Category / Strategy / Organizations

by anthonysmoak

More Than You Want to Know About Wal-Mart’s Technology Strategy Part 2

This article is a continuation of my earlier analysis (Part 1 here, continued here at Part 3) where I waded into Wal-Mart’s strategy for technology infrastructure and strategy for IT capability & staffing. Whether you love or hate Wal-Mart, no one can argue that historically the organization has been highly innovative, effective and efficient. 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.

Wal-Mart: Strategy for Information Risk & Security:

Wal-Mart operates a massive information system infrastructure that has been called the largest private computer system in the country. As such, the company must be strategic in implementing the proper information security protocols and vigilant in order to react to attempted compromises to its confidential information. Any compromise of sensitive customer information could lead to a significant expense in compensating affected parties and lead to updating systems, processes and procedures to restore customer confidence. This scenario is especially relevant as Wal-Mart’s extensive point of sale system, from a black hat hacker’s perspective, registers a veritable treasure trove of customer debit, credit and gift card information.

In order to mitigate the aforementioned risks, Wal-Mart has complied with the PCI DSS or Payment Card Industry Data Security Standard. PCI DSS offers, “compliance guidelines and standards with regard to our (Wal-Mart’s) security surrounding the physical and electronic storage, processing and transmission of individual cardholder data” (Wal-Mart Stores Inc., 2016). Some operational system components of PCI DSS include maintaining a secure network via use of firewalls to protect sensitive data, encrypting cardholder data that is transmitted across public networks, regularly updating anti-virus software as well as tracking and monitoring all access to network resources and cardholder data. (PCI Security Standards Council, 2016). Former CIO Turner has stated, “Necessity is the mother of invention, and we’ve invested a lot of knowledge and capital in intrusion detection and playing as much offense as we can to make sure that we’re protecting our company. Personally, every day I spend time on security” (Lundberg, 2002).

From a disaster recovery perspective, Wal-Mart maintains redundant primary and secondary information systems to mitigate the risks of operational downtime and/or significant loss of information. The organization keeps primary and secondary information systems physically separated. In 2005, the company was lauded for its disaster recovery and business continuity efforts in the wake of Hurricane Katrina. The company stood up satellite links for its retail centers enabling those centers to correspond with headquarters despite the loss of phone lines and internet connectivity (Worhten, 2005). Wal-Mart also maintains an Emergency Operations Center (EOC) established in the wake of the September 11, 2001 terror attacks. The organization has a central EOC located at headquarters in Arkansas which works in concert with decentralized EOCs at a division level. During Hurricane Sandy, the organization was successful in moving generators across state lines in order to reopen stores and provide systems operability in a timely manner (PricewaterhouseCoopers, 2005).

Wal-Mart: Strategy for Stakeholder Requirements, Testing & Training/Support:

Wal-Mart’s immense size allows it considerable influence over its supplier stakeholders. Typically, suppliers reside in an inferior position (Wal-Mart can end the supplier relationship or demand sub-optimal concessions from the supplier) which enables the retailing behemoth to dictate industry wide changes in how suppliers and merchants interact. This unbalanced power relationship allows the company to micromanage its supply chain partners from a business process and respective information technology project perspective. When the power balance is more on an equal footing, Wal-Mart is willing to work collectively with a supplier.

Case in point is the lauded cooperation between Procter & Gamble and Wal-Mart in the late 1980’s to implement Retail-Link. Retail-Link was a joint business process and related technology systems project between the two organizations for mutually beneficial gains. Wal-Mart’s in-store point of sale data acted as a pull to automatically trigger manufacturing orders to P&G when stocks were low (Wailgum, 2007). When this concept proved successful, Wal-Mart dictated to 2,000 supplier stakeholders that they must all update their information systems to integrate with Retail-Link. The integration and information sharing with Retail-Link was a boon to Wal-Mart’s suppliers as it provided predictable volumes and constantly humming factories, but the takeaway is that Wal-Mart mandated the terms to stakeholders based upon its asymmetrically favorable power position.

In some cases, Wal-Mart’s technical project mandates to suppliers did not yield mutually beneficial Return on Investment (ROI). An example of this scenario is embodied in the much publicized initiative to have its suppliers adopt RFID in the mid 2000’s. Wal-Mart was seeking to increase its inventory visibility at the warehouse and in its stores. In this case, Wal-Mart did not adequately consider stakeholder technology implementation concerns before issuing its RFID mandate. A supplier is on record stating that the consumer packaged goods industry was not the best early adaptor for RFID and that the small margins and project complexities didn’t offer compelling ROI (Wailgum, 2007). The ROI that could be established from a supplier standpoint was to continue doing business with Wal-Mart while only investing the bare minimum in upgrades required to implement RFID. A Gartner analyst has estimated that the implementation costs of RFID for smaller companies would cost between $100,00 to $300,000, while larger manufacturers could experience investment costs of up to $20 million (Network World, 2008).

Once a critical mass of important supplier stakeholders decided that their operating costs were being negatively impacted, Wal-Mart decided to back down from its mandate. Only when the favorable power dynamic shifted from Wal-Mart to the supplier network, did the company walk back its mandate.

From a development standpoint, Wal-Mart traditionally used the more structured Systems Development Lifecycle (SDLC) methodology. All systems within the company require testing & validation. According to former CIO Turner, “In any development effort, our [IS] people are expected to get out and do the function before they do the system specification, design or change analysis. The key there is to do the function, not just observe it. So we actually insert them into the business roles. As a result, they come back with a lot more empathy and a whole lot better understanding and vision of where we need to go and how we need to proceed” (Lundberg, 2002). Turner also eschews testing systems in low volume stores or with the easiest customers.

Recently, in its more cutting edge Silicon Valley based development division (@WalmartLabs) the company has moved to adopt an Agile development methodology. Agile methodology allows the group to react faster to changing market conditions with respect to the much slower SDLC methodology. This approach is necessary in a cut-throat marketplace where competitors such as Amazon have been using Scrum for over a decade (King, 2014).

