Case Studies

Chapter 1. Cisco Systems: Poster Child for the Digital Firm?

Chapter 2. Can A&P Renew Itself with New Information Systems?

Chapter 3. Can GE Prosper with a Digital Firm Strategy?

Chapter 4. The Collapse of Webvan

Chapter 5. Is FBI's Carnivore Eating Our Privacy?

Chapter 6. Enerline Turns to an ASP

Chapter 7. Ford and Firestone's Tire Recall: The Costliest
Information Gap in History

Chapter 8. Schneider National Keeps on Trucking with
Communications Technology

Chapter 9. General Motors Takes a Test Drive on the Internet

Chapter 10. Frito-Lay's Drive to Repackage Knowledge

Chapter 11. BC Hydro Systems Electrify the Utilities Field

Chapter 12. Can APCO Insure Its Future with a New System?

Chapter 13. A New Supply Chain Project Has Nike Running for Its Life

Chapter 14. The World Trade Center Disaster: Who Was Prepared?

Case Study

Cisco Systems advertises itself as the company on which the Internet runs, and this San Jose, California, company does dominate the sale of network routers and switching equipment used for Internet infrastructure. Under the leadership of CEO John Chambers, it has been so successful that it even briefly became the most valuable company on earth in early 2000, reaching a valuation of $555 billion and a stock price of more than $80 per share. One key to its success is that Cisco uses information systems and the Internet in every way it can. However, by April 2001 the stock closed below $14, a decline of more than 80 percent, while the company value fell to around $100 billion. What was to blame for this precipitous plunge? What role did Cisco's information systems play?

Cisco was founded in 1984 by Stanford University computer scientists looking for an easier and better way to connect different types of computer systems. By 1990 the company was growing at a double-digit rate, which it maintained for 10 years, even surpassing 50 percent in growth during some years. The company claims it now has 85 percent of the Internet switching equipment market.

Cisco's growth was based on two main strategies. First, the company outsources much of its production, and second, a significant portion of its growth has been through strategic acquisitions of and investments in other companies, amounting to $20 billion to $30 billion between 1993 and 2000. Cisco's investments were carefully selected as a means of building internal competencies in areas where the market was evolving. In September 2000, six months after the stock market decline began, Cisco announced its sales were growing at an annual rate of 66 percent.

Cisco was very proud of its use of the Internet to drive its business and has actively promoted itself as a model for other companies. It is generally believed that "Cisco uses the Web more effectively than any other big company in the world. Period," according to Fortune Magazine. If any company epitomized the digital firm, it was—and still is—Cisco.

Cisco began selling its products over the Internet in 1995. In 2000 Cisco was selling about $50 million in products daily via the Web. Customers can use Cisco's Web site, called the Cisco Connection Online, or CCO, to configure, price, route, and submit orders electronically to Cisco. More than half of the orders entered on CCO are sent directly to the supplier, and once the product has been manufactured, it is shipped directly to the customer. Those orders are never touched by Cisco. The result is that the company has reduced its order-to-delivery cycle from six to eight weeks to less than three weeks. Moreover, this has enabled Cisco and its suppliers to manufacture based on actual orders, not on projections, lowering inventory costs for both Cisco and its suppliers, while leaving customers pleased with the speed of fulfillment. In addition, 85 percent of customer support queries are handled through Cisco's Web site, saving the company $600 million in 2000 alone, according to Chambers. Cisco claims it has seen a 25 percent increase in customer satisfaction since it established these portals in 1995.

Cisco uses the Internet in many other ways. It has established a business-to-business supply chain extranet called Cisco Manufacturing Connection Online (MCO) for its manufacturers and suppliers, which is used to purchase supplies, make reports, and submit forecasts and inventory information. This Web site has helped Cisco and its manufacturing partners reduce their inventories by 45 percent.

