IT Can Drive Innovative Strategies
1. The “I” vs. “T” in IT
2. Frito-Lay Case
- Use of IT to Sustain Competitive Advantage
- Changes made to the Management Process
- Lessons on How to Get Payoff from IT Investment
3. Anheuser Bush: Learns from Frito-Lay
Pfizer Could Have Learned to Reduce Bloated Costs
4. FedEx Case
- IT Drives Innovative Business Model
- Used IT for Delivering Value-Adds to Customers
5. IT Strategies of UPS vs. FedEx: “Follower” vs. “First-Mover”
6. McKesson Case - IT was Key to Company’s Growth
7. Cardinal Health Case: Use of “I” to Grow Beyond a “Middleman”
8. Change Management: A “MUST-DO” for Successful implementation
- Lewin-Schein Model of Change
- Case Example: GE’s Wake-Up Call about Potential of the Net
- GE’s “Operating System” Enables Organizational Change
The Business Environment Today
- Two Key Factors
1. Globalization
The liberalization of trade and regulatory regimes in
many countries and the falling costs of transportation
and communication are making the world economy
more global.
Markets are so heavily interconnected that ignoring
interdependencies can only be at our peril. Advances
in telecommunication and digital technology have
further shrunk the globe to the point where
“geography is now history”.
Source CEO of Ranbaxy’s Address, Business India, Dec 28 – Jan 10, 1999
Dr. Lakshmi Mohan
2
The Business Environment Today
- Two Key Factors
2. Knowledge-Based Competition
Globalization has changed the rules of the game. Businesses
no longer complete in the exclusive comfort of their domestic
backyards, using capital and labor imbalances or regulatory
perversities to further wealth creation. These approaches and
techniques that served us well during the past few decades
have now been pushed aside by technology and, increasingly,
by knowledge as a basis for competition.
- 40 years ago; Ghana & South Korea had nearly the same per
capita income - by the early 1990s, Korea stood at 6 times
Ghana, more than half the growth being attributed to Korea’s
superior ability to use knowledge for transformations.
Dr. Lakshmi Mohan
3
Is IT Just a Back-Office Data Processing Function?
“Historically, IS was regarded as a support
function and treated as administrative overhead,
but now technology has become entwined with all
the classic functions of business…
to such an extent that understanding its role is
necessary for making intelligent and effective
decisions about any other function.”
Dr. Lakshmi Mohan
4
Much Truth is Said in Jest!
A man is flying in a hot air balloon and realizes he is lost. He reduces height
and spots a man down below. He lowers the balloon further and shouts:
“Excuse me, can you tell me where I am?”
Man:
“Yes, you’re in a hot air balloon, hovering 30 feet above this field.”
Balloonist: “You must work in Information technology”
Man:
“I do. How did you know?”
Balloonist: “Well, everything you have told me is technically correct, but
it’s no use to anyone.”
Man:
“You must work in business.”
Balloonist: “I do. How did you know?”
Man:
“Well, you don’t know where you are, or where you’re going, but
you expect me to be able to help. You’re in the same position you
were before we met, but now it’s my fault.”
Dr. Lakshmi Mohan
5
The Information Economy
- The View from Two Different Lenses
The Original Management Guru, Peter Drucker
“From being organized around the flow of things and the flow of money,
the economy is becoming organized around the flow of information.”
Wall Street Journal, September 9, 1992
The Czar of the U.S. Economy, A. Greenspan
IT has “begun to alter, fundamentally, the manner in which we do
business and create economic value.” By enabling businesses to
remove “large swaths of unnecessary inventory,” real-time information is
accelerating productivity growth and raising living standards. This has
contributed to the “greatest prosperity the world has ever witnessed.”
Speech to the Gerald R. Ford Foundation in Grand Rapids, as quoted in
Wall Street Journal, September 21, 1999
Dr. Lakshmi Mohan
6
Impact of IT
IT is fundamentally transforming the way companies are run. The
new economy is about the specific potential of IT to change the
way businesses work and thereby yield a quantum shift in
productivity. The computer, and especially now the Internet, can
change how companies deal with suppliers and customers…
The Net is helping customers to lower costs dramatically across
their supply and demand chains, take their customer service into a
different league, enter new markets, create additional revenue
streams and redefine their business relationships.
The Economist, June 24, 1999
Dr. Lakshmi Mohan
7
The “I” versus “T” in IT
- Peter Drucker Pinpoints THE Issue
So far, for 50 years, the information revolution has centered ... on the “T”
in IT. The next information revolution asks: What is the MEANING of
information, and what is its PURPOSE? And this is redefining the tasks
to be done with the help of information, and with it, to redefining the
institutions that do these tasks.
Forbes ASAP, August 24, 1998
Information is data endowed with relevance and purpose.
Converting data into information thus requires knowledge… So far, most
computer users still use the new technology only to do faster what they have
always done before, crunch conventional numbers. But as soon as a company
takes the first tentative steps from data to information, its decision processes,
management structure and even the way its work gets done begin to be
transformed.
