January 4, 2019January 9, 2020 by anthonysmoak

Starbucks, Digital and Analytics: A Perfect Blend

Starbucks is a differentiator, an early adopter in regards to technology and a savvy user of data analytics. Employing the “Starbucks Experience” differentiation strategy (e.g., customer service, ambiance, interior aesthetics, prime locations), the company is able to command above market prices for a commodity product.

Surprisingly, for an organization that was not born in the digital era, Starbucks embraces new technology like a forward-looking digitally native company. The company has demonstrated a willingness to take risks on its road to digital maturity which helped it acquire a unique value proposition in loyalty and customer satisfaction. From a company strategy perspective, the organization is aware that early adopters can acquire advantages.

“In 1998, it was one of the first companies to launch a website; in 2002, it began offering WiFi to its customers, helping to start the transition from quick coffee stop to all-day hangout; and a full decade ago, Starbucks was establishing its social media presence. Now, while others are setting up mobile payment terminals and struggling to start a loyalty program, Starbucks is seeing 11 percent of its sales from mobile order and pay, and 14.2 million Starbucks Rewards members accounting for 37 percent of U.S. company-operated sales.” [1]

As the importance and impact of data has come to prominence in today’s business environment, the company relies heavily upon analytics and digital technologies to enhance business performance. Starbucks processes approximately 90 million transactions per week, [2] therefore the company has to have the requisite culture and resources in place to wring optimal value from data and analytics.

Starbucks Technology Leadership

Any company’s drive for a culture of digital, data and analytics is greatly influenced by senior leadership. As such, Starbuck’s senior leadership increasingly reflects a silicon valley background and mindset. Former chairman and CEO Howard Schultz has been referred to as the “Steve Jobs” of coffee. Schultz’s handpicked successor Kevin Johnson is a veteran technology player having previously served as CEO of Juniper Networks and as President of Microsoft’s Windows division.

Another high level technology hire was that of Gerri Martin-Flickinger who has held technology leadership roles at Adobe, VeriSign and McAfee Associates. Ms. Martin-Flickenger serves as the company’s first Chief Technology Officer, which is a title change from the previous CIO position held by Curt Garner. Incidentally Garner left Starbucks to become the CIO of Chipotle, as his new suitor was impressed with Starbuck’s use of online ordering and mobile pay capabilities.

The ultimate technology name drop belongs to Satya Nadella who serves on Starbuck’s board of directors (as of 2017) and is currently the CEO of Microsoft. Coincidentally, Starbucks is a prominent customer leveraging the Microsoft Azure cloud platform.

Mobile Order / Mobile Pay

One of Starbuck’s most laudable achievements has been its execution of mobile ordering and mobile pay via its iOS and Android applications. Customers who are short on time can pop open the Starbucks app on a smartphone and then place and pay for their order. Purchases lead to an accumulation of loyalty “stars” which can be redeemed for free products. This digital relationship has helped drive demand in physical stores and increase ticket spend per customer.

“They’re actually broadening the footprint of their stores with technology. If everything was a walk-in order, you’d only be able to sell what people could drive up and wait around to get. But by having mobile pay and drive thru, they can extend that store footprint out for miles.”  [1]

This functionality has been so popular that it has caused operational challenges in the physical stores as customers have walked out after seeing large crowds waiting on mobile orders. The company has beefed up staffing and changed store layouts where applicable to accommodate the increased demand. Starbucks has also based loyalty program rewards on total spend as opposed to number of transactions. The latter approach allowed customers to game the system by sub-dividing orders into multiple transactions which caused bottlenecks.

Future enhancements to the application include a personalization engine that will allow stores to target customers for differentiated treatment (e.g., birthday rewards, discounts for previously purchased items). To increase customer satisfaction and operational efficiencies, geolocation can be used to track a customer’s presence near the store and allow the point of sale terminal to pre-assemble the customer’s typical order. The barista can then confirm the order once the customer arrives and then submit at the press of a button.

Additionally, voice ordering capabilities via Amazon’s Alexa platform will allow customers to order and pay for food and drinks as if they were speaking to a human barista. The company demonstrated this capability at an investor conference when it placed an order for a “Double upside down macchiato half decaf with room and a splash of cream in a grande cup.” [3]

Due to the company’s investment in this digital capability, Starbucks is in a position to capitalize on its homegrown mobile order and payment processing technology via licensing to other retailers. The decision would have to be weighed against the advantages of keeping its technology and processes proprietary.

Geolocation

Starbucks is a savvy user of data and analytics to help determine where to place its next retail locations. The organization has a real estate analytics team (amongst many others) that spearheads its site selection strategy.

Using an in-house mapping and business intelligence platform called Atlas, the organization can combine data from various internal and external sources to create models which help drive decision making.

“Through a system called Atlas, Starbucks links to as many external and internal APIs as possible, connecting the data with R to build cannibalization models that can determine impact to existing stores if a new store enters the area. This model drives decision-making in cities across the US and world.” [4]

As part of its growth strategy, Starbucks is planning to open 3,000 stores in mainland China through 2022. That is approximately 600 stores per year, or 1 every 15 hours [6]. Choosing the correct site locations is absolutely critical to store success and the correct mix of data and analyses must be conducted to enable a successful rollout.

Starbucks weaves together various data points such as weather, auto traffic, consumer demographics, population density, income levels, coffee purchase patterns, current store locations and even levels of mobile phone ownership to construct its site selection strategy. The company analyzes all pertinent data points overlaid on a visualization map powered by a spatial data warehouse.

Weather and sales data individually can tell two different stories but blended together they can offer the company new insights. For example, if it’s forecasted to be hotter than average in a location, Starbucks can geo-design a localized promotion for cold beverages [6].

Store Labor Analytics

In a presentation given by Leslie Hampel (VP, Store Operations) at Dartmouth’s Tuck School of business, she described the process of balancing the company’s top down strategic store scheduling decisions with emergent strategies from store level managers. If an improvement suggestion is offered by one store for use in all others, then its impact has to be modeled on a statistically significant group of stores first.

Starbucks is very risk averse in regards to making labor related changes. If you consider that labor is about a third of Starbuck’s cost base, a decision that is wrong by 1% will be wrong by about 40 million dollars [7].

In addition to taking suggestions from stores, the company will use analytics to systematize best scheduling practices by examining the best operating 10% of stores. These localized processes are then tested on a statistically significant group of 100 stores. An internal analytics team will assess the impact of the changes to the company’s financials, as well as impacts to store sales and the customer experience. At the end of the 90 day testing period the new process will either be rolled out to multiple stores, tweaked and re-tested, or simply abandoned [7].

As an aside, it’s worth noting that the creation of Starbuck’s famous Frappuccinos were the result of an emergent strategy from a store level manager in California. Although Starbucks stores are only supposed to sell company approved drinks, the manager sold them in her store against company mandate. Despite corporate management’s initial reluctance to stock and sell the drink (until seeing the local sales data), Frappuccinos are now a billion dollar business for Starbucks [8]. The company learned that it should pay attention to its ground level employees, as they are the closest to the customer.

Starbucks & Bitcoin

No post about digital technology would be complete without a nod to Bitcoin.

To burnish its tech bona fides, Starbucks has been in talks with Microsoft, the parent of the New York Stock Exchange and the Boston Consulting Group to develop a crypto-initiative. Bakkt (pronounced “backed”) will allow consumers to store and convert digital currencies to dollars that can be used for in-store purchases.

The idea has the backing of major corporations and could help lend some Fortune 500 legitimacy to the somewhat murky and volatile world of cryptocurrencies. Although cryptocurrencies have yet to reach mainstream appeal, Starbucks is showing its willingness to be an early adopter of a new payments solution as it did with its mobile ordering and payment initiatives.

References:

[1] 5 Ways Starbucks is Innovating the Customer Experience. https://www.qsrmagazine.com/consumer-trends/5-ways-starbucks-innovating-customer-experience

[2] Starbucks’ CTO brews personalized experiences https://www.cio.com/article/3050920/analytics/starbucks-cto-brews-personalized-experiences.html

[3] Starbucks Adds Voice Ordering to iPhone, Amazon Alexa http://fortune.com/2017/01/30/starbucks-alexa-voice-ordering/

[4] Data Analytics in the Real World: Starbucks https://www.northeastern.edu/levelblog/2016/03/04/data-analytics-in-the-real-world-starbucks/

[5] China is getting nearly 3,000 new Starbucks https://money.cnn.com/2018/05/16/news/companies/starbucks-in-china-store-expansion/index.html

[6] Esri 2014 UC: Starbucks Coffee and IT. Coffee beans and business strategy. https://www.esri.com/videos/watch?videoid=3654&isLegacy=true

[7] Using Data to Create & Maintain the Starbucks Experience https://www.youtube.com/watch?v=sUkQwhMwOig @32:42

[8] Rothaermel, Frank T. 2015. Strategic Management 2nd Edition. New York: McGrawHill, Irwin (2nd edition).

Image Copyright : monticello on 123rf.com

February 18, 2018December 4, 2018 by anthonysmoak

The Definitive Walmart Technology Review

Did you know that the legal name “Wal-Mart Stores, Inc.” was changed effective Feb. 1, 2018 to “Walmart Inc.”? The name change is intended to reflect the fact that today’s customers don’t just shop in stores.

I’ve kept an eye on Walmart because historically the company was the leading innovator in regard to advancing retail focused technology and supply chain strategy. Even though Walmart isn’t the typical “underdog”, in the fight for online retail supremacy it currently finds itself in this position; and everyone can appreciate an underdog (see Philadelphia Eagles). Currently Walmart is locked in a fierce battle with Amazon to carve out a more substantial space in digital and online retail. As such, the company is bolstering its capabilities by focusing on technology enabled business processes, training and digital growth to keep pace with Amazon’s world domination efforts.

Walmart is experimenting with cutting edge technology such as virtual reality, autonomous robots, cloud storage platforms, cashier-less stores and even blockchain. It’s also formed various online retail and technology-based alliances to keep pace with Team Bezos. Walmart’s kitchen sink technology strategy seems to be paying dividends from an online sales perspective. E-Commerce industry luminary Marc Lore and his influence can been seen in some of the innovative technology plays.

Blockchain

Walmart, yes Walmart is getting in on the blockchain ledger revolution (or hype). The company plans to team up with IBM, JD.com and Chinese based Tsinghua University to create a blockchain food safety alliance.

Here is how the partnership will work according to ZDNet:

Walmart, JD, IBM and Tsinghua University will work with regulators and the food supply chain to develop standards and partnerships for safety.
IBM provides its blockchain platform
Tsinghua University is the technical advisor and will provide expertise in technology and China’s food safety ecosystem.
Walmart and JD will help develop and optimize technology that can be rolled out to suppliers and retailers.

Walmart has shown that blockchain technology has reduced the time it takes to trace food from farm to store from days to seconds. During product recalls this capability could prove useful for the retailer.

If Walmart were to offer a more investor appealing use of blockchain (e.g. a “Sam’s-Coin” ICO), you could count me in for a high two figure investment.

http://www.zdnet.com/article/ibm-walmart-jd-com-and-tsinghua-university-eye-blockchain-for-food-supply-chain-safety-in-china/

Ok Google

Image courtesy of ZDNet

Straight from “the enemy of my enemy is my friend” playbook, Walmart and Google announced a partnership to make Walmart’s items available on Google’s shopping service, Google Express.

The New York Times reports that “it’s the first time the world’s biggest retailer has made its products available online in the United States outside of its own website”. We can readily see what Walmart gets out of the alliance (expanded presence on the dominant search engine) but interpreting Google’s angle requires a bit more perspicacity.

Google fears that its search engine is being bypassed by consumers who go straight to Walmart to search for products. Google, (you may have heard) dabbles a bit in search and online advertising. A substantial shift in product search behavior that favors Amazon is bad for business. If Google can expand its own online marketplace with Walmart’s appreciable offerings as well as entice customers to use Google Home and the mobile based Google Assistant to locate products, then the company can retain a greater share of initial product searches. Google Express already offers products from Walmart competitors Target and Costco although Walmart’s collaboration offers the largest number of items.

“Walmart customers can link their accounts to Google, allowing the technology giant to learn their past shopping behavior to better predict what they want in the future. Google said that because more than 20 percent of searches conducted on smartphones these days are done by voice, it expects voice-based shopping to be not far behind.”

An existing Walmart application feature called “Easy Reorder” is slated for integration with voice enabled shopping via Google Assistant. Currently, when a consumer logs into the Walmart mobile app, they can easily see their most frequently purchased in-store and online items and easily reorder those items. Integration with Google Express provides an additional data channel to bolster the effectiveness of this Walmart offering.

The Matrix:

Virtual reality would not be the first technology play that one would likely associate with Walmart. However, the company’s tech incubator (Store No. 8) has purchased Spatialand, a VR development tools company. Spatialand has previously worked with Oculus, Intel and “rap rock” artists Linkin Park to create virtual content.

Walmart’s intent is to use Spatialand to develop “immersive retail environments”. My expectations aren’t high that this acquisition will pay off in the near to medium term, but the company is demonstrating that it is trying to be on the vanguard of future retail technology. One can imagine this acquisition eventually enabling Star Trek “holodeck” capabilities where customers can enter virtual stores or dressing rooms and interact with products while in the comfort of their homes.

I propose that Spatialand and Walmart owned Bonobos would make ideal mash-up partners. Instead of trekking to a physical Bonobos store and trying on shirts and or slacks, consumers can create an avatar with similar dimensions and play virtual dress-up in 3D. The garments can then be shipped directly.

Additionally, Walmart is actually using Oculus headsets to train employees at its 170 training academies. The company has partnered with STRIVR, a virtual reality startup based in Menlo Park. I envision virtual customers stampeding through entrances on a Black Friday opening.