Cisco shares a great deal of its own knowledge on its intranet, whereas many corporations believe that most of their knowledge must be guarded. The company's stated goal for admitting many customers, suppliers, and distributors to selected portions of its intranet, according to Peter Solvik, Cisco's CIO and senior vice president, is "to create a relationship where customers can get access to every aspect of their relationship with our company over the intranet or Internet."

Although the employee turnover rate is very high in most technology companies, at Cisco it is very low. One reason may be Cisco's use of its employee intranet, called the Cisco Employee Connection. Employees use it to enroll in company benefits and file expense reports, and they are usually reimbursed within 48 hours. Four-fifths of employee technical training take place on-line, saving the company employee time and travel money while enabling employees to receive more training. Managers review their employees, collect information on competitors, and monitor sales or other functions the manager is responsible for, all on-line.

The company's sales database is updated three times daily, enabling managers to determine which salespeople and regions are not meeting quotas. Engineering managers receive e-mail alerts if a big problem occurs that is not solved within one hour. The manager will then call the appropriate customer and offer help. When customers call Cisco with problems, Cisco employees use its Web site to help solve the problems. About 85 percent of 25,000 monthly job applications to Cisco come over the Internet. If most came on paper, the firm simply could not sort or read them all, much less select out and consider the most promising of them.

Cisco even developed what it calls its "virtual close." Larry Carter, Cisco's chief financial officer, said that it used to take Cisco 14 days to close its books, "a real hindrance." Now the finance group achieves its close in only a few hours, giving employees "real-time access to detailed operating data." Today, "we update our bookings, revenues, and product margins by the minute," said Carter. "These tools and data have been invaluable in helping Cisco manage its rapid growth. Executives can constantly analyze performance at all levels of the organization," he claims. Cisco's systems also are used to forecast sales. The forecasts primarily are based on past sales and current orders. "Daily information about our product backlog, product margins, and lead times," are included, according to Carter, and that triggers decisions throughout Cisco's chain of suppliers. These forecasts also include information about bookings, shortfalls in supplies, and delayed product deliveries.

Although the stock market reached its all time high in March 2000 and then started to correct, Cisco continued to thrive a while longer and its management remained absolutely optimistic. During market declines in past years when sales of networking devices slowed (1994 and 1997–98), Cisco had continued to aggressively expand even though its competitors slowed their activities or merged with other companies. Each time Cisco had increased its market share.

However, this time proved to be different. Cisco faced a decline of two-thirds in the technology-laden Nasdaq stock market which included a major pull back in telecommunications, a pivotal field for Cisco. Cisco had previously projected telecommunications sales to double in 2000–2001, but the opposite happened, resulting in the sharp decline in Cisco's stock. In the summer of 2000 Cisco still believed its situation was very positive. It received an outpouring of orders, so many in fact that it lacked many parts, causing massive delays in fulfilling orders. Many customers waited as long as 15 weeks for delivery. Cisco launched a two-fold strategy to resume filling orders quickly. It started purchasing key components months before they were ordered, so they would be available when needed. Also the company lent $600 million interest-free to its contract producers so they could purchase the missing parts. Although some of these manufacturers were concerned that Cisco was being too expansive, Cisco's July 29 year end showed a revenue jump of 60 percent from the previous year. By September the company backlog was more than seven weeks with a value of $3.8 billion. Although the stock for Nortel Networks Corp., a Cisco rival, did fall 33 percent in two days because Nortel announced slower-than-expected sales, Michelangelo Volpi, Cisco's chief strategy officer, said Nortel had fallen prey to management "exuberance." This was not true of Cisco, he said, because, "We try to very precisely set expectations [using our virtual close]." Chambers emphasized that Cisco could meet Wall Street projections. Meanwhile, two Cisco manufacturers informed the company that their shipments were slowing.