Harvard Business Review, January-February, 1988
Dr. Lakshmi Mohan
8
Drug Companies Spend Big on Software
(“Times of India” – Jan 2, 2004)
 The 12 major pharma companies (46% of domestic market) spent Rs.114
crore on IT in 2002-03 … Expected to go up 6% to Rs.121 crore
– about 1% of revenue – in 2003-04 (TCS Study)
 “With research advancing at a break-neck pace, scientists are looking for
way to better manage the vast volumes of data generated
Over 60 million pieces of data per molecule each year”
- IT-intensive R&D can shave a year off the drug development time
- Translates into $70 M for a niche drug and $365 M for a blockbuster drug.
 Urgent need to transform “data” into “intelligence”
- Ranbaxy Labs installed an ERP software from Hummingbird …
“Our consolidation of enterprise-wide data including financial,
sales and product information, empowered us to make faster
and better decisions and real-time extended enterprise”
Dr. Lakshmi Mohan
9
The Frito-Lay Case
Use of IT to Sustain Competitive Advantage
Competitive Advantage of Frito-Lay was NOT IT
- It was: Direct Sales to 350,000 Stores
- Army of 13,000 salespeople with trucks
- Competitors unable to match it
50% share of the $15 billion salty-snacks U.S. market
Staved off the threat from Anheuser-Busch’s Eagle Snacks...“Frito’s a
fortress ... don’t try to impinge on Frito’s territory or you’ll get crushed.”
Anheuser sold its plants to – who else? – Frito-Lay.
Wall Street Journal, October 27, 1995
Dr. Lakshmi Mohan
10
Value of the Direct Sales Model
F/ L Plant
- 40 Plants
- 200 SKUs
Truck - Load
Shipments
F/L Warehouse
- 200+ W/ Hs
F/ L
Salespeople
with Trucks
Stores
Purchases by
Consumers
 High Costs
- Operations of 200+ Warehouses
- Inventory Costs
- Cost of “Stales” in Warehouses & Stores
 Big Benefit
- Know which SKUs are selling in each store
- Salesforce can sell the “Right SKU” to the Right Store at the Right Time
- Salesforce trained to rotate products – “older-date” packs moved to the front of
the shelves – and stack them neatly to attract shoppers in the aisles
- Load
Annheuser - Truck
Shipments
Busch
Plant
Third - Party
Distributor/
Wholesaler
Salesforce of
Distributor
Stores
Purchases by
Consumers
 Third – party Salesforce is NOT the same as Company Salesforce !
Dr. Lakshmi Mohan
11
IT Target
- SUSTAIN the Competitive Advantage
FOCUS ON:
- Revenue Drivers to Increase Revenues
- Cost Drivers to Reduce Costs
 Improve Salesforce Productivity
- Expand coverage by adding new stores without increasing the salesforce
 Reduce “Stales”
- Timely information on sales and inventory from stores can trigger
corrective action to reduce stales
 Micromarketing
- Promote the “Right SKU in the Right Store at the Right Time”
- Get more bang for the promotional dollars !
Dr. Lakshmi Mohan
12
The “T” Had to be Developed
 Pioneered hand-held computers for used by 13,000 salespeople
 Contracted with Fujitsu in early 1980s to develop the “T”
 Rugged hardware had to be developed for use in trucks
 Field-tested hardware in Texas and Minnesota to check whether
it will work in extreme climatic conditions
THAT WAS THE EASY PART!
MORE DIFFICULT: How to get the Salesforce to Change?
Dr. Lakshmi Mohan
13
The Implementation Strategy
- Key to Successful IT Innovation
 PILOT TEST IN A SELECTED SALES AREA IS A MUST
- especially when the salesforce has to use a new IT tool
 TEST WHETHER SALEFORCE BUYS-IN TO THE NEW TOOL
- “GO”
Roll it out to All Sales Areas
- “NO GO”
Back to the Drawing Board
 SELECT MOST HUNGRY AREA: Receptive to Change
- If “No Go”, Buy-In from Rest of Salesforce will be a BIG PROBLEM!
 FRITO-LAY CHOSE THE “BEST”: The Los Angeles Sales Area
 GOT “GO“ SIGNAL FROM PILOT TEST
- Used LA Sales Staff in rollout to establish credibility with salesforce
 TRAIN THE TRAINERS IN EACH SALES AREA
- Minimizes Training Costs: More Effective
Dr. Lakshmi Mohan
14
Impact of Hand-Held Computers
 Eliminated Paperwork of Salesforce
- Time savings: 3 to 5 hours per week
 BUT… Is That a Benefit?
Frito-Lay Made It a Benefit!
- Allayed salespeople’s fears of downsizing
- Used time saved to grow revenues and reduce cost
 A Side-Benefit, But Important for Salesforce
- End-of-day reconciliation was easier, more accurate
- “Over/short” accounting discrepancies were
$4 million in 1985 and growing
- Source of extreme frustration to salespeople
Dr. Lakshmi Mohan
15
“What’s In It for Me?”
- Reduces Tedious Arithmetic at End of the Day
Salesperson must reconcile each SKU’s daily sales from store invoices
with the “Load-Out – Load-In” Sheet.
