[MUSIC] Welcome to module 3 of the Digital Transformations Course. So far, our focus has been on the industry impact of IT. In the first module, we assessed how IT enabled business models disrupt established industries. In the second module, we examined platform media to business networks as a unique class of business models that characterized digital goods. In this module and the next, we will examine the transformative impacts of IT within the organization. In the third module, that is in this module, you will gain an understanding of how IT can transform your firm's cost of operations and what it takes to implement this transformation. There are two ways in which IT alters your cost structure. First, simple automation or substitution of labor with technology. So let's say I have ten people that perform my payroll function for me. They manually go through employee contracts and estimate wages of employees, including tax withholdings, annual holidays, deductions for employee benefits, etcetera, etcetera. Now I decide to automate this payroll management of my company. By substituting these ten people with a payroll management system. What I'm doing is I'm automating the entire function using software. The software automates inputs, transfers them across relevant modules, and estimates wages while eliminating redundancies and improving accuracy. This simple substitution of label with technology will clearly save you costs. But is it a source of competitive advantage? In other words, can this simple automation create for you sustainable performance differences relative to your competition? No, not really. If you don't engage in this kind of automation, it's a source of competitive disadvantage. But if you engage in it, it's not really competitively valuable. Why? Because everyone can imitate this investment with relative ease. So much so that nobody really owns their payroll functions anymore. It's management is outsourced to third parties such as ADP who builds scale and skill in this function and offer it to your firm as a mere service. The second way in which IT alters your co structure is through the design of information capabilities. If you keep automating various functions within your organization you might end up with silos of automation. So it's important that these different functions in your organizational value chain talk with eachother. This integration is critical to providing the right information to the right stakeholder at the right time in your firm. And your ability to do so speaks for the information capabilities of your firm, and while automation is not a source of competitive advantage the design of information capabilities sure is. Don't just take my word for it. The next two slides compare the information capabilities of Amazon and Barnes & Noble. Two companies that you are perhaps familiar with. Amazon, the world's largest book retailer and so far an online retailer. Barnes & Nobles, a company that dominated book sales in the world before Amazon. Barnes and Noble used to have these large stalls where you would walk in, browse the shelves, drink coffee, eat a criossant and just maybe but a book. Now look at Amazon's information capabilities, they have in place something called a touchless business process. Can't speculate what that is. When a touchless business process is one where data items are captured automatically in the value chain with no manual re-entry of the same data items ever again in the value chain. In other words, when you enter information on Amazon to order a book, there is no more human touch to that data. It flows automatically through their systems and business processes to reach suppliers and third party logistics providers like Fed-Ex, who can drop-ship your product based on this information. So when a publisher logs into the Amazon value chain, what do you think he or she sees? He or she sees the off take of their books at the retail front. The publisher has real-time visibility into demand for their products. In contrast, when a Barnes and Noble publisher logs into the Barnes and Noble value chain, they see how much Barnes and Noble has ordered from them. A significant lag in communicating demand information at the retail front to the upstream players in the value chain. When there is no delay in relaying inventory information and this information is seamlessly available across the value chain. The result is far superior inventory management. Therefore, at Amazon there is little error in inventory planning and there is little delay in scheduling delivery of inventory. This online retailer using it's superior information capabilities has done something wonderful. They have substituted inventory with information. And then therefore able to deliver quality customer service, maintain a large variety of products. And maintain adequate inventory and inventory turns of those products. Variety, inventory management, and service, a triad of objectives almost unheard of being fulfilled in the retail business. By contrast, when I load this up, I walked around a few Barnes and Noble stores in Austin. I saw 8 to 10 copies of a book, not a very highly ranked book laying around. And this was the story in many, many