NBA 600: Session 5 Customer Access to Information 4 February 2003

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NBA 600 Session 5Customer Access to
Information 4 February 2003

• Daniel Huttenlocher

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Todays Class

• Finish material from last time
• Saw new IT can change industry structure,
  demanding focus on strategy
  
• Finish considering examples of where new IT
  resulted in (required?) new business models
  
• Start discussing value of information to the
  customer
  
• Sometimes can also lower costs
• Can remove information bottlenecks, which may be
  profitable components of old structure
  
• Can be used to enhance value of other goods and
  services

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Reflect Whats a Business Model

• Business model how to profitably generate value
  for the customer
  
• Focus on customers and their needs
• What they value and will pay for
• Simple story for expressing the value
• Omits focus on competition
• Which comes from competitors, suppliers,
  customers, substitutes, new entrants
  
• Business model mediates between value creation
  and new technology (Chesbrough)
  
• Current models may not allow value to be realized
  or captured

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Some History of IT Business Models

• Radio broadcasting needed new model
• Subscription or fee not possible model
• In contrast to newspapers, magazines, movies
• Promising new technology
• Stock bubble (1905-1910)
• Big business by 1920s
• Many broadcasters were manufacturers
• Westinghouse, RCA
• Evolution of national radio networks
• Eventually audience for sponsors/advertisers
• TV broadcasting radio advertising model
• Initial losses absorbed by radio broadcasters

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IT Hardware Manufacturers

• Often explicitly create product need through
  content/services
  
• Radio equipment manufacturers developed
  broadcasts to drive demand for radio sets
  
• Motorola creates businesses to drive demand
• Built early pager and cellular networks
• Exited service businesses once critical mass
• Satellite phone networks (e.g., Iridium) were
  costly businesses that never yielded demand
  
• Intels VC arm invests in applications that
  create need for faster microprocessors
  
• Positive returns generate more value

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Copying Written Information

• Haloid (Xerox) introduced 914 in 1959
• First plain paper copier substitute for existing
  technologies that did not produce typed quality
  
• Prevailing business model razor blades
• Slight markup over cost on equipment
• Typical machine sold for around 300
• Higher markup on consumables (special paper and
  supplies)
  
• On average used for 15-20 copies per day
• Business model a problem for Haloid
• Manufacturing cost of 914 around 2000
• Although per copy costs similar to others

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A (Revolutionary) New Model

• Nobody could see how to make money with this new
  technology
  
• Haloid tried to get Kodak, GE and IBM to help
  market the 914 but all thought no business
  
• AD Little concluded device was highly versatile
  but had no future in office copying market
  
• Joe Wilson bet that there was greater latent
  value in the technology
  
• Leased the device at 95/mo including 2,000
  copies, .04 per additional copy
  
• Without extra copies, about 2 years to reach
  profitability on each lease

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Wildly Successful Model

• Once installed, the 914s generated an average of
  2,000 copies/day (not month)
  
• Almost 20x the lease revenue
• Xerox compound growth rates 41/yr for twelve
  years
  
• 2.5 billion revenue and high margins by 1972
• Never would have gotten off the ground without a
  new business model leasing
  
• Unfortunately Xerox had too hard a time getting
  past the lease plus click model
  
• Lost low-end printers to HP razor blades

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Value of Information

• Information often has high value
• Even when it is a component of some other product
  or service
  
• Value may change substantially with new
  technology
  
• Value may not be realizable under some models
• Important to explicitly understand value and how
  to get paid for it
  
• Can be difference between huge business and
  nothing
  
• Information has social value people want to
  share it

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Informing the Customer

• Saving money by informing customer more
  efficiently
  
• Customers want access to information, what is it
  costing you to provide it
  
• Better customer loyalty by providing more
  information
  
• Adding value for the customer, such as direct
  airline reservations or package tracking
  
• Learn more from the customer
• Dont let intermediaries become more
  knowledgeable than you

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Example IT in Airline Industry

• Mid 1970s larger airlines create computer
  reservation systems CRS
  
• E.g., Apollo (United), Sabre (American)
• Terminals directly in travel agent offices
• Fares and reservations for any airline paying
  fee
  
• Prior discussion among travel agents about
  building common reservation system
  
