Module 1: Strategic Imperatives

Cisco Press

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IT, Efficiency, and Innovation

As noted previously, innovation is critical to business because it has a direct, measurable impact on financial results. Businesses that encourage creativity and innovation tend to outperform those businesses that do not. As you saw in the previous case study, and illustrated in Figure 1-5, through integrated networked information systems, Wal-Mart leads its industry in key financial performance measures, including these:

  • Sales per employee

  • Inventory turnover

  • Return on invested capital

  • Return on assets

Figure 1-5

Wal-Mart's Financial Performance Metrics Compared to its Industry

It bears noting that Wal-Mart is one of the most highly studied companies in the world. Just as the Japanese captured world attention with their application of total quality management principles, Wal-Mart is driving a wave of copycats that seek to replicate what Wal-Mart has achieved. It is inevitable that other Wal-Mart-like companies will evolve; what is certain is that at least one of those rising competitor companies will be even more efficient and innovative than Wal-Mart is today. The bar that Wal-Mart set will be raised and will drive further change in the discount retail market.

IT and Customer Satisfaction

Satisfaction has become a principal metric in the evaluation of the effectiveness of the delivery of a good or a service. It is also a strong indicator of the probability of repeat business from a customer. Measuring customer satisfaction informs a supplier about its performance and the quality of its relationship with the customer over time. Customer satisfaction also informs a supplier about the current and future needs, issues, and expectations of its customers. Businesses seek to maximize satisfaction and typically invest substantial resources in trying to determine the level of satisfaction of their customers. In fact, a common complaint of many consumers is that they are overwhelmed with opinion surveys by vendors with whom they have done business. The point of all of those surveys is to gauge satisfaction.

But what is satisfaction? Customer satisfaction can be defined as the ability of a company to fulfill the business, emotional, and psychological needs of its customers. Generally, from a survey point of view, the question is this: did the transaction make you happy? Although "happy" is a state of mind subject to interpretation, in the context of a business transaction, it can be a good determinant of how satisfied the customer is.

The Internet and IT are driving customer satisfaction by enabling the following:

  • Self-service and trust-building through the sharing of information

  • 24 x 7 access to place orders, access information, and gain customer service support

  • Unique customer experiences through the use of personalization tools that recognize returning customers

  • Improved responsiveness to service requests

And, customer satisfaction can have a measurable effect on business financial performance. To the extent that satisfied customers tend to be repeat customers, seeking to maximize customer satisfaction can be good business. Market research also shows that it is easier and more affordable for a business to retain a customer than to gain a new customer, so the impact of customer satisfaction is high for the business.

The Reference Management Barometer Study by PriceWaterhouseCoopers surveyed top executives from multinational companies and found that nonfinancial performance measures were considered more important than current financial results in creating long-term shareholder value. Nonfinancial performance measures include product and service quality and customer satisfaction and loyalty. Among those surveyed, 83 percent cited customer satisfaction and loyalty as long-term contributors to shareholder value.

Today, customers are increasingly expecting to receive service and support through a variety of means, including the Internet. Integrated contact centers and Web-based applications are reducing customer acquisition costs. Web-based tools and customer relationship management (CRM) applications are created to improve customer satisfaction outcomes. As shown in Figure 1-6, technology improvements lead to greater revenue and higher levels of customer satisfaction and loyalty.

Although an initial measure of customer satisfaction is important, you need to recognize that the feeling of satisfaction can dissipate rapidly if a product or service does not live up to expectations over time. This notion of satisfaction durability is central to the next concept: quality.

Figure 1-6

Value of Customer Satisfaction Improvement Initiatives

IT and Quality

Prior to the great Japanese quality revolution, few people thought much about the idea. However, since the 1980s, quality has become a central theme in any business. Although quality as a practice has undergone several iterations (TQM, Six Sigma, and so on), the fundamental idea is the same: reducing defects.