Wal-Mart: Project ROI and Key Success Measures:

Despite the less than successful analysis and grasp of intended project benefits related to its RFID initiative, Wal-Mart relies heavily on ROI as a measure of project success. Cost is a major driver of IT related expenses thus a reliance on ROI is a sensible approach. Former CIO Turner has stated that 33% of Wal-Mart development projects are canceled before they are completed and that 56% of completed projects are subjected to budget overruns of 189%. “One of the problems is that a lot of companies don’t require an ROI except for major purchases. ‘At Wal-Mart, everything has to pay its way, even infrastructure [investments]. A lot of people say you can’t cost-justify infrastructure, but you can. There is a way. You have to make ROI the center of what you’re about, to begin to pay your way’” (Power, 1998). At Wal-Mart all technology implementations are assigned a payback analysis and the savings from the analysis must be incorporated into the business plan. A quarterly report on each project is shared at the executive level to ensure that business unit profit and loss statements reflect the investment value that was initially calculated. The mentality at Wal-Mart is a focus on turning information technology from a traditional cost center to a profit center.

Additionally, the centralized information technology group at Wal-Mart does not saddle its divisions with a chargeback funding method. The company takes a holistic enterprise wide view approach with respect to determining which projects make sense for the company. Wal-Mart can be said to employ the corporate budget funding method where IT managers have considerable control over the entire IT budget. When it’s time to implement a project, the divisions with the largest budgets are treated the same as divisions where resources are more scarce. As of 2004, the organization lacked an IT steering committee which helped speed up the project selection process (Sullivan, 2004). The drawback to this funding method approach is that IT competes with all other budgeted items for funds (Pearlson, Galletta & Saunders, 2016).

Project completion dates in the organization’s nomenclature are referred to as “end dates”. All projects are tracked against the end dates and problem projects are scrutinized when they fall behind schedule. When new systems are deployed it is not uncommon for high level management to solicit feedback from line employees involved in using the system. When necessary, personnel are replaced on project teams in order to increase project effectiveness (Lundberg, 2002).

To be continued in Part 3 where I address these three areas:

  • 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:

King, R. (October 2014). Wal-Mart Becomes Agile But Finds Some Limits. Dow Jones Institutional News. Retrieved from Factiva

Lundberg. A. (July 1, 2002). Wal-Mart: IT Inside the World’s Biggest Company. CIO magazine. Retrieved from http://www.cio.com/article/2440726/it-organization/wal-mart–it-inside-the-world-s-biggest-company.html?page=2

Network World. (September, 2008). “Wal-Mart’s RFID revolution a tough sell; Even for the world’s biggest retailer, championing an unproven technology with no clear ROI has been difficult” Retrieved from Factiva on June 13/16

PCI Security Standard Council. (2016). Maintaining Payment Security. Retrieved from https://www.pcisecuritystandards.org/pci_security/maintaining_payment_security

PricewaterhouseCoopers. (September, 2013). Interview with Mark Cooper. Walmart takes collaborative approach to disaster recovery. Retrieved from http://www.pwc.com/gx/en/industries/capital-projects-infrastructure/disaster-resilience/walmart-disaster-response-strategy.html

Power, D. (June, 1998). WAL-MART: TECHNOLOGY PAYBACK IS IMPERATIVE. Supermarket News. Retrieved from Factiva

Pearlson, K., Galletta, D., & Saunders, C. (January, 2016). Managing and Using Information Systems: A Strategic Approach, Binder Ready Version, 6th Edition

Sullivan, L. (September 24, 2004). Wal-Mart’s Way: Heavyweight retailer looks inward to stay innovative in business technology. Retrieved 6/17/16 from http://www.informationweek.com/wal-marts-way/d/d-id/1027448?

Wailgum, T. (October 2007). How Wal-Mart Lost Its Technology Edge. Retrieved from http://www.cio.com/article/2437953/strategy/how-wal-mart-lost-its-technology-edge.html

WAL-MART STORES, INC. (January 31, 2016). FORM 10-K. Retrieved from https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

Worthen, B. (November 1, 2005). How Wal-Mart Beat Feds to New Orleans. CIO Magazine.Retrieved from http://www.cio.com/article/2448237/supply-chain-management/how-wal-mart-beat-feds-to-new-orleans.html

by anthonysmoak

The IT Department Needs To Market Its Value or Suffer the Consequences

This article is also published on LinkedIn.

By now it’s an all too common cliché that the IT department does not garner the respect it deserves from its counterpart areas of the business. This perceived respect deficiency can manifest itself in the lack of upfront involvement in business strategy (we’ll call you when it breaks), unreasonable timelines (do it yesterday), rampant budget cuts and layoffs (do more with less) and/or limited technical promotional tracks (promotions are for business areas only).

IT pros tend to believe that if they’re adding value, delivering difficult solutions within reasonable timeframes and providing it all in a cost efficient manner, the recognition and gratitude will follow. Typical IT and knowledge worker responsibilities fall under the high level categories of “keep things running” (you’re doing a great job so we don’t notice) or “attend to our technical emergency” (drop what you’re doing).

It’s fair to say that there is a perception gap between the true value and the perceived value of what IT brings to the table. Anecdotally, there certainly seems to be a disconnect between the perceived lack of difficulty in business asks and the actual difficulty in delivering solutions. This perception gap can occur not only between IT and the “business” but also between the non-technical IT manager and the technical rank and file.

In this era of automation, outsourcing and job instability, there is an element of danger in one’s contributions going unnoticed, underappreciated and/or misunderstood. Within IT, leaders and the rank and file need to overcome their stereotypical introverted nature and do a better job of internally marketing their value to the organization. IT rank and file need to better market their value to their managers, and in turn the IT department collectively needs to better market its value to other areas of the business.

Perception matters, but IT must deliver the goods as well. If the business misperceives the actual work that the IT department provides and equates it to commoditized functions such as “fix the printers” or “print the reports” then morale dips and the IT department can expect to compete with external third parties (vendors, consulting firms, outsourcing outfits) who do a much better job of finding the ear of influential higher–ups and convincing these decision-makers of their value.

