.
Cortada, New York
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The History ofSABRE
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SABRE 1959-1969

• - American Airlines and IBM signed
• contract for the development of a
• communications-bases reservation
• system
• - The first SABRE system is installed. SABRE
  becomes one of the first of the large , online ,
  real-time applications using computer developed
  in the United States.

1959
1960
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SABRE 1959-1969

• - SABRE system is complete.

1964
- The initial research, development and
installation investment in this system took a 400
person staff and cost almost 40 million
Source Historical Dictionary of Data Processing
Technology p.331-332, James W. Cortada, New York
www.sabre.com
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SABRE 1959-1969 Initial startup success

• Once the system was complete in 1964, AA saved
  30 on its investments in staff alone.
• Average time required to complete the processing
  of reservations transaction reduce from 45
  minutes to 3 seconds.
• Error rate reduce to less than 1
• Automatically reminds AA agents at various
  locations to advise their scheduled passengers of
  any changes affecting them.

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SABRE 1959-1969 Initial startup success

• More airline seats will be available to the
  customers.
• Automatically advise agents to check on
  passengers who have not picked up their tickets
  within the time limit.
• Maintain and automatically process waiting lists
  of passengers desiring space on fully-booked
  flights.
• Automatically supply fare quotations for most
  flights.
• Automatically supply information on arrival and
  departure time for the current days flight.

Source IBM Corporate Archives, New York
www.sabre.com The story of
American Airlines, Serling Robert, New York, 1985
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SABRE 1970-1979

• AA began marketing SABRE to travel agencies and
  airlines throughout the US.
• The SABRE system is installed in a travel agency
  for the first time. Passengers can also ask for
  hotel reservations, car rentals, special meals
  etc.
• 86 of the top 100 agency accounts located in
  highly competitive markets elect to use SABRE
  system.
• United Airlines introduces their Apollo System.

1975
1976
Source Datacomm Advisor, Waltham, June1976
www.sabre.com
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SABRE 1970-1979

• Internal Users, Travel Agents, Travelers and
  External Users.
• United Airlines with the Apollo Computer
  Reservation System (CRS).
• Being a first mover with products and services

Customers
Competitors
Competitive
Advantage
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SABRE 1980-1989

• SABRE had 41 of the market share Apollo had
  39, started offering computer terminals to
  travel agents.
• Started to market a travel awards program
  AADVANTAGE
• Unveiled AAirpass with 5 year to lifetime options
• Reorganized to AMR Corporation
• 10,000 travel agencies were now using SABRE
• AMR builds worlds largest private data base in
  Tulsa Ok.

1981
1982
1985
1987
Source Business Week, Transportation, August
1982 www.sabre.com
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SABRE 1980-1989

• Internal Users, External Users, Travel Agents and
  Travelers.
• Apollo, PARS (TWA) and Amadeus.
• Being a first mover with products and services

Customers
Competitors
Competitive
Advantage
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SABRE 1990 -1999

• SABRE introduces SABRE AirFlite a flight
  scheduling system
• To prepare for Y2K, new software is sent to
  40,000 travel agents
• SABRE becomes a separate legal entity of AMR
  followed by an IPO of 18 percent of its stock.
• Travelocity.com is launched

1992
1995
1996
Source Air Transport World, Sabre Unleashed,
Nov. 1996 www.sabre.com
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SABRE 1990-1999

• External Users, Travel Agents and Travelers.
• Apollo, Galileo (buys Apollo in 1993), Amadeus,
  Expedia.com (Microsoft)
• Being a first mover with products and services

Customers
Competitors
Competitive
Advantage
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SABRE 2000- Present

• SABRE acquires GetThere.com a B2B internet
  provider of travel services.
• SABRE is completely spun off from AMR
  Corporation.
• AMR spun off SABRE due to decrease in options
  SABRE is guiding AMR and it should be the other
  way around.
• AMR looking for ways to expand profits.
• Internet allows access to more people without
  travel agents.
• AMR is to retain 25 leading developers

2000
Reasons
Source Air Transport World, AAdios to Sabre,
Feb. 2000 www.sabre.com
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SABRE 2000- Present

• AMR now competes against SABRE with Orbitz.com
• SABRE signs a long term contract with AMR
• SABRE sells IT outsourcing business to EDS, SABRE
  will focus on software, distribution, travel
  marketing and reservation hosting
• transfer 4,200 employees to EDS
• transfer 250 employees to AMR Corp.
• Selling the Data CenterThey obviously dont view
  anything as a sacred cow

