Transcript Lecture 4.ppt

The Top IS Job
Lecture 4
2-1
Summary of Previous Lecture
2-2
Summary.. The Top is Job

The responsibilities of the head of the IS
function now go far beyond operating highly
efficient “production programming shops.”
These executives must understand the
goals of the enterprise and work in
partnership with line executives to deploy IT
to attain the organization’s goals
2-3
Summary .. The Top is Job

We shall discuss in next lectures the top
IS executive’s job, looking first at the top
job itself by summarizing six major
responsibilities, and then exploring several
ways the information systems function is
evolving in organizations
2-4
Summary … The Top is Job

The SABRE system, Lifescan, BP, Aetna
Life and Casualty, Duke Energy
International, Wal-Mart Vs. Kmart, AXA
Financial, and Rexam provide examples of
how the role of information systems
management is changing
2-5
Today’s Lecture

Introduction

Where is the IS Organization headed?
 The
Escalating Benefits of Information Technology
 Case Studies SABRE International,
 BERGEN BRUNSWIG
 Wal Mart
2-6
Introduction

Management of IT has changed drastically in the past 50
years

Early days = manage the technology:




Get it to work
Keep it running
Reduce cost of doing business
Then = manage the information resources

Support (management) decision making


Delivering information when and where it was needed
Now = IT is pervasive and is a mandatory link between
enterprises
2-7
Introduction cont.
• Responsibilities of the head of IS now go far
beyond operating highly efficient ‘production
programming shops’
• These executives are now part of top
management and help form the goals of the
enterprise in partnership with the CEO, CFO
and other members of top management
2-8
Where Is The IS Organization Headed?
•
•
The Escalating Benefits of Information Technology
– Kenneth Primozic, Edward Primozic, and Joe
Leben introduce the notion of “Waves of
Innovation” which they define as how IT is used by
industries and enterprises.
There are five Waves of Innovation (Figure 2-1):
5. Reaching the consumer
4. Enhancing executive decision making
3. Enhancing products and services
……………………………………………………………………………………
2. Leveraging investments
1. Reducing cost
2-9
Where Is the IS Organization Headed?
Escalating Benefits of IT
2-10
CASE STUDY
THE SABRE SYSTEM
2-11
SABRE
 Semi




Automated
Business
Research
Environment
Source : American Airlines, Simon Forty, 1997
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
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
$3.00
$2.50
$2.00
$1.50
Revenues in
Billions
$1.00
Data as of March 14, 2002
$0.50
$0.00
1997 1998 1999 2000 2001
Revenue from SABRE Inc. declined 19% from 2000 to
2001 and has grown a total of 18% since 1997
Source : Goldman Sachs, PrimeAccess Research
Organization Chart
William J. Hannigan
CEO
Sam Gilliand
CMO
Carol Kelly
CIO
Michael Haefner
HR
Source : www.sabre.com
Jeffery Jackson
CFO
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
The History of
“SABRE”
SABRE 1959-1969
1959
- American Airlines and IBM signed
contract for the development of a
communications-bases reservation
system
1960
- 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.
SABRE 1959-1969
1964
- SABRE system is complete.
- 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 1959-1969
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.

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 day’s flight.

SABRE 1970-1979
1975
1976
-
-
-
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.
SABRE 1970-1979
Customers
-
Competitors
-
Competitive
Advantage
-
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 1980-1989
1981
-
-
1982
1985
1987
-
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.
Source : Business Week, Transportation, August 1982
www.sabre.com
SABRE 1980-1989
Customers
-
Competitors
-
Competitive
Advantage
-
Internal Users, External
Users, Travel Agents and
Travelers.
Apollo, PARS (TWA) and
Amadeus.
Being a first mover with
products and services
SABRE 1990 -1999
1992
-
1995
-
1996
-
-
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
Source : Air Transport World, Sabre Unleashed, Nov. 1996
www.sabre.com
SABRE 1990-1999
Customers
Competitors
Competitive
Advantage
-
-
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 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
Reasons
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
SABRE 2000- Present
2001
-
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”
Source : Computerworld, Sabre sells IT business to EDS,
March, 2001
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)
SABRE’s
Competitive Advantage
-
New products
-
-
Need continued change to keep
customers
-
-
Set the market and make change – prefer not
to follow the competitors
Customers like new ideas and “better”
services
Update products & services
-
Add extra features to feel continued “value
added”
Waves of Innovation
- Below the line (Saving $)

Wave 1: Reducing costs
 Began in the ’60s
 Focused on increasing
the productivity of
individuals and business areas by e.g. automating
manual processes

Wave 2: Leveraging Investments
 Began
in the ’70s
 Concentrated on more effective use of corporate
assets
 Systems justified on ROI, cash flow etc.
2-33
Waves of Innovation
- Above the line (Making $)

Wave 3: Enhancing Products & Services
Began in the ’80s
 Attention shifted to using IT to produce revenue by gaining strategic
advantage or creating entirely new businesses


Wave 4: Enhancing Executive Decision Making



Began in the late ’80s
Changed fundamental structure of organizations
Created real-time business management systems

Waves 1 & 2 = could be done at ‘any time’ (and are still being
done!)

Waves 3 & 4 = must be implemented once an industry leader has
set a precedent

Companies that don’t do = cease to be competitive
2-34
Waves of Innovation
- Above the line (Making $) cont.

