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The Top IS Job
Lecture 4
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Summary of Previous Lecture
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
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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
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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
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Today’s Lecture Introduction
Where is the IS Organization headed? The Escalating Benefits of Information Technology Case Studies SABRE International, BERGEN BRUNSWIG Wal Mart
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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
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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
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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
6. Enhancing executive decision making
7. Enhancing products and services……………………………………………………………………………………
2. Leveraging investments
3. Reducing cost
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Where Is the IS Organization Headed?
Escalating Benefits of IT
THE SABRE SYSTEMCASE STUDY
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SABRESemi 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
Revenue from SABRE Inc. declined 19% from 2000 to 2001 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 ChartWilliam J. Hannigan
CEO
Sam GilliandCMO
Carol KellyCIO
Michael HaefnerHR
Jeffery JacksonCFO
Source : www.sabre.com
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
- 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 1959-1969
- 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 1959-1969 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
- 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
- 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 1970-1979
Customers
Competitors
CompetitiveAdvantage
SABRE 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 1980-1989
Customers
Competitors
CompetitiveAdvantage
SABRE 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 1990-1999
Customers
Competitors
CompetitiveAdvantage
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
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- 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 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- 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”
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.
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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
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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’
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• 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
The SABRE system (American Airlines)Case example: ‘Waves of Innovation’
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• 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
The SABRE system (American Airlines)Case example: ‘Waves of Innovation’ cont.
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 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 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)
$7.8$8.7
$9.8$11.7
$16.2
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
1997 1998 1999 2000 2001
1997
1998
1999
2000
2001
Source : Goldman Sachs PrimeAccess Research Mar 14-02
Earnings Per Share/Profit ($)
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
Customers
Hospitals
Traditional Pharmacies
Residential Delivery
Supermarket Pharmacies
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 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 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
-$0.50
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
1997 1999 2001
Bergen
McKesson
CardinalHealth
D & K
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
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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 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/Suppliers Competitors
KmartSearsTarget
SuppliersP & G Thousands of others
(4)
Distribution Structure
Vendor Vendor VendorVendorVendor
Distribution Center Distribution Center Distribution Center Distribution Center
Store Store Store Store StoreStore Store Store
IT 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 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: EDI Transmission of data to and from various
companies Examples:
Purchase OrdersPayment 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. 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 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 responsivenessResulted in Wal-Mart out pricing it’s
competitorsSuperior Customer SatificationSales Revenues tell the story
(3)(4)(5)
Sales Revenue
020406080
100120140160180200
1991 1995 1998 2001
Sales(Billions)
2001 Annual Report, Wal-Mart Inc.
Summary of Todays
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Where is the IS Organization headed? The Escalating Benefits of Information TechnologyCase Studies SABRE International, BERGEN BRUNSWIG Wal Mart