SKU
Load-Out from
Warehouse
Load-In to
Warehouse
Out minus In
Sales to Stores
(from invoices)
Short/ Over
1
300
200
100
90
-10
2
250
50
200
210
+10
3
400
250
150
150
0
200
75
125
120
-5
:
:
200
A Huge Tangible Benefit:
- Time saved in adding the sales figures for each SKU from the individual store
invoices to get the total sales of the SKU (the “Sales to Stores” figure above)
- No arithmetical errors in the adding process
Dr. Lakshmi Mohan
16
Management Process Had to be Changed to
Capitalize on New Information
Availability of timely information at the SKU
level for each store enabled weekly one-on-one
meetings between first-line district sales
managers and their salespeople
If a salesperson's stales are running higher than my
district goal, we discuss what can be done to
decrease them. We analyze sales returns to zero in
on the stores and the SKUs with the most stales,
and then decide whether to change the mix of
products or their location in the store.
Dr. Lakshmi Mohan
17
The New “I” Enables Micromarketing
Recently, I noticed red numbers (indicating reduced market
share) for tortilla chips in our central business region. I punched
up another screen display and located the problem: Texas. I
kept punching up new screens and tracked the red numbers to a
specific sales division and, finally, the chain of stores. The
numbers pinpointed the problem area and, after additional
research, revealed the culprit: the introduction of a generic
store-branded product. We quickly formulated a counterstrategy and sales climbed again.
Frito-Lay President
Dr. Lakshmi Mohan
18
How to Get Payoff from the IT Investment
 Hardware investment - $40 million
 Software investment - $100 million during 1984 - 88
To pay for it, Corporate Sales had to commit to reduce selling expenses
from 22 cents on the dollar to 21 cents within a year of the handheld
installation – increase sales at constant cost or reduce costs or a
combination of the two
By setting this target before the rollout, we focused the
attention of each sales area on identifying ways to use the
technology to change the way it did business and ensure
that we achieved the anticipated benefits.
- CEO of Frito-Lay
Dr. Lakshmi Mohan
19
Decentralization Facilitated
By Frito-lay System
Information support for 4 geographic
regions with P&L responsibility
Frito-Lay
System
Timely, accurate information for top management
- NOT massaged & sanitized information
Impact: 60% of corporate decisions pushed to regions
Dr. Lakshmi Mohan
20
DECENTRALIZATION REQUIRES DECENTRALIZED
INFORMATION
BEFORE
Information took weeks to wend its way back to the 32 FritoLay Divisional Sales Managers from the variety of databases in
Headquarters, if it got there at all.
AFTER
PC in the Division provides information on:
• Comparison of brand / pack sales by type of store
• Analysis of weekly performance by districts
• Ranking of sales reps’ performance (about 350 in each district)
• How Frito-Lay stacks up against competition in market shares,
prices, promotion, etc.
Dr. Lakshmi Mohan
21
EMPOWERING OF EMPLOYEES
Organizations have to be fast, flexible and
responsive to be competitive in a dynamic
and complex business environment
Decision-making authority has to be
passed to the "front lines"
Dr. Lakshmi Mohan
22
PREREQUISITE FOR EMPOWERMENT
PROVISION OF RELEVANT INFORMATION
TO ALL LEVELS TO EFFECTIVELY FUNCTION
IN THEIR JOBS
Wal-Mart's "Store within a Store"
What sets us apart is that we train people to be merchants. We
let them see all the numbers so they know exactly how they're
doing within the store and within the company; they know their
cost, their markup, their overhead, and their profits. It's a big
responsibility and a big opportunity.
Sam Walton, Wal-Mart CEO
Dr. Lakshmi Mohan
23
EIS IS THE KEY TO
A BALANCED ORGANIZATION
that leverages the benefits of both centralized and
decentralized decision-making and control systems.
Empowering does not mean
wholesale relinquishing of authority to lower levels.
There must still be management by higher level executives.
Top management must have access to
information that is not massaged and sanitized.
Dr. Lakshmi Mohan
24
An Invaluable Benefit
"Management by Walking Around“ is Feasible
 Frito-Lay CEO can make a "computer tour" of operations
 “Can view the performance of each of our managers and
salespeople around the country“
 Can fire off an electronic-mail memo if the view is not good
or contact manager to congratulate on the good view
Dr. Lakshmi Mohan
25
The Frito-Lay System
- An Integrated Everyone’s Information System
Delivers timely and consistent information to ALL levels
of management and ALL functions:
• A sales support system for field personnel
• An Executive Information System for the top 200
executives
• A market analysis and profitability reporting
system for corporate staff
• Additional support systems for key functions:
purchasing, manufacturing and logistics
Dr. Lakshmi Mohan
26
JUSTIFYING THE IT INVESTMENT
• BENEFITS NOT EASY TO QUANTIFY
• LOOK AT THE COSTS IN RELATION TO
- Cost of NOT Having the “I” at ALL Levels
To Make Smarter Decisions
• IT CAN PROVIDE COMPETITIVE ADVANTAGE IF
That “IF” depends on WHAT IT is used for.
“We’ve invented… $40 million for hardware and software
so for, and $15 million per year to keep it rolling… I believe
this will give us real competitive advantage.”
- Frito-Lay CEO
Dr. Lakshmi Mohan
27
Major Payoffs from
The Frito-Lay Enterprise System
Compress the time taken for information flows….