“STRIVR’s technology allows employees to experience real-world scenarios through the use of an Oculus headset, so that employees can prepare for situations like dealing with holiday rush crowds or cleaning up a mess in an aisle.”

There’s an App for That:

Walmart is trying to balance keeping its in-store traffic high while accommodating its growing mobile customer base. The company recently enhanced its Walmart application with a new “Store Assistant” feature that activates when a customer walks in the door. The app will allow customers to build shopping lists, calculate costs and locate in-store items at all of its domestic locations.

“So-called mobile commerce revenue — mostly generated via smartphones — will reach $208 billion, an annual increase of 40 percent, EMarketer forecasts.” – Bloomberg

Channeling its inner Tim Cook, Walmart launched a nationwide rollout of the Walmart Pay system as an additional application enhancement.

“To use the three-step payment system, shoppers link their chosen payment method to their Walmart.com account, open the camera on their smartphone and snap a photo of a QR code at the register. That notifies the app to process the customer’s payment. Shoppers can link their credit or debit cards, prepaid accounts or Wal-Mart gift cards to their payments; however, they still cannot use ApplePay.” – CNBC

Rise of the Machines:

As labor costs rise and technology increases, we can be sure of one thing. Robots are coming to take all of our jobs and Walmart isn’t doing much to disabuse us of this notion. As part of a pilot, the company is employing autonomous robots to about 50 locations to help perform “repeatable, predictable and manual” tasks. Primary tasks include scanning store shelves for missing stock, inventory calculations and locating mislabeled and unlabeled products. The robots stay docked in charging stations inside the store until they are activated and given an autonomous “mission”.

According to Reuters, Walmart’s CTO Jeremy King states that the robots are 50% more productive and can scan shelves three times faster at a higher accuracy. Walmart’s current carbon-based units (my words) can only scan the shelves about twice a week.

While Walmart insists that the robots won’t lead to job losses, I say to remember that technology always marches forward. Today’s “repeatable, predictable and manual” tasks are tomorrow’s non-repeatable, unpredictable and automated tasks.

Image courtesy of Walmart

Additionally, in 2016 the company “patented a system based on mini-robots that can control shopping carts, as well as complete a long list of duties once reserved for human employees.” Keep an eye on those robots as Walmart does not have a reputation for overstaffing.

In all seriousness, shelf inventory checks ensure that customer dollars aren’t left on the table due to un-shelved items. If Walmart can significantly lower the occurrences of un-shelved products with its army of shelf scanning Daleks, then the robots will pay for themselves.

Mr. Drone and Me

Never missing an opportunity to improve supply chain efficiency, reduce labor costs and keep pace with Amazon, Walmart is experimenting with drones. The company’s Emerging Science division has been tasked to consider future applications of drone technology to enhance operational efficiency.

Currently, inventory tracking at the company’s fulfillment centers requires employees to use lifts, harnesses and hand-held scanning devices to traverse 1.2 million square feet (26 football fields) of warehouse space; a process that can take up to a month to complete. If you consider that Walmart has close to 190 distribution centers domestically, the inventory process consumes a significant amount of labor hours when aggregated across the company.

The current plan is to utilize fully automated quad-copter drones mounted with cameras to scan the entire warehouse for inventory monitoring and error checking.

“The camera is linked to a control center and scans for tracking number matches. Matches are registered as green, empty spaces as blue, and mismatches as red. An employee monitors the drone’s progress from a computer screen.”

Drones would eventually replace the inventory quality assurance employees.

Millenial Digs:

In an effort to increase its appeal to the young, hip and tech savvy, Walmart has opened a new engineering tech design center in Austin. The new millennial digs are located in a renovated 8,000 square foot space. “Walmart ATX” will house minds that work with cutting edge technology such as machine learning, artificial Intelligence, blockchain, internet of things and other emerging technologies. Factors such as a deep talent pool and low cost of living drove the creation of this Austin hub.

Here’s hoping Amazon decides to stay far away from its retail rival and brings its talents to Atlanta, Georgia.

http://www.512tech.com/technology/walmart-gets-creative-with-new-tech-design-center-downtown-austin/f3iWwhdaUtUQeIjhZEt0RI/

E-Books

The saying goes that Amazon is trying to become more like Walmart and Walmart is trying to become more like Amazon. Walmart teaming up with Japanese e-commerce giant Rakuten to sell e-books solidifies this sentiment. It should go without saying that Amazon has a sizable lead in selling e-books. However, Walmart is leaving no stone unturned as far as offering products that keep e-commerce shoppers from Amazon’s web presence.

https://www.nytimes.com/2018/01/25/business/walmart-ebooks-kobo-japan.html

Online Grocery Pickup:

Walmart is experimenting with allowing customers to place their orders online for pickup at a local store. The scheme currently requires the company’s human employees (eventually robots) to walk the aisles using a handheld device in order to fulfill customer orders. The device acts as an in-store GPS that maps the most efficient route to assemble the customer order.

Customers then pull into a designated pickup area where live human beings (eventually robots) will dispense the pre-assembled order.

I’m not kidding about “eventually robots” dispensing the pre-assembled order. Walmart currently has an automated kiosk in Oklahoma City that dispenses customer orders from internal bins. Customers walk up to the interface and input a code which then enables the kiosk to retrieve the order. Hal, open the pod bay doors; the future is here and apparently its name is Oklahoma City.

Courtesy of The Oklahoman

These approaches address the “last mile” problem which plagues large e-commerce players and start-ups alike. As consumer preferences shift from physical stores to online channels, repurposing stores into dual e-commerce fulfillment centers wrings additional utility from these assets.

In Home Delivery:

Another innovative e-commerce “Last Mile” proposal from Walmart involves the creation of a smart home delivery pilot. By partnering with a smart lock startup company August Home, outsourced delivery drivers will be supplied a one-time passkey entry into a customer’s home to unload cold and frozen groceries into the refrigerator. The home owner is alerted via phone notification that the driver has entered their property and can watch the in-home delivery livestreamed from security cameras. An additional notification is sent to the consumer when the door has automatically locked. This limited scale program is only being piloted in Silicon Valley (of course).

Per the Washington post:

“This is a group of people who are already used to a certain level of intrusiveness.. But God help the teenager playing hooky or the family dog who’s not expecting the delivery man.”

I can envision a future sci-fi use case involving “smart fridges” and automatic home replenishments. This pilot move is a search for an advantage in grocery delivery as Amazon recently purchased Whole Foods without overtly signaling what disruptive services may emerge from the amalgamation.

Smart Cart Technology

When Walmart made the largest ever purchase of a U.S. e-commerce startup with Jet.com for $3.3 billion, the company was looking for a way to ramp up online sales and infuse itself with fresh perspectives for online selling.

As I’ve mentioned previously, Jet.com has the potential to infuse Walmart with much needed digital innovation. This fresh perspective has the potential to add tremendous value to the organization as a whole. The “old guard” rooted in Walmart’s core business model needs to allow acquisitions to thrive instead of imposing the more conservative legacy culture.

The Jet infusion of innovative ideas back to the mothership is happening. Current Walmart e-commerce head Marc Lore launched Jet.com around an innovative “smart cart” system that offers the potential of lowering the price of customer orders. Here is how it works according to Forbes:

“If you have two items in your cart which are both located in the same distribution center and can both fit into a single box, then you will pay one low price. If you add a third item that is located at a different distribution center and cannot be shipped in a single shot with the other two items, you will pay more. As you shop on the site, additional items that can be bundled most efficiently with your existing order are flagged as ‘smart items’ and an icon shows how much more you’ll save on your total order by buying them.”

The order price can be further lowered if customers use a debit card or decline returns. This smart cart process is expected to launch on Walmart’s flagship site in 2018.

Who Needs Cashiers?

Customers shopping at roughly 100 stores across 33 states can participate in Walmart’s “Scan and Go” service. Via a dedicated mobile app, customers can scan the barcodes of items as they shop, pay through the app using Walmart Pay, and then exit the store after showing a digital receipt to an employee. As customers shop and scan with their phones, they can observe the running total of their purchases. This service is currently available at all Sam’s Club locations.

In this case Walmart is keeping pace with grocery competitor Kroger which is also experimenting with digital checkout experiences. Kroger has a “Scan, Bag & Go” service rolling out at 400 grocery chains.

Additionally, Walmart’s skunkworks retail division “Store No. 8” is working on a futuristic project codenamed “Project Kepler”. This initiative goes a step further and eliminates both cashiers and checkout lines by using a combination of advanced imaging technology on par with Amazon’s “Amazon Go” concept. As customers take items off of shelves, they are automatically billed for their purchase as they walk out of the store. The Jet.com acquisition is in play here as this initiative is being led by Jet’s CTO Mike Hanrahan.

Grocers already operate on razor thin margins therefore removing cashier interaction from the shopping equation fits in with the goal of lowering labor costs. Walmart employs approximately 2 million reasons to turn this future technology into reality.

Send in the Clouds:

According to the Wall Street Journal, Walmart is telling some of its technology vendors that if they want to continue being a technical supplier then they cannot run applications for the retailer on the leading cloud computing service, Amazon Web Services. Vendors who do not comply run the risk of losing key Walmart business. This is where we open our strategy textbooks to Porter’s Five Forces and key in on “Bargaining Power of Buyers” in the retail information technology provider space. The Economist reports that in 2015 Walmart poured a staggering $10.5 billion into information technology, more than any other company on the planet. To misquote E.F. Hutton, when Walmart speaks, you listen if you’re a technology vendor. The company’s cloud ultimatum is responsible for an uptick in usage of Microsoft’s Azure offering.

As I’ve mentioned in other posts, Walmart is known for its “build not buy” philosophy in regard to technology. Most of its data is housed on its own servers or Microsoft Azure which is the primary infrastructure provider for e-commerce subsidiary Jet.com. According to CNBC, about 80 percent of Walmart’s cloud network is now in-house.

Walmart’s cloud application development is facilitated by the company’s own open source cloud application development platform named OneOps. The aim of OneOps is to allow users to deploy applications across multiple cloud providers (i.e. allow users to easily move away from Amazon Web Services). Walmart has also been a huge contributor to OpenStack, which is an open source cloud offering and has been working with Microsoft, CenturyLink and Rackspace.

OneOps was originally developed by Walmart Labs and has since been released as an open source project so that Walmart can benefit from a broader community that’s willing to offer improvements. The main codebase is currently available on GitHub (https://github.com/oneops/).

Foreign Investment:

Walmart is currently challenging tech titans Amazon and China’s Alibaba for a lucrative stake in India’s burgeoning online retail market. India’s expanding middle class makes its online market a lucrative target. The market is purported to reach $220 billion by 2025 according to Bank of America Merrill Lynch. Walmart is essentially barred from outright owning physical store locations in India due to the country’s restrictive foreign investment regulations. Foreign ownership for multi-brand retailers is limited to 51% and retailers must source 30% of its goods from small suppliers which poses a difficulty for Walmart. Walmart uses its global buying power to squeeze deep discounts from major suppliers such as Unilever and Proctor and Gamble. Smaller Indian firms will have more difficulty yielding to exorbitant price concessions.

Therefore, Walmart is currently in talks to purchase a sizable stake in Indian online retailer Flipkart. Flipkart is a highly attractive opportunity because it has been able to effectively compete with Amazon in India despite being outspent by Team Bezos. Flipkart currently has a 44% market share in India which is running ahead of Amazon’s share at 31%. Walmart’s multibillion dollar investment will likely value Flipkart at $20 to 23 billion.

An infusion of capital from Walmart makes sense for both parties; Flipkart can hold off attacks from Amazon while Walmart gets a piece of the action in a growing and lucrative online market. Amazon has stated its intention to invest $5 billion in India in order to beef up the number of its fulfillment centers. Ironically, Flipkart was launched in 2007 by two former Amazon employees, Sachin and Binny Bansal.

Walmart isn’t the only company looking for a piece of Flipkart as Google is also purported to make a sizable investment in the Indian firm at a valuation of $15 to $16 billion.

Walmart has had difficulties operating in India previously as evidenced by its now disbanded partnership with Bharti Enterprises. The two companies built 20 superstores branded as Best Price Modern Wholesale, but the venture fizzled due to aforementioned regulatory restrictions.

Meanwhile in China, Walmart partnered with JD.com which is a fierce Alibaba rival. Walmart and JD will merge their membership systems, so members can receive similar discounts at both retailers. In addition, the two companies will jointly work to create a system that enables JD.com to fulfill customer orders from Walmart inventories. Walmart initially had its own Chinese marketplace named Yihaodian but sold it to JD in 2016 due to its small market share in comparison to both JD and Alibaba.

Header Image Copyright: moovstock / 123RF Stock Photo

December 3, 2017January 11, 2019 by anthonysmoak

General Motors’ Information Technology: IT’s Complicated

General Motors and its relationship with technology has been one of innovation followed by periods of stagnation. Its technology staffing strategy of choice has been acquisition, followed by pure outsourcing, until it settled on its current insourcing approach. New startups like Tesla and Uber have a profound effect on a rapidly evolving automotive industry. GM as an industry incumbent must embrace new trends regarding autonomous vehicles and all the requisite software and technology to remain viable. The company currently believes that an in-sourced IT staff can help it develop competitive advantages.

The EDS Acquisition

General Motors has a long history of employing Electronic Data Systems Corporation (EDS) to service its information technology needs. The $2.5 billion acquisition of EDS in June of 1984 from billionaire Ross Perot was a move to help impose structure upon GM’s unorganized maze of data-processing systems and IT infrastructure. From the start, there were culture clashes between the two organizations; although EDS saw significant revenue increases after the acquisition. The management styles of brash, outspoken EDS founder Ross Perot and the bureaucratic GM CEO Roger Smith were incompatible.