I once worked on an extremely complex report automation initiative that required assistance from ETL developers, architects, report developers and business unit team members. The purpose was to gather information from disparate source systems, perform complex ETL on the data then and store it in a data-mart for downstream reporting. Ultimately the project successfully met its objective of automating several reports which in-turn saved the business a week’s worth of manual excel report creations. After phase 1 completion, the thanks I received was genuine gratitude from the business analyst whose job I made easier. The other thanks I received was “where’s phase 2, this shouldn’t be that hard” from the business manager whose technology knowledge was limited to cutting and pasting into excel.

Ideally my team should have better marketed the value and helped the business partner understand the appropriate timeliness (given the extreme complexity) of this win, instead of just being glad to move forward after solving a difficult problem for the business.

I believe Dan Roberts accurately paraphrases the knowledge worker’s stance in his book Marketing IT’s Value.

“’What does marketing have to do with IT? Why do I need to change my image? I’m already a good developer!’ Because marketing is simply not in IT’s comfort zone, they revert to what is more natural for them, which is doing their technical job and leaving the job of marketing to someone else, which reinforces the image that ‘IT is just a bunch of techies.’”

The IT department needs to promote better awareness of its value before the department is shut out of strategic planning meetings, the department budget gets cut, project timelines start to shrink and morale starts to dip. IT workers need to promote the value they bring to the table by touting their wins and remaining up to date in education, training and certifications as necessary. At-will employment works both ways, if the technical staff feels stagnant, undervalued and underappreciated, there is always a better situation around the corner; especially considering the technical skills shortage in today’s marketplace.

“It’s not about hype and empty promises; it’s about creating an awareness of IT’s value. It’s about changing client perceptions by presenting a clear, consistent message about the value of IT. After all, if you don’t market yourself, someone else will, and you might not like the image you end up with [1]”

References:

[1] Colisto, Nicholas R.. ( © 2012). The CIO Playbook: Strategies and Best Practices for IT Leaders to Deliver Value.

[2] Roberts, Dan. ( © 2014). Unleashing the Power of IT: Bringing People, Business, and Technology Together, second edition.

 

by anthonysmoak

More Than You Want to Know About Wal-Mart’s Technology Strategy Part 1

Wal-Mart has long been associated with innovations in its home-grown information technology systems, which in turn have exerted tremendous influence on its business strategy of everyday low prices. The company was a pioneer in bar code scanning and analyzing point of sale information which was housed in its massive data warehouses. Wal-Mart launched its own satellite network in the mid 1980’s which led to profound business practice impacts with respect to its supply chain management process. Strategic systems such as Retail-Link, spearheaded by industry luminary Kevin Turner, enabled data integration and sharing between Wal-Mart and its suppliers. These systems also enabled the concept of vendor managed inventory. However, not every technology project in which the company invests significant resources turns to gold as Wal-Mart encountered missteps with its RFID technology initiative. Despite the less than stellar ROI and supplier adoption rate of RFID, that effort demonstrated the willingness of its technology to push the envelope in exerting tremendous changes on business processes not only within Wal-Mart but throughout the industry.

Storm clouds are on the horizon as consumer preferences change from “big-box” brick and mortar stores to online retail platforms such as Amazon. To counter Amazon’s online dominance, the company must continue to invest in its digital know-how. Adding new capabilities to its online presences and refreshing its digital properties will be a requirement in order to keep pace in a shifting industry dynamic.

Wal-Mart: Strategy for Technology Infrastructure:

Wal-Mart’s architectural philosophy can be classified by the twin sentiments of “build rather than buy” (the organization has historically held the belief that their information systems provide a competitive advantage over other industry players) and one of innovation. Recently, as consumer preferences have shifted away from “big-box” brick and mortar stores to the convenience of online “e-tail”, competitors such as Amazon and Target have begun to erode Wal-Mart’s retail dominance. In order to react, Wal-Mart has been allocating resources to invest in digital capabilities that will allow the organization to effectively compete and become better aligned with consumer shopping preferences.

Historically, Wal-Mart’s information technology strategy has long favored an internal “build rather than buy” approach which has spawned innovative business strategies. Wal-Mart prefers to build in house strategic systems that allow the company to gain competitive advantages. Retailers are known to prefer home-grown systems and Wal-Mart’s immense size has traditionally been a hindrance in running off the shelf packages (Wailgum, 2007). Globally, the company runs a heavily modified version of IBM’s elderly point of sale (POS) supermarket application at all of its checkouts with the exception of Japan (Zetter, 2009). The in-house systems approach has been a source of competitive advantage for Wal-Mart. “Wal-Mart was a pioneer in applying information and communications technology to support decision making and promote efficiency and customer responsiveness within each of its business functions and between functions” (Ustundag, 2013).

The advantage of an in-house strategic system is that it offers tight alignment between the company’s business strategy and the finished solution. Another advantage of in-house strategic systems as opposed to running off the shelf packages from third parties is the ability to keep proprietary business process and systems knowledge out of the hands of competitors. A third party developer would have no problem advertising a system that was in use at Wal-Mart and then selling that system to competitors. The advantages of the in-house development approach must be weighed against the downsides, namely the higher cost of development and the internal staffing required for new innovative development and on-going maintenance.

Recently, as Wal-Mart tries to use its geographic reach and existing retail infrastructure to compete with Amazon, it is making a move to ramp up its cloud based technology assets. In keeping with its “build rather than buy” approach, the company built its own data centers and developed supporting cloud based commerce applications using open source tools. “‘We took back control of the technology and largely built it ourselves,’ explained Jeremy King, chief technology officer for global e-commerce at Walmart” (Lohr, 2015). Additionally, as of 2015, the company is in the middle of an IT systems overhaul called Pangaea that “includes a hybrid cloud platform and search technology” (Nash 2015). King, in keeping with the Wal-Mart approach has stated, “Most people don’t replace entire systems in one shot, especially with from-scratch development…but given how rapidly this place is changing, we didn’t have time to screw around” (Nash 2015).

