IT Strategy - A presentation from Dr. Lakshmi Mohan's class

1. Outline
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. FedEx Case
- IT Drives Innovative Business Model
- Used IT for Delivering Value-Adds to Customers
- Lurking Threat from the Net
4. IT Strategies of UPS vs. FedEx: “Follower” vs. “First-Mover”
5. McKesson Case - IT was Key to Company’s Growth
6. Cardinal Health Case: Use of “I” to Grow Beyond a “Middleman”
6. Observations from FedEx, UPS & McKesson Cases
7. Wal-Mart Case - “An American Original”
8. Summing Up

2. 2Dr. Lakshmi Mohan
The Business Environment Today
- Two Key Factors
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
1. Globalization

3. 3Dr. Lakshmi Mohan
The Business Environment Today
- Two Key Factors
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.
2. Knowledge-Based Competition

4. 4Dr. Lakshmi Mohan
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.”

5. 5Dr. Lakshmi Mohan
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.”

6. 6Dr. Lakshmi Mohan
The Information Economy
- The View from Two Different Lenses
“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 Original Management Guru, Peter Drucker
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

7. 7Dr. Lakshmi Mohan
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

8. 8Dr. Lakshmi Mohan
The “I” versus “T” in IT
- Peter Drucker Pinpoints THE
Issue
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
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

9. 9Dr. Lakshmi Mohan
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 block-
buster 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”

10. 10Dr. Lakshmi Mohan
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

11. 11Dr. Lakshmi Mohan
Value of the Direct Sales Model
F/ L Plant
- 40 Plants
- 200 SKUs
Stores
F/L Warehouse
- 200+ W/ Hs
Purchases by
Consumers
Truck - Load
Shipments
F/ L
Salespeople
with Trucks
 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
Annheuser -
Busch
Plant
Stores
Third - Party
Distributor/
Wholesaler
Purchases by
Consumers
Truck - Load
Shipments
Salesforce of
Distributor
 Third – party Salesforce is NOT the same as Company Salesforce !

12. 12Dr. Lakshmi Mohan
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 !

13. 13Dr. Lakshmi Mohan
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?

14. 14Dr. Lakshmi Mohan
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

15. 15Dr. Lakshmi Mohan
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

16. 16Dr. Lakshmi Mohan
“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
:
:
200 200 75 125 120 -5
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

17. 17Dr. Lakshmi Mohan
Management Process Had to be Changed to
Capitalize on New Information
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.
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

18. 18Dr. Lakshmi Mohan
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 counter-
strategy and sales climbed again.
Frito-Lay President

19. 19Dr. Lakshmi Mohan
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

20. 20Dr. Lakshmi Mohan
Decentralization Facilitated
By Frito-lay System
Information support for 4 geographic
regions with P&L responsibility
Timely, accurate information for top management
- NOT massaged & sanitized information
Frito-Lay
System
Impact: 60% of corporate decisions pushed to regions

21. 21Dr. Lakshmi Mohan
DECENTRALIZATION REQUIRES
DECENTRALIZED INFORMATION
BEFORE
Information took weeks to wend its way back to the 32 Frito-
Lay 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.

22. 22Dr. Lakshmi Mohan
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

23. 23Dr. Lakshmi Mohan
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

24. 24Dr. Lakshmi Mohan
Major Payoffs from
The Frito-Lay Enterprise System
 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
Purchasing Manufacturing Logistics Sales
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:

25. 25Dr. Lakshmi Mohan
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 !

26. 26Dr. Lakshmi Mohan
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

27. 27Dr. Lakshmi Mohan
“ 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

28. 28Dr. Lakshmi Mohan
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.

29. 29Dr. Lakshmi Mohan
Federal Express Error
Index
• 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.
12 Service Quality Indicators are monitored daily, e.g.:

30. 30Dr. Lakshmi Mohan
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
FedEx was an Aggressive First-Mover In Using IT

31. 31Dr. Lakshmi Mohan
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 $ 1 B

32. 32Dr. Lakshmi Mohan
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 partner-
ship with DHL for express deliveries from 11 cities in the
U.S. to Europe. The package tracking information capa-
bilities 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

33. 33Dr. Lakshmi Mohan
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 manage-
ment 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.