“Problems surfaced within a year when the differences in management style between Perot and Smith became evident. The August 1984 issue of Ward’s Auto World suggested ‘Mr. Perot is a self-made man and iconoclast used to calling his own shots … Roger B. Smith [is] a product of the GM consensus-by-committee school of management, never an entrepreneur.’” [1]

Additionally, six thousand GM employees were transferred from GM to EDS at lower pay [2], which served to stoke the fires of the culture clash.

From 1984 until it was eventually spun-off in 1996, EDS was a wholly owned subsidiary of GM. Although there was an ownership separation, the two behemoths were still tightly coupled in regard to technology staffing. The decision to divest itself of EDS was a strategic decision by GM to focus on its core competency of vehicle manufacturing. EDS also gained the freedom to win additional technology contracting work from other organizations.

HP Enterprise Services (formerly EDS, Electronic Data Systems) corporate headquarters in Plano, Texas (Wikipedia)

Post EDS Spin-Off

Post spin-off, General Motors continued to contract with EDS for technology services as it still accounted for a third of EDS’s revenues at the time. Perceived as Texas “outsiders” by the Detroit incumbents, EDS found it difficult to deal with the fragmented nature of GM’s systems across various business units and divisions. While EDS had the requisite technical expertise, it did not always have enough internal influence to navigate GM’s intense political landscape. Obtaining consensus amongst business units in regard to technology decisions was a challenging endeavor. In an attempt to address these issues, incoming GM CIO Ralph Szygenda spearheaded the creation of an internal matrixed organization called Information Systems & Services (IS&S).

IS&S was created as a matrix organization consisting of internal GM technology executives and various other technologists (e.g. business and systems analysts). The new organizational structure consisted of a dual reporting relationship; IS&S members simultaneously reported to the CIO organization and to their local business unit leadership.

Generally, matrix organizations are instituted in order to promote integration. The advantage of the matrix organization is that it allows members to focus on local initiatives in their assigned business unit and it enables an information flow from the local units to the central IT organization. General Motors is a famously siloed global organization. With the creation of IS&S, members could now promote information sharing between different functions within GM and address the cross-organizational problems that had challenged EDS.

The matrix structure is not without weaknesses. To quote a famous book, “No man can serve two masters.” Employees in a matrix organization often deal with additional frustrations as they attempt to reconcile their allegiances and marching orders from conflicting authorities. “Matrix organizations often make it difficult for managers to achieve their business strategies because they flood managers with more information than they can process” [3]. From my own personal experiences of working with IS&S while employed at GM subsidiary Saturn, I observed that members were inundated with meetings as they tried to stay up to date with the plans and initiatives of the central IT organization while trying to remain focused on their internal business units.

A Return to EDS Insourcing

From the creation of IS&S in 1996 until 2012, GM relied upon a variety of outsourced contractors and vendors to deliver information technology services such as Capgemini, IBM, HP and Wipro. In 2010 GM renewed an existing technology outsourcing contract with the old EDS (now HP) for $2 billion.

The general wisdom in regard to outsourcing is that companies will seek to focus on those core activities that are essential to maintain a competitive advantage in their industry. By focusing on core competencies, companies can potentially reduce their cost structure, enhance product or service differentiation and focus on building competitive advantages.

In a reversal of its longstanding IT sourcing strategy, GM made headlines in 2012 with the decision to insource and hire thousands of technologists to supplement its bare bones IT staff. New GM CIO Randy Mott reasoned that an internal technical staff would be more successful working with business units and would deliver technology needs at a cheaper cost than outside providers. These savings could then be used to drive IT innovation and fund the capabilities needed to compete in a rapidly evolving automotive industry.

“By the end of this year (2012) GM will employ about 11,500 IT pros, compared with 1,400 when Mott started at the company four years ago, flipping its internal/external IT worker ratio from about 10/90 to about 90/10, an astounding reversal” [4].

GM decided to hire over 3,000 workers from HP that were already working at GM as part of its Global Information Technology Organization. The move could be considered an act of “getting the band back together” as HP purchased EDS in 2008 for $13.9 billion. Randy Mott was the CIO of HP before assuming the same position at GM. It is plausible that this fact factored into GM’s insourcing decision calculus.

It should be noted that insourcing IT personnel is not without risks. Insourcing requires a company to compete for technical resources which can be difficult in cutting edge technology areas. Furthermore, the complexities of running IT in house “requires management attention and resources that might better serve the company if focused on other value-added activities” [3].

GM’s Information Technology Transitions from Commodity to Innovation

The automotive industry is embarking upon significant changes as it deals with innovations and disruptions from the likes of Uber and Tesla. To illustrate this point, Tesla (founded in 2003) had a higher market capitalization than both GM and Ford for a period of three months in 2017. Auto industry incumbents like GM are focusing on automating and streamlining commoditized processes as well as applying IT to more innovative value-added functions (e.g. computerized crash testing, simulations to shorten vehicle development times and data analysis for profit optimization).

In its early years, GM had been widely perceived as an innovator before making a series of missteps that harmed this reputation. GM fell behind on hybrid engine development after taking a technology lead in the electric vehicle space. The company defunded its lauded EV1 offering in the early 1990s to appease the bean counters. The company also starved innovative upstart Saturn of the necessary funds to introduce new models for a period of five years.

2000-2002 Saturn SL2 (Wikipedia) The innovative Saturn subsidiary was starved of funds.

“G.M.’s biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about returns on investment” [6].

After a government bailout in 2009, the company promised to emerge leaner and commit itself to technology leadership. Automakers are now focusing on software development as a source of competitive advantage. As a result, GM has opened four information technology innovation centers in Michigan, Texas, Georgia and Arizona. These locations were chosen in order to be close to recent college graduates from leading computer science programs.

GM Opens Fourth IT Innovation Center in Chandler, Arizona

One of GM’s 4 new Information Technology Innovation Centers

Additionally, GM purchased Cruise automation which is developing autonomous driving software and hardware technology. It is even testing a ride-sharing app for autonomous vehicles. The purchase will bolster GM’s technology staff and efforts in an emerging space.

“Harvard Business School professor Alan MacCormack, an expert in product development management within the software sector, says that outsourcing even routine software development can carry risks for companies that are seeking innovation in that area. He notes that today’s vehicles have more software and computing power than the original Apollo mission. ‘Everybody can make a decent enough powertrain. But what differentiates you is what you can do with your software,’ he says of car makers generally. ‘Companies have to be careful that they don’t outsource the crown jewels’” [6].

The company also developed an internal private cloud nicknamed Galileo, to improve its business and IT operations and consolidated twenty three outsourced data centers into two insourced facilities [7].

With its new cadre of insourced technologists, GM will need to find a way to bridge the ever-persistent culture gaps between innovative technologists, bureaucratic management and the Excel zealots in finance.

“IT is core, I think, to GM’s revival, and I think it will be core to their success in the future,” – Former GM CEO Dan Akerson [7]

References:

[1] http://www.fundinguniverse.com/company-histories/electronic-data-systems-corporation-history/

[2] Nauss, D. (May 20, 1994). Pain and Gain for GM : EDS Spinoff Would Close Stormy, Profitable Chapter. Los Angeles Times. Retrieved from http://articles.latimes.com/1994-05-20/business/fi-60133_1_gm-employees

[3] Keri E. Pearlson, Carol S. Saunders, Dennis F. Galletta. (December 2015). Managing and Using Information Systems, A Strategic Approach
6th edition. Wiley Publishing ©2016

[4] Preston, R. (April 14, 2016). General Motors’ IT Transformation: Building Downturn-Resistant Profitability. ForbesBrandVoice. Retrieved from https://www.forbes.com/sites/oracle/2016/04/14/general-motors-it-transformation-building-downturn-resistant-profitability/#67b37d551222

[5] Boudette, N. (July 6, 2017). Tesla Loses No. 1 Spot in Market Value Among U.S. Automakers. The New York Times. Retrieved from https://www.nytimes.com/2017/07/06/business/tesla-stock-market-value.html

[6] Leber, J. (November 5, 2012). With Computerized Cars Ahead, GM Puts IT Outsourcing in the Rearview Mirror. MIT Technology Review. Retrieved from https://www.technologyreview.com/s/506746/with-computerized-cars-ahead-gm-puts-it-outsourcing-in-the-rearview-mirror/

[7] Wayland, M. September 18, 2017. GM plots next phase of IT overhaul Unlocking the Potential of a Vast Data Empire. Automotive News. Retrieved from http://www.autonews.com/article/20170918/OEM06/170919754/gm-it-randy-mott

Featured Image Copyright: akodisinghe / 123RF Stock Photo

October 16, 2017November 25, 2018 by anthonysmoak

General Electric’s Digital Pivot

Digital technologies will touch and transform every business sector. No industry will be completely safe from either nimble venture capital backed startups or disruptive “new economy” organizations born of the digital age. Industrial companies founded at the tail-end of the 19th century would not be expected to reside at the forefront of digital change and experimentation. But this is exactly where we find General Electric. The 125 year old company has embarked upon a remarkable transformation of its people, technology and overall business model to embrace an impressive digital strategy in a relatively short period of time.

However, I’d be remiss without mentioning that the digital shift has not resulted in immediate changes to operating results. In successful companies, continual reinvention is the name of the game even when business is good. General Electric however has endured a number of challenges over the past decade (e.g. financial crisis, share price, executive shakeup, activist investors) but the company does deserve credit for its impressive shift to digital while addressing a myriad of ongoing challenges.

GE has invested significantly in machine learning, artificial intelligence, open source software development, 3D printing, internet of things (IoT), internet connected drones and all the accompanying personnel required to make its digital ambitions feasible. General Electric has stated an audacious plan to be one of the world’s top ten software companies with sales and services worth as much as $15 billion by 2020 [1]. The company will have invested $6.6 billion, from 2011 through the end of this year in transforming itself into a “digital industrial” company [2].

Bringing Good Things to Life

Back in 2009, former CEO Immelt was speaking with scientists working on the development of new jet engines. From this experience he learned that the engine sensors were generating large quantities of data from every flight but that the company was not maximizing the potential benefits of the accumulation. Traditionally, sensor data was analyzed real time by a technician to gauge current performance and then that data was discarded.

Immelt visualized a future where the company’s sensor data data would be worth as much as the machinery itself [2]. Two years later, the company established GE Digital as a separate corporate unit headquartered in San Ramon California. Immelt realized that a separate unit needed to be established in order to keep it from being stifled by the legacy organization.

“The San Ramon complex, home to GE Digital, now employs 1,400 people. The buildings are designed to suit the free-range working ways of software developers: open-plan floors, bench seating, whiteboards, couches for impromptu meetings, balconies overlooking the grounds and kitchen areas with snacks” [1].

The company even embarked upon an ad campaign where it poked fun at its stodgy corporate reputation. The campaign was intended to showcase General Electric as a destination for software engineers and other technical talent.

The aim of the company’s ambitious new unit was to house the requisite personnel and lay the groundwork for GE to pivot towards a “digital-industrial” strategy. By developing software that links together sensor data from a bevy of industrial machines, General Electric could then sell additional services like predictive maintenance to its industrial customers. As machines become smarter, they can run more efficiently, use less fuel and raise alerts before costly breakdowns occur. Smarter machines lead to longer lived equipment.

GE Digital was eventually merged with the company’s corporate IT department. In this manner, algorithms or other development work could be leveraged by multiple business units which helped minimize duplication of effort across many silos. Pre-GE Digital, business units were making choices based upon local conditions which resulted in an inefficient bundle of technologies and platforms.

The Centerpiece of General Electric’s Digital Strategy – Predix

The most ambitious offering from GE Digital’s strategy is the development of an open source industrial operating system named Predix. The company has poured significant investment capital (more than a billion dollars) into its creation. Predix was partially developed to head off competition from traditional tech players who have been considering forays into the industrial internet space. Just as fellow “old economy” blue chip Wal-Mart has had to revamp its digital strategy to compete with Amazon, General Electric realized that it needed to go on the offensive to head off potential competition from more mature tech savvy players such as IBM and Google. Additionally, Siemens, a more traditional industrial competitor, has a competing product known as MindSphere which is also angling for a piece of the industrial internet pie.

Predix was developed as a cloud based platform-as-a-service which enables asset performance management. The product aims to be the “Microsoft Windows” of the industrial internet, in that it functions as an operating system and enables third party application development. In a similar manner to Amazon expanding the market for cloud computing with its Web Services offering, GE is betting that there is a similar market opportunity for Predix in the industrial internet space to derive value from the cloud, data and analytics.

General Electric has also partnered with Apple to create a Predix software development kit for iOS. This move expands Predix’s potential reach to a popular mobile operating system which powers millions of iPhones and iPads [3].

“The basic idea is that G.E. and outside software developers will write programs to run on Predix. This software might, for instance, monitor the health and fine-tune the operation of equipment like oil-field rigs and wind-farm turbines, improving performance, reducing wear and adapting to changing environmental conditions. It amounts to software delivering the equivalent of personalized medicine for machines” [1].

One component of Predix involves creating a virtual “digital twin” of a highly complex industrial machine (e.g. aircraft engine, turbine, or locomotive engine). This digital twin is a real time virtual model which displays a host of performance metrics. The digital twin leverages machine learning to gain insights from simulations and other machines and then marries that information with human input. “Though digital twins are primarily lines of software code, the most elaborate versions look like 3-D computer-aided design drawings full of interactive charts, diagrams, and data points” [4].

The company predicts that it will have developed over one million digital twins by the end of 2017 [5].

Image courtesy of 2016 GE Annual Report

Considerations

GE has a built in competitive advantage in its attempt to become the dominant software player for the industrial internet. The company already has a sizable customer base that currently uses its industrial equipment. However, GE must generate enough of an outside developer following to make the Predix platform sustainable. The company hopes to generate up to 4 billion in Predix based revenue by 2020. In order to meet this goal, GE will need to cultivate an ecosystem of third party applications running on its Predix platform.