Wal-Mart: Strategy for IT Capability & Staffing:

Wal-Mart is not a technology company, but it is a company in which technology is a key enabler of business strategies. Since technology has been a crucial component of the organization’s competitive advantage, its IT governance archetype can be characterized as an IT duopoly. The IT duopoly arrangement allows technology executives and business unit leaders to collaborate on technology projects and decisions. Kevin Turner, who was a Wal-Mart vice president for application development, a former CIO and the current CEO of Citadel Securities, has stated that technology payback figures for Wal-Mart initiatives are put into writing, “which in turn requires the affected business units to acknowledge savings and work them into their business plan — or dispute the savings and work with the IT department toward a resolution” (Power, 1998). “‘Do the [business units] always agree with us? No. Will they work with us? Yes. If they don’t, we won’t do anything more for them in the future. And I’ll tell you, that works,’ said Turner” (Power, 1998).

Traditionally, Wal-Mart’s IT staff have a background in other non-technology areas of the business. The company looks to promote its staff out of the IT department which allows a technological “cross-pollination” of knowledge to occur across the organization. When Wal-Mart is looking to develop new systems it dispatches its top engineers to perform “regular” operations jobs so they can gain working hand knowledge of the challenges that line employees face (Boyer, 2003).

As Wal-Mart has looked to withstand new online retail challenges from chief competitors Amazon and Target, its technology staffing mix and organizational structure have had to adapt in order to remain competitive. Former CEO Mike Duke was looking to combine the organization’s stores, information technology assets and logistics expertise into one channel in order to drive growth (Buvat, Khadikar, & KVJ, 2015). Wal-Mart was cognizant that it could not realistically expect the technical staff that it required in order to compete with Amazon, to relocate to Bentonville Arkansas. Therefore, in 2010 Wal-Mart re-organized and consolidated its worldwide e-commerce staff into a new Global division located in Silicon Valley California. Historically, the company has favored a centralized Information Systems structure coupled with an in-house development approach. Former Wal-Mart CIO Turner has stated, “What we’ve come up with is a model of decentralized decisions but centralized systems and controls. We will have a common system and a common platform, but we have to allow a great deal of flexibility in our systems so that the people in those local markets can do their job in the best, most effective way” (Lundberg, 2002).

The new Global E-Commerce initiative is in keeping with that philosophy as the new division’s key responsibilities include, “running Walmart’s ten websites worldwide, building and testing cutting-edge technology at @WalmartLabs, and building Walmart’s eCommerce capabilities” (Buvat et al., 2015). Additionally, in order to bolster its e-commerce staff, Wal-Mart has purchased 14 companies primarily for the purpose of gaining access to engineering personnel. As a result of Wal-Mart’s emphasis on ramping up e-commerce talent, its e-commerce sales grew from 4.9 billion to 12.2 billion dollars between 2011 and 2014; an increase of nearly 150% (Buvat et al., 2015).

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

Also check out The Definitive Walmart E-Commerce and Digital Strategy Post and The Definitive Walmart Technology Review to see how Walmart is ramping up to compete with Amazon.

Finally check out Costco’s Underinvestment in Technology Leaves it Vulnerable to Disruption to learn how Costco currently competes and how the company should compete.

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

References:

Boyer, J. (February, 2003). Technology Helps Stores Order Only As Much As They’ll Sell. Albany Times Union. Retrieved from Factiva

Buvat, J., Khadikar, A., KVJ, S. (2015). Walmart: Where Digital Meets Physical. Capgemini Consulting. Retrieved from https://www.capgemini-consulting.com/walmart-where-digital-meets-physical

Lohr, S. (October 2015). Walmart Takes Aim at ‘Cloud Lock-in’ Retrieved from http://bits.blogs.nytimes.com/2015/10/14/walmart-takes-aim-at-cloud-lock-in/

Lundberg. A. (July 1, 2002). Wal-Mart: IT Inside the World’s Biggest Company. CIO magazine. Retrieved from http://www.cio.com/article/2440726/it-organization/wal-mart–it-inside-the-world-s-biggest-company.html?page=2

Nash, K. (October, 2015). “Wal-Mart to Pour $2 Billion into E-Commerce Over Next Two Years.”, Dow Jones & Company, Inc. Retrieved from Factiva

Power, D. (June, 1998). WAL-MART: TECHNOLOGY PAYBACK IS IMPERATIVE. Supermarket News. Retrieved from Factiva

(ed), Alp Ustundag. ( © 2013). The value of rfid: benefits vs. costs. [Books24x7 version] Available from http://common.books24x7.com.libezproxy2.syr.edu/toc.aspx?bookid=49466.

Wailgum, T. (October 2007). How Wal-Mart Lost Its Technology Edge. Retrieved from http://www.cio.com/article/2437953/strategy/how-wal-mart-lost-its-technology-edge.html

Zetter, K. (October 13, 2009). BIG-BOX BREACH: THE INSIDE STORY OF WAL-MART’S HACKER ATTACK. Wired. Retrieved from https://www.wired.com/2009/10/walmart-hack/

by anthonysmoak

Andy Grove and Intel’s Move From Memory to Microprocessors

A titan of the technology industry recently passed away on March 21,2016. Andy Grove was instrumental in taking a commodity product such as the microchip and making it a branded must have hardware feature. “Intel Inside” and “Pentium” were on the minds of the majority of PC consumers during the 1990’s. As the beneficiary of Andy Grove’s leadership, Intel was able to sustain high profitability and sustainable profit growth. With the help of a Redmond based operating systems company, the “Wintel” standard won the format wars against Apple and IBM’s OS/2. Regarding Andy Grove and his Intel tenure, the Economist reported, “Under his leadership it increased annual revenues from $1.9 billion to more than $26 billion and made millionaires of hundreds of employees.”

For all of Andy Grove’s successes in the semiconductor market, it was not a forgone conclusion that Intel would ever make the leap into this industry. Most people of my generation who grew up in the 80’s and 90’s are not familiar with the fact that at the time of Intel’s founding, the company primarily produced replacement computer memories for mainframes. Intel first and foremost was founded as a memory company.