Sales data from the hand-held computers of salespeople provide
the foundation for “time synchronizing” the entire
business process:
Purchasing
Manufacturing
Logistics
Sales
 Able to tie manufacturing to consumer purchases
from the stores
 Reduced “stales” by 50%
 Micromarketing optimizes margin
 Able to target local demand patterns with just the
right sales promotion
 Domestic revenues: $3B in 1986 $4.2B in 1989
Dr. Lakshmi Mohan
28
Some Lessons
1. Modern IT is a marvel, but to realize the potential, you have to USE it to make each person more effective and efficient.
2. “Manumation” – mere automation of manual processes – will not
generate the anticipated payoff from the IT investment.
3. Focus IT on Revenue Drivers and Cost Drivers.
4. Data by itself is worthless
– It has to be converted into Actionable Information.
5. Availability of good quality ‘I” does not automatically guarantee its use.
Problem: What do we do with the new “I”?
The Management Process has to be changed, including the
Performance Measurement and Reward Systems, to capitalize on
the new “I”; and Training to implement the new process.
6. Get the Sequencing of IT projects Right !
Dr. Lakshmi Mohan
29
Anheuser Busch Learns from Frito-Lay
- Becomes a Data-Driven Company
 Chairman, August Busch III, changed the rules of the beer
industry, a technological laggard, in 1997
 Amended contracts with distributors (about 700 in the U.S.)
to demand that they start collecting data on:
… how much shelf-space their retailers devoted to various
beer brands, including competitors’ brands
… which ones had the most visible displays
… which locations had the displays
… etc, etc.

Sales reps of distributors equipped with handheld
computers for inputting data when they “walk the store” –
the handhelds are jacked into the rep’s cell phone for
wireless data uploads to the servers in the warehouses
Dr. Lakshmi Mohan
30
“ It’s Not Just Collecting Data…
Anheuser Busch is Smart in Figuring Out How to Use It”
- Developed BudNet to collect the data in a nightly nation wide sweep
of the distributors’ servers
… Use the data to draw a picture each morning of what brands are selling in which
packages in which stores using which medley of displays, discounts and
promotions
… Then sends “new marching orders” to its distributors
“ Distributor- and store-level data has become the lifeblood of our organization”
“ If Anheuser-Busch loses shelf-space in a store in Clarksville, Tennessee, they know it
right away. They’re better at this game than anyone, even Coca-Cola”.
Bottom-Line: Anheuser has posted double-digit profit gains for 20 straight
quarters, while its nearest competitors, Miller and Coors, have flattened
“ Brewers and distributors with a clear data- driven focus will have a distinct
competitive advantage”. August Busch IV, President for Domestic Operations
Dr. Lakshmi Mohan
31
Pfizer’s Bloated Cost Structure
- Belongs to a Different Era
“Every weekday, some 38,000 sales reps fan out around the
globe. Armed with briefcases full of free drug samples, reams of
clinical data, and lavish expense accounts for wining and dining
their quarry, the reps infiltrate doctors’ offices and hospitals.
Their goal: to persuade doctors to make Pfizer drugs the
treatment of choice for their patients’ aches and pains.
Equally important: Pfizer’s $3B Annual Ad Budget – behind only
GM, P&G and Time Warner.
A pricey array of prime-time commercials and glossy magazine
ads show vibrant people freed from the threats of heart disease,
hay fever, and a dismal sex life. Sure, consumers can’t go out
and buy this stuff. It has to be prescribed by a doctor. But Pfizer
and the industry have learned that stoking demand among
consumers puts irresistible pressure on doctors. That’s why
Pfizer is now the fourth-largest advertiser in the land.”
Source: Business Week, Feb 28, 2005
Dr. Lakshmi Mohan
32
A HUGE Pain for Pfizer
- The Sales Army
 Largest Sales Force in the Pharma Industry
- 11,000 people in the U.S.,
38,000 worldwide (roughly the size of 3 army divisions !)
 Annual Cost: $170,000 per sales rep
- Including car, computer and benefits
 S & A Expenses: $16:9B in 2004, Twice R&D Cost
 Gross Profits in 2004: $45 B; $1.2 M per Sales Rep
- A big-selling drug can generate fantastic margins as sales
ramp up
e.g., Celebrex: 90% Margin; $3B Gross Profits
- If Celebrex gets yanked from the market, like VIOXX, profit per
Sales Rep drops to $1.1 M … a 7% decline in productivity
 Future Does Not Look Rosy !
- Sales estimated to DECLINE by 1.5% per year through 2010
Source: Business Week, Feb. 28, 2005
Dr. Lakshmi Mohan
33
Massive Sales Force
Can Quickly Become a Massive Millstone
 Backlash from Doctors
– Rivals emulated Pfizer and increased their salesforces over the
years – a sales arm race
– Number of Sales Reps in the U.S.: 100,000
– Doctors beseiged with so many sales reps on the prowl
– “We’ve had multiple times where we’d see three reps from Pfizer
in one day.”
– Started to institute policies to restrict when sales people could
visit and where in the office they could talk to doctors
 Return on Sales Investment Has Also Slackened
– As blockbuster drugs have lost patent protection
– New drugs have been slow to take their places
Pfizer Signaled the End of an Era
- Cut 20% of its U.S. Sales Force in 2007 … 2,000 people
Source: Wall Street Journal, Nov. 29, 2006
Dr. Lakshmi Mohan
34
The Federal Express Case
- IT Drives Innovative Business Model
• Founded in 1971, CEO states:
“IT is absolutely the key to our operations”
• Unique Value Proposition – Guaranteed overnight package delivery
- Time-certain Transportation vs. Holding Inventory
• Pioneered airbill bar coding for package tracking - information
about the package is as important as the package itself.
