NBA 600: Session 6 Customer Access to Information 6 February 2003

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NBA 600 Session 6Customer Access to
Information 6 February 2003

• Daniel Huttenlocher

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Todays 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 Dells case
• Use to gain advantage, loyalty, market share

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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
  CRSs and by own in-house systems
• Customer value in agent layer variable
• Airline value if agent drove customers to them

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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

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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

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Internet Changed All Players

• CRSs (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

• CRSs 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 CRSs
• 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 1970s 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 1980s Fedex developed and distributed custom
  PC based software for package origination
• Gave 100,000 PCs 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 Fedexs
  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 Porters 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 1990s Dell was a company built around
  its internal information systems
• Like Fedex relentless focus on IT for
  coordination and logistics
• Dells goal was to eliminate inventory
• At 35 days in early 90s 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 Dells 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 Smiths 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 Dells
  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 customers 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 Dells 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, PCs 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?