An article by Robert A. Burgelman in the Administrative Science Quarterly highlights the processes and decision calculus of Intel executives which led the company to exit the dynamic random access memory (DRAM) market. Burgelman provides key insights regarding the transformation of Intel from a memory company into a microcomputer company.

DRAM at one point in time accounted for over 90% of Intel’s sales revenue. The article states that DRAM was essentially the “technology driver” on which Intel’s learning curve depended. Over time the DRAM business matured as Japanese companies were able to involve equipment suppliers in the continuous improvement of the manufacturing process in each successive DRAM generation. Consequentially, top Japanese producers were able to reach production yields that were up to 40% higher than top U.S. companies. DRAMs essentially became a commodity product.

Intel tried to maintain a competitive advantage and introduced several innovative technology design efforts with its next generation DRAM offerings. These products did not provide enough competitive advantage, thus the company lost its strategic position in the DRAM market over time. Intel declined from an 82.9% market share in 1974 to a paltry 1.3% share in 1984.

Intel’s serendipitous and fortuitous entry into microprocessors happened when Busicom, a Japanese calculator company, contacted Intel for the development of a new chipset. Intel developed the microprocessor but the design was owned by Busicom. Legendary Intel employee Ted Hoff had the foresight to lobby top management to buy back the design for uses in non calculator devices. The microprocessor became an important source of sales revenue for Intel, eventually displacing DRAMs as the number one business.

There continued to be a disconnect between stated corporate strategy and the activities of middle managers during the transition period. Top executives gave weak justifications for the company’s reluctance to face reality and exit the DRAM space; they were emotionally attached to the DRAM business. A middle manager stated that Intel’s decision to abandon the DRAM market was tantamount to Ford deciding to exit the car business!

The demand for Intel microprocessors led middle managers to begin allocating factory resources to heavily produce microprocessors over DRAM. Intel’s cultural rule that information power should always trump hierarchical position power gave middle managers the decision space to make production allocation decisions that overrode corporate stated goals. These actions further dissolved the strategic context of DRAMs.

“By the middle of 1984 some middle managers made the decision to adopt a new process technology which inherently favored logic [microprocessor] rather than memory advances”. By the end of 1984, Intel’s top management was finally forced to face business reality with respect to DRAMs. In order to regain leadership in DRAM, management was faced with a 100 million dollar capital investment decision for a 1 MEG product. Top management decided against the investment and thus eliminated the possibility of Intel remaining in the DRAM space.

It should not be understated that Andy Grove saw a future where microprocessors would become the dominant driver of Intel’s success. He had the foresight to tell his direct reports to “make data based decisions and not to fear emotional opposition”. This was a gutsy call because the culture of Intel viewed DRAM memory as a “core technology of the company and not just a product”.

Andy Grove himself is quoted as saying, “The fact is that we had become a non-factor in DRAMs, with 2-3% market share. The DRAM business just passed us by! Yet, many people were still holding to the ‘self-evident truth’ that Intel was a memory company. One of the toughest challenges is to make people see that these self-evident truths are no longer true.”

Under Andy Grove’s leadership, Intel embarked upon a high stakes technological paradigm shift where either complacency or botched execution could have jeopardized the very existence of the company. Rest in peace Mr. Grove.
References:

Burgelman, Robert A (1994). Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments. Administrative Science Quarterly. Vol. 39, No. 1 (Mar., 1994), pp. 24-56.

by anthonysmoak

Lessons from the Japanese Auto Industry

I spent seven years working at Saturn Corporation which was a truly innovative automotive company. Unfortunately, to the chagrin of Saturn-philes, the subsidiary suffered from a lack of sufficient investment from its parent entity, General Motors. Sadly, the defunct Oldsmobile brand was the recipient of funding that should have been allocated to Saturn but I digress. As an automotive industry veteran (albeit on the I.T. and data side of the house), I enjoyed discussions during my days in business school that focused upon the strategy of companies operating within the industry. In an MBA class titled Managing the Resources of Technological Firms (offered at Georgia Tech), our readings concentrated on the challenges associated with managing a firm’s resource capabilities for long-term competitive advantage.

On such article typifying the aforementioned concentration was written by business historian Michael A. Cusumano. In his article Manufacturing Innovation: Lessons from the Japanese Auto Industry which appeared in the MIT Sloan Management Review, Cusumano sets out to debunk the fact that higher productivity amongst Japanese auto firms is a result of the employment of Japanese workers. He aims to illustrate that the merits of innovative processes are the cause for higher productivity emanating from Japanese owned firms.

The article is in essence a summarization of major findings from a five year study of the Japanese auto industry focusing particularly on Toyota and Nissan. It states that some observers of Japan have assumed that Japanese firms copied US manufacturing techniques and then benefited from a better educated and more cooperative workforce. Cusumano attacks this perception by commenting that Japanese run factories located in the United States have demonstrated higher levels of productivity, quality and process flexibility than their domestic counterparts.

Japanese firms who shunned US or European production techniques were able to innovate and improve upon their native processes. Toyota in particular avoided conventional production techniques and decided to focus on developing a tailored system that met the needs of the Japanese market. Other Japanese firms such as Hino, Daihatsu, Mazda and Nissan started to leverage the techniques employed by Toyota and moved away from the US/European traditional process. Toyota and Nissan appeared to have matched or surpassed US productivity levels by the late 1960’s even though their production levels were far less than US automakers.

Cusumano does not share the Boston Consulting Group’s assessment that Japanese management’s emphasis on long term growth in market shares led to an accumulation of experience. He believes that that the emphasis on the accumulation of experience and innovation led to the rise in market share.

Toyota’s legendary Taiichi Ohno realized that firms needed to be flexible when producing small volumes. Three basic policies were introduced during post war Japan’s auto manufacturing era. Just in time manufacturing reduced buffer stocks of extra components and this small lot philosophy tended to improve quality since workers could not rely on extra parts or rework piles if they made mistakes. The second policy was to reduce unnecessary complexity in product designs and manufacturing processes. Nissan and Toyota standardized components across model lines. The third policy involved a Vertical “De-Integration”. In essence, automakers began to build up a network of suppliers for outsourced component production.