In November 2000 Cisco's orders for its telecom division reported a sales decline of 10 percent from the previous quarter. Moreover, Cisco's sales to newer companies didn't grow at all. Some of these companies, including several that had borrowed funds from Cisco, declared bankruptcy. Yet according to Chambers, orders were "comfortably" up by more than 70 percent from the previous year, and Carter said Cisco expected sales to grow by nearly 60 percent in the current quarter. The company aggressively hired new staff. On December 4 Chambers again described the perceived slowdown as a Cisco opportunity, following its earlier slowdown strategy. "Cisco is actually better off if the stock market stays tough for the next 12 to 18 months," he said. However, just before December 15, after Chambers's vaunted virtual close system told him that daily sales were 10 percent below expectation for two weeks, he called his top sales executives, who verified the unexpected numbers. He then met with his senior executives to let them know about his concern over the sudden drop in quarterly sales. The group agreed to delay both hiring and inventory building for the next 45 to 60 days.

Earlier, in late spring 2000 as Cisco was planning its 2000–2001 fiscal year to begin in October, Chambers had said the dot.coms "had money" and "they were buying." His view was, "To not plan to meet that growth is the quickest way to lose customers." However, at the end of January 2001, Cisco's second quarter ended with sales to young telecom companies down by 40 percent. Sales to dot.coms were down by half rather than rising by half as the Cisco's vaunted computer systems had predicted. Between November 2000 and March 2001, the company had hired about 5,000 new staff, but on March 9 Cisco announced it would lay off 5,000 (soon increased to 6,000) employees and up to 3,000 temporary workers while restructuring its business. By April Cisco was selling to only about 150 young telecom companies, down from 3,000 companies only one year earlier. On April 16, 2001, Cisco announced it would write off $2.5 billion of its swollen inventory, although it was still left with an inventory of $1.6 billion, one-third higher than the previous summer. In addition, with so many bankruptcies, barely used network equipment had come on the market at steep discounts of around 15 cents on the dollar.

What went wrong? It was crystal clear the company was suffering from overordering. Cisco was focused on what their customers were ordering. No one looked at the macroeconomic factors overshadowing the entire communications industry. Someone should have said, "These orders can't be sustained." One explanation was that, facing delays in shipments after ordering, many customers began ordering from Cisco and also ordering from two or three other suppliers, causing the backlog to look greatly larger than it actually was. When an order did arrive, those companies cancelled the other orders, resulting in a sudden, rapid backlog decline. Cisco's information systems could not account for that situation, and so the company was misled by the very systems in which it had so much pride. "We knew there were multiple orders," said Volpi. "We just didn't know the magnitude." Cisco's forecasting software focused on growth data and ignored such macroeconomic data as debt levels, economic spending, interest rates, the bank market, and the stock market. The software was not designed to deal well with declining demand. Misleading, though accurate, information had resulted in bad decisions.

Some observers expressed their belief that Cisco sales forecasts were way too high because the company suffered from overconfidence after years of remarkable sales growth. It had relied on past rosy sales and never considered the possibility that sales might actually decline. Management was more concerned about turning away orders than about whether the orders were real. Moreover, "People see a shortage and intuitively they forecast higher," commented Ajay Shah, the CEO of Solectron Technology Solutions Business Unit, a company that produced networking parts for Cisco. He went on, "Salespeople don't want to be caught without supply, so they make sure they have supply by forecasting more sales than they expect." Shah also noted that his company (and some others ) saw a decline and began to cut back. He did not urge Cisco to do the same, because, he said, "Can you really sit there and confront a customer and tell him he doesn't know what he's doing with his business? The numbers might suggest you should." M. Eric Johnson, an associate professor of business administration at the Tuck School of Business and an expert in supply chains, said Cisco's outsourcing business model ultimately worked against the company. He said the outsourcing model has "done some wonderful things. But Solectron has to watch its own business. It matters less to them if Cisco's numbers look off."

