NBA 600: Session 6
Customer Access to Information
6 February 2003
Daniel Huttenlocher
Today’s Class
 Finish up discussion of online travel and
effects on airline industry
– Customer access to information changing the
competitive landscape, outcome still unclear
 Look at role of Internet at two companies
that have strong IT emphasis
– Fedex and Dell have both exploited Internet
– Bring more information to customers
• And to suppliers in Dell’s case
– Use to gain advantage, loyalty, market share
2
Airline Sales Structure 1990
 Two layers of intermediary between airline
and customer
– Substantial costs associated with each layer
 Customer value in CRS layer
– Routing and pricing across airlines
– Airline value diminished by intermediary power
of CRS’s and by own in-house systems
 Customer value in agent layer variable
– Airline value if agent drove customers to them
Airline
CRS
Agent
Customer
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Internet Travel Today
 60% of Americans research travel online
– Similar to percentage in 2001
– Calls and visits to traditional travel agents down
each year
• 15% decrease in number of agents in 5 years
 Over 39 million people booked travel online
– Up 25% over 2001
– 70% of them booked over half travel online
– 30% of them booked over $2500/yr online
 Southwest books over 1/3 of sales online
– About $2B/yr
4
Airline Sales Structure Today
 Web access supports very different models
although may look same to user
–
–
–
–
Airline sites
Travelocity part of a CRS (Sabre)
Expedia an independent travel agent
Orbitz a consortium of airlines
 Each arguing other is anti-competitive
Airline
Consort.
CRS
Agent
Customer
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Internet Changed All Players
 CRS’s (Sabre/Travelocity)
– Allowed Sabre to bypass agents
• Conflict: Sabre also in business of serving agents
 Individual airline web sites and new
consortium (Orbitz)
– Bypass CRS and agent intermeidaries
 Online agent new entrant
– Expedia started with technology lead, kept
evolving its model
 Traditional agents have been big losers
– Except “managed” business travel – how long?
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Change Waiting for Enabler
 CRS’s and travel agents had become
information bottleneck
– Relatively large rents compared to value added
• Due to position in the information chain
– Both consumers and providers (airlines)
viewed them this way
 Warning: not all apparent information
bottlenecks are real
– Many viewed broker-dealers on Wall Street as
information bottlenecks
• They turn out to provide substantial value in
many cases
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Two Generations of IT Led Change
 First generation: CRS’s
– Lowered airline costs through outsourcing
– Increased airline revenue through differential
pricing of business and leisure
– Over time made travel agents more powerful
 Second generation: Internet
– Lowered airline costs by enabling elimination
of commissions
– Killing traditional travel agent business
– Challenging differential pricing through better
customer access to information
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Airline Strategy and IT
 Major airlines presume low-cost carriers
aimed at leisure travelers
 Arguably JetBlue and Southwest have
strategy of low-cost and ease-of-use
– As new IT makes all travel easier at lower cost,
will this appeal to business travelers?
• E.g., JetBlue has long haul flights, reserved seats
– JetBlue has “tech culture”
• Sells about 60% of tickets online
• DirectTV
• Virtual reservation centers – operators work from
home using voice over IP
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Example: Air Freight
 In 1970’s specialized fractured business
– Not readily available to individual consumers
– No clearly defined value proposition over
ground transport (e.g., UPS)
 Fedex started with idea of guaranteed
delivery: “absolutely, positively overnight”
– Focused on building air network that could
provide this
• Introduced hub and spoke system
• Drove de-regulation
– Quickly saw that information systems were
critical as well
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Fedex Information Systems
 As early as 1979 founder Fred Smith said
– “The information about a package is as
important as the delivery of the package itself.”
 Systems designed to share information
with the customer not just internal use
– Initially technology costs limited this to
customers who did substantial business
• In 1980’s Fedex developed and distributed
custom PC based software for package origination
• Gave 100,000 PC’s to large customers making
customer base into an electronic network
• Exponential growth from ’81-’86
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Direct Customer Access at Fedex
 Lowered costs because customers
prepared manifests and sent electronically
– Often lower cost for customer too when
connected to their in-house software
 Provided customers with more control,
information and ease of use
 Allowed for more complex billing models
 Value to customer increased by exposing
Fedex’s internal information
– Package tracking made available
– Starting in 1986 handheld scanners recorded
every movement of a package
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Internet Enabled Universal Access
 Not a strategy shift for Fedex
– Lowered cost enabled more customers to be
reached
 In 1994 became first Web site to enable
customers to track status of packages
– Rudimentary software “scripts” to tie site to
mainframe package tracking system
 Rapidly evolved into Internet based access
for large as well as small customers
 Tracking became major value to end
consumers
– Retailers began offering order tracking
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Role of IT at Fedex
 Viewed as critical to business both
strategically and operationally
– Enables strategy that information about the
package is as important as the package
• Creates competitive advantage
• Drives excellence (no hiding from customer)
– Arguably has been critical to rapid growth
– Sub-committee of board specifically on IT
 In contrast many companies view IT as
operational but not strategic
– Is package delivery special?
