Using IT as a Competitive Advantage By Marisa Anekratchadaporn Nolan Bayliss Bill Burgard Tony Mercadante.

Using IT as a Competitive Using IT as a Competitive AdvantageAdvantage

By

Marisa Anekratchadaporn

Nolan Bayliss

Bill Burgard

Tony Mercadante

How can IT create a How can IT create a competitive advantage?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

Critical Commodities

Critical Differentiators

******

Useful Commodities Eliminate/Migrate

Critical

Useful

Commodity Differentiator

Source : Lecture and notes, Mary Lacity, 2002

Outstanding case studiesOutstanding case studiesAmerican Airlines – SABRE

Bergen Brunswig

Walmart

SABRESABRE

Semi

Automated

Business

Research

Environment

Source : American Airlines, Simon Forty, 1997

SABRE : What is it?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

OverviewOverview

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

Revenue from SABRE Inc. declined 19% from 2000 to Revenue from SABRE Inc. declined 19% from 2000 to 2001 and has grown a total of 18% since 19972001 and has grown a total of 18% since 1997

Source : Goldman Sachs, PrimeAccess Research

Data as of March 14, 2002

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

1997 1998 1999 2000 2001

Revenues inBillions

Organization ChartOrganization Chart

William J. Hannigan

CEO

Sam Gilliand

CMO

Carol Kelly

CIO

Michael Haefner

HR

Jeffery Jackson

CFOSource : www.sabre.com

What prompted What prompted change?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

The History ofThe History of

“SABRE”“SABRE”

SABRE 1959-1969SABRE 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.

1960

1959

SABRE 1959-1969SABRE 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

SABRE 1959-1969SABRE 1959-1969 Initial startup successInitial 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.

SABRE 1959-1969SABRE 1959-1969 Initial startup successInitial 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 day’s flight.

Source : IBM Corporate Archives, New York

www.sabre.com

The story of American Airlines, Serling Robert, New York, 1985

SABRE 1970-1979SABRE 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.

1976

1975

Source : Datacomm Advisor, Waltham, June1976

www.sabre.com

- 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

SABRE 1970-1979SABRE 1970-1979

Customers

Competitors

CompetitiveAdvantage

SABRE 1980-1989SABRE 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

19821985

Source : Business Week, Transportation, August 1982

www.sabre.com

1987

- Internal Users, External Users, Travel Agents and Travelers.

- Apollo, PARS (TWA) and Amadeus.

- Being a first mover with products and services

SABRE 1980-1989SABRE 1980-1989

Customers

Competitors

CompetitiveAdvantage

SABRE 1990 -1999SABRE 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

- External Users, Travel Agents and Travelers.

- Apollo, Galileo (buys Apollo in 1993), Amadeus, Expedia.com (Microsoft)

- Being a first mover with products and services

SABRE 1990-1999SABRE 1990-1999

Customers

Competitors

CompetitiveAdvantage

SABRE 2000- PresentSABRE 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

Source : Air Transport World, AAdios to Sabre, Feb. 2000

www.sabre.com

Reasons

SABRE 2000- PresentSABRE 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 Center“They obviously

don’t view anything as a sacred cow”

2001

Source : Computerworld, Sabre sells IT business to EDS, March, 2001

SABRE SummarySABRE 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)

SABRE’s SABRE’s Competitive AdvantageCompetitive 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”

BERGEN BRUNSWIG

Pharmaceutical Distributor

Bergen BrunswigBergen Brunswig

Founded in 1969 from Lucien Brunswig’s Brunswig Drug Co in Los Angeles; merged with Emil Martini’s Bergen Drug Co. in New Jersey.

Today : now called AmerisourceBergen as of 8/01

3rd largest pharmaceutical distributor in the world.

Source : bergenbrunswig.com

Company OfficersCompany OfficersOrganizationa l Chart

K u rt J . H ilz in g erC O O /E xe c V P

L in da B urke ttC IO

M ich a e l D . C a n d iloC F O / S r V P

R . D a vid Y o stC E O /P re s id e n t

R o b e rt E . M a rtin iC h a irm a n o f the B o a rd

Source : bergenbrunswig.com

IT OrganizationIT Organization

CIO- Linda Burkett12,200 Employees for entire corporation300 IT Employees1999 Annual IT Budget : $58 million

Source : schwab.com/bergenbrunswig.com/Drug Store News 12/13/99 v21 i20 p36.