Non GE equipment typically forms the majority of machines in a company’s facilities. Therefore GE needs to incentivize other OEMs to write applications on Predix that can analyze data on their own equipment. There is additional value gained when customers can analyze data from GE’s sensors in concert with data from third party machinery. This combination of capabilities has the potential to provide customers a more holistic look at their asset ecosystem. MIT’s Sloan Review indicates that GE has encountered challenges with this step.

“..everyone loves the idea of benefiting from everyone else’s data, but is far less excited about sharing their own — a tragedy of the commons. The potential is there, but incentives are not well aligned” [6].

Consider that GE earns little from selling hardware and that a majority of its revenue comes from selling services [6]. The company is betting that Predix investments will profitably augment its current array of service offerings. Contractual services agreements for a large piece of industrial equipment can run up to 30 years. Meeting agreed upon machine up-time metrics results in bonus payouts to GE. However, there is a potential downside to longer running machines; namely reduced demand for additional GE machines.

Internally, Predix has allowed the company to garner significant productivity gains but those gains have been reinvested back into Predix and associated applications. Thus, these internal productivity gains (up to a billion) have not shown up on the company’s earnings [7].

Additionally, the company’s large sales force must learn to incorporate software services into their repertoire as opposed to solely pitching traditional hardware products. Chief information officers and chief technology officers will now have a seat at the buyers’ table along with the traditional operational heads and plant managers.

General Electric’s Additional Digital Investments

In addition to Predix, GE has made other digital investments and formed partnerships:

In 2015, GE launched a startup named “Current” which is focused on industrial scale smart lighting.
A new GE subsidiary named Avitas Systems will use “internet-connected drones and other robots to perform high-risk equipment inspections in industries like oil and gas” [7].
GE spent $1.4 billion to acquire two European 3D printing companies, Arcam AB from Sweden and SLM Solutions Group from Germany. The company has spent $1.5 billion on 3D printing investments since 2010, meaning the acquisitions will double what the company has invested in the last five years [8].
GE partners with Intel for sensor technology as well as Cisco for network hardware and Amazon Web Services for cloud delivery [9]. GE must be careful to ensure that a substantial portion of its digital offerings do not become non-proprietary.

Conclusion

Outgoing CEO Jeffrey Immelt’s transformation exploits have been criticized for sacrificing short term profit maximization for future earnings. Immelt doesn’t receive enough credit for running a leaner GE which enabled a massive investment in digital transformation. Immelt has stated that his initial goal was to hire a thousand software engineers to support the transformation [10]. This prodigious commitment to ramping up digital demonstrates that General Electric was anticipating disruptive innovation to negatively impact its business. History has taught us that industry incumbents have been caught off guard at best and rendered obsolete at worst by rapid changes in technology. Immelt forced the company to see the need for change as “existential”.

“Half measures are death for big companies, because people can smell lack of commitment. When you undertake a transformation, you should be prepared to go all the way to the end. You’ve got to be all in. You’ve got to be willing to plop down money and people. You won’t get there if you’re a wuss” [10]. – Jeffrey Immelt

It is a huge bet to shut down all of the company’s analytics based software ventures and redirect efforts to one platform. It takes guts to open up your software to competitors, enabling them to reap benefits. It is audacious to infuse senior personnel with new leadership from outside the company who specialize in a non core, forward looking discipline. As a result, there are now dedicated digital organizations and chief digital officers positioned inside each of GE’s businesses. Even the marketing organization is attracting individuals who can speak and sell digital.

However, bumps on the road to becoming a successful digital business should be expected. The desired financial gains from digital investments have not yet materialized for General Electric as indicated by share appreciation. Per Gartner:

“The IoT is emerging as a key enabler of our digital future, and global spending on IoT – including all hardware, software and services – will increase in the next five years. However, the path to capturing benefits will not be a straight line. It will have many twists and turns as companies pursue big plans, hit roadblocks, learn and adjust. Some will give up, while others will follow through and realize the transformational potential the IoT can have in helping them become a successful digital business” [11].

Jeffrey Immelt has moved on and new CEO John Flannery has signaled an intent to pick up and run with the digital baton. In my opinion, General Electric has more favorably positioned itself to compete and win in a challenging new environment that extends beyond physical engines and turbines.

References:

[1] Lohr, S. Aug, 27 2016. G.E., the 124-Year-Old Software Start-Up. New York Times. https://www.nytimes.com/2016/08/28/technology/ge-the-124-year-old-software-start-up.html

[2] Lohr, S. June 27, 2017. G.E. Results Show Next Chief’s Challenges at Revamped Company. New York Times. https://www.nytimes.com/2017/07/21/business/ge-john-flannery.html

[3] Bruno, G. October 18 2017. Apple, GE Announce Partnership to Develop Industrial IoT Apps. TheStreet. https://www.thestreet.com/story/14347334/1/apple-ge-announced-partnership-to-develop-industrial-iot-apps.html

[4] Woyke, E. June 27, 2017. General Electric Builds an AI Workforce. https://www.technologyreview.com/s/607962/general-electric-builds-an-ai-workforce/

[5] General Electric. 2016. Leading A Digital Industrial Era. 2016 Annual report

[6] Winig, L. February 18, 2016. GE’S BIG BET ON DATA AND ANALYTICS. Seeking opportunities in the Internet of Things, GE expands into industrial analytics. MIT Sloan Review. https://sloanreview.mit.edu/case-study/ge-big-bet-on-data-and-analytics/

[7] Scott, A. May 12, 2017. GE’s Immelt bets big on digital factories, shareholders are wary. Reuters. http://www.reuters.com/article/us-ge-factory-idUSKBN1880K4

[8] Geuss, M. September 6, 2016. GE buys two 3D printing companies at $1.4 billion. A Swedish and a German company join the fold to make industrial components. Ars Technica. https://arstechnica.com/information-technology/2016/09/general-electric-doubles-investment-in-3d-printing-with-1-4-billion-purchase/

[9] Iansiti, M & Lakhani, K. November, 2014. Digital Ubiquity: How Connections, Sensors, and Data Are Revolutionizing Business. Harvard Business Review. https://hbr.org/2014/11/digital-ubiquity-how-connections-sensors-and-data-are-revolutionizing-business

[10] Immelt, J. September 2017. How I Remade GE. Harvard Business Review. https://hbr.org/2017/09/inside-ges-transformation

[11] Laney, D. & Jain, A. June 20, 2017. 100 Data and Analytics Predictions Through 2021. Gartner.

Header image courtesy of 123rf.com

August 6, 2017August 7, 2017 by anthonysmoak

Costco’s Underinvestment in Technology Leaves it Vulnerable to Disruption

Introduction

The conventional wisdom with respect to Costco is that its business model forms a “defensive moat” against the conquering retail army of “House Bezos”. Costco offers its loyal shoppers a reason to visit its warehouses replete with low cost bulk items, pharmacies and food courts. This sentiment has held, but nothing drains a moat faster than when Amazon expands its physical retail presence into your market with a splashy $13.7 billion acquisition (see Whole Foods). We don’t quite know what Amazon is up to in the grocery sector (and meal kit delivery space), but given its track record of disruption, Costco better start taking up a stronger defensive position to enable long term success. At a minimum, we can expect Whole Foods to adopt best practices and leverage world-class data mining capabilities from the Amazonian fiefdom. The prevailing thought is that Amazon will revolutionize how groceries are purchased.

Unfortunately, Costco is a laggard in the technology investment arms race as compared to B2C heavyweights Amazon and Walmart; even as e-commerce has captured a larger share of sales industry wide. Costco’s main competitors are devoted to having formidable omni-channel presences which will drive future revenues. In the second quarter of 2017, Walmart’s e-commerce revenue grew 63%; even Target saw a 22% increase as compared to Costco’s 11% [1].

Amazingly, Costco consciously chooses to underinvest in its e-commerce capabilities, which I believe is a disservice to an otherwise strong business model (and the continuing availability of $4.99 rotisserie chickens). In an industry where market share is being gobbled up by a noted technology disruptor, it’s as if Costco has subscribed to the “IT Doesn’t Matter” philosophy. Costco is not only on the defensive technology wise, it’s in catch-up mode.

On June 15th, 2017 the day before Amazon’s Whole Foods acquisition was announced, Costco stock opened at $180.39. One day later the stock dropped 8.5% to close at $165. As of August 4th, 2017 the stock trades at $156.44 representing a 13.2% drop from June 15th. A more competitive grocery sector combined with Costco’s underwhelming investments in e-commerce technology have not inspired investors as of late.

In this post I’ll touch upon Costco’s advantages with respect to its competitors in the consumer staples and grocery sector, as well as offer some recommendations for its burgeoning digital strategy.

What Costco Does Well (Its Defensive Moat Against Competitors):

The “Treasure Hunt”

Let me be clear, Costco is not going anywhere in the medium run. Its revenues in 2016 totaled $119 billion as compared to $136 billion by Amazon. Costco’s value proposition relies upon attracting customers to its bricks and mortar warehouses, which are infused with “treasure hunt” and impulse purchase appeal. Shoppers explore the vast warehouses and stumble upon unexpected items, bargains and free samples that they didn’t know they wanted in the first place. The company believes that in-store customers will purchase many more items than they would otherwise purchase via an online channel.

“We still are a bricks-and-mortar entity and we want to get you into the store because you’re going to buy more in the warehouse. You’re going to buy more when that happens, and we’ve got a lot of reasons for you to do that. We also recognize we don’t want to lose the sale to somebody else because they only buy online.” [2] – Costco CFO Richard Galanti

Because Costco sells many items in bulk, it is rightfully apprehensive of the freight costs associated with e-commerce. However, it needs to make progress in shoring up delivery capabilities if it wants to keep pace with Amazon and Walmart; potentially through investments in additional fulfillment centers. Walmart offers many bulk items online through Samsclub.com. Walmart is even experimenting with online order pickup at Sam’s Club locations.

“About a year ago, Costco CFO Richard Galanti said the only thing keeping him up at night is ‘everybody in the world never wanting to leave their house and only typing stuff to order and get it at the front door.’” [3]

Low Prices

In-store customers load up their baskets with groceries and other items in bulk with minimal price markups. Low prices are a strong competitive differentiator for Costco in that it has some of the lowest gross margins in its industry.

“Wal-Mart and Whole-Foods price their goods up higher. Wal-Mart posted 25.65% gross and 2.81% net margins in 2016. Whole Foods, known for its pricey merchandise, had 34.41% gross and 3.22% net.” [4]

Consider that Costco’s numbers are razor thin gross margins of 13.32% and net margins of 1.98%. The bottom line is that Costco shoppers obtain industry leading pricing from the company’s warehouses. Costco appeals to a wide variety of shoppers and it even attracts business customers looking to buy in bulk. In contrast, Whole Foods (derisively known as Whole Paycheck) appeals to a higher income demographic in search of artisanal offerings; thus there is minimal overlap with Costco’s broader range of shoppers. However, Amazon Prime members and Costco members overlap as both customer bases are in search of low prices.

Further enabling Costco’s low price scheme is its strategic use of vertical integration for enhancing product quality and increasing profitability. “Such integration includes Costco working with farmers to help them buy land and equipment to grow organics, building its own poultry farm, owning and operating its own beef plant and hot dog factory, and having its own optical grinding factory.” [5]

Memberships

Costco makes most of its money from selling memberships. The company is able to offer such low pricing and still make a profit because of its successful membership model. Costco charges $60 for its standard memberships and $120 for its executive memberships which pay-out a 2% redeemable award on pre-tax purchase amounts.

“Our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase penetration of our Executive members, and sustain high renewal rates, materially influences our profitability.” [6] – Costco 2016 10K Filing

In other words, it’s easy to match or beat competitor pricing when your business model is buoyed by piles of membership cash. Costco’s 88 million memberships worldwide represent a healthy revenue stream for the company, accounting for an astounding 72% of pretax profits [7]. Furthermore, Costco shoppers renew their memberships at a high rate (roughly 91% in the U.S. and Canada and 88% on a worldwide basis). However, Costco would be wise to note that its “membership revenue growth has decelerated to around 5.5% from around 7%” [8].

Kirkland Signature: The Private Label Brand Everyone Loves

Whether you are a Costco member or not, you are most likely familiar with its “Kirkland Signature” in-house brand which was started in 1992. The successful brand sells everything from dress shirts to luggage to vodka (i.e. the consultant staples). Costco has done a first-rate job of making Kirkland Signature a strong value play alternative to national brands.

“‘Costco’s Kirkland Signature is the best store brand there ever was,’ said one writer at foodie bible Bon Appetit in August, the same month Wal-Mart paid $3.3 billion for Jet. ‘You wouldn’t expect a brand that makes cashmere sweaters, batteries, and 900-count packs of baby wipes to also produce some top-notch food products’” [8]

Sales of individual Kirkland items have been reported to exceed $1 billion and the brand itself constitutes roughly 25% of Costco’s revenue. Although Amazon’s Whole Foods carries a “365” private label brand and Walmart carries “Sam’s Choice” and “Member’s Mark” (amongst others), both competitors offer Costco’s Kirkland Signature brand through their e-commerce properties.

According to research from 1010data Market Insights, 69.5% of Kirkland online spend [9] is generated on Amazon! This unofficial cross-platform selling indicates a mashup between strong brand preference and the number one retail e-commerce portal. Since the current selection of Kirkland Signature branded products available on Amazon is offered by third parties, there is an opportunity to capture a portion of that online demand through the official Costo.com channel. Jet.com (recently purchased by Walmart for $3.3 billion) has indicated a phase out of Costco products in order to boost the popularity of the Sam’s Club “Member’s Mark” private label.