As W. Edwards Deming and other process improvement thought leaders pointed out, the reduction of defects is not an activity that can be imposed on a process; it must be integral to the process. By ensuring that a process is in statistical control, defects are minimized and process improvement can be undertaken to further reduce the defect rate.

Processes that are deemed in control are defined as repeatable. IT and the Internet have enabled the repeatable processes by helping to do three things:

  • Improve design collaboration and project management

  • Provide a single source of trusted data linking engineering, manufacturing, and customer service systems

  • Improve consistency of customer-facing and supply-chain processes

The Reference Management Barometer Study by PriceWaterhouseCoopers surveyed top executives from multinational companies and found that 89 percent of business leaders cited product and service quality as a contributor to long-term shareholder return.

In addition, quality has a direct, measurable effect on near-term financial performance as it relates to manufacturing. Key quality metrics that influence financial performance include product returns, credits, yields, and scrap variations.

Conclusion

As you have seen, Internet-enabled IT can fundamentally drive business productivity, efficiency, innovation, customer satisfaction, and product quality. As has been noted, the most profound impact of IT on business is likely in the area of innovation. Because intellectual property is the business everyone is in, innovation is the engine that drives intellectual property creation. As more of the noncore functions of an enterprise become commoditized, ultimately the one essential core competency of any business is its ability to develop, leverage, and expand on good ideas.

Internet-enabled IT is an essential part of making innovation possible. Armed with the good ideas made possible by IT, businesses can then use the power of IT to become more efficient and productive and to improve customer satisfaction and product quality.

The next section examines some of the fundamental concepts behind market forces and business responses to those forces.

Market and Business Drivers

All businesses share the need to focus on revenue, growth, and profitability. Market and business efficiency often determine whether an organization will succeed, survive, or fail.

In this section, you will learn the following:

  • What market efficiency is

  • What business efficiency is

  • The key forces of market efficiency and business efficiency

  • The drivers of market efficiency and business efficiency

  • Ways to improve business efficiency

To this point, the focus has been on the dynamics of technology. You have seen how the Internet combined with IT has transformed businesses and industries and brought local markets into global markets. You have also seen how the same technology can transform businesses into much more productive and efficient revenue-making machines. You might assume that, armed with this technology, a business is assured of success. However, nothing could be further from the truth.

If that is the impression you have gained from the material so far, do not feel bad. This is exactly what happened to entire economies during the dot-com era. Equipped with technology and little else, many businesses secured large amounts of capital and then discovered that they did not really know how to make money or even why money is made. What they did not understand is the fundamental way in which markets operate and, more importantly, how businesses operate within markets.

This section reviews the ideas of market efficiency and business efficiency: what makes a market operate, and what the corresponding processes are within businesses that must operate within the market.

Efficiency, you will recall, is a way of thinking about productivity with minimal waste. It turns out that in a market that is unconstrained by artificial controls and in which information is allowed to flow freely, maximum efficiency can be approached. This section explores the implications of such efficiency on businesses that aim to achieve success within such unconstrained markets.

Market Efficiency and Business Efficiency

What is meant by market efficiency or business efficiency? Efficiency implies talk about a reduction of overheads and a high degree of throughput. But what does this mean in the context of a market?

It turns out that a market can be thought of in much the same way that you think of a business. A market consumes raw materials and information and produces goods and services that customers want—at the price they want them. Of course, a market is composed of many businesses, all of which want to maximize their own profits and share of the market. How can this work?

Free markets function because all the players in the market have fairly complete information on the actions of the other players. As long as all players have the opportunity to act upon their information, the actions of each will be constrained by the actions of the others. In other words, competition will act to prevent any one player from grabbing too large a share of the market and from arbitrarily raising prices. The market will always act to reduce prices, increase quality, and maximize innovation. This does not work perfectly, however, which is why most countries have laws against monopolies. However, unconstrained markets where most of the players obey the rules will always work better and be more efficient than those markets that are constrained.