• CEO’s Quality Goals:
“100% on-time deliveries, 100% accurate information on every
shipment and 100% customer satisfaction.”Won the 1990 Malcolm
Baldridge Quality Award
The measurement system is the key to our quality effort ...
We had to come up with a system that actually measured our
performance on every transaction - regardless of the fact that
we are talking of hundreds of thousands of transactions.
Dr. Lakshmi Mohan
35
Federal Express Error Index
12 Service Quality Indicators are monitored daily, e.g.:
• how many packages were delivered on wrong
day?
• how many late ?
• how many damaged ?
• how many billing corrections ?
The 12 indicators are weighted judgmentally
according to their importance to the customer to
produce the error index.
Dr. Lakshmi Mohan
36
FedEx was an Aggressive First-Mover In Using IT
1979
: COSMOS, the centralized computer system for package tracking on a
real-time basis
1980
: Launched a proprietary and then-revolutionary data network called
Digitally Assisted Dispatch Systems (DADS) which enables
dispatchers to use text messages to change drivers’ routes and
pickup requests – still in use, DADS led to a 30% increase in
productivity, the first day it was used.
1984
: Standalone DOS-based automated shipping system for customers
who ship over 5 packages a day
1986
: Present generation of wireless handhelds to capture package data via
a bar-code scan, which is downloaded to COSMOS when the
handheld is inserted in the DADS unit in the truck.
1998
: On-Line package tracking at FedEx.com – saw the Net as a low-cost
alternative to call centers for reducing costs and improving customer
service
Dr. Lakshmi Mohan
37
FedEx Gets IT!
“We consider our IT division a line organization; it’s an
operating unit that is absolutely involved in the day-to-day
operation of the company. We measure its performance.
I’m just as close to the IT division as to our sales division -and the salespeople are the ones who bring in all the bacon.”
1990
1998
Revenues
$8 B
$ 13.25 B
Daily Package Volume
1.5 M
3.0 M
Employees
94,000
143,000
IT Expenditure
$243 M
$1B
Dr. Lakshmi Mohan
38
FedEx Used IT to Expand its Core Competence
From Moving Boxes to Bytes
All major transportation and delivery companies from
United Parcel Service to Ryder System are betting big on
IT. The U.S. Postal Service has just announced a partnership with DHL for express deliveries from 11 cities in the
U.S. to Europe. The package tracking information capabilities pioneered by FedEx have become industry norms
rather than a competitive advantage.
FedEx shifted to new pastures
- Used IT to provide logistics services, for big
manufacturers and retailers around the world
Dr. Lakshmi Mohan
39
A Win-Win Tie-up
with National Semi-Conductor
Nat Semi’s products from 3 factories and 3 subcontractors in
Asia are shipped to a FedEx distribution warehouse in
Singapore.
Nat Semi’s order-processing system on an IBM mainframe
in Santa Clara, California, sends a daily batch of orders
over a dedicated line directly to FedEx’s inventory management system running on a Tandem machine in Memphis.
FedEx essentially takes over and fulfills the order from the
Singapore warehouse, and sends an execution record to Nat
Semi.
Dr. Lakshmi Mohan
40
The Value-Add for Nat Semi
National Semi-Conductor reduced...
... Average Customer Delivery Cycle from 4 weeks to 7 days
... Distribution costs from 2.9% of sales to 1.2%
National Semi-Conductor eliminated...
... 7 regional warehouses in the U.S., Europe and Asia
FedEx has helped us prove that quicker cycle times and
reduced costs are not mutually exclusive. It’s been five years
of hard work and a painful change process, but we’ve
succeeded. We used to have to deal with so many different
nodes in the process -- freight forwarders, customs agents,
handling companies, delivery companies, airlines. Now
FedEx is our one-stop shop.
Dr. Lakshmi Mohan
41
A Lurking Threat for FedEx
… From the Net!
 Overnight Delivery: 50% of FedEx revenues
- 25% of this business: Letter-size envelopes
- Additional 15%: Paper documents such as contracts, legal briefs, etc.
