Vijay Gurbaxani

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Creating Value through IT in the Information Age
Vijay Gurbaxani Professor of Management and
Computer Science Kenneth L. Kraemer Professor of
Management and Computer Science Director,
CRITO
Presentation to CIO Breakfast Roundtable February
12, 1999
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IT Payoffs to Individual Firms

• Engaged in study of payoffs from IT investments
• Supported by 10 companies in CRITOs
  Industry-University Cooperative Research Center
• Payoffs from IT investment must be evaluated in
  the context of a firms strategy
• We characterize a firms business strategy as
• Operations Focus
• Product Focus
• Customer Focus
• Firms try to excel on one dimension, but must
  maintain parity on the others
• IT can be used to improve performance on all
  three dimensions

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Firm Strategies

• Operations Focus --- providing a product/service
  with a compelling price-quality ratio
• Low cost, fast, accurate execution
• Product Focus --- getting new and enhanced
  products/services to market
• New product development, product differentiation
• Customer Focus --- providing unique
  product/service offerings to customers based on
  comprehensive understanding of their needs
• Relationship, customization, intimacy

One significant challenge is to continue
improving performance in the presence of
ever-increasing IT capabilities
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Well-Known Examples of Success with IT

• Operations Focus
• United and American Airlines
• Federal Express
• Walmart
• Product Focus
• Boeing
• MCI
• Customer Focus
• Merrill Lynch
• Lands End

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New examples - firm strategy and IT impact

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Why These Case Examples?

• Each is transforming its industry and setting
  new rules of the game for competitors
• Each illustrates a different strategic focus
• Each illustrates the potential payoff from IT on
  its choice of focus
• Of course, each has also used IT to improve
  performance on multiple dimensions

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Amazon Transforming Book Retailing

• Amazon is truly a network era company
• Business model is built around Internet
  technologies
• Customer-focused company
• Uses capabilities of Internet to provide
  customers with value-added services and enhance
  the customer book- buying experience

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Book Retailing Industry - Major Players

• Traditional retail presence
• Barnes and Noble
• Borders
• Crown Books
• Online retail presence
• Amazon
• Barnes and Noble
• Borders
• We focus on Amazon and Barnes Noble

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Book Retailing Industry

• 1994 Retail (Prior to Online)
• Book Retail Industry 1.5 billion books
  purchased.
• Bookstore Chains 25.
• Independent Bookstores 21
• Book Warehouse Clubs, Discount Stores 32
• Used Books, Mail Order Others 22
• Book Retail Industry Breakup
• Adult Books 1 billion books
• Juvenile Books 0.5 billion books

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Book Retailing Industry

• 1997 Retail (Including Online)
• Book Retail Industry 1.8 billion books
  purchased.
• Bookstore Chains 31
• Independent Bookstores 15
• Book Warehouse Clubs, Discount Stores 32
• Used Books, Mail Order Others 22
• Book Retail Industry Breakup
• Adult Books 1.2 billion books
• Juvenile Books 0.6 billion books
• Barnes Noble 11 of market
• Borders 8 of market
• Amazon unknown, but significantly

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Net Sales
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Net Income
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Facts Figures
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Amazon Business Model --- StrategyCreating Value
for the Customer

• Simplifying the transaction
• Customer accounts
• 1- click
• Shopping cart
• Providing value added services to customers
• E- mail confirmation after placement of order
• E- mail service for notification of new books
  (EYES)
• Enhancing the customer experience
• Reviews and recommendations from authors
• Chat sessions with authors and other readers
• Added an extensive CD and tape collection

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Amazon Business Model --- Structure

• Alliances
• Major search engines like Yahoo, Excite,
  Altavista
• Aggregators (AOL, Netscape)
• Web based service (PlanetAll, Junglee)
• Associate Partner program
• Financial rewards to on-line vendors /
  individuals who provide links to the Amazon site
  from their website.
• Distribution
• Relies mainly on sourcing capability of existing
  wholesaler (Ingram)
• (see next slide)

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Barnes Noble Business Model --- Strategy

• In-store
• Customer focus
• Enhance customer experience
• Cafes, music, sofas
• Customer service technologies
• WINGS (Inventory Management System)
• BookMaster (Store System)
• Express Lane
• Online
• Product focus
• Proprietary publishing
• Maintain web presence as an additional
  distribution channel
• Expanded into software
• Synergies between In-Store and Online
• Reduction of inventory in bookstores
• Exploit existing inventory for quick delivery