34. 34Dr. Lakshmi Mohan
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.

35. 35Dr. Lakshmi Mohan
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

36. 36Dr. Lakshmi Mohan
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”

37. 37Dr. Lakshmi Mohan
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

38. 38Dr. Lakshmi Mohan
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%)

39. 39Dr. Lakshmi Mohan
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 web-enabled
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

40. 40Dr. Lakshmi Mohan
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

41. 41Dr. Lakshmi Mohan
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

42. 42Dr. Lakshmi Mohan
The McKesson Case
- IT was Key to Company’s
Growth
• Look at IT from the perspective of the Value-Added Chain
• Use IT to execute each step efficiently and effectively
• Foremost McKesson: A Pharmaceutical Wholesaler-Distributor
• 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.
Purchasing
from Mfrs
Receiving Ware-
housing
Distri-
butingPackaging
Selling
to drug
stores

43. 43Dr. Lakshmi Mohan
Next: Used IT to Link with
Customers
• 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
Purchasing Receiving
Ware-
housing
Distri-
buting
Packaging Selling
Drug
Stores

44. 44Dr. Lakshmi Mohan
Real Strategic Use of IT
came...
(1) When the product line was broadened by adding new items
requested by customers
- In addition, locking in the customers because of high
switching costs to a new supplier - training personnel on a new
system
(2) When a whole new business was created for McKesson
through IT
- Claims processing and collection for McKesson’s
customers from third-party insurance companies, saving
the drug stores the cost of doing that job and speeded up
the collection time
- Developed a whole new product based on IT:
Claims processing and collection - a middleman
in the financial processing business

45. 45Dr. Lakshmi Mohan
Cardinal Health: A Pharma Distributor
- Use of “I” to Grow Beyond A “Middleman”
Pharma
Mfrs.
Cardinal
Health
26,000 Retail Pharmacies,
Hospital Groups,
Managed Care Providers
Product
“I”
Product
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

46. 46Dr. Lakshmi Mohan
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

47. 47Dr. Lakshmi Mohan
New Businesses Developed by Cardinal
- To Meet Supplier Needs
1. Design and Produce 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

48. 48Dr. Lakshmi Mohan
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 time-
consuming to build, once the software has been developed
and the information has been captured, they can be reused at
very low marginal cost.

49. 49Dr. Lakshmi Mohan
Cardinal Moved Beyond
Delivering Pills from Point A to Point B
- Huge new revenues stream with higher profit margins
- Revenues - $2B in 1995 to $75B in 2005
- Operating Earnings - $60M to $3B
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

50. 50Dr. Lakshmi Mohan
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. Using 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

51. 51Dr. Lakshmi Mohan
Wal-Mart: An American Original
 1962: Sam Walton launched his first store
 Location: Bentonville, a backwater in Arkansas,
“a state where chickens outnumber people”
Different Business Model:
− Located stores in small towns since big retailers such as
Kmart and Sears dominated large towns
− Kept overhead low
− Offered incentives - Profit-sharing for staff
− Partnerships for suppliers
− Large investment in IT … To keep inventory low
− Customers got friendly service
− AND, “Everyday Low Prices”
 Today: World’s Largest Retailer
− Second-largest Company after ExxonMobil

52. 52Dr. Lakshmi Mohan
Wal-Mart after 40 years …….
Lord of the Things
• Annual 2001 sales: $220 billion – Pre-text Profits: $9.3 Million
….. 60% of U. S. Retail Sales
• #1 Food Retailer in the U.S.: $56 billion in 2001
….. Opened since 1985 over 1000 massive dept./grocery supercenters,
at 200,000 sq. ft., bigger than 4 football fields
• # of employees worldwide: 1.28 million
…. More than the US Postal service ; # in China : 4,000
• # of Suppliers : 30,000 ….. In every continent but Antarctica
• Value of 100 shares bought in 1970 @ $16.50 per share: $11.5 million
• Wal-Mart’s % of P&G's $40 billion in annual sales : 15%
P&G has a 150-strong Bentonville office & Senior EVP dedicated to Wal-Mart
• Typical starting hourly wage: $6.50
Source: Business 2.0, March 2002