• Less resources and not as organized
• A common airline system rejected by United
• Prior to CRSs travel agents used printed fare
  book, telephoned in reservations

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Airline Reservations Before CRSs

• Manual processing of calls from agents
• Costly call centers to handle growing air travel
  volume

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Value of CRSs

• Airline operating savings on call centers
• Major motivator ROIs were 70-100 a year
• More convenient for agent
• No sitting on hold direct access to information
• Enabled differential pricing
• Manual system did not support complex pricing
• Airlines able to de-commoditize their product
• Charge more for business traveler who values
  buying at last minute or not staying weekend
  
• Yield management was born algorithms to obtain
  maximal revenue for seats

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Evolution of CRSs

• Each travel agency installed single system
• High fixed costs needed to be distributed over
  many ticketed reservations
  
• Charges were per segment
• Competition and consolidation
• Winners such as Sabre became large profitable
  businesses
  
• Spun out from American, served travel agents
• CRSs and agents had considerable power
• Controlled flow of information and access to
  customers

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Industry Structure 1990

• Two layers of intermediary between airline and
  customer
  
• Substantial costs associated with each layer
• Customer value in CRS layer
• Routing and pricing across airlines
• Airline value diminished by in-house systems
• Customer value in agent layer variable
• Airline value if agent drove customers to them

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Rapid Adoption of Internet

• Customers and airlines both motivated to change
  benefits to both sides
  
• Customers wanted more information and control
  than getting from agent
  
• Agent profits tied to airline bonus programs and
  not necessarily customer interest
  
• Airlines wanted to cut costs
• Agent fees were 10 of ticket CRS fees rising
• Airlines rapidly developed direct Web sales and
  Orbitz consortium
  
• Bypassing agents and own reservation centers
  which were also costly

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Rapid Adoption of Internet

• New entrants such as Microsoft/Expedia
• Exploited early technology leadership
• Driven by frustration with agents as information
  bottlenecks
  
• Successful online agents keep evolving
• Competing head-on with Priceline model
• Offering wide range of travel products
• Experimenting with revenue models
• E.g., merchant revenues now larger than agency
  revenues (re-sellers taking inventory risk)
  
• Travelocity becomes part of Sabre CRS

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Internet Travel Today

• 60 of Americans research travel online
• Similar to percentage in 2001
• Calls and visits to traditional travel agents
  down each year
  
• 15 decrease in number of agents in 5 years
• Over 39 million people booked travel online
• Up 25 over 2001
• 70 of them booked over half travel online
• 30 of them booked over 2500/yr online
• Southwest books over 1/3 of sales online
• About 2B/yr

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Industry Structure Today

• Web access supports very different models
  although may look same to user
  
• Airline sites
• Travelocity part of a CRS (Sabre)
• Expedia an independent travel agent
• Orbitz a consortium of airlines
• Each arguing other is anti-competitive

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Internet Changed All Players

• CRSs (Sabre/Travelocity)
• Allowed Sabre to bypass agents
• Complicated momdel as Sabre still claims to be in
  business of serving agents
  
• Individual airline web sites and new consortium
  (Orbitz)
  
• Allowed airlines to bypass CRSs and agents who
  they view as over priced
  
• Online agent new entrant
• Expedia started with technology lead, kept
  evolving its model
  
• Traditional agents have been big losers

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Change Waiting for Enabler

• CRSs and travel agents had become information
  bottleneck
  
• Relatively large rents compared to value added
• Due to position in the information chain
• Both consumers and providers (airlines) viewed
  them this way
  
• Warning not all apparent information bottlenecks
  are real
  
• Many viewed broker-dealers on Wall Street as
  information bottlenecks
  
• They turn out to provide substantial value in
  many cases

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Two Generations of IT Led Change

• First generation CRSs
• Lowered airline costs through outsourcing
• Increased airline revenue through differential
  pricing of business and leisure
  
• Made travel agents more powerful
• Second generation Internet
• Lowered airline costs by enabling elimination of
  commissions
  
• Killed traditional travel agent business
• Challenging differential pricing through better
  access to information

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Example Air Freight

• In 1970s specialized fractured business
• Not readily available to individual consumers
• No clearly defined value proposition over ground
  transport (e.g., UPS)
  
• Fedex started with idea of guaranteed delivery
  absolutely, positively overnight
  
• Focused on building air network that could
  provide this
  
• Introduced hub and spoke system
• Drove de-regulation
• Quickly saw that information systems were
  critical as well

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Fedex Information Systems

• As early as 1979 founder Fred Smith said
• The information about a package is as important
  as the delivery of the package itself.
  