In sum, Cisco may have overrelied on forecasting technology, leading people to undervalue or ignore human judgment and intuition. In November 2000, when the economic troubles were clear to many, Volpi said, "We haven't seen any sign of a slowdown," and Chambers announced, "I have never been more optimistic about the future of our industry as a whole or of Cisco." Only when the virtual close showed the actual sales line crossing under the sales forecast line in mid-December did the company see a problem for the first time, according to Peter Solvik, who was in charge of Cisco's information systems function.

Chambers has expressed a very different view. According to him, Cisco is suffering because of the sudden and unexpected economic deterioration. He denies that the company relies exclusively on its software. "Do our systems do a great job of telling us where we are today? Yes, but they don't tell the future." He admitted that if they had instituted a hiring freeze in the autumn of 2000, there would be no layoffs now. But, he added, that would have cost sales and market share. "We will always err on the side of meeting customer expectations," he said, also noting that pausing when sales hit a small decline would have prevented the company from reaching its $19 billion sales mark last year.

In late August 2001, Cisco underwent a major reorganization, abandoning its "line of business" organization that had been in place since 1997. The old lines of business, including commercial, consumer, enterprise, and service provider, were less useful as Cisco customer interest increasingly cut across multiple product lines. Cisco replaced this structure with a centralized engineering and marketing organization with 11 technology groups, focusing on access; core routing; Internet switching and services; network management services; and optical, voice, and wireless technologies. The reorganization enables Cisco to more closely track which products and technologies are the most and least profitable so that it can focus on them. Cisco found through this reorganization, that its service provider business was its poorest performer and that wireless networking technology promises rapid sales growth. The question is, how quickly and effectively can Cisco rebound? Can it maintain its leadership role in networking technology? And is its digital firm strategy a recipe for future successes or pitfalls?

Sources: Scott Berinato, "What Went Wrong at Cisco," CIO Magazine, August 1, 2001; Larry Carter, "Cisco's Virtual Close," Harvard Business Review, April 2001; Dan Goodin, "Cisco Expects Tornadoes to Power Growth," Wall Street Journal, July 20, 2001; Lee Sherman, "A Matter of Connections," Knowledge Management, July 2000; Bret Swanson, "For Cisco, It's Change or Perish," Wall Street Journal, April 18, 2001; Scott Thurm, "Even as Rivals Began to Stumble, Cisco Believed Itself to be Immune," Wall Street Journal, April 18, 2001; John Pallatto, "Inside Cisco," Internet World, October, 2001; and Scott Thurm, "Eating Their Own Dog Food," Wall Street Journal, April 19, 2000.

Case Study Questions

Analyze the relationship between information systems, Internet technology and Cisco's business strategy.
To what extent is Cisco a digital firm?
How successful was Cisco's reliance on information systems and the Internet?
Why did Cisco react so slowly to deteriorating economic conditions and declining sales in 2000? What management, organization, and technology factors influenced the way Cisco responded? Include evidence to support your analysis.
What do you think Chambers and Cisco could and should have done differently in 2000 and early 2001? Do you agree or disagree with Chambers's conclusion that the company had to take the steps it did? Why or why not?

Case Study

Chapter 2

Can A&P Renew Itself with New Information Systems?

Is A&P, the most famous supermarket chain in the United States, about to disappear? Maybe, but if it happens, it won't be immediately because management is fighting hard to survive. The Great Atlantic & Pacific Tea Co. (A&P's official name), headquartered in Montvale, New Jersey, had about 750 stores in 16 states, Washington D.C., and Ontario, Canada. These stores include the A&P chain but also the Food Emporium, SuperFresh, and Waldbaum's chains. They have about 24,400 full-time employees plus 56,600 part timers.

This "granddaddy" of grocery store chains was founded in 1859 and has been a leader right from the start. In the 1920s A&P was one of the first chains to offer store brands, such as A&P's Bokar Coffee. In 1937 it launched its own magazine, Women's Day. A&P became so large that in 1950 its annual revenue was second only to General Motors in the United States. However, by 1990 its sales were no longer growing, and it was facing stiff competition from such giant chains as Safeway and Kroger.