53. 53Dr. Lakshmi Mohan
A Simple But Powerful Idea:
Minimize the “Bad I” - Inventory
Walton figured out that most of the costs gets added after the
product leaves the factory and moves through the supply
chain:
Mfg. → Wholesaler → Retailer
- 20% - 30% of retail price spent on keeping inventory in
3 warehouses
- Walton eliminated the wholesaler
- He instituted JIT inventory practices using “real-time”
flow of information from a store’s sales floors to the
supplier’s plants that dictated:
What to produce? When to ship? To which stores?

54. 54Dr. Lakshmi Mohan
IT is Critical for Wal-Mart’s
“Everyday Low Price” Strategy
Invested in most of the waves of retail IT systems earlier and
more aggressively than its competitors
- Set industry standards in IT
1969 : Used computers to track store inventory
1980 : Adopted bar codes
1985 : Electronic Data Interchange (EDI) with suppliers
Late 80’s : Wireless scanning guns
2003 : Mandated its 100 largest suppliers to place RFID (Radio Frequency
Identification) tags on the boxes and pallets shipped to Wal-mart
stores by January 2005
Focus of IT Investments:
Applications that directly enhanced its core value proposition – EDLP – and
increase sales through micromerchandising

55. 55Dr. Lakshmi Mohan
Sharing Sales Data With Suppliers
- Key to Low-Price Leadership
 Treat Suppliers as Partners, NOT Adversaries
 Implemented a Collaborative Planning, Forecasting and
Replenishment (CPFR) Program
 JIT Inventory Program Reduced Carrying Costs
- for Both Wal-Mart AND Its Suppliers
 Wal-Mart’s Cost of Goods : 5% - 10% Less Than Competitors
“CPFR has blurred the lines between Wal-Mart and the Supplier:
You’re both working to the same end: To sell as much product as
possible without either of us having too much inventory”
Source: Computerworld, Sept. 30, 2002

56. 56Dr. Lakshmi Mohan
Wal-Mart’s Data Warehouse
Current Level of Storage Capacity : 570 Terabytes *
– Second only to the U.S. Government’s
– More than all of the Internet’s fixed pages
BUT ALL THAT DATA IS USELESS
UNLESS IT IS USED
Information is shared with its own buyers AND
suppliers – 100,000 queries a week on purchase
patterns or checking on a product
* Wall Street Journal, Dec 3-4, 2005

57. 57Dr. Lakshmi Mohan
Help to time merchandise deliveries -
Its shelves stay stocked, but NOT overstocked
“Predict what is going to happen,
instead of waiting for it to happen”
Example : Analysis of purchases during Hurricane Charley
indicated products to be stocked in Florida’s Wal-Mart ahead
of Hurricane Frances that hit a few weeks later
“Not just the usual flash-lights, but, for example, strawberry
Pop-Tarts whose sales rates is 7 times the normal rate. The
Pre-Hurricane top-selling item was beer! ”
Value of the Data Warehouse
- Wal-Mart’s Buyers
Source: New York Times, Nov 14, 2004

58. 58Dr. Lakshmi Mohan
Wal-Mart opened its data vault in January 1999 to its
suppliers – Cements Wal-Mart’s power over them
Extranet built by Wal-Mart, Retail Link, allows suppliers to see
how their products are selling in different stores
Vast and detailed data on sales and inventory exceeds what
many manufacturers know about their own products
Value of the Data Warehouse
- Suppliers