2001
Source Computerworld, Sabre sells IT business
to EDS, March, 2001
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SABRE Summary

• American Airlines designed the system initially
  to be a competitive advantage to increase the
  number of reservations and reduce transaction
  errors
• Sold CRS to external vendors (first mover)
• Gave travel agents a terminal (first mover)
• Added services, travel, hotel, etc. (first mover)
• Added features EaasySABRE, SABRE AirFlite
  (first mover)
• Added Travelocity.com (first mover)

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SABREs Competitive Advantage

• New products
• Set the market and make change prefer not to
  follow the competitors
• Need continued change to keep customers
• Customers like new ideas and better services
• Update products services
• Add extra features to feel continued value added

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• BERGEN BRUNSWIG
• Pharmaceutical Distributor

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Bergen Brunswig

• Founded in 1969 from Lucien Brunswigs Brunswig
  Drug Co in Los Angeles merged with Emil
  Martinis Bergen Drug Co. in New Jersey.
• Today now called AmerisourceBergen as of 8/01
• 3rd largest pharmaceutical distributor in the
  world.

Source bergenbrunswig.com
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Company Officers
Source bergenbrunswig.com
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IT Organization

• CIO- Linda Burkett
• 12,200 Employees for entire corporation
• 300 IT Employees
• 1999 Annual IT Budget 58 million

Source schwab.com/bergenbrunswig.com/Drug Store
News 12/13/99 v21 i20 p36.
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Major Products Being Sold

• Generic Pharmaceuticals
• Pharmaceutical Services
• Pharmaceutical Solutions

Source Bergenbrunswig.com
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History of the System

• 1995 Linda Burkett promoted to CIO.
• 1996 Interlinx first implemented.
• 1999 Interlinx evolved into COE (Catalog Order
  Entry), when Bergen moved from a desktop
  application to the web.
• Known to customers as IBERGEN.COM

Source Brooke Walton, Bergenbrunswig Marketing
dept
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Revenue Trend (bn)
Source Goldman Sachs PrimeAccess Research Mar
14-02
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Earnings Per Share/Profit ()
Source SP Stock Report 09-MAR-02
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Customers
Hospitals
Traditional Pharmacies
Supermarket Pharmacies
Residential Delivery
Source bergenbrunswig.com
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Customer Interaction

• Orders placed through worldwide web.
• Customers enter order, receive next day,
  sometimes same day.
• Patients pickup prescription at pharmacy, store,
  hospital, or have home delivery.

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Economic Forces on Bergen(1990-present)

• 1990-1992 Recession
• Clintons Healthcare Plan
• Mergers/Acquisitions
• FTC Antitrust concerns
• 1990s Price fixing lawsuits
• FTC ma approvals during G.W. Bush era
• HMOs, third party payers lower payments

Source Drug Topics, Dec 13, 1993 v 137 n23
p102(3) Wall Street Journal
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Critical Differentiator

• Rather than be acquired, Bergen Brunswig decided
  to invest in IT to lower costs/maximize profit
• Build the best pharmaceutical
  distribution platform through inventory/regional
  distribution centers
• Moved from telephone ordering to desktop
  networks, and then onward to the worldwide web.

Sources Brady, R. The Strategic Use of
Information Seizing the Competitive Edge,
Information Week May 26, 1986 pp 26-62.
Kettinger, William J. MIS Quarterly, Minneapolis
Mra 1994 Vol 18 Iss. 1 pg 31,28pgs
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Key Features of a Successful System

• Building relationships/Brand recognition.
• Mass of Force. Ability to grow leaps and bounds
  in a short time.
• Showing customers how Bergen can save them money
  which keeps customers in business for the long
  run.
• Investing in IT to compete in low margin
  environment.
• Fulfillment.
• Regional distribution centers.
• Competitive pricing.
• Same Day Service/Next day service (bulk
  shipments).
• Solid supplier agreements as well as 3rd party
  carrier agreements.

Source Drug Store News, Dec 13, 1999 v21 i20 p20
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EPS Comparisons

• Bergen vs. main
  competitors

Source Schwab.com/SP Stock Report 9-Mar-02
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Competitive Advantage

• System Designed for Competitive Advantage from
  the beginning to continue brand recognition and
  dominance while building solid long term
  relationships.