Assuming a free market, unaffected by overregulation or the actions of monopolists, several forces influence market and business efficiency.

Market Efficiency

  • Transparency is the ability of the market to get information about price, products, and services.

  • Stability is the steadiness of pricing and the supply of products.

  • Availability of substitutes is the alternative products and services that can be used to address a need.

  • Market intelligence includes insights into the products and services that enable customers to judge quality and performance.

Business Efficiency

  • Low latency/lean operations mean an efficient supply chain with reduced cycle time and low inventory levels. This creates a smooth flow of goods and services from the supplier to the customer and lowers operating costs.

  • Agility is the ability to change quickly to meet market needs.

  • Core vs. context is the focus on activities that enhance competitive differentiation and minimizes non-value-added costs.

  • Collaboration is the ability to tap external resources and gain the value of customers and partners. As a result, cost is lowered.

  • Business intelligence is how much a business knows about its own organization, its market, and its competitors. This knowledge helps the business take advantage of opportunities and address challenges more quickly.

  • Rapid implementation means shortening the time it takes for a product or service to reach the market.

Market efficiency is defined by transparency, stability, alternatives, and intelligence. The common theme here is that information is allowed to flow freely. All the players are aware of each other and their actions. Consumers are aware of the players and can choose between them. In other words, anything that promotes this free flow of information contributes to efficiency.

Businesses, on the other hand, also benefit from information flow. Information helps them stay agile, focus on core competencies, collaborate with internal and external resources, acquire business intelligence, and speed implementation.

Drivers of Market Efficiency and Business Efficiency

Over time, market efficiencies in all industries naturally increase. Organizations must keep up with the market by improving their business efficiency, or they will fail. As market leaders become more efficient, they are in turn able to drive further market efficiencies and gain a competitive advantage.

The Internet and use of information are key drivers of both market efficiency and competitive advantage. Figure 1-7 shows how the Internet improves market efficiency by increasing market transparency and educating customers. It betters business efficiency by enabling businesses to reduce costs.

Figure 1-7

Market Efficiency Improves Through Increased Market Transparency

Efficient and Inefficient Markets and Businesses

As Figure 1-8 illustrates, you can represent market efficiency and business efficiency as a four-quadrant model. Market efficiency moves from low to high along the vertical axis, whereas business efficiency moves from low to high along the horizontal axis. If you consider this chart carefully, you will realize that this defines the way in which different kinds of businesses and markets interact to enable business success or failure.

Figure 1-8

Business Impacts of Increased Market Efficiencies

Success or failure of a firm in a given market is influenced by a combination of the efficiency of the market and the efficiency of the business operating within the market. Thus, it is necessary to examine the organization to determine whether the business efficiency is high or low.

High Market Efficiency and Low Business Efficiency

  • Highly efficient markets enable the free flow of information to customers.

  • Thus, customers select only the most competitive suppliers.

  • If business efficiency is low, the organization will most likely reduce costs.

  • This is done by reducing the workforce and budget cuts.

  • Eventually, the organization will go out of business.

High Market Efficiency and High Business Efficiency

  • Highly efficient markets enable the free flow of information to customers.

  • Thus, customers select only the most competitive suppliers.

  • When an organization has high business efficiency and attractive products, customers will regularly select its products or services.

Low Market Efficiency and High Business Efficiency

  • Inefficient markets inhibit the free flow of information.

  • Customers are ignorant of the choices available and continue to select known providers.

  • An efficient organization is able to address the most attractive opportunities.

  • This undercuts inefficient competitors.

  • The efficient organization thus dominates its market sector.

Low Market Efficiency and Low Business Efficiency

  • Inefficient markets inhibit the free flow of information.

  • Customers are ignorant of the choices available and continue to select known providers.

  • An inefficient organization survives until the customer becomes more informed or a competitor gains competitive advantage through improved business efficiency.