59. 59Dr. Lakshmi Mohan
All That Data Is Mined!
- Doing it since 1990
Analysis of its 90 million shopping cart transactions per week
- To see how the purchases of the different items are related.
- Company can then better identify items to market together.
Obvious examples:
- Charcoal and tongs go alongside the barbecue grills
- Tiny baggies next to the pretzel boxes so Mom can pack snacks for
the kids
A not so obvious example!
- Customers who buy Barbie dolls (it sells one every 20 seconds)
have a 60% likelihood of buying one of three types of candy bars
Source: Forbes, Sep 5, 1997

60. 60Dr. Lakshmi Mohan
Micromerchandising Pays Off
Sales per square foot
0
100
200
300
400
500
2000 2001 2002
Year
Dollars($)
Kmart
Target
Wal-Mart

61. 61Dr. Lakshmi Mohan
Wal-Mart Stays Ahead of Competition!
Competitors began to adopt many of Wal-Mart’s IT innovations
including EDI and wireless bar code scanning in earnest in the
mid-1990s. Target’s vice-chairman acknowledges that his
company is “the world’s premier student of Wal-Mart”. Still Wal-
Mart’s productivity measured by real sales per employee is
higher than competitors.
118
133
181
Sears
Kmart
Wal-Mart
87
109
148
Sears
Kmart
Wal-Mart
1995 1999
Sales per employee, $ thousand

62. 62Dr. Lakshmi Mohan
The Wal-Mart Effect on Retail
1987:
- Wal-Mart’s Market Share: 9%
- But 40% more productive than its competitors
1995:
- Wal-Mart’s Market Share: 27%
- Productivity advantage widened to 48%
1995-99:
- Competitors reacted by adopting Wal-Mart’s innovations
- Managed to increase their productivity by 28%
- Wal-Mart raised the bar further by increasing its own efficiency
by another 20%
Source: “Retail: The Wal-Mart Effect”, The McKinsey Quarterly, 2002, No. 1

63. 63Dr. Lakshmi Mohan
Wal-Mart Changed Retailing Economics
Company
(Latest 12 months in 1994-95)
Wal-Mart
Circuit City
K-Mart*
Caldor*
Bradlees*
Federated Dept. Stores
Selling, General & Admin.
Costs As a % of Sales
15.8%
(19.4% in 1984)
19.0%
22.2%
24.4%
29.4%
33.3%
*Now in Chapter 11 bankruptcy proceedings
Source: Business Week, Nov 27, 1995

64. 64Dr. Lakshmi Mohan
IT Innovation Is NOT Enough…
… At least half of Wal-Mart’s productivity edge stems from managerial
innovations that improve the efficiency of stores and have nothing to do
with IT.
For Example:
Cross-training of employees allows them to function
effectively in more than one department at a time.
Better training of cashiers and monitoring of utilization can
increase productivity rates at checkout counters by 10% to
20%.

65. 65Dr. Lakshmi Mohan
Wal-Mart’s Management Process
Key Features
1. Low Wages… But “Golden Cuffs”
--All employees have stock options
“After nearly 25 years at the company, Shirley Cox, a cashier, still earned barely
$7.00 an hour. But she retired in her 40s on $250,000 of company stock…. the
stock is a prevailing theme for everyone at Wal-Mart… if you hang around long
enough, you can make a fortune on the stock.”
2. Employees hence have a stake in the company doing well
3. No class system, thus fending off all attempts at unionization
-- ALL employees are called “associates” drumming home the notion that
managers and workers are partners
4. Promote from within
-- In 1996, 5,900 workers moved up to management jobs
-- 60% of the 30,000 managers are former hourly workers