Recommendations for Costco:

I’ll open this section with Costco’s own words from its 2016 Annual Statement:

“If we do not successfully develop and maintain a relevant multichannel experience for our members, our results of operations could be adversely impacted. Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and new developments by our competitors.” [6]

Costco’s relative lack of ambition in e-commerce capabilities leaves the company vulnerable to disruption. Its online sales are currently $4 billion or barely 3% of sales; this figure is far less than smaller revenue retail players like Best Buy and Macy’s [10]. Walmart has poured billions of dollars into its digital and e-commerce capabilities in order to keep pace with Amazon. Costco would do well to leverage some items from the Walmart playbook.

- Invest in an e-commerce research division to help bolster the organization’s base expertise in this space. Acquire the necessary pool of data scientists, software engineers and PhDs to inject new life into a digital and technology focused strategy.

- - This approach will allow the company to increase its capabilities in e-commerce basics such as search functionality, order tracking and predictive analytics. Costco is already located in the technology rich talent pool known as greater Seattle.

- Offer more items online at Costco.com. Focus on re-capturing some of the demand for Kirkland branded Costco products from Amazon. It bears repeating that 69.5% of Kirkland online spend is generated on Amazon!

- Acquire startups to gain access to digitally focused management teams and their respective technology and insights (a la Walmart’s purchase of Jet.com and Marc Lore). Internal disruptors help cross-pollinate successful ideas that are not considered by the core legacy business.

- - In this sense Costco should acquire Chieh Huang’s e-commerce warehouse startup “Boxed”. Boxed was started in 2013 out of the founder’s garage and is currently known as the “warehouse in your pocket” by millennials. Boxed enables bulk goods to be ordered directly from a mobile app without the need for membership fees.
  - Currently Boxed offers free deliveries on orders of $49 or more. Although Boxed delivers non food items in bulk, it currently purchases its food items from Costco and marks up the price for delivery! [11] Costco has an opportunity to acquire a startup rival in order to gain access to its e-commerce talent.

- Install drive through stations where customers can pick up online orders at either Costco warehouses or dedicated “click and collect” facilities. Walmart’s Sam’s Club currently offers this service at about 65 of its 660 US stores [12]. The company should be aware that members will not want to pay the markup associated with delivery specialists Instacart and Google Express; especially Costco members who have shelled out for a yearly membership.

- Increase investments in fulfillment centers that will help temper the expenses associated with shipping bulk products ordered online.

- Get better at the basics with respect to information technology infrastructure. Granted, core IT infrastructure is not necessarily a strategic resource but it is the cost of doing business. Consider this quote from Costco CEO Richard Galanti:

- - “You know, about three-and-a-half years ago, when we embarked on this dark journey, [we recognised that] we probably had the lowest-cost IT out there. I always joke we were in the greatest MASH unit. It was always up and running, but band-aided to death.” [2]

Costco needs to realize that its “treasure hunt” appeal to customers needs to be paired with a more robust omni-channel approach. This means Costco must ramp up its capital expenditures in e-commerce and mobile just to keep from losing pace with industry competitors who have a substantial head start. Costco will be fine in the medium run for all the reasons I’ve highlighted earlier. But how long until continued e-commerce disruption crosses the organization’s defensive moat and treats Costco like one of its mouthwatering rotisserie chickens?

For more retail related technology coverage check out:

References:

[1] Sozzi, B. Jul 19, 2017. Here Is What Costco Should Do to Keep Amazon From Being the Largest Company on Earth. https://www.thestreet.com/story/14233036/1/here-are-the-big-things-costco-could-do-to-keep-amazon-from-being-the-largest-company-on-earth.html

[2] Lauchlan, S. March 8 2017. Costco – an e-commerce tortoise takes on the omni-channel hares. http://diginomica.com/2017/03/08/costco-e-commerce-tortoise-takes-omni-channel-hares/

[3] Levy, A. March 12, 2017. Not Even Costco Is Safe From Amazon. https://www.fool.com/investing/2017/03/12/not-even-costco-is-safe-from-amazon.aspx

[4] GuruFocus. June 22, 2017. After Amazon’s Whole Foods Acquisition, Investors Are Looking At Costco. https://www.forbes.com/sites/gurufocus/2017/06/22/after-amazons-whole-foods-acquisition-investors-are-looking-at-costco/#18b01a50271d

[5] Tu, J. June 19, 2017. Amazon’s move into groceries could squeeze Costco. http://www.seattletimes.com/business/retail/amazons-move-into-groceries-could-squeeze-costco/

[6] Costco Wholesale Corp. 10K/A Annual Report for the Fiscal Year Ending Sunday August 28, 2016. https://www.last10k.com/sec-filings/cost/0000909832-16-000034.htm#

[7] Fonda, D. July 2017. Costco Is Surviving in the Age of Amazon. Warehouse giant Costco continues to prosper despite the growth of internet retailing. http://www.kiplinger.com/article/investing/T052-C008-S002-costco-is-surviving-in-the-age-of-amazon.html

[8] Boyle, M. June 12, 2017. Jet.com Will Phase Out Costco Products After Wal-Mart Acquisition. https://www.bloomberg.com/news/articles/2017-06-12/wal-mart-s-jet-com-carries-costco-products-but-not-for-long

[9] Wilson, T. September 13, 2016. Kirkland’s Online Enterprise. https://1010data.com/company/blog/kirkland-s-online-enterprise/

[10] Wahba, P. December 8,2016. Costco’s Battle Plan for the E-Commerce Wars. http://fortune.com/2016/12/08/costco-ecommerce/

[11] Fickenscher, L. August 4, 2017. Boxed buys from rival Costco before hiking prices for delivery. http://nypost.com/2017/08/04/boxed-buys-from-rival-costco-before-hiking-prices-for-delivery/

[12] Young, J. April 5, 2017. Why Costco Loves Store Sales: You Try Shipping a Tub of Mayo http://www.foxbusiness.com/features/2017/04/05/why-costco-loves-store-sales-try-shipping-tub-mayo.html

Header Imagine: Copyright: niloo138 / 123RF Stock Photo

July 1, 2017February 18, 2018 by anthonysmoak

The Definitive Walmart E-Commerce and Digital Strategy Post

Introduction:

Walmart has long been a dominant player in the traditional “bricks & mortar” retail space. The retailing giant has about 4,600 stores in the United States and about 6,000 stores worldwide that helped it generate fiscal year 2017 revenues of $485.9 billion. However, this retailing “Death Star” has a weakness as technological changes and innovations in its industry represent both an opportunity and a threat. The biggest threat to Walmart is the consumer preference shift from traditional in-store purchases to on-line digital channels. E-commerce is a small piece of the retail pie currently (roughly 10.4% of all retail sales in 2015), but it is growing at a pace that is much faster than growth at bricks and mortar locations. If Walmart does not evolve to defend its dominant market position, the company will erode (see Montgomery Ward, Woolworths, K-Mart, Sears) allowing other industry competitors to capitalize.

Previous disruptions in the retail space have not been kind to dominant players. Sears was able to overtake dominant retailing incumbent Montgomery Ward in the 1950’s by aggressively investing into suburbs (which was a new phenomenon for the time), while Montgomery Ward skittishly hoarded cash in anticipation of another great depression [1].

Walmart is not willing to be a Montgomery Ward in this scenario as the company became aware of the risks of e-commerce underinvestment and complacency. However, e-commerce giant Amazon is more than willing to be Sears in this example by over-investing in the more recent retail business model (e-commerce). Furthermore, Amazon recently encroached into Walmart’s home turf (i.e. physical locations) by purchasing Whole Foods for $13.7 billion. This high profile acquisition signaled to Walmart and the rest of the retail industry that Amazon is willing to take unanticipated bets to develop a competitive advantage across multiple channels.

Walmart certainly has a challenging road ahead if it wishes to catch Amazon in overall e-commerce sales but it is finally competing effectively. Although the company does not break out specific e-commerce dollars, it stated that its e-commerce sales had increased 64% domestically in the first quarter of 2017. Consider that Amazon generated $136 billion in annual sales during 2016, which accounted for half of all online shopping in the United States [2].

“With approximately 160 million items for sale, Amazon has become the go-to outlet for anything. In comparison, Walmart.com sells “only” 15 million items — and just 2 million of them are available for the free two-day shipping. It’s no wonder 52% of online shoppers start their search on Amazon, according IHL Group.” [3]

Walmart will not be able to overtake Amazon’s position as the dominant e-commerce player in the near future, but the company is positioning itself to remain competitive.

Walmart’s Main Strategic Risks in E-Commerce

Walmart’s annual 2017 10-K filing (a comprehensive summary of financial performance) details the strategic risks that the company faces. As mentioned previously, Walmart is aware of the risks of e-commerce underinvestment and complacency. Consumer preferences are shifting to shopping online and mobile platforms.

Failure to grow our e-commerce business through the integration of physical and digital retail or otherwise, and the cost of our increasing e-commerce investments, may materially adversely affect our market position, net sales and financial performance [4].

Many companies fail to adequately capitalize on the shift in consumer preferences (e.g. Smith Corona, Blockbuster, Kodak), while other firms are able to successfully capitalize (e.g. Intel, Apple). Unsuccessful companies either refuse to risk capital, lack the vision, or lack the execution competency to produce the new products and/or technologies necessary to maintain success. With that being said, Walmart plans to increase its investments in e-commerce and technology, while moderating the number of new store openings.

Figure 1. [4]

Walmart’s capital expenditures back up its strategy. Observe that a $1.023 billion reduction in new stores and clubs dove-tails with a $199 million dollar increase in already impressive expenditures related to information systems, distribution and digital retail ($4.162 billion line item).

Walmart recently divested itself of its Walmart Express brand which contributed to the reduction in new store capital expenditures. These convenience store sized locations were originally conceived in 2011 to compete in the price conscious dollar store segment. Dollar General (a digitally un-savvy competitor) purchased 41 Walmart Express stores and plans to rebrand them under the Dollar General moniker. In an age of stalled wage growth, Walmart is experiencing pricing pressure from both Dollar General and Family Dollar for the most price conscious consumers.

The bottom line is that Walmart has to walk a fine line in the implementation of its e-commerce strategy. On the one-hand, the company may not be successful in implementing and integrating its physical and digital retail channels. As of late the company has been criticized for “overpaying” for growth in regards to its acquisitions. If its e-commerce acquisitions underperform or sustain large losses, this can harm Walmart’s market position and financial performance.

On the other hand, if the company is “too successful” with their e-commerce strategy, the company runs the risk of lowering physical store traffic which could also adversely impact in-store economics. The company seems to be facing a “dammed if you don’t, damned if you do” conundrum.

“The challenge for Walmart, and for all other retailers in the e-commerce era, is to protect both sales and profits. But these goals nay be mutually exclusive. Retailers face pressure to offer both free shipping and competitive prices, which generally makes selling a product online less profitable than doing so in existing stores. To expand sales online, retailers must spend on technology, which squeezes margins further. Making matters even worse, retailers are often not gaining new customers but simply selling the same item to the same person online for less profit. ‘You pour from one bucket into a less profitable bucket,’ explains Simeon Gutman of Morgan Stanley.” [5]

Backend E-Commerce Acquisitions

Walmart’s initial e-commerce forays focused on acquiring companies that helped bolster its prowess in backend technologies. This approach was a departure from the company’s traditional “build rather than buy” philosophy which helped it obtain and retain technological competitive advantages in its supply chain processes. Its research division @WalmartLabs, augmented its e-commerce war chest by making multiple purchases in the first half of the decade. “Between 2011 and 2014, Walmart acquired 15 small companies tied in some way to e-commerce. The other thing most of them had in common was that they were selling for a bargain after failing to attract a new round of venture funding.” [6]

For example, in 2013 @WalmartLabs purchased a company named Inkiru for its predictive analytics technology to target customers in marketing campaigns. The company purchased Kosmix in 2011 to revamp its Walmart.com search capabilities; a project known as Polaris. Site optimization start-up Torbit was purchased in 2013 to optimize page loading of its e-commerce sites. The acquired technology compresses files to an optimum size based upon display by phones, tablets or desktops. The company also purchased Adchemy for its strong pool of data scientists and PhDs who have specialized knowledge in the areas of ad technology and search engine optimization (SEO).

As an aside, “CEO Murthy Nukala and four top executives all got payouts of between $1.5 million and $2 million in the deal” while employees who held common stock saw their holdings become worthless [7].

The point of these acquisitions along with others of similar characteristics, was an attempt to grow e-commerce sales organically.

The Acquisition of Marc Lore and Jet.com

Walmart learned that it is both difficult and time consuming for a firm to obtain organic growth intrinsically. When asked of his biggest regret at the helm of the company, former CEO Mike Duke who held the position from 2009 to 2013 said that the company should have moved faster to expand in e-commerce. One could draw the conclusion that Walmart either believed that growth in e-commerce would shift too much volume from bread and butter physical stores or that Amazon’s rise to e-tail prominence was not a significant threat to its dominant market position.

“When I look back, I wish we had moved faster. We’ve proven ourselves to be successful in many areas, and I simply wonder why we didn’t move more quickly. This is especially true for e-commerce. Right now we’re making tremendous progress, and the business is moving, but we should have moved faster to expand this area.” – Former Walmart CEO Mike Duke [8]

As Walmart’s sales growth continued its trend downward, new CEO Doug McMillon was tapped in 2014 to implement a new e-commerce, digital and technology focused strategy. In fact, for the first time since Walmart became a publicly traded company in 1970, annual sales shrank for the first time in 2015. McMillon was asked why did it take so long for Walmart to get into e-commerce and if the profitability of their original model affected its urgency to change. McMillon responded.