As you might recall, market efficiencies naturally increase over time. For businesses to survive, they must improve their efficiency; otherwise, they will fall behind the market and fail. Efficient businesses may be able to drive market efficiencies and competitive advantage through innovation and cost leadership:

  1. An organization that has low business efficiency will be able to survive temporarily in a market that also has low efficiency. However, as customers become more informed or a competitor gains a competitive advantage through improved business efficiency, the organization must improve efficiency or fail.

  2. An organization that has high business efficiency in a market with low efficiency will do the best. However, if the market efficiency increases, and the organization can maintain high business efficiency, it will continue to do well.

In the following space, indicate where you think your business falls in this chart. List at least three reasons why.

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Business Scenario

Take a look at the following business scenario:

  • Zipcart Company is a business that produces golf carts. In its ten years of operation, it has remained profitable while growing its business by an average of 15 to 20 percent each year.

  • The golf cart market has been experiencing steady growth over the past couple of years, attracting new entrants who have introduced products similar to those of Zipcart. Also, new foreign competitors are offering similar products at lower prices. The Zipcart market share is declining, and its resellers are demanding lower pricing to compete.

  • To improve its competitiveness and profitability, Zipcart recently integrated its order entry, scheduling, inventory, and shipping systems with its manufacturers, distributors, and suppliers. This integration has increased production efficiency while lowering costs. This has enabled Zipcart to lower pricing while remaining profitable.

Do you think that Zipcart is operating in a market of high market efficiency, low market efficiency, mid-market efficiency, or no market efficiency? On this and the following page, give your answer and list your reasons.

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Conclusion

As you have seen, in highly efficient markets, efficiency must increase for the business to survive in the market. As market efficiencies develop over time, driven by the rise in business efficiencies by various organizations, your organization must constantly look for new ways to improve and streamline its processes as well as cut costs.

The Internet enables both markets and businesses to achieve efficiency. As the Internet increasingly pervades the global economy, it is driving market efficiency worldwide. This transformational dynamic is creating a single global market where businesses everywhere are forced to be efficient or die.

External Integration and Business Value

Organizations that want to survive and thrive in the economy today must leverage their relationships with their partners, suppliers, distributors, and manufacturers. Gone are the days of hoarding information, maintaining independent information sources, and keeping processes disconnected.

This section discusses the following:

  • External integration

  • The four levels of integration

  • The way the integration of processes and technology relate to financial performance

  • The way the integration of processes and technology relate to customer value

Prior to the Information Age, companies basically worked in isolation. Although vendor-supplier relationships existed, these tended to be relationships beyond the loading dock. The Japanese realized that for high-quality process control to work effectively, supplier relationships would need to be tightened. The just-in-time (JIT) manufacturing methods required suppliers to be tightly coupled into the manufacturing process. In some instances, this even required access to the vendor systems. These connections, though, were static. Typically, the integration of systems was hard enough that only a few critical suppliers were integrated and then, with the expectation that the relationship would last for a considerable period.

With the advent of Internet-enabled IT, the ability to link closely with a supplier became a capability that was accessible to all businesses. The Internet, with its ubiquitous presence, ensured that any company could connect with any other, and the systems available for process management and inventory control made it relatively easy for any company to grant access to its systems for the purpose of production.

The ability to leverage your partners and suppliers has moved beyond something that is a nice-to-do to a level of must-do. To survive in a global economy, closely coupled vendor-supplier relationships are essential. Organizations that want to survive and thrive in the economy today must leverage their relationships with their partners, suppliers, distributors, and manufacturers. Gone are the days of hoarding information, maintaining independent information sources, and keeping processes disconnected.

The next section examines the implications of external integration, explores the four levels of integration, and then discusses some of the financial implications of such integration.

External Integration

External integration works only when businesses internally link their own departments and information assets. Historically, information systems within an organization were not networked. These non-integrated departmental information systems are shown in Figure 1-9. Each department managed its own information, and this information was not shared between suppliers and purchasing, between employees and human resources, or between customers and warehouses. Customer and supplier data had to be entered into the information system each time the data came in contact with a different part of the company. Paper-dependent processes and a large, middle management layer were required to handle business and administrative processes.