66. 66Dr. Lakshmi Mohan
Wal-Mart’s Management Process
Key Features
5. Empowering of Front-Lines
-- Wal-Mart gives them information at their finger-tips and the freedom to act.
“If someone asks me how we manage a $100 billion company, I tell them a store at
a time, and we constantly challenge that unit to make it the best.” – CEO
6. Management will not tolerate “shrinkage”
Loss, theft and damage of inventory is capped at around 1%
Other retailers settle for 3% - 5%
7. Keeping Track of Competitors’ Prices
“Later that afternoon, she leaves the store for an hour to compare prices at nearby
Kmart and Target stores. She is reimbursed mileage. If a competitor’s prices are
the same or lower than Wal-Mart’s, she consults with her supervisor about cutting
her own prices up to 5 %.”
8. Work Ethic, Disdain for Extravagance and Customer-Centric
Wal-Mart’s corporate offices are cramped, dingy and cheaply furnished. Walton
believed that executives should spend more time on the selling floor than behind
desks

67. 67Dr. Lakshmi Mohan
Bentonville, Arkansas, Does Not Come to the World
- The World Comes to Bentonville!
It Buys the Most
Company % of its total sales to Wal-Mart
Tandy Brands Accessories 39%
Clorox 23%
Revlon 20%
PJR Tobacco 20%
Procter & Gamble 17%
It Sells the Most Products
Company Wal-Mart’s U.S. market share
Dog Food 36%
Disposable diapers 32%
Photographic film 30%
Toothpaste 26%
Pain remedies 21%
Source: “One Nation Under Wal-Mart; Fortune, Feb. 18, 2003

68. 68Dr. Lakshmi Mohan
A Telling Example of Wal-Mart’s Growth
- Went Past Toys “R” Us by 1998
Toys “R” Us: Largest Toy Retailer in the U.S.
--- Value Proposition: Choice, Quality, Reasonable Price
--- Displaced Dept. Stores and small specialist toy retailers
--- 25% share of the market – Before Wal-Mart!
Today:
Wal-Mart: Largest Toy Retailer: 25% market share
--- Toys “R” Us Share: 15% (2003 Sales: $11B)
--- Value Proposition: One better than Toys “R” Us: Rock-Bottom PRICES
WAL-MART STRENGTHS:
--- Super-efficient supply chain
--- Mass retailer, with a broad diverse array of products
--- Can afford to use toys as a loss-leader (lose money on toy sales) to lure in
customers who then purchase higher-margin goods
- Toys “R” Us just doesn’t have that luxury
Source: Wall Street Journal, August 31, 2004

69. 69Dr. Lakshmi Mohan
41 Years of Nonstop Growth

70. 70Dr. Lakshmi Mohan
Wal-Mart’s Numbers
 5,482 stores in 14 countries as of Oct 31, 2005
 Revenues : $285B, #2
ExxonMobil : $298B, #1
GE: $152B, #5
 Workforce: 1.3 M
Target: 292 K & K-Mart: 133K
Biggest private-sector employer in the world

71. 71Dr. Lakshmi Mohan
“Sense & Respond” Management Process of
Wal-Mart : Why They are Unbeatable
Disappointing sales on Friday, Nov 26, 2004
(the day after Thanksgiving),
Traditionally the biggest shopping day of the year
- Wal-Mart knows it literally at the end of the day
Because of their state-of-the-art information system

72. 72Dr. Lakshmi Mohan
How did Wal-Mart Management respond to it?
1. Within a couple of hours, Michael Duke, the president of
Wal-Mart, had gotten messages on his Blackberry that sales
were off at stores around the country.
2. He brainstormed with execs and store managers about
which products to mark down.
3. A team met over the weekend to finalize the list and contact
suppliers.
4. On Tuesday, stores nationwide offered the new prices.
Source: www.fastcompany.com

73. 73Dr. Lakshmi Mohan
How did Wal-Mart Management respond to it?
5. On Thursday, Wal-Mart broadcast a video for its stores
suggesting new displays.
6. The next day, the displays were up, and a new ad campaign
was underway.
7. On Saturday, the company conducted a meeting with 500
employees asking for more ideas -- and acted on 21 of their
recommendations.
The result? The retailer expects December
sales to be up three percent. Although it's not
the holiday season it had initially hoped for, it
represents a heck of a comeback.
Source: www.fastcompany.com