“We wish we had been more aggressive early on, no doubt. In some ways we experienced what Clay Christensen calls the ‘innovator’s dilemma.’ We hired talent, invested, and just kind of meandered along rather than hammering down, being aggressive, and making it a must-win aspect of our business. That’s partly because we had a bird in hand. We knew that if we continued to open Walmart Supercenters, they would do well.” – Walmart CEO Doug McMillon [9]

McMillion, true to his mandate, made a splash by acquiring online retailer Jet.com for 3.3 billion in cash and stock. The deal is reported to be the largest ever purchase of a U.S. e-commerce startup [10]. There were multiple reasons stated by the company for making a splashy purchase of this nature. However, the crown jewel of the acquisition was the procurement of e-commerce wunderkind Marc Lore who was immediately tapped to head both Jet.com and Walmart.com.

Marc Lore established his digital retailing bona fides by founding Quidisi. The start up was known for its diapers.com and soap.com sites amongst others. Quidisi was sold to Amazon in 2010 for $550 million. The purchase of Quidisi at the time was an attempt by Amazon to stifle competition.

“Amazon was slashing the price on diapers on its own site, putting pressure on Quidsi’s margins and making outside investors hesitant to put in more money. Furthermore, Amazon promised to keep dropping prices if Quidsi sold to Wal-Mart.” [15]

Lore stayed at Amazon for two years and then left to ponder his next move. Subsequently, in 2014 Lore founded Jet.com based upon the premise of charging members a yearly fee, encouraging consumers to buy in bulk and incentivizing consumers to purchase items from the same distribution center to lower product prices. On the strength of his name and new business model, Lore was able to raise $500 million in investment capital on this venture. Lore earned $243.9 million in 2016 making him the highest compensated CEO in the United States after the sale. Expect Lore to be at Walmart for at least five years, as he will lose substantial compensation if he exits beforehand.

Walmart previously missed out on buying Quidisi in 2010 as both Walgreens and Amazon were in a bidding war for Lore’s e-commerce property. Walmart decided with the Jet.com acquisition that they were not going to lose an opportunity to buy Marc Lore’s services again.

How Will Walmart Benefit from Jet.com?

In just one year of operation, Jet.com scaled up to 12 million different products and reached a run-rate of $1 billion in gross merchandise value [11]. With this acquisition, Walmart is buying additional diversity of online product offerings. The brands that Jet.com offers are those that appeal to consumers that reside outside of Walmart’s more suburban, rural, older cost conscious demographic. Jet.com’s brand positioning is targeted to younger, “urban”, millennials who constitute a faster growing demographic than the demographic that Walmart has traditionally attracted. Walmart plans to keep the Jet.com brand identity separate from Walmart.com. Jet.com has relationships with more upscale brands that may not want to sell their products on Walmart.com. Additionally, this brand separation helps maintain Jet’s appeal to higher income consumers.

According to CNBC, Jet.com shoppers are more likely to have $150,000 and up incomes. Additionally, only 20% of Jet.com buyers also purchased from Walmart.com in the past six months (as of August 8th, 2016) [12]. There was little overlap between the customer bases of both companies making the acquisition by Walmart highly attractive. Furthermore Jet.com’s innovative supply chain business model and focus on low prices dovetailed with Walmart’s penchant for supply chain innovation and focus on low prices. Here is how Marc Lore described the company’s novel “smart cart” business process:

“Here’s how it works: If you have two items in your cart which are both located in the same distribution center and can both fit into a single box, then you will pay one low price. If you add a third item that is located at a different distribution center and cannot be shipped in a single shot with the other two items, you will pay more. As you shop on the site, additional items that can be bundled most efficiently with your existing order are flagged as ‘smart items’ and an icon shows how much more you’ll save on your total order by buying them.”

It should be noted that Jet was experiencing a high cash burn rate prior to being acquired by Walmart. Jet.com dropped its annual $50 membership fee which caused it to lose money on every shipment. The advantage of Jet.com being acquired by a deep pocketed industry player like Walmart was to help alleviate the stress of private fund-raising for an unprofitable company [13].

Walmart has to allow Jet.com to maintain its startup, entrepreneurial culture or risk losing talent. For instance, Walmart’s conservative, southern influenced culture clashed with the office drinking, happy hour culture of Hoboken New Jersey based Jet.com. Walmart eventually reversed course and did not impose this “in-office prohibition” rule on subsequent startup acquisitions. However, the more conservative Walmart did ask Jet employees to be mindful of swearing in the office [14].

Jet.com has the potential to infuse Walmart with much needed digital innovation. This fresh perspective has the potential to add tremendous value to the organization as a whole. The “old guard” rooted in Walmart’s core business model needs to allow acquisitions to thrive instead of imposing the more conservative legacy culture. According to CEO McMillon, the core business itself must learn to become more digital.

“The people who run the older parts of our business must also become digital. We can’t have some people live in yesterday while others live in tomorrow. And given the effects of inertia, we need people to lean into the future even more than other companies might. We’re trying to move large numbers of people to change their established habits.” [9]

E-Commerce Executive Shakeup

There was an immediate shakeup in the executive ranks once the Jet.com acquisition materialized. Neil Ashe, Walmart’s global e-commerce head previously ran CBS Interactive and had been named head of technology shortly before the acquisition, was transitioned out to make room for Marc Lore. Lore will assume the title of president and CEO of e-commerce at Walmart. Lore will head not only Jet.com but also all of Walmart’s e-commerce functions. Also leaving is Michael Bender, Walmart’s global e-commerce COO.

Fernando Madiera who previously headed Walmart.com and was previously CEO of Walmart’s Latin American e-commerce business was transitioned. Mr. Madiera had just taken the Walmart.com post in 2014. Other high level executives that transitioned were Dianne Mills, senior vice president of global e-commerce human resources; and Brent Beabout, senior vice president of e-commerce supply chain. Not even Wal-Mart’s chief information officer Karenann Terrell was spared, as she left the company late February of 2017.

Key executives from Jet.com that will join Marc Lore’s new team include Scott Hilton who was previously chief revenue officer at Jet.com. Jet.com co-founder Nate Faust will become the senior vice president for U.S. eCommerce and supply chain for Walmart’s domestic operations.

The point of this game of executive musical chairs is to provide Marc Lore with the executive team he deems necessary to launch an effective attack on Amazon’s e-commerce dominance. Walmart has 3.3 billion reasons to make sure Lore feels he has the necessary team in place to win.

Walmart & Jet.com E-Commerce Timeline

February 2016: Jet.com purchases online furniture retailer Hayneedle.com for $90 million. The move is seen as way for Jet.com to acquire revenue growth. Of note, the Hayneedle CEO (John Barker) received a parachute package worth $3.4 million while other employees saw their investment stakes effectively wiped out.

August 2016: Walmart purchases Jet.com for $3.3 billion. The deal is reported to be the largest ever purchase of a U.S. e-commerce startup.

January 2017: Jet.com purchases Boston based ShoeBuy for $70 million. The purchase increases Jet’s online catalogue of items substantially and will allow the same items to be sold across Walmart.com, Jet.com and Shoes.com.

February 2017: Walmart purchases hip Michigan based outdoor retailer Moosejaw for $51 million. Moosejaw sells brands like Patagonia and North Face online and in its 10 brick and mortar stores. Moosejaw has expertise in online sales and social marketing that Walmart wishes to tap. Moosejaw and Its 350 employees will continue to exist as a standalone subsidiary.

March 2017: Jet.com purchases women’s online clothing retailer Modcloth for $75 million. The site caters to size diversity and body positivity. The acquisition represents an attempt to appeal to a younger, hipper demographic than Walmart currently courts.

March 2017: Walmart launches a Silicon Valley based tech incubator called Store No. 8. The initiative is named after a store where Sam Walton was known to experiment. Walmart plans to invest in businesses like a venture capitalist firm would and then grow this group of startups as a portfolio. “The incubator will partner with startups, venture capitalists and academics to promote innovation in robotics, virtual and augmented reality, machine learning and artificial intelligence, according to Wal-Mart. The goal is to have a fast-moving, separate entity to identify emerging technologies that can be developed and used across Wal-Mart.” [18]

June 2017: Walmart purchases NYC based men’s clothing retailer Bonobos for $310 million. The brand started modestly by selling chino pants and expanded its line of offerings for sale in its own stores and in Nordstroms. “Its co-founder and chief executive, Andy Dunn, will oversee Walmart’s digital brands, which also include the independent women’s brand ModCloth.” [16] Passionate Bonobos fans have mocked the acquisition on social media snarkily asking if the popular chinos will be refitted for the average Walmart customer. Bonobos has a vertically integrated supply chain as it designs and manufactures all products in-house, which allows it to cut out middlemen costs [17]. Walmart is eager to tap founder Andy Dunn for his expertise in this area.

Peddling upscale merchandise will allow Walmart to expand its reach from low and middle income consumers to a more affluent base. As middle income consumers slowly shrink, Walmart is diversifying its customer base.

“Between 2000 and 2014, middle-class populations decreased in 203 of the 229 metropolitan areas reviewed in a Pew Research Center study. In an economically divided America, Walmart has tried to sell not only to shoppers looking for extreme discounts, but also to shoppers with higher incomes seeking higher-quality items. Walmart has been working to increase its sales to more affluent customers for years, especially in e-commerce.” [19]

Conclusion

Walmart’s e-commerce strategy appears to be reaping dividends as of the writing of this post. As mentioned earlier, Walmart stated that its e-commerce sales had increased 64% domestically in the first quarter of 2017.

For years, Walmart has dominated the retail space with its low cost/low price strategy (see my Micheal Porter post). In today’s e-commerce environment, the key is to compete on low prices and convenience, as well as appeal to diversified income groups. Only time will reveal if Walmart has the innovative capacity and leadership to overtake Amazon. The company is making bold bets in the e-commerce space and is aware of the shift in consumer preferences.

Walmart’s core business must be willing to be disrupted by its internal innovators. The current retail landscape is one of declining profits and closing stores. The organization as a whole must not be ideologically wedded to its massive assortment of physical stores while ignoring threats from outside competitors (namely Amazon).

Additionally, Walmart cannot ignore fresh retail ideas emanating from internal disrupters like Marc Lore, Andy Dunn or successful Store No. 8 startups if they materialize. The company must cross-pollinate successful ideas and quickly post-mortem and move on from unsuccessful ones. If Walmart continues to buy online growth at the expense of organic growth, then it must ensure that it does not continually overpay for growth and assets. If its e-commerce acquisitions underperform or sustain large losses, this can harm Walmart’s market position and financial performance.

For more Walmart coverage please check out Part 1, Part 2 and Part 3 of my series on Walmart’s overall technology strategy, where I address areas such as:

Strategy for Technology Infrastructure
Strategy for IT Capability & Staffing
Strategy for Information Risk & Security
Strategy for Stakeholder Requirements, Testing & Training/Support
Project ROI and Key Success Measures
Strategy for Data Acquisition and Impact on Business Processes
Strategy for Social Media/Web Presence
Strategy for Organizational Change Management, Project Strategy and Complexity

If you’re interested in Business Intelligence & Tableau check out my videos here: Anthony B. Smoak

References:

[1] Kaufman L. & Deutsch, C. Dec 29, 2000. Montgomery Ward to Close Its Doors. New York Times. http://www.nytimes.com/2000/12/29/business/montgomery-ward-to-close-its-doors.html

[2] Abrams, R., May 18 2017. Walmart, With Amazon in Its Cross Hairs, Posts E-Commerce Gains. New York Times. https://www.nytimes.com/2017/05/18/business/walmart-online-sales-jump-63-percent.html?mcubz=0

[3] Yohn, D., March 21, 2017. Walmart Won’t Stay on Top If Its Strategy Is “Copy Amazon”. Harvard Business Review. https://hbr.org/2017/03/walmart-wont-stay-on-top-if-its-strategy-is-copy-amazon

[4] Walmart STORES, INC., ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2017. http://d18rn0p25nwr6d.cloudfront.net/CIK-0000104169/c3013d40-212d-409e-bf30-5e5fd482fc2f.pdf

[5] The Economist. June 2, 2016. Walmart: Thinking outside the box. As American shoppers move online, Walmart fights to defend its dominance. http://www.economist.com/news/business/21699961-american-shoppers-move-online-walmart-fights-defend-its-dominance-thinking-outside

[6] Levy, A. April 24, 2017. Is Wal-Mart’s New E-Commerce Acquisition Strategy Any Better Than Its Old One? https://www.fool.com/investing/2017/04/24/is-wal-marts-new-e-commerce-acquisition-strategy-a.aspx

[7] Edwards, J. May 27, 2014. Some Employees Are Furious At Management Payouts In Walmart’s Big Adtech Acquisition. http://www.businessinsider.com/adchemy-stock-payouts-in-walmartlabs-acquisition-2014-5

[8] Lutz. A. Dec 12, 2012. Walmart CEO Mike Duke Shares His Biggest Regret. Business Insider. http://www.businessinsider.com/walmart-ceo-shares-his-biggest-regret-2012-12

[9] Ignatius, A. March 2017. “We Need People to Lean into the Future”. Harvard Business Review. https://hbr.org/2017/03/we-need-people-to-lean-into-the-future

[10] Nassauer, S. Nov 1, 2016. Wal-Mart E-commerce Executives Depart in Wake of Jet.com Purchase. Wall Street Journal. https://www.wsj.com/articles/wal-mart-e-commerce-executives-depart-in-wake-of-jet-com-purchase-1478038997

[11] Gustafson, K. August 8, 2016. Wal-Mart: This is why Jet.com is worth $3.3 billion. CNBC. http://www.cnbc.com/2016/08/08/wal-mart-this-is-why-jetcom-is-worth-33-billion.html?view=story

[12] CNBC Interview with Marc Lore. Aug, 9. 2016. https://www.nytimes.com/2016/08/09/business/dealbook/walmart-jet-com.html?mcubz=0

