S ta ffor d sh i r e U N IV E R SIT Y

Strategic Planning and Systems Development Mini-Case Studies for Portfolios 1 to 7 Workshop Worksheets Case Studies You should read the following mini case studies carefully before attempting the workshops. Each workshop is designed to build on the knowledge gained from previous workshops. Case Study 1 - American Airlines The airline business in the US was in a turbulent situation in the late 1970s due to fierce competition and deregulation. Most of the airlines that operated on the same routes used the same aircraft and the same terminals. Since the services were so similar it seemed that the only scope for differentiation was in terms of cost. In keeping with the systems thinking of the time American Airlines (AA) developed a computerised reservation system with the intention of cutting costs through the reduction of clerical staff. The system automated the main clerical tasks including finding out flight information, booking a seat on a flight, issuing tickets and invoices, etc. When a travel agent telephoned AA to make a booking on behalf of a passenger, a clerk/telephonist sitting at a computer terminal entered the customer/flight details onto the system and relayed the details back to the travel agent. The rest of the process (booking the seat and issuing the paperwork) was automatic reducing the number of clerks. This was a standard type of 'data processing' system and had achieved its objectives, but the next step in the quest for cost reduction caused something of a revolution. The plan was to install terminal on the travel agents' desks, and therefore to achieve further savings by having the travel agents carry out the data entry work. The unexpected benefits of the new system occurred because it changed the way in which AA conducted its business. The easier access to more flight information (and perhaps the 'novelty value' of on-line booking) was appreciated by both travel agents and passengers, and as a result AA's market share increased. Passengers preferred to use travel agents that shared the AA system, which was by now called SABRE. SABRE gave AA another significant business advantage besides differentiation. Having up-to-the-minute information about bookings allowed AA management to operate differential seat pricing, offering discount seats when booking factors were low and charging a premium when aircraft were fully booked. Rivals lacking this type of information had to offer all seats at the lower price - resulting in lower profits! As the 'first mover' in the IT-based booking system field in several areas of the US AA had made it difficult for other airlines to develop their own systems. Some of the bigger rivals chose to make the huge investments, which were involved in developing similar systems. Many smaller airlines negotiated to have their own flights included on SABRE . This benefited AA, as the travel agents were able to book seats on other flights if an AA flight was full, and passengers wishing to connect with flights outside AA's area were able to 'book through' in one transaction. These features were popular with passengers and it became unnecessary for a travel agent to consider installing another booking system. The SABRE screens were designed so that it was always easy for a travel agent to access AA's details before its competitors' - the airline even had an alphabetic advantage! AA had discovered another source of revenue, since the airlines had to pay AA a fee whenever a seat booking was made. This resulted in other airlines attempting to take legal action against AA under the US 'antitrust' laws. The widespread use of SABRE enabled AA to add innovative features which its competitors had little choice but to emulate, such as the 'frequent flier program' and 'air miles' which encouraged passengers to be loyal to AA. Such developments increased the contribution to AA's profit which resulted directly from SABRE to the extent that in several years recently it has made more profit from its information system than from flying. Max Hopper, AA's CEO, is reported to have said that if he had to choose between operating SABRE and the aircraft fleet, in profit terms he would choose SABRE!

S Begley Updated by D.T.Thomas

S ta ffor d sh i r e U N IV E R SIT Y
Strategic Planning and Systems Development Case Study 2 - Remington Tyres The market for tyres in the US has two major segments; the 'original equipment' market (OE) that supplies vehicle manufacturers and the aftermarket, which supplies chains of dealers for resale to motorists. When Far Eastern firms began to import large numbers of tyres into the US in the early 1980's, the US tyre industry rationalised and sought to compete by introducing new technology. Remington Tyres installed an electronic date interchange (EDI) system to computerise the trading links with OE customers. The system allowed orders to be placed, delivery details given and invoices issued electronically. Remington persuaded a number of car manufacturers to install EDI terminals in their purchasing offices. Remington wanted to increase its cost efficiency and speed up its supply, but also to gain an advantage over its competitors in a way that had been reported widely in the US management press (e.g. American Airlines and McKesson Pharmaceuticals). Unlike these examples, however, Remington's attempt to achieve strategic advantage failed. The main reason for this was that the car manufacturers used the inventory features of the EDI system to reduce their own stocks of tyres. The ability to order batches of tyres at very short notice allowed the adoption of 'just-in-time' (JIT) manufacturing procedures. Remington was not able to update its own manufacturing processes, and therefore was forced to stock large quantities of expensive tyres on behalf of its customers. In addition, when other tyre companies developed EDI systems the car manufacturers were able to play off one against the other in a more efficient way. Another manufacturer was able to introduce an EDI system which exploited the discounting of tyres and which focused on the 'after market' dealers. This allowed them to pick up a high proportion of the stable, high-volume orders and left Remington with a majority of small, unpredictable, last minute orders, which they had to carry increased stock to cover!