US companies stopped innovating by the early 1960’s as they perceived the domestic auto market as mature. The “American Paradigm” from an automotive production standpoint meant large production runs, worker specialization and statistical sampling. The unique market conditions of Japan after WW2 presented an opportunity for Toyota and other producers to challenge convention and become more efficient at much lower levels of production.

Image courtesy of winnond at FreeDigitalPhotos.net

by anthonysmoak

How Timken Manages the Business Cycle

Capital Expenditures

In Peter Navarro’s book entitled “The Well Timed Strategy: Managing the Business Cycle for Competitive Advantage”, the professor of business at the University of California-Irvine defines the master cyclist as “A business executive who skillfully deploys a set of well-timed strategies and tactics to manage the business cycle for competitive advantage”[1]. With respect to capital expenditures, firms headed by master cyclists will increase capital expenditures during recession in order to develop new and innovative products and be better positioned to satisfy pent up demand once a recovery takes place. These firms will also modernize existing facilities during economic slowdowns [10].

The overall financial performance of the Timken Company was disappointing in 1998. Although the company was able to set a new sales record at that time, earnings as compared to 1997 dropped 33% [2]. A combination of difficult market conditions and unusual occurrences such as a prolonged strike at General Motors contributed to the decline. “A nearly global economic slow down — which started last year in Thailand, spread to Japan, then to most of the rest of Asia, South America and Russia — has squashed demand for many U.S. products”[3]. The modernization of existing capacity in many countries along with volatile currencies and a strong dollar placed substantial downward pricing pressures with respect to bearings worldwide [1]. Competitors in Asia found the U.S. market appealing since demand was drying up in their home markets. Consequently, the amount of imports into the United States for the products Timken manufactured increased, while exports decreased during this time period.

In this global economic slowdown for players in the steel and ball bearings industry, conventional wisdom would dictate that a company would need to decrease their capital expenditures to better position themselves. Timken during this period of time executed some strategies that were contrarian to conventional wisdom in an attempt to manage the business cycle. From their 1998 annual report Timken states, “We made record capital investments to prepare for the future and lower costs”[4]. During the third quarter of 1998, Timken dedicated a $55 million dollar (~$69 million in constant dollars) rolling mill and bar processing investment at its Harrison Steel Plant in Canton, Ohio [11]. Modernization expenditures were also announced for Timken’s Asheboro plant which opened in 1994 and produces bearings used in industrial markets. “The expansion will increase the size range of bearings the Asheboro plant is able to produce, hike plant capacity and add options available to Timken’s industrial customers” [5].

Timken has a record of increasing its capital expenditures in the face of economic slowdown or recessions in keeping with the strategies and tactics of a master cyclist. Their last new steel making plant prior to 1998 was the Faircrest Steel Plant in Perry Township, Ohio [6]. The plant was announced in the middle of the early 1980’s recession and opened in 1985 [12]. Timken took a huge gamble and invested $450 million (~1.1 billion in constant dollars), which was two-thirds of Timken’s net worth at the time — to build the only completely new alloy steel plant in the U.S. since World War II” [7]. At the time, the so-called experts said the U.S. steel industry was dead and companies didn’t need to build any new plants ” [12]. Similarly during the recession year of 1991, Timken boosted capital expenditures to $144.7 million up from $120 million in 1990 [12].

In order to differentiate its products from pure commodities Timken invested in research and development during this period of economic uncertainty for its products. This strategy is also in keeping with the master cyclist philosophy of increasing capital expenditures to develop innovative products and new capacity in time for a recovery. While Timken’s largest research and development center is in Canton Ohio, it added another large facility in Bangalore India to focus on new product development. Timken Research has four centers located in the US, Europe, Japan, Romania and India. The Timken Engineering and Research India Pvt Ltd is part of the company’s “work with the sun” concept where it is day time in at least one of the company’s centers [8].

Risk Management

 Firms that geographically diversify into new countries and regions can reap the benefits that this hedging strategy provides against business cycle risk. “The effectiveness of geographical diversification as a hedge is rooted in the fact that the business cycles and political conditions of various countries are not perfectly correlated ” [5]. The privatization of Brazil’s steel mill industry in 2001 opened up the door for North American companies to do business there [9]. Timken responded by forming a joint venture with Bardella S.A. Industrias Mechanicas (Bardella) to provide industrial services to the steel and aluminum industries in Brazil. In 2001 the company also acquired Bamarec which operated two component manufacturing facilities in France. The presence of French facilities allowed Timken to expand their precision steel components business unit. Timken CEO James Griffith believed that there was an opportunity to grow this business in Europe and entering the French market provided a base from which to launch their European strategy [10]. Both of the moves during a recession provided Timken an opportunity to hedge against the business cycle risks they faced in the United States.

 

[1] Navarro, Peter. The Well-Timed Strategy: Managing the Business Cycle for Competitive Advantage. New Jersey: Wharton School   Publishing 2006.

[2] The Timken Company 10K Report. 1999.

[3] Adams, David. “Canton, Ohio Steel Executive Favors Federal Reserve Rate Cut.” Akron Beacon Journal, Ohio. 13 November 1998. KRTBN Knight-Ridder Tribune Business News: Akron (Ohio) Beacon Journal.

[4] The Timken Company Annual Report. 1998.

[5] “Timken plans $20M boost for bearings. 16 July 1997.” American Metal Market. Vol. 105, No. 136, ISSN: 0002-9998

[6] Adams, David. “Steel Bearings Maker Timken Co. Opens New Canton, Ohio Mill.” 11 August 1998.

[7] Industry Insider. “How Timken Turns Survival into Growth.” http://www.businessweek.com/magazine/content/03_14/b3827027_mz009.htm 7 April 2003.

[8] Business Line (The Hindu). “Timken Company R&D base in India.” 11 February 1999.

[9] Robertson, Scott. “Timken expects to benefit from Brazil steel privatization.” 9 April 2001. AMM.