[13] Abramsaug, R. & Picker, L. August 8, 2016. Walmart Rewrites Its E-Commerce Strategy With $3.3 Billion Deal for Jet.com. New York Times. https://www.nytimes.com/2016/08/09/business/dealbook/walmart-jet-com.html?mcubz=0

[14] Baskin, B. & Nassauer, S. June 25, 2017. It’s 5 O’Clock Somewhere—Unless You’ve Been Acquired by Wal-Mart. The retailing giant bought Jet.com for $3.3 billion, then had to cope with its weekly happy hour. Wall Street Journal. https://www.wsj.com/articles/its-5-oclock-somewhereunless-youve-been-acquired-by-wal-mart-1498410840lipi=urn%3Ali%3Apage%3Ad_flagship3_feed%3Bu3d9V%2FcPTBqo%2BB0cP7nSZQ%3D%3D

[15] Levy, A. August 9, 2016. Why Wal-Mart couldn’t let Jet.com’s founder get away…again. CNBC. http://www.cnbc.com/2016/08/09/why-wal-mart-couldnt-let-jetcoms-founder-get-away-again.html

[16] de la Merced, M. June 16, 2017. Walmart to Buy Bonobos, Men’s Wear Company, for $310 Million. https://www.nytimes.com/2017/06/16/business/walmart-bonobos-merger.html?smid=li-share

[17] Sergan, E. June 19, 2017. Bonobos Founder Andy Dunn Knows You Might Be Mad At Him For Joining Walmart. Fast Company. https://www.fastcompany.com/40432313/bonobos-founder-andy-dunn-knows-you-might-be-mad-at-him-for-joining-walmart

[18] Soper, S. March 20, 2017. Wal-Mart Unveils ‘Store No. 8’ Tech Incubator in Silicon Valley Bloomberg. https://www.bloomberg.com/news/articles/2017-03-20/wal-mart-unveils-store-no-8-tech-incubator-in-silicon-valley

[19] Taylor, K. March 24, 2017. Walmart’s latest move confirms the death of the American middle class as we know it. Business Insider. http://www.businessinsider.com/walmart-invests-as-american-middle-class-shrinks-2017-3

Photo Copyright: moovstock / 123RF Stock Photo

April 26, 2017August 2, 2017 by anthonysmoak

More Than You Want to Know About State Street Bank’s Technology Strategy Part 3

This article is a continuation of my earlier analyses (Part 1, Part 2 here) where I waded into State Street’s strategy for Technology Infrastructure, IT Capability and Staffing, Information Risk & Security, Stakeholder Requirements, and Project ROI. In this final part of my three part series I will broach the company’s strategy for Data Acquisition, Social Media, Organizational Change Management and Project Strategy. State Street’s cloud implementation and virtualization initiative is a worthy example of business strategy/need influencing the firm’s information technology strategy.

State Street: Strategy for Data Acquisition and Impact on Business Processes:

The nature of State Street’s business as a custodian bank with trillions of dollars under custody management and multiple clients distributed worldwide means that the organization houses and processes a tremendous amount of data (internally generated and externally collected). The sheer volume and complexity of this data presents challenges as the bank looks to file regulatory reports and provide data back to its clients. The company receives an untenable 50,000 faxes a month from its client base (Garber, 2016). According to consulting firm Accenture, “(State Street) was unable to adequately track trades through each step in the trading lifecycle because there were multiple reconciliation systems, some reconciliation work was still being done manually and there was no system of record. To maintain industry leadership and comply with regulations, the company’s IT platform had to advance” (Alter, Daugherty, Harris, & Modruson, 2016).

The bank’s cloud initiative helped facilitate and speed up the burdensome process of transferring data back and forth between its clients. In addition, (as of 2016) a new digital initiative (code named State Street Beacon) will potentially help drive more cost savings. The cloud architecture project was a boon to data analysis capabilities as it enabled clients to access their data in the State Street cloud and subsequently enrich the data from multiple sources to support forecasting (Camhi, 2014). In this case, the bank’s infrastructure as a service (IaaS) enabled platform as a service (PaaS) capabilities.

The bank has embarked upon the development of 70 mobile apps and services that support its PaaS strategy. In one case, the bank developed a tablet and mobile accessible app for its client base named State Street Springboard. This application put investment portfolio data in the hands of its client base. Additionally, “Since State Street’s core competency is transaction processing, its Gold Copy app is one of the most important new tools it offers: The app lets a manager follow a single ‘gold’ version of a transaction as it moves through all of the company’s many departments and office locations — say, as it makes it way through trading, accounting, and reporting offices globally” (Hogan, 2012). This capability of the Gold Copy app enables more effective management of counterparty risk as an asset moves through the trading process.

State Street’s new infrastructure and massive data collection provides the bank with new big data capabilities that can better inform business units in the area of risk management. Data insights can potentially fortify stress testing, “What-If” and “Black Swan” scenario modeling. As we’ve seen in the recent 2016 case of Britain’s pending withdrawal from the European Union (i.e. “Brexit”), uncertainty in global financial markets is a certainty.

State Street: Strategy for Social Media/Web Presence:

State Street has traditional Facebook, LinkedIn and Twitter social presences but it has also used other social platforms to support various aims such as employee interaction and brand awareness. The bank was named a “Social Business Leader for 2013” by Information Week. As part of a “social IT” strategy (in which technology supports a collaboration initiative), the company held an “Innovation Rally” on its eight internal online forums to gather employee ideas on how best to improve its business. From 12,000 total submitted postings, employees could attempt to build a business case around the best ideas for executive management to implement (Carr, 2013). The company also launched an internal “State Street Collaborate” platform with the aim of crowdsourcing employee knowledge to help people find an appropriate in-house expert regarding diverse work related topics of interest.

Additional social initiatives include a partnership with TED to provide employees the opportunity to give a “Ted Talk” in front of their peers; the aim is to promote knowledge sharing within the organization. The bank also experiments with a presence on the (almost defunct) video sharing platform “Vine” where it can showcase the organization in quick six second sound bites. This approach caters to clients and the future millennial talent base.

State Street: Strategy for Organizational Change Management, Project Strategy and Complexity:

As stated earlier in this series, State Street started migrating its new cloud applications to production by selecting those with low volume and low complexity and then gradually ramped up to migrating the more complex applications (McKendrick, 2013). The standardization and virtualization aspects of cloud infrastructure that the bank implemented is conducive to agile development. Standardization and a reusable code approach reduces complexity by limiting development choices, simplifying maintenance and enabling new technology staff to get up to speed on fewer systems. Developers are placed in agile teams with business subject matter experts to provide guidance and to increase stakeholder buy-in. Per Perretta, “We circle the agile approach with additional governance to ensure that the investments are paying off in the appropriate timeframe” (High, 2016).

Another key approach that State Street uses to gauge project complexity is that of predictive analytics. The bank can help its internal business teams better understand the project costs and delivery timetables by analyzing historical data on all of the projects implemented over the years. The predictive analytics model uses inputs such as “…scope, team sizes, capability of the team, the amount of hours each team member spent, and ultimately, how well it delivered on these programs” (Merrett, 2015). As the business teams list their project requirements, the predictive model is created in real time which provides all parties with additional clarity.

Finally, it would be remiss to mention banking and transformation in the same breath without mentioning the requisite layoffs and outsourcing activities. For all the benefits of the bank’s cloud computing initiatives, technology workers who do not fit in with the new paradigm find themselves subjected to domestic and non-domestic outsourcing initiatives. A standardized infrastructure platform leads to fewer distinct systems in the technology ecosystem, an emphasis on code reuse and increased automation. This perfect storm of efficiency gains has lead to roughly 850 IT employees shuffled out of the organization to either IBM, India based Wipro or outright unemployment. Staffing cuts occurred amongst the employees who maintained and monitored mainframes and worked with other non-cloud based infrastructure systems. The bank was interested in shifting fixed costs for variable costs by unloading IT staff who were perceived as not working on innovative cutting edge technologies. The layoffs amount to “21% of State Street’s 4,000 IT employees worldwide” (Tucci, 2011b).

Revisit earlier analyses here:

References:

Alter, A., Daugherty, R., Harris, J., & Modruson, F., (2016). A Fresh Start for Enterprise IT. Accenture. Retrieved from https://www.accenture.com/us-en/insight-outlook-journal-fresh-start-enterprise-it

Camhi, J. (2014). Chris Perretta Builds Non-Stop Change Into State Street’s DNA. Bank Systems & technology. Retrieved from http://www.banktech.com/infrastructure/chris-perretta-builds-non-stop-change-into-state-streets-dna/d/d-id/1317880

Carr, D. (May 30, 2013). State Street: Social Business Leader Of 2013. Retrieved 6/25/16 from http://www.informationweek.com/enterprise/state-street-social-business-leader-of-2013/d/d-id/1110179?

Garber, K. (February 29, 2016). State Street doubles down on digital. SNL Bank and Thrift Daily. Retrieved from Factiva 6/20/16.

High, P. (February 8, 2016). State Street Emphasizes Importance Of Data Analytics And Digital Innovation In New Role. Retrieved from http://www.forbes.com/sites/peterhigh/2016/02/08/state-street-emphasizes-importance-of-data-analytics-and-digital-innovation-in-new-role/#a211b1320481

Hogan, M. (September 3, 2012). State Street’s Trip to the Cloud. Barron’s. Retrieved from Factiva 6/20/16

McKendrick, J. (January 7, 2013). State Street’s Transformation Unfolds, Driven by Cloud Computing. Forbes. Retrieved from http://www.forbes.com/sites/joemckendrick/2013/01/07/state-streets-transformation-unfolds-driven-by-cloud-computing/#408e1acf64cf

Merrett, R. (April 2, 2015). How predictive analytics helped State Street avoid additional IT project costs. CIO. Retrieved from http://www.cio.com.au/article/571826/how-predictive-analytics-helped-state-street-avoid-additional-it-project-costs/

Tucci. L. (July, 20, 2011). State Street tech layoffs: IT transformation’s dark side. Retrieved from http://searchcio.techtarget.com/blog/TotalCIO/State-Street-tech-layoffs-IT-transformations-dark-side

April 8, 2017January 12, 2019 by anthonysmoak

Get Out of the Spreadsheet Abyss

When an organization turns a blind eye to the proliferation of spreadsheet based processes, it subjects itself to substantial risks. Have you ever encountered (or enabled) the following scenario?

Enterprise reporting is lacking thus a “power-user” (i.e. analyst) is conscripted into cobbling together an ad-hoc spreadsheet based process to address the management request;
The power user exports data from various business applications and then manipulates the data output typically with macros and formulas;
This initial spreadsheet is manually integrated with business unit data from various other unofficial spreadsheets, further distancing the data from the source business application;
Multiple tabs are added, charts are generated and data is pivoted (all manually);
Management finds value in the report and elevates it to a repeatable process;
The original request increases in complexity over time as it requires more manipulations, calculations and rogue data sources to meet management needs;
Management doubles down with the need for a new request and the process is repeated;
IT proper is NEVER consulted on any of the requests;

The business unit is now supporting a “spreadmart”. The term is considered derogatory in data circles.

“A spreadmart (spreadsheet data mart) is a business data analysis system running on spreadsheets or other desktop databases that is created and maintained by individuals or groups to perform the tasks normally done by a data mart or data warehouse. Typically a spreadmart is created by individuals at different times using different data sources and rules for defining metrics in an organization, creating a fractured view of the enterprise.” [1]

Although the initial intentions of these requests may be reasonable, the business never bothers to approach IT to propose building out a proper data store. Additionally, the conscripted analysts are unhappy with their additional manual responsibilities. Spreadsheet wrangling and manual integration activities shift precious time away from more value-added pursuits such as data analysis and formulating recommendations.

From management’s perspective, why should they pay IT to build out an officially sanctioned solution that will deliver the same information that an internal team of analysts can provide? After all, the spreadmart is responsive (changes can be made quickly) and it’s inexpensive (as opposed to new investments in IT). Eventually, the manual processes are baked into the job description and new hires are enlisted to expand and maintain this system. The business sinks deeper and deeper into the spreadsheet abyss.

The short term rewards of the spreadmart are generally not worth the longer term risks.

Risks:

“It’s not an enterprise tool. The error rates in spreadsheets are huge. Excel will dutifully average the wrong data right down the line. There’s no protection around that.” [2]

The spreadmart can also be bracketed as a “data shadow” system to borrow a term from The Business Intelligence Guidebook, authored by Rick Sherman. Here are the problems associated with “data shadow” systems as paraphrased from The Business Intelligence Guidebook [3]:

Productivity is severely diminished as analysts spend their time creating and maintaining an assortment of manual data processes;
- I would add that team morale suffers as well;
Business units have daggers drawn as they try to reconcile and validate whose numbers are “more correct”;
- As a result of a new silo, the organization has compounded its data governance issues;
Data errors can (and will) occur as a result of manual querying, integrating and calculating;
Data sources can change without notice and the data shadow process is not on IT’s radar for source change notifications;
Embedded business logic becomes stagnant in various complex macros or code modules because they are hidden or simply not understood by inheritors;
The solution doesn’t scale with increasing data volume or number of users;
Audit trail to ensure control and compliance does not exist;
- “It is often ironic that a finance group can pass an audit because the IT processes it uses are auditable, but the data shadow systems that they use to make decisions are not, and are ignored in an internal audit”;
Process and technical documentation does not exist which impacts the ability to update the solution;

Additionally, these processes are not backed up with any regularity, multiple versions may exist on multiple users’ desktops and anyone can make changes to the embedded business logic. The bottom line is that the business is potentially making decisions based upon erroneous data which can have serious financial and reputational impacts.