 Alternative: Digital Delivery
- Transmit documents electronically, or
- Post them online; download when needed
“For now, the impact on FedEx is less than catastrophic. But online security is
improving. And businesses are starting to adopt contractual devices such as
digital signatures. As these technologies mature, the electronic transit of
everything from real-estate closings to legal settlements is poised to explode –
at the expense of shipping”
Source: Business Week, May 21, 2001, pp. 67-68
Dr. Lakshmi Mohan
42
UPS: From A Humble Seattle Messenger Service
Company Founded in 1907 to “Big Brown” Today
 A traditionally insular and conservative enterprise with a 1950s’ style
engineering culture well into the 1990s
 Still, managed to reinvent itself time and again to keep growing
 Started overnight delivery by air only in 1985
 Set up a logistics services unit in 1994 to manage the supply chains of customers
 Went public only in November 1999
Today: World’s Largest Shipping Carrier
-2003 revenue: $33.5B vs. $24B for FedEx, but more profitable than FedEx
- Annual Exp. on IT: $1B, same as FedEx, but FedEx revenues are 30% less
- Aggressively moving into supply chain management for big companies such
as Ford, HP, Nike, … , and deeper into Asia where the fast-growing factory
sector is opening new doors for UPS
- “What Can Brown Do For You – Synchronizing the World of Commerce”
Dr. Lakshmi Mohan
43
UPS Adopted a “Follower” IT Strategy

Started building the IT infrastructure in 1985
 Carefully followed FedEx’s tracks
- Learned not just how to copy FedEx’s systems,
- But often how to make them better and cheaper
 Example: Logistics Management Software
- UPS took 15 years to build a system comparable to FedEx’s renowned
COSMOS systems
- But UPS chose a wiser approach:
Built a more open system that made it easier for customers to incorporate
into their existing systems than FedEx’s proprietary software that customers
were forced to adopt
Dr. Lakshmi Mohan
44
UPS Adopted a “Follower” IT Strategy
 Spent more than $20B on IT since 1985
 Slow Copycat Approach to IT Paid Off
- By late 1990s, some big suppliers had begun to shift their logistics contracts
from FedEx to UPS
- One company in particular: National Semiconductor!
- UPS also handles more shipments from Internet retailers (55%)
vs. FedEx (10%)
Dr. Lakshmi Mohan
45
Some IT Firsts for UPS
…After a Late Start
1. Offer vital shipping information to customers via a wireless device
- Customers can track packages, find the nearest UPS drop-off location,
calculate shipping rate and find transit times via virtually any webenabled cell phone, PDA or pager
2. Extend wireless tracking around the globe in their native languages,
including traditional and simplified Chinese, Korean and Japanese, as
well as in English – the largest private wireless network in the world
3. Provide a range of online financial services tools to companies involved
in global trade!
- Track the flow of funds
- Serve both exporters and importers by electronically automating the
creation, execution and management of Letters of Credit
- Track online the daily movement of C.O.D payments into their bank
accounts
Dr. Lakshmi Mohan
46
UPS Reinventing Itself Again
- As a Logistics Outsourcer

About 75% of UPS’ business still comes from small-package deliveries
in the U.S.
- But, by the mid-1990s, plain-vanilla parcel delivery was a mature business
 “The small package market is about $60 B in the U.S. whereas the
world-wide supply chain market is about $3 T. So that’s where we see
much of our growth… Let our customers focus on their core business
and let us run the distribution networks”. …UPS CEO
 Spent more than $1 B since the year 2000 to buy 25 companies
involved in freight-forwarding, customs clearance, finance and other
logistics services
Dr. Lakshmi Mohan
47
UPS Reinventing Itself Again
- As a Logistics Outsourcer
 Able to help companies to manage all three flows of commerce:
goods, information and funds
 Boosted investment in IT
Completed a 7-year, $1 B expansion of tech-driven air-hub in Louisville, KY.
In 2002, the most expensive project in the company’s history
Doubled the size of the hub to 4M square feet (the equivalent of more than
80 football fields) and automated the express package sorting process with
advanced customized technology - 304,000 packages per hour or over 84
packages per second
Dr. Lakshmi Mohan
48
The McKesson Case
- IT was Key to Company’s Growth
• Foremost McKesson: A Pharmaceutical Wholesaler-Distributor
Purchasing
from Mfrs
Receiving
Warehousing
Packaging
Distributing
Selling
to drug
stores
• Looked at IT from the perspective of the Value-Added Chain
• Used IT to execute each step efficiently and effectively
• Payoff from using IT: More accurate tracking of
its principal asset: inventory,
More effective use of employees
- they can handle more items.
Cash turned over more frequently.
Dr. Lakshmi Mohan
49
Next: Used IT to Link with Customers
WareDistriPurchasing Receiving
Packaging
housing
buting Selling
Drug
Stores
• Put computer terminals in drug stores
• Customers entered orders directly in return for which
McKesson guaranteed delivery within a certain specified
time
• Customers did order-entry for McKesson but their
inventory levels were lower now
Dr. Lakshmi Mohan
50
Real Strategic Use of IT Came...
(1) When the product line was broadened by adding new items
requested by customers
- In addition, locked the customers because of high switching
costs to a new supplier, e.g. training personnel on a new system
(2) When a whole new business was created for McKesson
through IT to address the pain point of drug stores
- Claims processing and collection for McKesson’s
customers, the drug stores, from third-party insurance
companies, saving them the cost of doing that job
and speeded up the collection time
- Developed a whole new product based on IT:
Software for claims processing and collection
- A middleman in the financial processing business
Dr. Lakshmi Mohan
51
Cardinal Health: A Pharma Distributor
- Use of “I” to Grow Beyond A “Middleman”
Pharma
Mfrs.