stores. And here's a slide that quantifies this different in inventory management efficiency of the two companies. These numbers are a tad dated. They are for the financial year ended 2012. What you find is that Amazon holds nearly 10% of its revenue as inventory, while Barnes & Noble holds over 20% of sales in inventory. In turn, it takes Amazon 46 days to sell a book. It takes Barnes & Noble nearly 115 days to do so. Amazon has 90 days credit terms with its suppliers. The company operates with negative working capital. What I'm also showing you here is the saving that would accrue to Barnes & Noble if it were able to match Amazon's information capabilities. So instead of inventory to sales ratio of 20%, if inventory to sales ratio was 9.8% the company would save what it currently holds as inventory that is $1.4 billion less 9.8% of it's revenue which is what Amazon holds as inventory. You multiply that difference by some nominal inventory holding cost, let's say 25% and what you get is savings of $180 million for Barnes and Noble. I don't agree. The operating loss for the company for that year? 180 million. So you and I see this. Barnes and Noble must clearly see this, yet it's not able to put these capabilities in place. At least have not at the time that I wrote this up. Why is that? Several reasons that made it a class unto itself. We talked about some of these reasons in our module on disruptive innovation. Amazon's business model was so disruptive to Barnes & Noble that it never adapted. Even when it began to, Barnes & Nobles saw Amazon as a technology problem. Not a problem of a fundamentally different business model. So they set up a website. But this was a new way of doing business. And this was Barnes & Noble's commitment to this new way of doing business. In 2013, a blog post about reasons to return to 1998. Barnes & Noble was dangerously vetted to an old order. When the market was hammering the good users or to fit stock, it briefly considered going private to protect it's way of doing business. It's information capabilities were tied to an old business model, who's time had come, but the company simply could not adopt. On the other hand, Amazon superior information capabilities helped to evolve from a retailer to a marketplace. The company has developed such skill and skill in designing information capabilities that it offers it as a service to the sellers on its marketplace. What this press clip is telling you is that over 90% of the sellers on Amazon's marketplace use Amazon's logistics and warehousing services. You may say, hey, that's unfair. To compare these two models and hold one Barnes and Nobles or Amazon standards. After all, one is an online retailer and the other is a book store. But I'm going to push you back on that one, because who's customers are Amazon gaining? Barnes and Nobles. And if they're going after your customers, their business is your business. Nothing unfair in that comparison. And you want an example of an offline retailer with similar levels of inventory management, I raise you to Walmart. Revenue of 560 Billion dollars the company is like a mini country. And it's retail business is an unarguably complex one spanning diverse product categories. Yet this company maintains 9-10% of its sales as inventory. So it's not that this cannot be done for this business versus another or this business model versus another. But it is incredibly difficult to do. Many companies in the 90s tried to imitate Walmart. Notable amongst them was the discount retailer Kmart, who began to lose out significantly. In terms of operational efficiency to Walmart. Kmart suffered from poor inventory availability in its stores due to inadequate forecasting and fulfillment processes. It was widely recognized that Walmart's operational excellence was due significantly to an integrity IT infrastructure that provided end to end visibility in its value chains. The transmitted store sales and inventory data not just to head quarters but also to upstream manufacturers. In October 2000, Kmart was previously large scale IT initiative head stumbled announced a $1.7 billion effort to align with Walmart's information capabilities. This effort reflected a conscious strategy to change its physical and IT infrastructure as had Walmart. However Kmart failed where Walmart succeeded. In fall 2001 Kmart wrote off two distribution centers IT assets related to the effort worth $130 million while announcing a redirected $600 million IT strategy. In January 2002, Kmart declared bankruptcy, the firm had four chief information officers in the previous five years. These examples illustrate to you an important shift from focusing on IT to focusing on information capabilities. Superior information capabilities drive the competitor value or competitor advantage of firms like Walmart and Amazon because they are very, very difficult to replicate. They require a shift in business strategy, a redesign of business processes. And the change in organizational culture, and most firms are bad at it. Now that you are hopefully convinced about the importance of information capabilities, we will explore in the remainder of this module the recipe for the secret sauce. [MUSIC]