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Fedex and UPS
 UPS is the largest package delivery service
in North America
– About 13.6M versus 3M packages per day avg.
 While Fedex tends to be information
technology leader UPS is aggressive
– Rapidly rolls out new information services,
sometimes ahead of Fedex
 Both companies have air and ground
services but different emphasis
 IT investments increase barriers to entry
but not long-term competitive advantage
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Fedex Strategy Predates Internet
 Information should be made broadly
available to customers
– As valuable as the delivery itself – half of what
Fedex is selling its customers
– Opposite of Porter’s lament about the Internet
• Customers getting too much information
 Fedex was not only ready for this shift
they were looking forward to it
– UPS has been smart enough to follow along
and both have benefited
– How important was this readiness to success of
online commerce?
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Example: Dell
 In early 1990’s Dell was a company built
around its internal information systems
– Like Fedex relentless focus on IT for
coordination and logistics
– Dell’s goal was to eliminate inventory
• At 35 days in early ’90’s; 6 days by ‘99
 Direct sales model largely implemented by
call centers
– Market segmented according to transaction
versus relationship customers
• One-off purchase focused on system cost versus
ongoing purchases focused on TCO
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Dell.com
 Established in 1996
– Initial focus on transaction customers
• Knowledgeable, not first-time buyers
• Enthusiastic about more access to information
 Configuration
 Tracking
 Support information
 Separate sites for each region and
segment
– Business units controlled own content
– Dell online unit provided tools, managed
servers, enforced consistency of look & feel
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Dell.com: More Value, Lower Cost
 Configuration of machines in sales and
pre-sales process
 Support
– All technical and troubleshooting information
that Dell had for own tech staff
– Access to specific material based on serial
number
• Latest drivers, correct documentation
 Tracking
– Order status, manufacturing status
• Estimated and updated ship dates
– Post-ship tracking via Fedex/UPS
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Phenomenal Growth
 In first 6 months reached $1M/day sales
 By end of 2000, over $50M/day
– More than half of Dell’s total sales
– Less than 5 years after launch
 Unlocking demand from customers for
better access to information
– Focus on “bringing the customer inside the
company” – sharing rather than guarding
information on configuration, shipping, support
– Similar to Fred Smith’s claim that information
as valuable as package delivery
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Combating Internal Skepticism
 Many employees worried that Dell.com
would replace their jobs
– Dell stressed would replace mundane parts,
leaving time to help where really needed
 Was borne out in practice partly due to
Dell’s overall growth in sales volume
– Some customers used site just for research,
then phoned
• These orders allowed reps to be 50% more
productive because customers better informed
– Calls about order status dropped by 2/3
• On average had been 3 such calls per order
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Dell.com Evolving Market Strategy
 Started with focus on knowledgeable
transaction customers
– Early adopters
 After about 15 months developed Premier
Dell.com for relationship accounts
– Customized to specific customer’s way of doing
business
• Approvals, allowable configurations, etc.
– By end of 2000 had over 50,000 customized
premier sites
• Dell online developed technology for easily
customizing sites, content from business teams
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Dell Market Share Growth 2002
 Dell moved away from its long held
strategy of ignoring lower end of market
– Traditional focus on knowledgeable consumers
and companies – more expensive machines
 Main growth of market was in consumer
segment – weak corporate spending
– Dell capitalized on this by using its low-cost
online channel to be price leader
– Differentiated the segment through processor,
software options
– Grew share from 13.2% to 15.2%, while
leader HP dropped to near Dell’s share
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Differing Effects of Internet
 Both increasing barrier to entry and
competitive advantage for Dell
– Better service for customers, lower cost
structure, others unable/unwilling to copy
 Increasing barrier to entry for Fedex
– But not competitive advantage as UPS adopts
 Decreasing price differentiation for airlines
– CRS technology enabled, but broad distribution
over the Internet challenges
– Majors hobbled by difficulty of exploiting cost
savings and providing better service
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Culture of Informing Customer
 Fedex and Dell have explicit goals of
informing the customer
– “The information about a package is as
important as the delivery of the package…”
- Fred Smith
– “… used Internet browsers to essentially give
that same information to our customers…
bringing them literally inside our business”
- Michael Dell
 Internet powerful value creation tool for
such companies
– Is it neutral or value destroying for others?
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Internet and Industry Structure
 Travel industry large shifts in competitive
landscape
– Diminished role for agents, loss of pricing power
for providers, new channels
– Relatively little in way of using to advantage
 Package freight major role in e-commerce
but less change in own industry structure
– Fedex and UPS driving smaller players out
 PC industry large shifts
– Dell.com applicable to every “desktop” segment
– Better service and lower cost than others
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Closing Questions
 How much of the value is information
versus the product or service itself
– Package delivery, PC’s demonstrated to be high
– What about travel? Other industries?
 What information is valuable to your
customers
– Does it improve or reduce your pricing power,
differentiation from others?
– Does a model, such as differential pricing,
depend on hiding information?
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