Figure 1-9

Non-integrated Departmental Information Systems

Today, Internet-enabled organizations break out of their own departments to share information through the use of standard technology platforms and IT platforms. Where this is not true, companies have problems. Examples abound: U.S. automobile manufacturers, for years, relied on largely archaic information technology to track and deliver new cars to customers. The Japanese, with well-integrated automation, were able to deliver cars much faster, even when separated from their markets by large geographical distances. U.S. manufacturers are only now developing this same capability and continue to lag the Japanese in many respects.

Using Internet-based IT, business processes and relationships are restructured using web-based applications and the Internet. The result is more connection, better collaboration, and improved customer value.

After it is internally integrated, an organization can consider integrating externally. External integration refers to the level or degree to which an organization integrates its information, systems, and processes with other external organizations. As shown in Figure 1-10, these external organizations include suppliers and customers, as well as business partners. Integration can entail anything from the ability to view or exchange information online to the ability to share databases.

A recent study shows how organizations can measure how well they have integrated externally by using a four-level scale (NerveWire Study, 2002). Take a close look at the different levels, and determine where your organization is on the external integration scale.

Figure 1-10

Integration with External Organizations

Minimal Integration

  • Most interactions involve sharing information.

  • Organizations can share information through e-mail, fax, phone, or meetings.

Moderate Integration

  • Most interactions involve online viewing of information in databases.

  • Organizations also engage in an electronic exchange of information, through e-mail and on the Internet.

  • Organizations have a limited ability to change the databases of another.

High Integration

  • Most interactions involve automated transactions.

  • The transactions occur between other databases and applications.

Very High Integration

  • Most interactions involve tightly integrated databases and applications.

  • Organizations can share their databases and applications.

  • Organizations redesign processes and eliminate redundancies.

  • Organizations shift secondary activities to the appropriate partners.

Based on these ratings, on this and the following page identify where you think your organization is on this scale. Give 3 to 4 examples of why you think this is the case.

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Any level of integration will yield some business benefits, even at the lowest level (NerveWire, 2002). You can assess the level of benefits by using the seven key business measures:

  • Revenue

  • Costs

  • Cycle time (time it takes to accomplish a business process)

  • Quality

  • Head count

  • Number of new products or services introduced to the market

  • Customer retention

Organizations at the highest level of collaboration achieve major revenue gains, in addition to cost and cycle-time reductions, quality improvements, and increases in customer retention. Highly integrated organizations enjoy improved financial performance and added value for their customers.

According to NerveWire, the following financial benefits characterize organizations at each level of external integration1:

Minimal Integration

  • Organizations experience no increase in revenues and no cost reductions.

  • Organizations experience no increase in customer retention and no quality improvements.

Moderate Integration

  • Organizations that reach this level enjoy a higher percentage increase in revenue.

  • They reduce cycle times by an average of 26 percent.

  • They reduce costs by an average of 14 percent.

High Integration

  • Organizations that reach this level enjoy greater results.

  • They raise revenues by 14 percent.

  • They reduce cycle times by an average of 30 percent.

  • They reduce costs by an average of 12 percent.

  • They improve quality by 19 percent.

  • They increase customer retention by 18 percent.

Very High Integration

  • Organizations that reach this level enjoy huge financial benefits.

  • Revenues increase by an average of 40 percent.

  • Cost reductions increase by about 30 percent.

  • Cycle times decrease by about 52 percent.

  • Customer retention increases by 36 percent.

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Conclusion

Just as teamwork within organizations yields the benefits of multiple points of view and leverages the strengths of each individual to optimize decisions and the creation of good ideas, so too, integration both internally and externally to a business can improve the ability to compete successfully and to generate revenue.

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