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Barnes and Noble Online

• Announced IPO 100 million (20 stake in online
  business)
• Instead, sold 50 stake in online business to
  Bertelsmann
• Market value 2.7billion vs. 16.7 billion for
  Amazon
• Exclusively focus on the online business
• Generate working capital for online unit
  expansion

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Barnes Noble Business Model--- Structure

• Alliances
• Wired Ventures
• Disney Online
• AOL Marketplace
• Lycos
• Click Rewards
• Distribution
• Relies on 50 distributors and its own
  warehousing capabilities
• (see next slide)

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Comparison of Key Online Features
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Dell and the PC industry

• Industry is technology-driven, fast changing
  short cycles, high velocity quality is
  critical network economies
• Industry very competitive over 100 firms, but
  four firms account for 28 of market and expected
  to capture even bigger share
• PCs becoming a commodity
• Competition increasingly based on price rather
  than product differentiation
• Customer focus (market segmentation) and
  execution becoming key success factors

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Dell Computer

• Entered the PC industry in 1984
• Started by selling direct when industry was
  using resellers and retailers developed the
  channel
• Dell Model
• Direct sales to customers
• Build to order production
• Continuous refinement and extension of the Dell
  Model
• Defined different customer segments for direct
  sales
• relationship and transaction customers
• Refined build-to-order, distribution and
  service/support for each segment
• Extended geographic reach with Internet sales

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Network Model Versus Traditional Model

• Dell Computer
• Decentralized, virtual integration, outsourcing
• Segmented markets relationship and transaction
• Direct sales - telephone, Internet, vendor sales
  force
• Build to order
• IT architecture - loose integration, information
  sharing
• 12B sales 1997 14,000 employees
• Compaq Computer
• Centralized, vertical integration, do it
  yourself
• Indirect sales - resellers and retailers
• Build to forecast
• IT architecture - tight integration, enterprise
  systems
• 24B sales 1997 28,000 employees

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Operations Focus Using IT for End to End
Efficiency

• Dell has focused on information as the linkage
  rather than systems per se
• Dell has achieved virtual integration from
  suppliers to customers resulting in great
  efficiencies

Production and distribution
Procurement/ inbound logistics
Marketing, sales, service and support
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Operations FocusProcurement and Distribution

• Dells real time integration of information in
  supply logistics reduces inventory costs
• Dell has low inventory in the supply
  chain--11days vs. 30 days for Compaq
• Dell has no inventory in distribution
• Much of Compaqs inventory is in distribution
  channels
• Compaq experiences channel conflict as it seeks
  to reduce inventory in the distribution chain
• Dell can respond faster to changes in demand
• Dell gains higher margin by being first to
  market
• Bottom line
• Dell turns inventory 33 times annually vs.13
  times for Compaq

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Operations Focus Production

• Production automation improves quality, speed,
  throughput
• Information substitutes for inventory
• Build to order reduces need for inventory
• Information sharing with suppliers enables fast
  response
• Information helps balance production with
  demand and supply
• Call centers - thermometers in the market
• Call centers - sell available inventory
• On site reps - work with customers to forecast
  procurement
• Bottom line
• Dells production cycle of seven hours is best
  in industry
• Dell is able to fill all orders

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Customer Focus Sales Service

• Dells Web pages are customized
• Configuring ordering customized for a firm
  globally
• Service support customized to configuration(s)
  
• Dell maintains global inventory of PCs for its
  customers
• Dell manages the PC resource from procurement to
  disposition
• Compaq does not know who its customers are or
  what configurations they have
• Bottom line
• Dells sales growth has averaged 86 over the
  last three years compared to 32 for Compaq
• Dells customer satisfaction is highest in PC
  industry

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Dells Market Value Growth Leads PC Industry
Stock Price Index Feb.28, 1997100 Source
Schonfeld, Erick "The squeeze is on for PC
makers", Fortune, April 13, 1998, v. 137, n. 7,
pg. 182-186
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Dell Model Changing the IT Industry

• All major PC vendors are moving to the direct
  model
• Either on their own or through their resellers
  and retailers
• The direct model is enabled by network computing
• Execution is the key to success with the direct
  model
• Information and technology enable refinement of
  execution and extension into customers business
• One implication is greater competition - those
  who execute best will win the race