In 1993, 34-year old Christian Haub became the CEO of A&P. Haub is a member of the family that owns Germany's Tengelmann Group, which in turn holds 53 percent of A&P. Tengelmann is one of the 10 largest retailers in the world, with annual sales of about $25 billion. Haub immediately began to address A&P's problems. He launched a program he named the "Great Renewal" and rapidly closed more than 100 "underperforming" stores, while establishing a number of "superstores." Next he reorganized management into regional divisions, and in mid-1999 he hired Nicholas L. Ioli as A&P's senior vice president and CIO. Ioli, with strong and active support from Haub, immediately embarked on a project to reconstruct and modernize the company, including its whole supply chain.

A&P was facing a number of serious problems in addition to its stagnant sales. Its obsolete information technology infrastructure was composed of a complex web of stitched-together old legacy systems. The company was primarily using 12- to 20-year-old software running on two large mainframe computers. "We had extremely antiquated systems, from finance to merchandising to store and warehousing systems," explained Ioli. The company had fragmented distribution systems, resulting in little knowledge of what sells in which stores. Moreover, A&P's supply chain was not using the Web to work better and more inexpensively. The company also had outdated, ineffective business processes, such as not having systems to analyze data from either customers or suppliers.

The grocery business operates on high volumes of transactions and tiny profit margins of 1 to 2 percent of sales. In addition to traditional competitors, A&P was losing market share to new types of stores, such as Wal-Mart, that had entered the grocery business as part of their attempt to meet most home needs. Also the company was facing a challenge from discount club stores, such as Sam's Choice, and from convenience stores such as Seven-Eleven.

Haub's plan to revive A&P called for using new information systems to refocus the company on serving customers better and managing inventory more efficiently. Management expected the new systems to save about $325 million over four years by decreasing operating costs while making desirable products more easily available to customers. It also hoped the systems would eliminate inefficiencies in its supply chain. After that, Haub expected the project to result in an increase of $100 million annual pretax operating profits.

In March 2000, the company launched a $250 million project for a four-year redesign of its information systems. In describing the planned project, A&P estimated that, of the $250 million, 35 percent would be technology costs, whereas the remaining 65 percent would be for training, communications, and managing and measuring performance. One objective was to enable customers to use self-checkout lines to save time. Customers would even be able to order on the Web so, for example, they could order at work and pick up merchandise on the way home. Ioli expects the company to have store-specific data so that it can serve local customers. The project would also address A&P's technical staffing problems. Management plans to double A&P's IT department, from 150 people to 300. In addition, they will outsource noncore IT functions, which depend on the old legacy systems, so that A&P staff time is not wasted on such tasks. The project is planning for a Web-enabled, e-commerce supply chain and the modernization of other systems as well, replacing up to 95 percent of current applications. Ioli also expects to supervise training and other large-scale, change-management programs. Haub named the project "Great Renewal II" and set it up as a shared-risk partnership.

Wall Street's reaction was sharply negative. "The Great Renewal projects are absolutely needed, but they are significantly late," stated Mark Husson, a Merrill Lynch equity analyst. Analysts have criticized the project as being too expensive, thereby reducing company earnings and reducing shareholder value. Many analysts recommended that their clients sell the stock.

Ioli quickly turned to IBM as a consultant and partner for the Great Renewal project. Developing software was a major challenge, partly because there is very little prewritten software available for the grocery business. Most grocery retailers have to write their own software, which would be extremely time consuming and expensive for A&P. If the company did try to use the best prewritten software commercially available, it would have to create additional software to link different portions of the system together so they could communicate with each other. Creating this interface software would consume a great deal of time in a project that needed to be completed rapidly. Another possible solution was an enterprise system to integrate data and business processes for different functions. However, no ERP system had ever been designed specifically for the grocery business with its special problems, such as its need to move perishable items (fruits, vegetables, milk, ice cream, and meats) rapidly through the supply chain. Many products have to be purchased regionally. As a result, this would be "the first attempt to strategically reengineer a company and get as close to an ERP as we can" in the grocery industry, said Ioli. However, he added, "We believe the technology and functionality will allow us to move ahead of the competition."

