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Give a bunch of people a chain and they have two basic options: They can move massive weights by pulling it in a common direction or they can wear themselves out playing tug of war.
In value chain management, the name of the game is cooperation. One of the basic tenets of business today is that you can accomplish more--lower costs and increase profits--by working with your business partners instead of against them. And it is the top executive's job to make that cooperation happen.
CIO Enterprise spoke with the CEOs of four CIO-100 winners about their companies' value chains and how information technology links their suppliers, business partners and customers. Different as their value chains may seem--whether it's State Farm's insurance claims work with body shops or American Greetings' inventory management for drugstores--the four echo some common sentiments about customer focus and the changes information technology may bring about in the near future.
Retailers don't select which American Greetings cards or designs they will sell. Instead, they generally allocate shelf space to us; they say here is 140 linear feet of space, and we decide how much of that space to allocate for seasonal cards or everyday cards, how much is birthday, get well, sympathy or anniversary. Furthermore, we decide what price points to put in. This is an enormous advantage, but on the other hand, we have assumed total responsibility for productivity of that space.
We service about 35,000 retail outlets in the United States. The demographics of a store are of primary concern to us. Stores in Florida need to have an enormous assortment of grandson and granddaughter, niece and nephew products. Stores in younger areas need to have an awful lot of juvenile birthday cards. We do an exact analysis in every store to determine what we are going to put into those 140 feet. All of that starts with the enormous commitment that we have to product development. Every card produced at American Greetings is pretested. We produce it in quantities of 1,000 and measure its performance in test markets, scrap probably the lowest-performing 30 percent and then produce the other 70 percent in ratios relative to their consumer acceptance. We have consumer panels as well. For example, we have a panel composed of 1,000 families that each month send us all the cards they purchased in that month. Another panel of 1,000 send us all the cards they receive each month. All of that testing is an effort to come to grips with what is selling at the retail level and what future products should be like.
Sometimes I'm not sure whether we are part of a very complex industry, and we may well be, or that we have taken a fairly simple business of creating and complicated the hell out of it.
...on the role of technology
From a product development standpoint, technology has been most helpful for things like retrieval of verse, and art and design. Also, three months ago we had hundreds of workers filling orders by hand. Today we have reengineered the whole distribution center and virtually automated the whole order-filling process. We have 13,000 part-time merchandisers--men and women who work for us on a part-time basis who each maintain a store and its inventory and reorder as needed. We take an order and ship it to a store, we pick it up ourselves, we put it out, we take back seasonal returns. The retailers trust our reports because they have examined the information systems that we use and they continue to audit those systems for accuracy. All of our efforts have helped to make the greeting card category a very profitable category for retailers and for American Greetings.
...on the next five years
People want to buy greeting cards; they like greeting cards. It's a business that sort of builds on itself. Forgetfulness is our real competitor. If we can overcome the issue of forgetfulness, we will have grown our business a whole lot. We've introduced technology--Internet technology and CD-ROMs--that we hope will replace forgetfulness with convenience in many cases. In essence, CD-ROM users have access to our library of 1,500 designs for both everyday and seasonal cards.
It's also interesting that we never had young people buying in any large numbers, but with the Create-a-Card Plus, which is the name of our software program, we are seeing young people buying the software to make their own cards. Secondly, men, who are not great buyers other than at Valentine's Day and Mother's Day, are giving more cards now that they can do it in more ways, such as through e-mail and by creating their own. So over the next five years technology will continue to enhance the whole industry by expanding our customer base.
We can use the ATM networks as an example of the interdependency among suppliers, customers and us. We have the customer list, but we are completely relying on vendors for the equipment and on the telephone companies for the lines to the locations of ATMs--grocery stores, for example. If our ATMs break down, our customers get very dissatisfied--not just the customers who are using the ATMs but also the ones who provide us the location.
Since we are a highly regulated industry and will probably be that way for some time, we are somewhat restricted in what we can offer. We are trying to broaden our offerings of financial services to outside markets to the extent that the regulatory authorities allow us. That means we are more engaged in insurance sales, security sales and so forth than we have ever been before.
In insurance, our marketing area needs to determine first what products are particularly desirable for bank customers in a particular category. We use a lot of focus groups and also do statistical analysis to determine those needs. Then we have to go to an insurance company or to several insurance companies and ask them whether they have this kind of product and whether they will develop it for us. We then make it available either directly through our bankers, many of whom are licensed, or through insurance agencies that we've started to buy. It is then sold directly to our customer base.
...on the next five years
Five years has become such a long time. If you look back and see the changes that have taken place during the last five years, you get an idea of what kinds of changes probably will be coming about in the next five years.
We are in an industry that is changing very fast. We are also in an industry with overcapacity. One thing that will certainly continue, assuming that the economy stays reasonably healthy, is consolidation in the financial industry. We will probably end up with maybe three or four truly national players.
The delivery of banking services is going to change. We will see more and more financial transactions being done electronically. Right now only 20 percent of retail transactions are electronic. That percentage will increase every year. Our institution, for example, has just opened its 100,000th Web site account. Four years ago we had none. The challenge for banks is to balance the two delivery systems. We must combine the old-fashioned one, which we cannot abandon because the majority of our customers want it, with the new and push our customers gently in the direction of electronic banking. It is a huge cost reduction--the cost per transaction goes from dollars to pennies.
There are a number of delivery vehicles other than the Internet that might emerge during the next few years. Interactive TV through cable TV could conceivably be one delivery mechanism. Smart cards will probably play a more important role with the retail consumer. Europeans are much further along in the use of smart cards.