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Charles Schwab High Finance Goes High Tech

• Retail Brokerage Industry Trends
• Competition from multiple fronts --- full
  service brokerages, mutual fund companies, and
  increasingly banks, insurance companies, and even
  software companies
• New Internet-based low cost providers have
  created price pressure at the low end of the
  market
• Explosion of easily-accessible investment
  information on the Internet has lowered the
  demand for investment advice
• However, as baby boomers enter their
  wealth-building years, the majority of new
  customers are relatively inexperienced with
  investing they need guidance

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Schwabs Business Strategy

• Offering a combination of products and services
  to serve both experienced investors and new
  investors who are relative beginners to investing
• Implementing a unique technology-based solution
  to changing industry dynamics Schwab Style
  Advice
• Focusing on the middle of the market
• Away from the value wars at the high end and
  the price wars at the low end
• Bundling products for investors at moderate
  price

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Financial Growth Highlights

• Largest discount brokerage in the U.S. For the
  year ended December 31 1997
• 4.8 million customer accounts
• Total customer assets of 354 billion
• 272 branches
• Net income of 270 million on revenues of 2.3
  billion
• Growing at a rapid pace. During the period
  1991-1998
• Over 25 annual revenue growth rate
• Over 35 annual net income growth
• Roughly 30 after-tax profit margin

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The Schwab RevolutionTechnology Firm in the
Brokerage Industry

• 1982 24x7 stock trading (around the clock, 7
  days a week)
• 1989 TeleBroker --- a touchpad trading system
• 1992 OneSource --- a zero-commission mutual
  fund supermarket
• 1993 StreetSmart --- PC-based system for online
  trading
• 1994 CustomBroker --- phone, fax, pager alerts
  for active traders
• 1996 e.Schwab and Internet trading
• 1997-98 MarketBuzz and Asset Allocation Toolkit
  --- online tools for investment research and
  guidance to provide profound level of service

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Using IT for Product/Service Leadership

• Product/Service Focus
• Product Innovation --- a stream of innovative
  brokerage services e.g., mutual fund
  supermarkets and Internet trading
• Product Differentiation --- controlled
  Schwab-style advice keeps Schwab out of the
  value wars with full service brokerages and
  price wars with low-price electronic brokerages
  
• Reach --- new ways of providing customers with
  access to products and services
• Product leadership has been the primary area for
  the strategic leverage of IT at Schwab

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Other Areas of Strategic IT Impact

• Operations Focus
• Workflow Processing --- automation of order
  processing from customers at one end and the
  financial markets at the other end
• Electronic Distribution --- By the end of 1997,
  41 of the trades were acquired online
• Customer Focus
• Retail Customer Support --- customers have
  access to online market information, portfolio
  management tools, and a referral service to
  financial advisors
• Institutional Customer Support --- a proprietary
  extranet called SchwabLink provides high touch
  execution and brokerage accounting services to
  over 5,000 independent financial advisors

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IT Value in the Network Era Lessons Learned

• Operations Focus
• Lower costs by substituting IT for bricks
  mortar
• Reduce inventory and lead times by integrating
  end-to-end operations with IT
• Reduce inventory through better demand
  forecasting
• Reduce costs of delivering information
  products/services by direct delivery over a
  network
• Reduce costs of order-taking/ fulfillment.
• Decrease costs of partnering with suppliers

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IT Value in the Network Era Lessons Learned

• Product Focus
• Improve new product development process by
  obtaining customer feedback more easily and
  promptly
• Customize products/ services incorporating
  knowledge about customers business practices and
  preferences
• Create new technology-intensive products
• Differentiate products/ services via product
  design or distribution

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IT Value in the Network Era Lessons Learned

• Customer Focus
• Increase customer loyalty by creating virtual
  communities that enhance customer experience
• Reduce customers transaction costs by
  increasing accessibility, convenience and ease of
  use
• Increase value to customer by customizing
  interface
• Increase value to customer by providing
  information based value added services.

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Conclusions

• Econometric evidence uncovers positive returns
  on IT investment, on average
• There is substantial variation among payoffs for
  individual firms organizational and management
  practices make a difference
• IT is key to the execution of business strategy
  in the network era
• Many industries are being radically transformed
  by new IT-based business models.
• First movers need to find ways of protecting
  their innovations
• Incumbents need to find ways of responding to
  these challenges
• This is only the beginning ...