Wave 5: Reaching the Consumer


Began in the ’90s
Uses IT to communicate directly with consumers leading to
new:





Marketing
Distribution, and
Service strategies
Changes the rules of competition
Management must be involved in guiding IT use once
you ‘cross the line’

Management must steer the company in the new (evolved)
business environment

Not the ‘techies’
2-35
The SABRE system (American Airlines)
Case example: ‘Waves of Innovation’
• Waves 1 and 2
– SABRE built to reduce costs of making airline
seat reservations
• Wave 3
– System expanded so it could be used directly
by travel agents
• Wave 4
– System expanded to include hotels and rental
cars through alliances with these suppliers
2-36
The SABRE system (American Airlines)
Case example: ‘Waves of Innovation’ cont.
•
Wave 5
American extended their reach to the consumer:
–
Introduced EAASY SABRE that enabled consumers direct
access from their PCs
–
AAdvantage – frequent flyer program
–
Enhanced their Wave 5 connections to consumers via the Web
(and mobiles?)
–
Targeted its most profitable customers = Frequent Flyers
•
Marketing strategy including ‘distressed inventory’ (the unsold
seats)
•
Note: this example also illustrates that as the benefits of IT
increase, the importance of executive guidance also increases
2-37
BERGEN BRUNSWIG
Pharmaceutical Distributor
Bergen 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 Officers
Organizational Chart
Robert E. Martini
Chairman of the Board
Kurt J. Hilzinger
COO/Exec VP
R. David Yost
CEO/President
Linda Burkett
CIO
Michael D. Candilo
CFO/ Sr VP
Source : bergenbrunswig.com
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.
Major Products Being Sold
 Generic
Pharmaceuticals

Pharmaceutical
Services

Pharmaceutical
Solutions
Source : Bergenbrunswig.com
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
Revenue Trend (bn)
$18
$16.2
$16
$14
$11.7
$12
$10
$8
$7.8
$8.7
1997
1998
1999
2000
2001
$9.8
$6
$4
$2
$0
1997
1998
1999
2000
2001
Source : Goldman Sachs PrimeAccess Research Mar 14-02
Earnings Per Share/Profit ($)
$3.50
E$3.00
$3.00
$2.50
$1.90
$2.00
EPS
$1.38
$1.50
$1.00
$2.10
$0.98
$1.04
1997
1998
$0.50
$0.00
1999
2000
Source : S&P Stock Report 09-MAR-02
2001
2002
Customers
Hospitals
Traditional Pharmacies
Supermarket Pharmacies
Residential Delivery
Source : bergenbrunswig.com
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.
Economic Forces on Bergen
(1990-present)
1990-1992 Recession
 Clinton’s Healthcare Plan
 Mergers/Acquisitions
 FTC Antitrust concerns
 1990’s Price fixing lawsuits
 FTC m&a 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
Critical Differentiator
o
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 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 Comparisons
Bergen vs. main competitors
$3.00
$2.50
Bergen
$2.00
McKesson
$1.50
$1.00
Cardinal
Health
D&K
$0.50
$0.00
-$0.50
1997
1999
2001
Source : Schwab.com/S&P Stock Report 9-Mar-02
Competitive Advantage

System Designed for Competitive
Advantage from the beginning to continue
brand recognition and dominance while
building solid long term relationships.
Wal Mart
2-53
Background Information
 Financials
 Customers/Suppliers/Competitors
 IT Organization and Architecture
 IT Strategic Advantage

 EDI
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/Mainabout.jsp
Financials

$191 Billion in Sales in 2001


$8 billion in capital spending in 2001


Five Times that of AOL Time Warner
Market Expansion
Cash flow of $9.8 billion

Up 17 % from 2000
(5)
Competitors/Suppliers

Competitors
 Kmart
 Sears
 Target

Suppliers
P
&G
 Thousands of others
(4)
Distribution Structure
Vendor Vendor Vendor Vendor Vendor
Distribution Center
Store
Store
Distribution Center
Store
Store
Distribution Center
Store
Store
Distribution Center
Store
Store
IT Organization



Most powerful computer system in the corporate
world
Second largest data warehouse
Logistics Technology
LinkTM
 Enormous Network Infrastructure
 Retail


CIO: Kevin Turner
$500 million IT budget

.26 % of Annual Sales Revenue
(6)
Distribution Structure
• Supply Chain Management

Create superior efficiencies through SCM
1.
2.
3.
Decentralize distribution through multiple
distribution centers
Centralize management and control
Excellent coordination with multiple suppliers
(4)(3)(2)
IT Critical Differentiator: EDI
Transmission of data to and from various
companies
 Examples:

 Purchase
Orders
 Payment information
 Inventory information
 Invoices
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
•
•
How does it work?
Through telephone line:
1.
2.
3.
4.
5.
6.
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)
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)
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)
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 it’s
competitors
 Superior Customer Satification
 Sales Revenues tell the story
(3)(4)(5)
Sales Revenue
200
180
160
140
120
100
80
60
40
20
0
Sales(Billions)
1991
1995
1998
2001 Annual Report, Wal-Mart Inc.
2001
Summary of Todays
Where is the IS Organization headed?
The Escalating Benefits of Information
Technology
Case Studies SABRE International,
BERGEN BRUNSWIG
Wal Mart
68