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

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

Today’s Class • Finish up discussion of online travel and effects on airline industry • Customer access to information changing the competitive landscape, outcome still unclear • Look at role of Internet at two companies that have strong IT emphasis • Fedex and Dell have both exploited Internet • Bring more information to customers • And to suppliers in Dell’s case • Use to gain advantage, loyalty, market share

Airline CRS Agent Customer Airline Sales Structure 1990 • Two layers of intermediary between airline and customer • Substantial costs associated with each layer • Customer value in CRS layer • Routing and pricing across airlines • Airline value diminished by intermediary power of CRS’s and by own in-house systems • Customer value in agent layer variable • Airline value if agent drove customers to them

Internet Travel Today • 60% of Americans research travel online • Similar to percentage in 2001 • Calls and visits to traditional travel agents down each year • 15% decrease in number of agents in 5 years • Over 39 million people booked travel online • Up 25% over 2001 • 70% of them booked over half travel online • 30% of them booked over $2500/yr online • Southwest books over 1/3 of sales online • About $2B/yr

Airline Consort. CRS Agent Customer Airline Sales Structure Today • Web access supports very different models although may look same to user • Airline sites • Travelocity part of a CRS (Sabre) • Expedia an independent travel agent • Orbitz a consortium of airlines • Each arguing other is anti-competitive

Internet Changed All Players • CRS’s (Sabre/Travelocity) • Allowed Sabre to bypass agents • Conflict: Sabre also in business of serving agents • Individual airline web sites and new consortium (Orbitz) • Bypass CRS and agent intermeidaries • Online agent new entrant • Expedia started with technology lead, kept evolving its model • Traditional agents have been big losers • Except “managed” business travel – how long?

Change Waiting for Enabler • CRS’s and travel agents had become information bottleneck • Relatively large rents compared to value added • Due to position in the information chain • Both consumers and providers (airlines) viewed them this way • Warning: not all apparent information bottlenecks are real • Many viewed broker-dealers on Wall Street as information bottlenecks • They turn out to provide substantial value in many cases

Two Generations of IT Led Change • First generation: CRS’s • Lowered airline costs through outsourcing • Increased airline revenue through differential pricing of business and leisure • Over time made travel agents more powerful • Second generation: Internet • Lowered airline costs by enabling elimination of commissions • Killing traditional travel agent business • Challenging differential pricing through better customer access to information

Airline Strategy and IT • Major airlines presume low-cost carriers aimed at leisure travelers • Arguably JetBlue and Southwest have strategy of low-cost and ease-of-use • As new IT makes all travel easier at lower cost, will this appeal to business travelers? • E.g., JetBlue has long haul flights, reserved seats • JetBlue has “tech culture” • Sells about 60% of tickets online • DirectTV • Virtual reservation centers – operators work from home using voice over IP

Example: Air Freight • In 1970’s specialized fractured business • Not readily available to individual consumers • No clearly defined value proposition over ground transport (e.g., UPS) • Fedex started with idea of guaranteed delivery: “absolutely, positively overnight” • Focused on building air network that could provide this • Introduced hub and spoke system • Drove de-regulation • Quickly saw that information systems were critical as well

Fedex Information Systems • As early as 1979 founder Fred Smith said • “The information about a package is as important as the delivery of the package itself.” • Systems designed to share information with the customer not just internal use • Initially technology costs limited this to customers who did substantial business • In 1980’s Fedex developed and distributed custom PC based software for package origination • Gave 100,000 PC’s to large customers making customer base into an electronic network • Exponential growth from ’81-’86

Direct Customer Access at Fedex • Lowered costs because customers prepared manifests and sent electronically • Often lower cost for customer too when connected to their in-house software • Provided customers with more control, information and ease of use • Allowed for more complex billing models • Value to customer increased by exposing Fedex’s internal information • Package tracking made available • Starting in 1986 handheld scanners recorded every movement of a package

Internet Enabled Universal Access • Not a strategy shift for Fedex • Lowered cost enabled more customers to be reached • In 1994 became first Web site to enable customers to track status of packages • Rudimentary software “scripts” to tie site to mainframe package tracking system • Rapidly evolved into Internet based access for large as well as small customers • Tracking became major value to end consumers • Retailers began offering order tracking

Role of IT at Fedex • Viewed as critical to business both strategically and operationally • Enables strategy that information about the package is as important as the package • Creates competitive advantage • Drives excellence (no hiding from customer) • Arguably has been critical to rapid growth • Sub-committee of board specifically on IT • In contrast many companies view IT as operational but not strategic • Is package delivery special?