A&P wanted a core system where all of its item and merchandising information would reside; it also wanted functionality for category management, merchandising, procurement, promotion, pricing, and forecasting, including the perishable side of the grocery industry. Management selected Retek, a small Minneapolis-based software company that had developed systems for European and Asian grocery chains and for other major retailers, such as Ann Taylor and Eckard.

Retek provided a merchandising system that A&P could use to execute core merchandising activities; a demand forecasting system to produce accurate forecasts for supply chain planning, allocation, and replenishment; a merchandising planning application; a retail intelligence tool that identifies opportunities; and a data warehouse for analyzing vast pools of transaction data to discern patterns of customer behavior and sales trends.

Many observers considered the project risky; A&P was betting the future of the company on new technology. The whole grocery business is watching A&P's project very closely. A&P had invested comparatively less in information technology than its rivals. "If A&P does succeed, it will reinforce the inclination of grocery chains and their senior management boards to bet their thin margin businesses on IT investments," explained Greg Girard, an analyst at Boston's AMR Research. Observers feared that the project and its budget would grow beyond what was originally targeted. Yet another fear concerns training and support once the software portion has been completed. With 750 stores, a lot of part-time help and high turnover, A&P has a great deal to absorb.

Numerous other companies have experienced enterprise system failures. Fox Meyer, a large drug distributor, was liquidated after its project failed, whereas profits for Hershey Foods were badly slashed when serious project problems forced it to miss the highly profitable Halloween and Christmas/New Year's rushes. In the grocery business, Nash Finch Co., a supermarket operator, lost more than $70 million when it abandoned its enterprise project, and A&P's project is much larger. To address these risks, the A&P project team has developed and uses an elaborate business plan that includes holding weekly meetings with top management, team leaders, and representatives from Retek and IBM.

The core portion of the project, retail application development, was divided into three stages: purchasing, merchandising, and inventory management. The new applications must communicate with several other major pieces of software: OMI International's warehouse management system, Manugistics's transportation system, and both Tomax's and SofTechnics's store systems. Oracle systems were selected for the financial and human resources functions. The first of the three development stages was scheduled to be completed by December 2000, and the transportation system was actually operating in Canada by February 2001. The project's primary teams include technical and development teams; a change management team; a business processes team; a team to oversee information technology; and a team of eight A&P employees who monitor the project, including its schedule and costs.

Sources: Susannah Patton, "Can I.T. Save A&P?" and "A More Perfect Union," CIO Magazine, February 15, 2001; Sami Lais, "A&P's $250M IT Plan Shunned by Wall Street," Computerworld, March 20, 2000; Retek Corp., "A&P's Project Great Renewal Powered by Retek and IBM," www.retek.com; and www.aptea.com.

Case Study Questions

What problems did A&P have with its business? What management, organization, and technology factors contributed to those problems?
To what extent was the Great Renewal project a solution to those problems? What problems could system modernization solve? What A&P problems could it not solve?
How would implementing new systems change the way A&P ran its business?
Evaluate the chances of success for the Great Renewal project. What else do you think A&P needs to do if it is to be successful in redesigning its company? Explain your answers.

Case Study

Chapter 3

Can GE Prosper with a Digital Firm Strategy?

General Electric (GE) is the world's largest diversified manufacturer. Headquartered in Fairfield, Connecticut, the company consists of 20 major units, including Appliances, Broadcasting (NBC), Capital, Medical Systems, and Transportation Systems.

