NBA 600: Session 6 Customer Access to Information 6 February 2003 Daniel Huttenlocher
Jan 07, 2016
NBA 600: Session 6Customer Access to Information
6 February 2003
Daniel Huttenlocher
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Today’s Class
Finish up discussion of online travel and effects on airline industry– Customer access to information changing the
competitive landscape, outcome still unclear
Look at role of Internet at two companies that have strong IT emphasis– Fedex and Dell have both exploited Internet– Bring more information to customers
• And to suppliers in Dell’s case
– Use to gain advantage, loyalty, market share
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Airline Sales 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 intermediary power
of CRS’s and by own in-house systems
Customer value in agent layer variable– Airline value if agent drove customers to them
Airline CRS Agent Customer
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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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Airline Sales 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
Customer
Airline Consort. CRS Agent
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Internet Changed All Players
CRS’s (Sabre/Travelocity)– Allowed Sabre to bypass agents
• Conflict: Sabre also in business of serving agents
Individual airline web sites and new consortium (Orbitz)– Bypass CRS and agent intermeidaries
Online agent new entrant– Expedia started with technology lead, kept
evolving its model
Traditional agents have been big losers– Except “managed” business travel – how long?
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Change Waiting for Enabler
CRS’s 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: CRS’s– Lowered airline costs through outsourcing– Increased airline revenue through differential
pricing of business and leisure– Over time made travel agents more powerful
Second generation: Internet– Lowered airline costs by enabling elimination
of commissions– Killing traditional travel agent business– Challenging differential pricing through better
customer access to information
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Airline Strategy and IT
Major airlines presume low-cost carriers aimed at leisure travelers
Arguably JetBlue and Southwest have strategy of low-cost and ease-of-use– As new IT makes all travel easier at lower cost,
will this appeal to business travelers?• E.g., JetBlue has long haul flights, reserved seats
– JetBlue has “tech culture”• Sells about 60% of tickets online• DirectTV• Virtual reservation centers – operators work from
home using voice over IP
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Example: Air Freight
In 1970’s 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 1980’s Fedex developed and distributed
custom PC based software for package origination• Gave 100,000 PC’s to large customers making
customer base into an electronic network• Exponential growth from ’81-’86
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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
Fedex’s 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 Strategy 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 Porter’s 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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Example: Dell
In early 1990’s Dell was a company built around its internal information systems– Like Fedex relentless focus on IT for
coordination and logistics– Dell’s goal was to eliminate inventory
• At 35 days in early ’90’s; 6 days by ‘99
Direct sales model largely implemented by call centers– Market segmented according to transaction
versus relationship customers• One-off purchase focused on system cost versus
ongoing purchases focused on TCO
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Dell.com
Established in 1996– Initial focus on transaction customers
• Knowledgeable, not first-time buyers• Enthusiastic about more access to information
Configuration Tracking Support information
Separate sites for each region and segment– Business units controlled own content– Dell online unit provided tools, managed
servers, enforced consistency of look & feel
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Dell.com: More Value, Lower Cost
Configuration of machines in sales and pre-sales process
Support– All technical and troubleshooting information
that Dell had for own tech staff– Access to specific material based on serial
number• Latest drivers, correct documentation
Tracking– Order status, manufacturing status
• Estimated and updated ship dates– Post-ship tracking via Fedex/UPS
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Phenomenal Growth
In first 6 months reached $1M/day sales By end of 2000, over $50M/day
– More than half of Dell’s total sales– Less than 5 years after launch
Unlocking demand from customers for better access to information– Focus on “bringing the customer inside the
company” – sharing rather than guarding information on configuration, shipping, support
– Similar to Fred Smith’s claim that information as valuable as package delivery
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Combating Internal Skepticism
Many employees worried that Dell.com would replace their jobs– Dell stressed would replace mundane parts,
leaving time to help where really needed
Was borne out in practice partly due to Dell’s overall growth in sales volume– Some customers used site just for research,
then phoned• These orders allowed reps to be 50% more
productive because customers better informed
– Calls about order status dropped by 2/3• On average had been 3 such calls per order
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Dell.com Evolving Market Strategy
Started with focus on knowledgeable transaction customers– Early adopters
After about 15 months developed Premier Dell.com for relationship accounts– Customized to specific customer’s way of doing
business• Approvals, allowable configurations, etc.
– By end of 2000 had over 50,000 customized premier sites• Dell online developed technology for easily
customizing sites, content from business teams
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Dell Market Share Growth 2002
Dell moved away from its long held strategy of ignoring lower end of market– Traditional focus on knowledgeable consumers
and companies – more expensive machines
Main growth of market was in consumer segment – weak corporate spending– Dell capitalized on this by using its low-cost
online channel to be price leader– Differentiated the segment through processor,
software options– Grew share from 13.2% to 15.2%, while leader
HP dropped to near Dell’s share
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Differing Effects of Internet
Both increasing barrier to entry and competitive advantage for Dell– Better service for customers, lower cost
structure, others unable/unwilling to copy
Increasing barrier to entry for Fedex– But not competitive advantage as UPS adopts
Decreasing price differentiation for airlines– CRS technology enabled, but broad distribution
over the Internet challenges– Majors hobbled by difficulty of exploiting cost
savings and providing better service
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Culture of Informing Customer
Fedex and Dell have explicit goals of informing the customer– “The information about a package is as
important as the delivery of the package…” - Fred Smith
– “… used Internet browsers to essentially give that same information to our customers… bringing them literally inside our business” - Michael Dell
Internet powerful value creation tool for such companies– Is it neutral or value destroying for others?
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Internet and Industry Structure
Travel industry large shifts in competitive landscape– Diminished role for agents, loss of pricing power
for providers, new channels– Relatively little in way of using to advantage
Package freight major role in e-commerce but less change in own industry structure– Fedex and UPS driving smaller players out
PC industry large shifts– Dell.com applicable to every “desktop” segment– Better service and lower cost than others
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Closing Questions
How much of the value is information versus the product or service itself– Package delivery, PC’s demonstrated to be
high– What about travel? Other industries?
What information is valuable to your customers– Does it improve or reduce your pricing power,
differentiation from others?– Does a model, such as differential pricing,
depend on hiding information?