74. 74Dr. Lakshmi Mohan
Wal-Mart’s Exception Management
– Driven by IT
“At Wal-Mart, problems are referred to as
“exceptions”. We keep watching everything
that just happened. We are pretty near real-
time. We can tell people that they need to go
do something, and we are within hours,
depending on the event.”
“The event may be a truck’s failure to drop off or
pick up something. It could be the absence of
an important product in the store’s backroom
or in the distribution centre that serves the
store. Or, it could be an act of nature like the
hurricanes that descended, one after another,
on Florida in 2004”
Source: New York Times, Nov. 14, 2004

75. 75Dr. Lakshmi Mohan
A PARADOX !
Wal-Mart Retreats from Germany in July 2006
 Entered Germany in 1997
− Bought two struggling German retail chains
− 95 stores in 1999
 Spent 8 years before admitting defeat
− Too afraid to tarnish its image …
by pulling out of the world’s third largest economy
 Fiscal 2006 Sales: $ 2.5 B; Loses: $ 127.5 M
− Total International Sales: $ 63 B; Global Sales: $ 312 B
 Struggled from the outset against stuff local competition
− Closed 10 of the initial 95 stores
− “Tried German managers, US managers, and a combination of the two”
 Sold its 85 stores to Germany’s largest retailer, Metro
 Pre-tax Loss: $ 1 B on the Deal
Source: Financial Times, July 29-30, 2006

76. 76Dr. Lakshmi Mohan
Germany’s Discount Retail Market
- A Tough One to Crack
 German shoppers are frugal …
“People in this country only ever look out for one thing –
PRICE”
 This trait should have been a boon for Wal-Mart
- the guardian of EDLP
 But Germany already had a number of homegrown
discounters
 Regulations restrict store hours and other retailing basics
 Carrefour, Wal-Mart’s biggest global competitor, operates in
29 countries … But has steered clear of Germany
“It is clearly a very challenging market for us that we
have not figured out.” – Wal-Mart CEO, April 2006

77. 77Dr. Lakshmi Mohan
German Retail Discounters
- Proved to be A Real Match for Wal-Mart
 Power of Privately-held Discounters – Aldi & Lidl
− Grown their market share to 40% vs. < 2% for Wal-Mart
− Had discovered the efficiency of drab out-of-town store sites
and economies of scale that made their suppliers sweat
− Kept costs AND prices low
Underpriced Wal-Mart
− Sell a limited selection in each store … 850 to 1,000 items
vs. 100,000 at Wal-Mart
− Stock mainly their own brands
− 80% of German consumers are 20 minutes from an Aldi
Aldi has invaded Wal-Mart’s home turf
– opened more than 700 stores in the U.S.
Source: Asian Wall Street Journal, July 31, 2006

78. 78Dr. Lakshmi Mohan
BIG Mistake Made by Wal-Mart
- Exported Its Culture Wholesale
… Did NOT Adapt to the German Market
 Little feel for German shoppers,
− They care more about price than having their bags packed
− “The German consumer does not like extra service as he’s
worried that he’ll have to pay for it.”
− Bag-packers were reassigned !
 Little feel for German staff as well
− “They hid in the toilets to escape the morning Wal-Mart
cheer.”
“We screwed up in Germany. Our biggest mistake was putting our
name up before we had the service and low prices”
- Head of Wal-Mart International, The Economist, Dec 6, 2001

79. 79Dr. Lakshmi Mohan
At the End of the Day…
It’s How We Use IT That Counts
IT is a Means to Executing a Smart Strategy
1. Simply following IT trends can backfire.
Smart companies analyze their economics carefully and spend
aggressively on IT applications targeted at those levers that have the
greatest impact on productivity
2. A prerequisite for getting returns from IT investments is managerial
innovation. Business managers should lead the way, reshaping their
companies’ processes and practices so that the full benefits of new
information systems could be realized
3. Focus on value-adds for the customer
“There is only one valid definition of a business purpose: to create a
satisfied customer”. Peter Drucker, The Practice of Management, 1954