[10] “The Curse of a Strong Dollar; Timken CEO James Griffith says his outfit could sell a lot more bearings if the greenback wasn’t ‘overvalued…on the order of 30%.’” Business Week Online. 28 November 2001.

[11] “Continuity and Change in the Growth of a Family Controlled U.S. Manufacturing Firm.” Humanities and Social Sciences Online.   16 April 2007. <http://www.h-net.org/reviews/showrev.cgi?path=16914932502209&gt;

[12] Excerpt from Bear Stearns Industrial Internet Special. “The Wall Street Transcript – Questioning Market Leaders for Long Term Investors.” May 2001.

 

by anthonysmoak

The Importance of Standards in Large Complex Organizations

Large complex organizations require standards with respect to developing strategic goals, business processes, and technology solutions because agreed upon guiding principles support organizational efficiencies. Without standards in these spaces, there is the increased potential for duplication of functionality, as localized business units implement processes and technologies with disregard for the enterprise as a whole. When the enterprise as a whole considers items such as applications, tools and vendors, standards help ensure seamless integration.

Examples of enterprise standards might be:

  • “The acquisition of purchased applications is preferred to the development of custom applications.” [1]
  • An example of an infrastructure-driven principle might be, “The technology architecture must strive to reduce application integration complexity” [1]
  • “Open industry standards are preferred to proprietary standards.” [1]

These hypothetical top down standards can help settle the “battle of best practices” [2]. Standards also provide direction and can guide the line of business staff’s decision-making so that the entire organization is aligned to strategic goals. Furthermore, the minimization of diversity in technology solutions typically lowers complexity, which in turn helps to lower associated costs.

Enterprise Architecture standards also have a place in facilitating “post merger/acquisition streamlining and new product/service rollouts” [2]. Successfully and rapidly integrating new acquisitions onto a common framework can be vital to success.

Here are two banking examples where post merger system integration problems arose in financial services companies:

  • In 1996, when Wells Fargo & Co. bought First Interstate Bancorp, thousands of customers left because of missing records, long lines at branches, and administrative snarls. In 1997, Wells Fargo announced a $150 million write-off to cover lost deposits due to its faulty IT integration. [3]
  • In 1998, First Union Corp. and CoreStates Financial Corp. merged to form one of the largest U.S. banks. In 1999, First Union saw its stock price tumble on news of lower-than-expected earnings resulting from customer attrition. The problems arose from First Union’s ill-fated attempt at rapidly moving customers to a new branch-banking system. [3]

Having robust Enterprise Architecture standards in place may have helped to reduce the risk of failure when integrating these dissimilar entities.

References:

[1] Fournier, R., “Build for Business Innovation – Flexible, Standardized Enterprise Architectures Will Produce Several IT Benefits.” Information Week, November 1, 1999. Retrieved from Factiva database.

[2] Bernard, Scott A. “Linking Strategy, Business and Technology. EA3 An Introduction to Enterprise Architecture.” Bloomington, IN: Author House, 2012, Third Edition

[3] Popovich, Steven G., “Meeting the Pressures to Accelerate IT Integration”, Mergers & Acquisitions: The Dealmakers Journal, December 1, 2001. Retrieved from Factiva database.

by anthonysmoak

ADP: Mergers & Acquisitions

This small sample is taken from a group paper drafted for a strategic management class (MGT 6125) taken back in the Spring of 2007. The class was taught by the esteemed professor of strategy, Dr. Frank Rothaermel. As part of the class our project group interviewed an executive from ADP, wrote a strategic analysis of the company and then presented our findings to the company (complete with Q&A). The experience was enriching but contributed to the number of late nights experienced during that semester. It should be noted that in 2014 ADP spun off its Dealer Services business into a separate company now called CDK Global.

 

Mergers & Acquisitions

ADP has become highly successful in its strategy of pursuing growth via horizontal integration. Although current CEO Gay Butler has maintained that ADP has no interest in “large, dilutive, multiyear acquisitions” [1], the company will acquire smaller industry competitors. Acquisitions give ADP the opportunity to grow inorganically, increase its product offerings, acquire technology and to reduce the level of rivalry in its industry.

A perfect execution of this strategy can be seen in its January 2003 acquisition of Probusiness. Probusiness was a much smaller California based provider of payroll and human resources services. Before the acquisition, Probusiness cited eight new large competitors who had an interest in expanding their roles in the payroll business [2]. Amongst those eight competitors were notable companies such as International Business Machines Inc. (IBM), Microsoft Corp. and Electronic Data Systems Corp. (EDS) [2]. True to form, ADP decided to react and proceeded to acquire Probusiness. The acquisition effectively prevented large competitors from acquiring approximately 600 new payroll clients in the larger employer space and reduced future competition.

The Probusiness acquisition was also a boon to the company in the fact that it offered ADP advanced payroll processing technology. Probusiness utilized PC based payroll processing as opposed to ADP’s more mainframe based technology [2].

A key acquisition for ADP in terms of increasing its global footprint was the December 2005 acquisition of U.K. based Kerridge Computer. This particular acquisition was significant in the fact that it increased ADP’s Dealer Management Services (DMS) presence from fourteen countries to over forty one [3].

ADP along with its main DMS competitors in the European market, Reynolds & Reynolds and SAP, began to realize the significant growth opportunities for the region. The European market for DMS unlike the United States market, is much more fragmented which means there are more opportunities for a larger player to standardize product offerings [4]. In 2003 the European Union lifted rules that had previously banned franchised car dealers from selling rival brands [4]. Demand for pan-European systems to help multi-brand dealers manage their stores, sometimes in multiple countries and in various languages increased dramatically [4]. ADP shrewdly realized that many smaller DMS providers would not be able to meet this demand and acquired Kerridge to bolster its position.

Strategically, the Kerridge acquisition has allowed ADP to have first mover advantage over its main competitors with respect to China. New vehicle sales growth in Asia is expected to be at 25.3% by the year 2011 [5]. By becoming a first mover in the region, ADP will have the opportunity to lock customers into its technology since it currently has a 96% client retention rate [5]. ADP will also have the opportunity to create high switching costs for its customers and make it difficult for rivals to take its customers.