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• Background Information
• Financials
• Customers/Suppliers/Competitors
• IT Organization and Architecture
• IT Strategic Advantage
• EDI

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Background

• Founded by Sam Walton in 1962
• Company founded with first store in Rogers, AR
• Headquarters Bentonville, AR
• 38 stores in 1970
• 4732 stores today

http//www.walmartstores.com/wmstore/wmstores/Main
about.jsp
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Financials

• 191 Billion in Sales in 2001
• Five Times that of AOL Time Warner
• 8 billion in capital spending in 2001
• Market Expansion
• Cash flow of 9.8 billion
• Up 17 from 2000

(5)
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Competitors/Suppliers

• Competitors
• Kmart
• Sears
• Target
• Suppliers
• P G
• Thousands of others

(4)
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IT Organization

• Most powerful computer system in the corporate
  world
• Second largest data warehouse
• Logistics Technology
• Retail LinkTM
• Enormous Network Infrastructure
• CIO Kevin Turner
• 500 million IT budget
• .26 of Annual Sales Revenue

(6)
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Distribution Structure
Vendor
Vendor
Vendor
Vendor
Vendor
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Store
Store
Store
Store
Store
Store
Store
Store
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Distribution Structure

• Supply Chain Management
• Create superior efficiencies through SCM
• Decentralize distribution through multiple
  distribution centers
• Centralize management and control
• Excellent coordination with multiple suppliers

(4)(3)(2)
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IT Critical Differentiator EDI

• Transmission of data to and from various
  companies
• Examples
• Purchase Orders
• Payment information
• Inventory information
• Invoices

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WHY EDI?

• Realized the complexity of their supply chain
• Thousands of Stores, Suppliers and Products
• Inventory management removed from store level
• Also
• Transaction Costs
• Paperless Environment
• Inventory Management Efficiencies
• JIT of Retail
• Everyday low price strategy through up-to-date
  sales information

(1)(4)
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EDI

• How does it work?
• Through telephone line
• Item is purchased
• Computer Adjusts Inventory
• Need To Order Level reached
• Purchase Order sent to vendor
• Vendor replenishes and sends invoice
• Wal-Mart sends electronic funds transfer

(2)(4)
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Retail LinkTm

• Software that enhances EDI functionality
• Provided to vendor in 1991
• Allows for much better forecasting and reporting
  abilities
• Faster replenishment
• Better communication between Wal-Mart and Vendors

(1)(3)(5)
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EDI and Retail LinkTM Today

• No longer through telephone lines
• Cisco Networking
• Web Enabled
• Most vendors now utilize Retail LinkTm
• Required enrollment EDI

(1)(2)
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EDI

• Critical Differentiator?YES
• Has allowed for a 2-3 percent reduction in costs
• Allowed for increased vendor responsiveness
• Resulted in Wal-Mart out pricing its competitors
• Superior Customer Satification
• Sales Revenues tell the story

(3)(4)(5)
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Sales Revenue
2001 Annual Report, Wal-Mart Inc.
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EDI

• Sustainable Differentiator? YES
• Logistics System impossible to replicate
• Most efficient infrastructure network
• Continues to enhance traditional EDI
• JIT?. Close

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References

• Ehrens,J. Scott,Wal-Mart Beyond Regional
  Merchandizing, Apr 1992, Pg. 1-3
• Gilbert, A., Retails Super Supply Chain,
  Informationweek, Oct, 2000, Pg. 1-5
• www.cisco.com/warp/public/779/ibs/vertical/retail/
  Wal-Mart.PDF
• Caldwell, B., Wal-Mart Ups the Pace,
  Informationweek, Dec 9, 1996, Pg 1-6
• Janoff, B., High-tech Knowledge, Progressive
  Grocer, Dec 2000, Pg. 1-5
• 2001 Annual Report, Wal-Mart Inc.

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Best Practice

• IT might need a large budget but also can yield a
  prosperous benefit for the company.
• The competitive advantage always works for the
  company that willing to be an innovator.
• IT needs to be improved all the time, otherwise
  the competitor can catch up and the competitive
  advantage will no longer exist.

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Best practice

• CIO who pay close attention to IT and has a good
  capability in managing IT will lead the company
  to success.
• Only a few number of company can sustain their
  competitive advantage for a long time.

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Why most companies cannot sustain their
competitive advantage so long?

• Lack of managing skill
• Competitors
• IT become obsolete