Major Products Being SoldMajor Products Being Sold

Generic Pharmaceuticals

Pharmaceutical Services

Pharmaceutical Solutions

Source : Bergenbrunswig.com

History of the SystemHistory 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

Revenue Trend (bn)Revenue Trend (bn)

$7.8$8.7

$9.8$11.7

$16.2

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

1997 1998 1999 2000 2001

1997

1998

1999

2000

2001

Source : Goldman Sachs PrimeAccess Research Mar 14-02

Earnings Per Share/Profit ($)Earnings Per Share/Profit ($)

E$3.00

$2.10$1.90

$1.38$1.04$0.98

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

1997 1998 1999 2000 2001 2002

EPS

Source : S&P Stock Report 09-MAR-02

CustomersCustomers

Hospitals

Traditional Pharmacies

Residential Delivery

Supermarket Pharmacies

Source : bergenbrunswig.com

Customer InteractionCustomer 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.

Economic Forces on BergenEconomic Forces on Bergen((19901990-present)-present)

1990-1992 RecessionClinton’s Healthcare PlanMergers/AcquisitionsFTC Antitrust concerns1990’s Price fixing lawsuitsFTC m&a approvals during G.W. Bush eraHMOs, third party payers’ lower payments

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

Critical DifferentiatorCritical Differentiatoro Rather than be acquired, Bergen Brunswig decided to invest in IT to lower costs/maximize profit;

o Build the best pharmaceutical distribution platform through inventory/regional distribution centers;

o 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

Key Features of a Successful SystemKey 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

EPS ComparisonsEPS Comparisons

Bergen vs. main competitors

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

1997 1998 1999 2000 2001 2002

Bergen

McKesson

Cardinal Health

D & K

Source : Schwab.com/S&P Stock Report 9-Mar-02

Competitive AdvantageCompetitive Advantage

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

Background InformationFinancialsCustomers/Suppliers/CompetitorsIT Organization and ArchitectureIT Strategic Advantage

– EDI

Background Background Founded by Sam Walton in 1962Company founded with first store in

Rogers, AR

Headquarters: Bentonville, AR38 stores in 1970 4732 stores today

http://www.walmartstores.com/wmstore/wmstores/Mainabout.jsp

FinancialsFinancials

$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)

Competitors/SuppliersCompetitors/Suppliers

Competitors– Kmart– Sears– Target

Suppliers– P & G – Thousands of others

(4)

IT OrganizationIT 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)

Distribution StructureDistribution Structure

Vendor Vendor VendorVendorVendor

Distribution Center Distribution Center Distribution Center Distribution Center

Store Store Store Store StoreStore Store Store

Distribution StructureDistribution Structure

• Supply Chain Management Create superior efficiencies through SCM

1. Decentralize distribution through multiple distribution centers

2. Centralize management and control

3. Excellent coordination with multiple suppliers

(4)(3)(2)

IT Critical Differentiator: EDIIT Critical Differentiator: EDI

Transmission of data to and from various companies

Examples:– Purchase Orders– Payment information– Inventory information– Invoices

WHY EDI?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)

EDI EDI

• How does it work?• Through telephone line:

1. Item is purchased2. Computer Adjusts Inventory3. Need To Order Level reached4. Purchase Order sent to vendor5. Vendor replenishes and sends invoice6. Wal-Mart sends electronic funds transfer

(2)(4)

Retail LinkRetail LinkTmTm

Software that enhances EDI functionalityProvided to vendor in 1991Allows for much better forecasting and

reporting abilitiesFaster replenishmentBetter communication between Wal-Mart

and Vendors(1)(3)(5)

EDI and Retail LinkEDI and Retail LinkTMTM Today Today

No longer through telephone lines– Cisco Networking

– Web Enabled

Most vendors now utilize Retail LinkTm

Required enrollment: EDI

(1)(2)

EDIEDI

Critical Differentiator?YES– Has allowed for a 2-3 percent reduction in costs– Allowed for increased vendor responsiveness– Resulted in Wal-Mart out pricing it’s

competitors– Superior Customer Satification– Sales Revenues tell the story

(3)(4)(5)

Sales RevenueSales Revenue

0

50

100

150

200

1991 1995 1998 2001

Sales(Billions)

2001 Annual Report, Wal-Mart Inc.

EDIEDI

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

ReferencesReferences

(1) Ehrens,J. Scott,Wal-Mart: Beyond Regional Merchandizing, Apr 1992, Pg. 1-3

(2) Gilbert, A., Retail’s Super Supply Chain, Informationweek, Oct, 2000, Pg. 1-5

(3) www.cisco.com/warp/public/779/ibs/vertical/retail/Wal-Mart.PDF

(4) Caldwell, B., Wal-Mart Ups the Pace, Informationweek, Dec 9, 1996, Pg 1-6

(5) Janoff, B., High-tech Knowledge, Progressive Grocer, Dec 2000, Pg. 1-5

(6) 2001 Annual Report, Wal-Mart Inc.

Best Practice: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.

Best practice: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.

Why most companies cannot Why most companies cannot sustain their competitive sustain their competitive

advantage so long?advantage so long?

Lack of managing skillCompetitors IT become obsolete