Jack Welch, GE's CEO and chairman from 1981 until September 2001, has been often cited as the most admired CEO in the United States. Under Welch's leadership GE became a company of $130 billion in revenue, earnings of $12.7 billion, capitalization of $400 billion and 314,000 employees in 100 countries. Welch achieved spectacular results by pressuring GE workers to stretch themselves to meet ever-more demanding quality and efficiency standards. Welch demanded that his managers find ways of making each of the company's major businesses rank first or second in the world. Welch tried to overhaul the company over and over again--through globalization of the company in the late 1980s; "products plus service" programs in 1995, which placed emphasis on customer service; and Six Sigma in 1996, a quality program that mandated GE units to use feedback from customers as the center of the program.

Fortune named GE "America's Most Admired Company" in 1998, 1999, and 2000. Welch retired in September 2001 and was succeeded by Jeffrey Immelt. Well before Welch retired, GE had already become one of the biggest corporations in the world and an old economy business. How could it continue to throw off profits at the same furious pace it had in the past? Welch and his management team decided to explore using Internet technology for this purpose.

At a January 1999 meeting of 500 top GE executives in Boca Raton, Florida, Welch announced a new initiative to turn GE into an Internet company. Welch proclaimed that the Internet "will forever change the way business is done. It will change every relationship, between our businesses, between our customers, between our suppliers." By Internet-enabling its business processes, GE could reduce overhead costs by half, saving as much as $10 billion in the first two years. Gary Reiner, GE's corporate CIO, later explained, "We are Web-enabling nearly all of the [purchasing] negotiations process, and we are targeting 100 percent of our transactions on the buy side being done electronically." On the sell side Reiner also wanted to automate as much as possible, including providing customer service and order taking.

GE had quietly been involved with the Internet years before the 1999 meeting, conducting more purchasing and selling on the Internet than any other noncomputer manufacturer. For example within six months after beginning to use the Internet for purchasing in mid-1996, GE Lighting had reduced its purchasing cycle from 14 to 7 days. It also reduced supply prices by 10 to 15 percent as a result of open bidding on the Internet. In 1997, seven other GE units began purchasing via the Net. The company even sold the concept to others, including Boeing and 3M.

Polymerland, GE Plastic's distribution arm, began distributing technical documentation over the Web in 1994. It put its product catalog on the Net in 1995, and in 1997 it established a site for sales transactions. Its on-line system enables customers to search for product by name, number, or product characteristics; download product information; verify that the product meets their specifications; apply for credit; order; track shipments; and even return merchandise. Polymerland's weekly on-line sales climbed from $10,000 in 1997 to $6 million in 2000.

Welch ordered all GE units to determine how dot.com companies could destroy their businesses, dubbing this project DYB (destroy your business). He explained that if these units didn't identify their weaknesses, others would. Once armed with these answers, managers were to change their units to prevent this from happening. Each of GE's 20 units created small cross-functional teams to execute the initiative. Welch also wanted them to move current operations to the Web and to uncover new Net-related business opportunities. The final product was to be an Internet-based business plan that a competitor could have used to take away each GE unit's customers, and a plan for changes to their unit to combat this threat. Reiner ordered GE units to "come back with alternative approaches that enhance value to the customer and reduce total costs."

The Internet initiative started by changing GE's culture at the very top. GE's internal newsletters and many of Welch's memos became available only on-line. To give blue-collar workers access to the Net, GE installed computer kiosks on factory floors. One thousand top managers and executives, including Welch (who also had to take typing lessons), were assigned young, skilled mentors to work with them three to four hours per week to help them become comfortable with the Web. They had to be able to evaluate their competitors' Web sites and to use the Web in other beneficial ways. Every GE employee was given Internet training. Welch announced in 2000, that GE would reduce administrative expenses by 30 to 50 percent (about $10 billion) within 18 months by using the Internet. Employees can handle all of their business travel arrangements via the Internet and access employee information on-line through a corporate intranet.