Fedex and UPS • UPS is the largest package delivery service in North America • About 13.6M versus 3M packages per day avg. • While Fedex tends to be information technology leader UPS is aggressive • Rapidly rolls out new information services, sometimes ahead of Fedex • Both companies have air and ground services but different emphasis • IT investments increase barriers to entry but not long-term competitive advantage

Fedex Strategy Predates Internet • Information should be made broadly available to customers • As valuable as the delivery itself – half of what Fedex is selling its customers • Opposite of Porter’s lament about the Internet • Customers getting too much information • Fedex was not only ready for this shift they were looking forward to it • UPS has been smart enough to follow along and both have benefited • How important was this readiness to success of online commerce?

Example: Dell • In early 1990’s Dell was a company built around its internal information systems • Like Fedex relentless focus on IT for coordination and logistics • Dell’s goal was to eliminate inventory • At 35 days in early ’90’s; 6 days by ‘99 • Direct sales model largely implemented by call centers • Market segmented according to transaction versus relationship customers • One-off purchase focused on system cost versus ongoing purchases focused on TCO

Dell.com • Established in 1996 • Initial focus on transaction customers • Knowledgeable, not first-time buyers • Enthusiastic about more access to information • Configuration • Tracking • Support information • Separate sites for each region and segment • Business units controlled own content • Dell online unit provided tools, managed servers, enforced consistency of look & feel

Dell.com: More Value, Lower Cost • Configuration of machines in sales and pre-sales process • Support • All technical and troubleshooting information that Dell had for own tech staff • Access to specific material based on serial number • Latest drivers, correct documentation • Tracking • Order status, manufacturing status • Estimated and updated ship dates • Post-ship tracking via Fedex/UPS

Phenomenal Growth • In first 6 months reached $1M/day sales • By end of 2000, over $50M/day • More than half of Dell’s total sales • Less than 5 years after launch • Unlocking demand from customers for better access to information • Focus on “bringing the customer inside the company” – sharing rather than guarding information on configuration, shipping, support • Similar to Fred Smith’s claim that information as valuable as package delivery

Combating Internal Skepticism • Many employees worried that Dell.com would replace their jobs • Dell stressed would replace mundane parts, leaving time to help where really needed • Was borne out in practice partly due to Dell’s overall growth in sales volume • Some customers used site just for research, then phoned • These orders allowed reps to be 50% more productive because customers better informed • Calls about order status dropped by 2/3 • On average had been 3 such calls per order

Dell.com Evolving Market Strategy • Started with focus on knowledgeable transaction customers • Early adopters • After about 15 months developed Premier Dell.com for relationship accounts • Customized to specific customer’s way of doing business • Approvals, allowable configurations, etc. • By end of 2000 had over 50,000 customized premier sites • Dell online developed technology for easily customizing sites, content from business teams

Dell Market Share Growth 2002 • Dell moved away from its long held strategy of ignoring lower end of market • Traditional focus on knowledgeable consumers and companies – more expensive machines • Main growth of market was in consumer segment – weak corporate spending • Dell capitalized on this by using its low-cost online channel to be price leader • Differentiated the segment through processor, software options • Grew share from 13.2% to 15.2%, while leader HP dropped to near Dell’s share

Differing Effects of Internet • Both increasing barrier to entry and competitive advantage for Dell • Better service for customers, lower cost structure, others unable/unwilling to copy • Increasing barrier to entry for Fedex • But not competitive advantage as UPS adopts • Decreasing price differentiation for airlines • CRS technology enabled, but broad distribution over the Internet challenges • Majors hobbled by difficulty of exploiting cost savings and providing better service

Culture of Informing Customer • Fedex and Dell have explicit goals of informing the customer • “The information about a package is as important as the delivery of the package…” - Fred Smith • “… used Internet browsers to essentially give that same information to our customers… bringing them literally inside our business” - Michael Dell • Internet powerful value creation tool for such companies • Is it neutral or value destroying for others?

Internet and Industry Structure • Travel industry large shifts in competitive landscape • Diminished role for agents, loss of pricing power for providers, new channels • Relatively little in way of using to advantage • Package freight major role in e-commerce but less change in own industry structure • Fedex and UPS driving smaller players out • PC industry large shifts • Dell.com applicable to every “desktop” segment • Better service and lower cost than others

Closing Questions • How much of the value is information versus the product or service itself • Package delivery, PC’s demonstrated to be high • What about travel? Other industries? • What information is valuable to your customers • Does it improve or reduce your pricing power, differentiation from others? • Does a model, such as differential pricing, depend on hiding information?

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