Product
Cardinal
Health
Product
“I”
26,000 Retail Pharmacies,
Hospital Groups,
Managed Care Providers
Customer’s “Pain Points”:
1. Growing cost pressures for maintaining quality care
2. Complex task of managing patient and financial information
Source: Harvard Business Review, July 2002
Dr. Lakshmi Mohan
52
New Businesses Developed by Cardinal
- To Meet Customer Needs
1. Hosted Information Systems for Hospital Pharmacies
- Used its expertise in inventory management and procurement
2. Automated Transaction Systems for ordering and dispensing
medications, and distributing them to hospital patients
- Reduced loss and theft, improved accuracy and captured
valuable operational data
3. Moved into Hospital Pharmacy Management Services
- Staffing, Consulting, Outsourcing of the Pharmaceutical Functions
4. Introduced a “Franchise” Option for Independent Retail Pharmacists
- Offered them Information Systems, Marketing Resources, and
Purchasing Power
Dr. Lakshmi Mohan
53
New Businesses Developed by Cardinal
- To Meet Supplier Needs
1. Designed and Produced Customized Packaging for Drugs
- Used the “I” about the market
- Reduced manufacturing and distribution costs by linking the two costs for
JIT replenishment and smaller inventories
2. Aggregated Demand for Less Common Dosage Forms from Multiple
Pharma Companies
- Achieved scale production advantages for products like freeze-dried
tablets
3. Produced Custom Packaging of Certain Drugs for Hospitals
- A need that pharma companies could not meet with their siloed
manufacturing operations
Dr. Lakshmi Mohan
54
Created a New “I” Product
To package and sell real-time information about wholesale and
retail sales to pharmaceutical marketers
- A byproduct of its distribution and pharmacy management
services
A Huge Opportunity for Companies to Leverage their “I” Asset
… Although information systems are expensive and timeconsuming to build, once the software has been developed
and the information has been captured, they can be reused at
very low marginal cost.
Dr. Lakshmi Mohan
55
Cardinal Moved Beyond
Delivering Pills from Point A to Point B
Now:
 A major player in a dramatically larger market
… Consulting, IT, Drug-packaging Design and Manufacture,
Pharmacy Management
 Manages more pharmacies than all its competitors put
together
… Handles prescription benefits for nearly 3M individuals
… Provides automated drug deliveries to 4M patients a day
- Huge new revenues stream with higher profit margins
- Revenues - $2B in 1995 to $75B in 2005
- Operating Earnings - $60M to $3B
Dr. Lakshmi Mohan
56
Food for Thought
1. IT Innovation is NOT Just About Technology
- It must deliver a significant “value-add” to customers.
2. First-Mover Advantage on IT Innovation
- Does not last long since competitors will catch up.
3. IT Innovation is a Continuous Process
- Capitalize on IT opportunities for reducing pain points of customers and
becoming a one-stop shop.
4. Use IT to Lock Customers In
- High switching costs deters customers from switching to competitors
- Should be wary though of competitors trying to steal customers
with irresistible value-adds
5. A “Follower” Strategy May Be Better
- Can learn from the successes and mistakes of early movers
- Not only can unnecessary costs be avoided but the learning may enable
building of better systems
Dr. Lakshmi Mohan
57
Lewin-Schein Model of Change
1. UNFREEZING
• creating the climate for change
• users have to be unfrozen from their current
comfortable state and recognize the need that
“business cannot be as usual”
• cannot “sell” change - users must have a “felt need”
2. MOVING
• users move into a new state
• need training on how to change present methods of
operation
Dr. Lakshmi Mohan
58
The Last Stage: Most Critical
3. REFREEZING
• often overlooked in any organizational change
process
• change has to be institutionalized by the building of a
new and stable equilibrium that supports the change
• the system should be embedded in the organization
and become an organic part of the management
process
• in particular, the change is not complete if the new
system is not aligned with the organization’s control
and reward systems
Dr. Lakshmi Mohan
59
GE’s Approach to Six Sigma
… Training and Rewards
•
Borrowed a page from Motorola & Allied Signal (early 90s)
•
Took Motorola 8 years to get to 6 Sigma from about 3
•
GE’s Target in 1995: 5 years
•
In 1997: > 3.5 Sigma
•
Training Investment:
•
$450M in 1998
Incentive: 40% of top mgmt’s bonus tied to 6 Sigma goals
•
Benefits: 5.5% of sales or $6.6 billion by year 2000
Dr. Lakshmi Mohan
$200M in 1996
60
TODAY: Six Sigma is Religion at GE
•
Every new recruit to GE has to undergo Six Sigma
training to become a Green Belt
•
Additional training and implementation of two Six
Sigma projects for becoming a Black Belt
•
Black Belt is a pre-requisite for promotion at GE
Dr. Lakshmi Mohan
61
GE - A Real Old Economy Giant*
- A Late Wake-Up Call
CEO’s Annual Letter to Shareholders -
1998: No mention of E-Business
1999: “E-Business, which entered the operating system at
the January (1999) Managers Meeting … is changing this
Company to its core … (has) changed the DNA of GE forever”
2000: “Digitization is transforming everything we do,
energizing every corner of the Company, making us faster, leaner
and smarter even as we become bigger. In 2000, these words
began to turn into numbers:”
– Online sales of $ 7B of goods and services
– Over $ 6B in online auctions
– Over $ 1.5B improvement in operating margins
* Founded in 1878 by Thomas Edison
Dr. Lakshmi Mohan
62
The Change Process - Unfreezing
• Late 1998: Jack Welch’s wife was buying gifts on
the Web for the grandchildren
… Suddenly, he “got” the Net!