Other recent acquisitions by ADP include “Taxware which brings tax-content and compliance solutions to the table; VirtualEdge, which offers tools for recruiting; Employease, which develops Web-based HR and benefits applications; and Mintax, which provides tools for corporate tax incentives. [6]” All of these acquisitions represent small fast growing companies with complimentary products and services. These products and services can be incorporated in ADP’s vast distribution network and provide potential bundling or cross selling opportunities with ADP’s current offerings.

Endnotes:

[1] Simon, Ellen “ADP chief looks at expansion, not acquisition” ASSOCIATED PRESS (7 March 2007)

[2] Gelfand, Andrew “ADP Seen Holding Off Competition With ProBusiness Buy” Dow Jones News Service (6 January 2003) :Factiva

[3] Kisiel, Ralph “Reynolds, ADP aim for European growth” Automotive News Europe Volume 11; Number 3 (6 February 2006) :Factiva

[4] Jackson, Kathy “Dealer software market is booming; Multibranding boosts demand for dealership management programs” Automotive News Europe, Volume 11; Number 21 (16 October 2006) :Factiva

[5] ADP Annual Financial Analyst Conference Call Presentation. March 22, 2007

[6] Taulli ,Tom “ADP Tries Getting Even Better” Motley Fool (November 2, 2006) Accessed 4/14/07 <http://www.fool.com/investing/general/2006/11/02/adp-tries-getting-even-better.aspx.

by anthonysmoak

An Analysis of the Pharmaceutical Industry

Innovation

Innovation in the pharmaceutical industry is driven by the protections provided by intellectual patents. In theory, these patents temporarily grant innovative pharmaceutical companies a monopoly over their new product or innovation. This monopoly in turn allows pharmaceutical companies to recoup their research and development costs. Companies are able to reap high margins on their products and thus obtain a competitive advantage in the industry. Pharmaceutical companies that participate in the innovation sector are always under intense pressure to find and develop their next “blockbuster drug” quickly, cheaply and effectively. Those companies who are not able to innovate and bring a successful new product to market will experience financial difficulties. For example, pharmaceutical giant Pfizer Inc. has not produced a blockbuster drug since its introduction of the erectile dysfunction drug Viagra in 1998. As a consequence of not successfully innovating a new product since that time, the company will have a diminishing revenue stream in the future. Generic competitors will begin to steal market share from Pfizer as it loses its exclusive monopoly on highly profitable drugs.

While intellectual property protection can encourage innovation in the pharmaceutical industry it can also hamper innovation. Pharmaceutical companies can easily obtain new patents by making minor changes to existing products regardless of whether the drugs offer significant new therapeutic advantages [1]. Typically, minor changes are made to blockbuster drugs before their patent expiration date in order to increase the lifespan of the monopoly. In essence it is much faster and cheaper to receive new patent protections on these “me-too” products than to innovate and bring “new molecular entity” drugs to the marketplace.

Alternatives to the current monopolistic patent protection have been proposed to help foster more meaningful innovation. A drug prize system has been bandied about in intellectual discussions for some time. Under a prize system, the U.S. government would pay out a cash prize for any new drugs that successfully pass FDA regulations. The drugs would then be put into the public domain thus creating a free market system for drugs. “Generic drugs (‘generic’ being another way of saying the rights are in the public domain) already do a wonderful job of keeping prices down. While the price of patent-protected drugs has been rising at roughly twice the rate of inflation, the real price of generics has fallen in four of the last five years.” [2] The prize system has its benefits in the fact that marketing costs would be significantly reduced as companies would have already been paid an upfront prize for their efforts. Large awards could be provided to the pharmaceutical innovator who produces breakthrough results while smaller rewards would be paid for incremental “me-too” innovations.

A prize system could also help increase the number of innovations concerning critical diseases that affect the third world. Government intervention can help direct R&D resources to areas where the private market has failed to concentrate. Breakthroughs are badly needed in the fight against AIDS or the search to develop a malaria vaccine. Advanced industrialized nations could pool their resources together and decide to create a large bounty for any drug that provides a real breakthrough in this area. The desired end result would be enhanced access to better medicines for the third world. Obviously the prize system would have some drawbacks. One major drawback would be the duplication of efforts encountered by firms that would compete for the biggest prizes. It is possible that R&D resources concentrated on the highest prizes would encourage a majority of companies to compete to be the winner in these races even more so than in the current patent system.

Research and Development

Pharmaceutical companies are heavily dependent upon acquiring patents and innovating in order to compete in the industry. As a consequence, massive amounts of funding are needed for research and development in order to keep product pipelines full. The Tufts center for the study of drug development estimated the average costs of developing a prescription drug to be 802 million in 2001, up from 231 million in 1987 [3]. This estimation includes the costs of failures as well as the opportunity costs of incurring R&D expenditures before earning any returns.

A price/R&D tradeoff exists in the pharmaceutical industry. If pharmaceutical companies lower prices for drugs in the marketplace it is feasible to believe that profits will fall for these drug manufacturers. As profits fall, R&D is affected which in turn lowers the amount of new drugs coming into the marketplace. Fewer drugs in the marketplace could potentially lead to future generations of less healthy people.

The pharmaceutical industry is one of the most profitable industries in our nation’s economy, thus the companies that develop new drugs are quite content with the current structure in which R&D costs are high. Of course this means that prices for consumers will continue to remain high. Consumers on the other hand need access to new drug products for illness prevention or treatment purposes. Consumers would prefer that prices fall for new drugs while innovations increase. Given the current nature of the pharmaceutical industry this outcome will remain a paradox.

EndNotes:

[1] http://oversight.house.gov/Documents/20061219094529-73424.pdf

[2] http://www.forbes.com/2006/04/15/drug-patents-prizes_cx_sw_06slate_0418drugpatents.html

[3] http://csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=6

Image courtesy of amenic181 at FreeDigitalPhotos.net