S Begley Updated by D.T.Thomas

S ta ffor d sh i r e U N IV E R SIT Y
Strategic Planning and Systems Development Case Study 3 - The McKesson Corporation The McKesson Corporation is a distributor of pharmaceutical products in the USA. Its major business is supplying both prescription drugs and toiletries to retail drugstores. McKesson obtains these goods from a limited number of major suppliers, holds them in stock in several large warehouses across the US and suppliers them to thousands of individual drugstores by order. The business is very competitive and service factors (e.g. ex-stock delivery. lead time and order quantity) are very important. Profit margins are low and price competition is very keen. In the late 1970s McKesson's top management re-evaluated its corporate strategy and decided that the competition factors were centered on operational efficiency, and that IT could help the firm to increase efficiency. At the time McKesson used computers for accounting applications only. In order to promote the use of IT in support of the other business areas, McKesson developed a plan that included the following stages: Stage 1. A computerised stock control system was introduced into the large warehouses to reduce the amount of capital tied up in stock. This was intended to enable the purchase of IT equipment. Stage 2. The sales order-entry process was computerised, allowing customers to place telephone orders on the warehouses instead of ordering by post. The planned benefits were a reduction in clerical costs and better customer and management information. Stage 3. The separate functional systems - accounting, stock control and sales/ordering - were integrated into a single system across the USA. A telephone order would now be completely automated from receipt to delivery. Anticipated benefits included further reductions in clerical overheads and improvements in efficiency due to the single entry of data. Stage 4. This was a very significant stage in the planning and showed the opportunism which is typical of an 'emergent' IT strategy. It involved an imaginative switch from receiving customers' orders by telephone and having clerks entering them onto terminals to offering customers the possibility of having terminals linked to McKesson's system in their own offices. The drugstore staff could use the terminals to check product prices, stock availability and order status from their own desks. Most significantly, they were able to enter orders without the involvement of McKesson staff! Stage 5. Although the original intention was to increase efficiency by reducing staffing levels yet again, it was soon perceived by McKesson's management that the greatest actual benefit would be a strategic one - the drugstore buyers would be far more likely to order from McKesson, and the managers would be faced with switching costs is they tried to adopt other technology. They were effectively 'tied in' to McKesson's system (which was by then called Economost) This resulted in a considerable increase in market share, a factor which did not escape the notice of McKesson's competitors - who started to develop their own versions of Economost. McKesson had the problem that faces all 'first movers' in the competitive IT field - enhancing their system in advance of the competition. Stage 6. McKesson responded to the competitive pressures by offering Economost users an integrated software package, which was effectively a drugstore management information system (MIS). The information that this software provided (e.g. which products to stock in what quantities and how to plan shelf and floor space in the stores to achieve maximum sales). This led to large increases in profitability for the drugstores using Economost, while others were either taken over or went out of business. The result was a major structural change in the industry as only the most efficient, competitive pharmaceutical suppliers remained. In order to stay ahead of the competition McKesson had to pursue a new strategic thrust. Stage 7. McKesson's response at this stage had the same basis as its previous IS/IT initiatives - understanding the needs and actions of its customers. In this case McKesson used the particular financial structure of the US pharmaceuticals business to give an advantage. It effectively entered the financial services sector by using its existing IT, offering a credit/chard card service for the drugstores' customers to buy products supplied by McKesson and a rapid payment (i.e. factoring) service for prescription orders (which had the highest profit S Begley Updated by D.T.Thomas 3

S ta ffor d sh i r e U N IV E R SIT Y
Strategic Planning and Systems Development margin but the poorest cash flow). Again Economost was responsible for an increase in turnover and market share for McKesson.

S Begley Updated by D.T.Thomas