“F1F9 estimated that 88 percent of all spreadsheets have errors in them, while 50 percent of spreadsheets used by large companies have material defects. The company said the mistakes are not just costly in terms of time and money – but also lead to damaged reputations, lost jobs and disrupted careers.” [4]

Mitigation:

There is nothing wrong with the business responding to an emerging issue by requesting a one-time ad-hoc solution. The highest risks emerge when the ad-hoc process is systematized and a number of repeatable ad-hoc processes proliferate unchecked; and IT is never involved in any discussions.

IT proper is highly effective when it is allowed to merge, integrate and validate data. Business unit analysts and spreadsheets should be out of the collection and integration game for repeatable management reporting. Analysts should focus on analysis, trending and interpretation. Too often analysts get tossed into productivity traps involving hours of cutting, pasting and linking to someone else’s spreadsheet for data integration in order to meet management demands.

When IT is brought into the discussion, they must not point fingers but rather understand why the shadow system was established in the first place. Likewise, the business unit should not point fingers at IT for being unresponsive or limited by budget constraints. Once the peace treaty has been established, IT should analyze and reverse-engineer the cobbled together integration processes and data sources (which admittedly is a time consuming event) and deliver more controlled and scalable processes.

The new data integration processes should culminate in loading data to a business specific, validated, central data mart. The central mart doesn’t try to impose an unfamiliar tool upon the business but rather automates integration activities and references more “trustworthy” data sources. Spreadsheets can still be used by analysts to access the data but the analysts are not expected to be manual aggregators using a sub-standard ETL tool.

“Go with the flow. Some users will never give up their spreadsheets, regardless of how robust an analytic environment you provide. Let them keep their spreadsheets, but configure them as front ends to the data warehouse. This way, they can use their spreadsheets to access corporate-approved data, metrics and reports. If they insist on creating new reports, provide an incentive for them to upload their reports to the data warehouse instead of distributing them via e-mail.” [5]

Have I ever had to “get out” of a situation where data governance was lacking and burned-out, morale depleted analysts spent all of their time collecting and integrating spreadsheets to maintain an inefficient spreadmart?

I’ll never tell!

References:

[1] https://en.wikipedia.org/wiki/Spreadmart

[2] http://ww2.cfo.com/analytics/2012/01/imagine-theres-no-excel/

[3] Sherman, R. (2015). Business intelligence guidebook: from data integration to analytics.

[4] http://www.cnbc.com/id/100923538

[5] https://www.information-management.com/news/the-rise-and-fall-of-spreadmarts

March 20, 2017April 27, 2017 by anthonysmoak

More Than You Want to Know About State Street Bank’s Technology Strategy Part 2

This article is a continuation of my earlier analysis (Part 1 here) where I waded into State Street’s strategy for Technology Infrastructure and IT Capability and Staffing. In this second part of my three part series I will broach the company’s strategy for information risk and security, stakeholder requirements and project return on investment. State Street’s cloud implementation and virtualization initiative is a good example of business strategy/need influencing the firm’s information technology strategy.

State Street: Strategy for Information Risk & Security:

State Street has acquired a substantial client base and houses sensitive financial data that is subjected to regulatory scrutiny. Given the sensitive nature of its data and operations, the cloud infrastructure that the bank chose to implement was that of a virtualized private cloud. Former Chief Innovation Officer Madge Meyer stated, “We’re totally virtualized, our network is a virtual private IP network. Our servers are 72 percent virtualized and our storage is all virtualized for structured/unstructured data” (Burger, 2011). For State Street, a private cloud offers the benefits of a public cloud with the added benefit of being owned and operated by the bank (i.e. exclusive dedication). While no architecture is 100% secure, the risk of an information breach is mitigated as the controlling organization’s data can be completely isolated from the data of another organization.

Additionally, the cloud implementation and virtualization initiative gave rise to shared services that are centrally managed but enforced across the enterprise. This single security framework can be applied across all of the application touch points precluding the need for multiple security frameworks across disparate systems.

State Street: Strategy for Stakeholder Requirements, Testing & Training/Support:

The architecture group within State Street works together with the business to tie together strategic objectives. The idea to embrace cloud implementation (and the additional data functionality it enabled for the bank’s clients) emanated in the architecture group. Thus, the business and the board of directors were key stakeholders in the initiative. The board of directors has a special dedicated technology committee that receives “a complete rundown of the technology strategy and the work that we (IT group) are doing in terms of digitizing the business” (High, 2016). According to Perretta, “They (architecture group) created a proof of concept with an eye toward: Here are the capabilities that our entire organization is going to need, here are the technologies that we can deploy, and here’s how to make them operational” (Camhi, 2014).

State Street started migrating its new cloud applications to production by selecting those with low volume and low complexity and then gradually ramped up to migrating the more complex applications (McKendrick, 2013). Dual pilots of the cloud architecture were conducted using roughly 100 machines. Once favorable results were achieved, a larger pilot consisting of 500 machines was stood up. Approximately 120 use cases were tested in the pilot in order to let the development team understand the failure points of the system (Tucci, 2011a).

The standardization and virtualization aspects of the cloud infrastructure the bank implemented was conducive to agile development. Virtual machines on the cloud allowed development teams to spin up multiple server instances as opposed to physically installing a new box in the legacy non-virtualized environment. Contention between teams waiting for server use is virtually eliminated. “When adding cloud computing to agile development, builds are faster and less painful, which encourages experimentation” (Kannan, 2012). The relative ease at which development and testing servers can be instantiated promotes “spur of the moment” experimental builds that could yield additional innovative features and capabilities.

State Street: Project ROI and Key Success Measures:

Prior to State Street’s cloud infrastructure upgrade initiatives, potential operating cost savings were projected to be $575 million to $625 million by the end of 2014; which State Street is on track to achieve. “The bank had pretax run-rate expense savings from the initiative of $86 million in 2011, $112 million in 2012, and $220 million in 2013” (Camhi, 2014).

When the IT group makes a budget request for substantial investments, they must lay out the potential benefits to the business. Some of the benefits are timely payback, regulatory compliance, data quality improvement and faster development cycle times (providing features and functionality with re-use and less coding). The ultimate aim is to connect the IT strategy to business results in a way that yields advantage for the organization.

In 2011, State Street published a matrix on the advantages of cloud computing vs. traditional IT. The following figure provides insight into State Street’s IT and business unit considerations with respect to making an investment in a fixed or variable cost infrastructure (Pryor, 2011).

	Traditional IT	Cloud Computing
Cash Flow	Hardware / software purchased upfront	Costs incurred on a pay-as-you-go basis
Risk	Entire risk taken upfront with uncertain return	Financial risk is taken incrementally and matched to return
Income Statement Impact	Maintenance and depreciated capital expense	Maintenance costs only
Balance Sheet Impact	Hardware / software carried as a long-term asset	Cost incurred on a pay-as-you-go basis

From a funding perspective, State Street employs the chargeback funding method for its private cloud initiative. Architectural capabilities empower end-users to automatically provision virtualized servers for usage. There are policies in place that determine how long a virtual server may remain instantiated and how much load balancing is performed across the infrastructure. Server usage is monitored, measured and chargeback is calculated based upon end-user processing time. Subsequently, the usage is billed back to the end-user’s respective business unit. “In short, it puts a management layer of software over the virtualized servers and operates them in a highly automated, low touch, fashion” (Babcock, 2011).

Don’t miss part 3 of the analysis:
More Than You Want to Know About State Street Bank’s Technology Strategy Part 3

References:

Babcock, C. (November 9, 2011). 6 big questions for private cloud projects. Information Week. Retrieved from Factiva.

Burger, K. (October, 1, 2011). Riding The Innovation Wave; Technology innovation has been key to State Street Corp.’s success, according to chief innovation officer Madge Meyer — and she’s been willing to take some risks to prove it. Bank Systems + Technology. Retrieved from Factiva

Kannan, N. (August 20, 2012). 6 Ways the Cloud Enhances Agile Software Development. CIO. Retrieved from http://www.cio.com/article/2393022/enterprise-architecture/6-ways-the-cloud-enhances-agile-software-development.html

Tucci. L. (July, 2011a). In search of speed, State Street’s CIO builds a private cloud. Retrieved from http://searchcio.techtarget.com/podcast/In-search-of-speed-State-Streets-CIO-builds-a-private-cloud

December 23, 2016May 22, 2017 by anthonysmoak

More Than You Want to Know About State Street Bank’s Technology Strategy Part 1

Introduction:

In November of 2010, Investment Management firm State Street Bank publicly announced an overall transformation of its technology infrastructure. State Street is a massively sized transaction services provider to both mutual and pension fund managers. The custodian bank holds $23 trillion in investor accounts in 29 countries around the world. In an organization with a massive store of data (most of it subjected to regulatory oversight), enterprise wide data conformity and accessibility is a challenge.

In a case of business strategy/need influencing information technology strategy, State Street’s COO in 2009 (Jay Hooley) wanted to help an institutional client calculate its exposure to a particular market. The information request was highly urgent given the financial consequences of late reactions during the great recession. “Getting the numbers turned into a painful exercise as State Street’s middle- and front-office staffers reconciled disparate data sets housed in different client systems and in nine of State Street’s 29 global locations” (Fest 2013). This failure to deliver for the client in an instantaneous manner spurred Hooley to call upon his information technology leadership to present a strategy to address this business need. The result of the IT leadership planning effort was the idea to move the bank’s diverse legacy infrastructure to a more standardized and nimble cloud computing architecture.

State Street: Strategy for Technology Infrastructure:

Former State Street CIO Chris Perretta, who as of 2016 holds a similar position at MUFG America’s Holdings Corporation, spent a considerable amount of time evangelizing the benefits of cloud computing to both the business and the bank’s board members. In its early stages, the technology vision resulting from the COO’s planning request was to position an updated infrastructure as a competitive advantage for the business in terms of cost savings, automation, and future development efficiency. Furthermore, the updated infrastructure could be an enabler of new product revenue streams. It should be noted that a shift to the cloud for a financial organization the size of State Street was unusual. “Too Big to Fail” sized banks are not typically known for their innovative technology development. Derisively, the bank has been known as “Staid Street” for its conservative manner. Within financial services, innovation is usually the domain of smaller, nimbler “fintech” startups looking for scalability and speed to market.

From an infrastructure perspective, State Street embarked upon migrating from disparate legacy data centers running proprietary Unix servers to a standardized cloud architecture based upon commoditized x86 servers running Linux. The initial cloud service was built from a Massachusetts based disaster recovery center and the bank currently has six major data centers in the U.S., Europe and Asia along with three backup facilities (Brodkin, 2011). In addition to the rollout of virtualization capabilities and distributed database functionality, Perretta states, “New tools for provisioning, change control, load balancing, a common security framework and various types of instrumentation to enable multi-tenant infrastructures are all part of the mix” (Brodkin, 2011).

Traditionally State Street has relied upon the “build rather than buy” approach as it builds customized software (development traditionally accounting for ~20%-25% of annual IT budget) to meet its needs (CMP TechWeb, 2012). The standardized cloud platform now enables developers to reuse code for future development which can shorten project timeframes.

State Street: Strategy for IT Capability & Staffing:

State Street’s IT organizational structure can be characterized as federalism. With the federalist approach, the organization gains the benefit of having centralized leadership and vision at the “top of the house”, yet allows decentralized co-located IT groups to remain responsive to their respective divisions. As described by former CIO Perretta, “We line up delivery capacity with each unit, and each CIO is responsible for delivering business services to that unit” (MacSweeney, 2009). For example, The CIO has a direct report on the ground in China where the company operates a subsidiary (State Street Technology Zhejiang Co). Furthermore, the bank is tolerant of “skunk works” style projects that organically develop in different IT divisions throughout the enterprise (MacSweeny, 2009).

On the centralized side of the federalist equation, the bank operates a shared services group that is responsible for technical necessities distributed throughout the enterprise (i.e. security, information and communications). This federalized approach makes sense for a sprawling organization that is comprised of disparate business operations across its custodian bank, investment management, investment research and global divisions.

With the introduction of the cloud infrastructure at State Street, the technology staffing vision is to acquire individuals with architectural knowledge who can think “big picture” yet are able to wallow in the details as necessary. The bank employs a chief architect whose aim is to drive technology innovation that leads to strategies that will impact the business in an advantageous manner. Perretta states, “We don’t use him to manage projects; we use him to come up with the ideas that make sense for our business community. Now he does those pilots, and then we industrialize them for the rest of the organization” (Tucci, 2011).

To be continued in Part 2 and Part 3 where I address additional areas such as:

Strategy for Information Risk & Security
Strategy for Stakeholder Requirements, Testing & Training/Support
Project ROI and Key Success Measures
Strategy for Data Acquisition and Impact on Business Processes
Strategy for Social Media/Web Presence
Strategy for Organizational Change Management, Project Strategy and Complexity

References:

Brodken, J. (April, 14, 2011). State Street modernizing with cloud, Linux technologies; Virtualization, open source drive cloud project at State Street. Network World Fusion. Retrieved from Factiva 6/19/2016

CMP TechWeb. (June, 25, 2012). State Street Private Cloud: $600 Million Savings Goal. Retrieved from Factiva 6/19/2016

Fest, G. (January 1, 2013). State Street’s Dig (Data); Championed by CEO Jay Hooley, boston-based state street is remapping a huge technology infrastructure to reap the benefits of the cloud and big data. American Banker Magazine. Vol.123, No.1. Retrieved from Factiva

MacSweeney, G. (August, 1, 2009). Serious Innovation; CIO Christopher Perretta supports all of State Street’s IT needs by mixing new technologies and rapid development and even encouraging ‘skunk works’ experimentation when appropriate. Wall Street & Technology. Retrieved from Factiva

Tucci. L. (July, 2011). In search of speed, State Street’s CIO builds a private cloud. Retrieved from http://searchcio.techtarget.com/podcast/In-search-of-speed-State-Streets-CIO-builds-a-private-cloud

Photo courtesy of DAVID L. RYAN/GLOBE STAFF