• Systems designed to share information with the
  customer not just internal use
  
• Initially technology costs limited this to
  customers who did substantial business
  
• In 1980s Fedex developed and distributed custom
  PC based software for package origination
  
• Gave 100,000 PCs to large customers making
  customer base into an electronic network

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Direct Customer Access at Fedex

• Lowered costs because customers prepared
  manifests and sent electronically
  
• Often lower cost for customer too when connected
  to their in-house software
  
• Provided customers with more control, information
  and ease of use
  
• Allowed for more complex billing models
• Value to customer increased by exposing Fedexs
  internal information
  
• Package tracking made available
• Starting in 1986 handheld scanners recorded every
  movement of a package

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Internet Enabled Universal Access

• Not a strategy shift for Fedex
• Lowered cost enabled more customers to be
  reached
  
• In 1994 became first Web site to enable customers
  to track status of packages
  
• Rudimentary software scripts to tie site to
  mainframe package tracking system
  
• Rapidly evolved into Internet based access for
  large as well as small customers
  
• Tracking became major value to end consumers
• Retailers began offering order tracking

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Role of IT at Fedex

• Viewed as critical to business both strategically
  and operationally
  
• Enables strategy that information about the
  package is as important as the package
  
• Creates competitive advantage
• Drives excellence (no hiding from customer)
• Arguably has been critical to rapid growth
• Sub-committee of board specifically on IT
• In contrast many companies view IT as operational
  but not strategic
  
• Is package delivery special?

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Fedex and UPS

• UPS is the largest package delivery service in
  North America
  
• About 13.6M versus 3M packages per day avg.
• While Fedex tends to be information technology
  leader UPS is aggressive
  
• Rapidly rolls out new information services,
  sometimes ahead of Fedex
  
• Both companies have air and ground services but
  different emphasis
  
• IT investments increase barriers to entry but not
  long-term competitive advantage

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Fedex View Predates Internet

• Information should be made broadly available to
  customers
  
• As valuable as the delivery itself half of what
  Fedex is selling its customers
  
• Opposite of Porters lament about the Internet
• Customers getting too much information
• Fedex was not only ready for this shift they were
  looking forward to it
  
• UPS has been smart enough to follow along and
  both have benefited
  
• How important was this readiness to success of
  online commerce?

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IT and Industry Structure

• CRSs and Internet caused large shifts in travel
  industry competitive landscape
  
• Who holds most power over consumer
• Where customer value lies
• What can be charged for, by whom
• Fedex has driven large changes in economy but
  less in structure of own industry
  
• Integrated package delivery key to online
  commerce
  
• Ready competitor UPS has led Fedex growth to come
  at expense of other smaller rivals

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Assignment Schedule

• 2/4 individual short paper 1
• 2/13 individual short paper 2
• 2/25 individual short paper 3
• 3/1 group case topic review
• 3/13 group case write-up
• 3/27 individual short paper 4
• 4/1 final project topic review
• 4/8 individual short paper 5
• 4/29 final project paper
• In-class presentation 4/29 or 5/1

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Group Case Assignment Heads Up

• Case write-up
• Pick an industry where information technology has
  changed or is changing the competitive landscape
  
• Describe the changes in terms of Porters five
  competitive forces
  
• Illustrate with changes that have happened or
  what companies are doing
  
• Analyze a specific company, its business model
  and its reaction to that change
  
• Should and shouldnt dos and why
• Review your proposed topic with me as soon as
  practical but no later than 3/1

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Group Final Project Heads Up

• What do you believe will be a far-reaching change
  brought about by the Internet in the decade
  2001-2010
  
• How can you exploit this change to build a
  profitable new business, or how should you
  exploit this change to keep a current business
  profitable
• View this as a pitch to senior managers
• Review your proposed topic with me no later than
  4/1