One of the more immediate concerns we have is the year 2000 problem. We started addressing this problem at Huntington several years ago, and while we haven't completely finished our adjustments or the rewriting of our programs, we feel we will not have a problem internally. However, we are now taking surveys and spending an awful lot of time and effort talking with our customers and our suppliers--even more with customers than suppliers--to find out where they stand. The exposure that we have is very hard to gauge. If our customers get in trouble in the year 2000 because their data flow is not adequate, they don't pay the loans back. For banks, this is a major concern.
State Farm is the nation's largest home and auto insurer. We insure about 36 million automobiles and about 20 million homes across the United States and parts of Canada. We have close to 73,000 employees, about 17,000 State Farm agents, about 1,000 claims offices scattered around the country, and we deal with around 7 billion complex transactions a year. That gives you some feel for the scalability that we need.
How we are tied together evolves as technology evolves. We are in the process of building what we call our enterprise network, which will tie together all of our claims offices, regional offices and big data centers to make sure that we have the information flows to provide outstanding service to our customers in their time of need and when they have a question.
We have been very active in the claims arena in developing relationships with body shops, glass vendors and health-care providers. This effort has reduced the time it takes to process a claim--we've shortened that window between when a claim is reported and when it is settled and paid up. And cost savings in our organization ultimately go to the bottom line, which benefit our customers.
Dealing with a variety of small vendors scattered throughout the country can create some challenges for connectivity. Not all body shops are the same in terms of their electronic capabilities. There are certain basic connectivity requirements body shops need to meet to qualify for our Service First program. Even so, in some of the more remote locations there are communications challenges that you wouldn't necessarily find in more metropolitan areas.
In the car rental area, we are working with about 50 different rental groups across the country. Basically, if you have to put your car in the shop after an accident, we can electronically set up a rental car for you if you need one. This is another example of how we are trying to use information technology to get added value to our customers as soon as possible.
...on keeping track of new possibilities
offered by technology
Sometimes we do that better than at other times. The challenge--and I don't think anybody has a good handle on this--is to try to identify what will become the standard that you want to hook your train onto, as opposed to something that is going to hit a dead end in six months. We work closely with the folks at IBM, Hewlett-Packard, Microsoft, Sun--all the major names--to try to keep track of what's going on in this area. Since we're a major user of technology, they also come knocking on our door to make sure we are aware of what is happening. So some good partnering goes on there also.
...on the next five years
We will try to find more people to partner with as we look at where technology is going and how we can provide quality service to our customers. For example, in our fire and casualty business we're working with some contractors in a manner similar to how we work with our Service First auto partners. In our life insurance area, we're looking at ways to reduce the amount of time it takes for a customer to take out a policy loan.
I see technology as a complement to face-to-face service. I don't think technology will ever replace the value of a professional, caring individual being there in your time of need. That is a very critical aspect of our business. Now if you want to look at a number balance or amount due, or you have a question about something in the middle of the night, you can log on to our Web site. The Internet is a convenience tool; however, it will never do away with the hands-on element.
The business we are in is meeting the communications needs of our customers, whether they are individuals or large corporations. Today the customer's needs are changing rapidly in terms of reliability, bandwidth and bottom-line price. There is competitiveness in this industry, and it is technology that is allowing us to deliver new services at less cost. We are also working hard to present one Sprint to the customer. We don't want two or three people calling on a customer; we don't want two or three bills sent to a customer.
In an awful lot of industries you will find that companies compete aggressively with one another but then draw forces together with competitors when it is in their interest to do so. That is why we formed alliances in the wireless area and in the international area. It is not typical in our business,and I think the people who see things as "friend or foe" are looking backward and end up ostracizing themselves. We realize we need partners. But partnerships are definitely harder than being able to do it yourself.
...on the role of technology
I talk to many of my peers and they are really behind the curve in using the tools that are available. I don't think you can run a small company, let alone a large company, as effectively if you are not aggressively using the tools that are available.
Think about the way you exchange information. It is not particularly important whether a report is electronic or not. Rather, the issue is who gets it and how you work within your organization. A few years back, if you got a report and wrote a question on it, whom did you send it to? In my case, I might send it to a senior vice president, who would send it to a vice president, who would send it to somebody else, who would send it to the subject matter expert, who would return it back up the chain. A week or 10 days later I got the question answered, but I may have forgotten by that point what the burning issue was. Today our organization has enough confidence that someone in my position can go down three or four levels, ask a question and get the answer. So there is a way you work with people and a confidence in how you use technology. Once you start to use technology, you can start to organize your company differently. You can flatten it. You don't have as rigid a hierarchy, which I think is always good.
...In the next five years
In the next five years things are going to change even faster. I think eventually--perhaps longer than five years--the distinction between long-distance calls and local calls will go away, because the cost of handling those calls will essentially be the same. And I think the concept of being online versus offline will also go away because you will have ports in a home that are automatically online.
Another area of rapid change is bandwidth. [With] high-speed communications, a company doesn't have to have a big call center with a bunch of desks side by side. Instead you can disperse workers right into the home. With remote communications and higher bandwidth, you can think about how to change an organization--the people you hire, where you place them, how much real estate you need, how many offices you need.
So to stay ahead of the curve, companies must understand their customers and bring them the latest technology and communications capabilities. The companies that figure that out--that best meet customers' needs--will be the winners.
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