• Sent the first email ever to the 500 top executives
under the heading “dyb.com” with the blunt
message: change your business model or
somebody else will
• Hurled his whole company at the “biggest change
I have ever seen”
Dr. Lakshmi Mohan
63
The Change Process - Moving
• Set up “dyb.com” teams in each unit headed by an upand-coming manager
• Used a best practice from an European subsidiary:
“to overcome the discomfort” of top executives to the
Web… A corporation-wide mandate for the top 1,000
managers to be mentored by 1,000 “with it” very bright eBusiness mentors, many brand new to GE - to work with
them 3 to 4 hours a week surfing the Web, evaluating
competitor sites and learning to organize their computers,
and their minds, for work on the Net
• Helped overcome the real hurdle of top executives
- fear of the unknown
• dyb.teams transformed to “grow your business.com”
units with “e-business leaders”
Dr. Lakshmi Mohan
64
The Change Process - Refreezing
• Focus on Internal Digitizing rather than online sales since
“a lot of our customers (old-school manufacturers) were not
ready”
• Digitize every function from buying airplane tickets online
(now the only way employees can do so) to getting rid of
computer printers and most paperwork
-- a more ambitious attempt to redefine what GE managers do
Dr. Lakshmi Mohan
65
The Change Process - Refreezing
• “Every process we have is going to be a pretty simple Web
application supported by email”
• IT spending up by 12% in 2001 to $ 3B
-- Will eliminate 11,000 jobs out of its 340,000 strong work
force, mostly in administrative and back-office positions
• E-Business titles are being eliminated.
• All managers are rated on their Internet capability
- “It’s not a separate function, it’s a core competency. That’s a
huge culture change.”
Dr. Lakshmi Mohan
66
Key To The Change …
… The GE Operating System
• “A structured, year-round series of intense
learning sessions devoted to sharing, and putting into
action, the best ideas and practices drawn from our big
Company-wide initiatives”
• Only 4 initiatives launched during Jack Welch’s
20-year tenure as CEO
• Each initiative is cycled through, year after year,
building on the accomplishments of the previous year,
expanding the scope and increasing the momentum of
the initiative
… Globalization - more than a dozen cycles
… Services - in its 6th cycle
… Six Sigma - in its 5th cycle
… E-Business - in its 3rd cycle
Dr. Lakshmi Mohan
67
How The Year-Round Cycle Works
- First Quarter
• January: Operating Managers Meeting (“Boca”)
– 600 global GE Business leaders
…
…
…
…
Case for New Initiative
Outside Company Initiative Experience
One Year Stretch Targets
Role Model Presentations
…
…
…
…
Early Learning?
Customer Reaction?
Initiative Resources Sufficient?
Business Management Course (BMC) Recommendations
… Re-Launch of Current Initiatives
• February: Intense Energizing of Initiatives Across
Businesses
• March: Corporate Executive Council (CEC) Meeting
at Crotonville
– 35 Business and Senior Corporate Leaders
Dr. Lakshmi Mohan
68
How The Year-Round Cycle Works
- Second Quarter
• April: Anonymous Online CEO Survey
–
…
…
…
…
11,000 Employees
Do you “Feel” Initiatives yet?
Do Customers Feel It?
Sufficient Resources to Execute?
Message Clear and Credible
• May: Leadership Performance Reviews at Business Locations
–
…
…
…
…
All Business Staffs
Initiative Leadership Review
Level of Commitment/Quality of Talent on Initiatives
Differentiation (20%/70%/10%)
Promote/Reward/Remove
• June: CEC Meeting at Crotonville
…
…
…
…
Initiative Best Practices
Review of Initiative Leadership
Customer Impact
BMC Recommendations
Dr. Lakshmi Mohan
69
How The Year-Round Cycle Works
- Third Quarter
• July: Session I: 3-Year Strategy
…
…
…
…
Economic/Competitive Environment
General Earnings Outlook
Initiatives Update/Strategy
Initiative Resource Requirements
• August: Informal Idea Exchange at Corporate and
Businesses
• September: CEC Meeting at Crotonville
…
…
…
…
…
BMC Recommendations
Clear Role Models Identified
Outside Company Best Practices Presented
Initiative Best Practices (All Businesses)
Customer Impact of Initiatives
Dr. Lakshmi Mohan
70
How The Year-Round Cycle Works
- Fourth Quarter
• October: Corporate Officers Meeting
– 150 Officers
…
…
…
…
Next Year Operating Plan Focus
Role Models Present Initiative Successes
Executive Development Course (EDC) Recommendations
All Business Dialogue: What Have We Learned?
• November: Operating Plans Presented
– All Business Leaders
… Initiatives Stretch Targets
… Individual Business Operating Plans
… Economic Outlook
• December: CEC Meeting at Crotonville
… Agenda for “Boca”
… Individual Business Initiative Highlights
… BMC Course Recommendations
Dr. Lakshmi Mohan
71
Dramatic Transformation of GE
- From Products to Services...
High Growth
Year
Revenues
Product
Services
1980
$25B
85%
15%
1990
$50B
55%
45%
1995
$70B
45%
55%
1998
$100B
33%
67%
2000
$130B
30%
70
AND Higher Margins
• Almost twice the company average
Dr. Lakshmi Mohan
72