Many projects came out of the initiative. For example GE Medical Systems, which manufactures diagnostic imaging systems such as CAT scanners and mammography equipment, identified its DYB threat as aggregators, such as WebMD, which offered unbiased information on competing products as well as selling them. GE products on these sites looked like any other commodity. The unit's major response was iCenter, a Web connection to customers' GE equipment to monitor the equipment operation at the customer site. iCenter collects data and feeds it back to each customer who can then ask questions about the operation of the equipment through the same site. GE compares a customer's operating data with the same equipment operating elsewhere to aid that customer in improving performance. "We can say, 'Do you know you're only 60 percent as productive as another customer using the same equipment in another part of the world,'" explained Joe Hogan, Medical Systems' CEO, "'and by doing x, y and z, you can increase productivity?'" In addition customers are now able to download and test upgraded software for 30 days prior to having to purchase it. The unit also began offering its equipment training classes on-line, enabling clients to take them at any time. The aggregators were also auctioning off used equipment, which was in demand in poorer countries. Medical Systems established its own site to auction its own used equipment, thus opening new markets (outside the United States). GE Aircraft adapted iCenter and now monitors its customers' engines while they are in flight.

GE Power Systems then developed its Turbine Optimizer, which uses the Web to monitor any GE turbine, comparing its performance (such as fuel burn rate) with other turbines of the same model anywhere in the world. Their site advises operators how to improve their turbines' performance and how much money the improvements would be worth. The operator can even schedule a service call in order to make further performance improvements.

Late in 1999 GE Transportation went live with an e-auction system for purchasing supplies. Soon other units, including Power and Medical, adopted the system. GE later estimated the system would handle $5 billion in GE purchasing in 2000, and the company would do at least 50 percent of its purchasing on-line in 2001. The system lowers prices for GE because approved suppliers bid against each other to obtain GE contracts. It also results in fewer specification errors and speeds up the purchasing process.

GE Appliances realized that appliances are traditionally sold through large and small retailers and that the Internet might destroy that model, turning appliances into commodities sold on big retail and auction sites. GE wanted to maintain the current system, keeping consumer loyalty for their GE brand (versus Maytag, Whirlpool, or Frigidaire). Appliances developed a point-of-sale system to be placed in retail stores, such as Home Depot, where customers could enter their own orders. The retailer is paid a percentage of the sale. The product is shipped from GE directly to the customer. GE Appliances claims it can now ship products from its factories anywhere in the United States virtually overnight on a cost-effective basis. Today, nearly 100 percent of its sales take place over the Web. Instead of $5 per telephone call, each order taken over the Web only costs 20 cents.

The corporation and its units issued a blizzard of press releases touting the successes of each of GE's Internet initiatives and the subsequent positive effect on financial results. CIO Reiner said, "We are not talking about incremental change. We're talking total transformation."

A January 2001 article by Mark Roberti of The Industry Standard was skeptical. Roberti commended GE for embracing the Internet so quickly. He also noted that, "these endeavors are unlikely to make GE vastly more profitable . . . because the company isn't using the Internet to reach new markets or create major new sources of revenue." Roberti questioned the great savings through Internet-based cost cutting that GE claimed. To cut costs by moving business processes on-line, a firm "must eliminate--or re-deploy--a significant number of employees" and eliminate redundant systems. "GE hasn't." For example, Roberti said, 60 percent of orders to GE Capital Fleet Services were being placed on-line, but GE had not reduced its call center staff (nor has GE reduced the call center staff of GE Appliances). GE reported that its selling and general and administrative expenses as a percentage of sales fell for the first nine months of 2000 from 24.3 percent in 1999 to 23.6 percent, a minor drop at best. Reducing costs by having customers and employees serve themselves via the Web has proved elusive at other companies as well, such as IBM and UPS. Overall, Roberti pointed out, GE has achieved genuine progress and even leadership, but the company could not be generating the savings management had been predicting.

Since the publication of Roberti's article, GE has agreed with some of his points. In May 2001, GE acknowledged that its expected $10 billion savings would only reach $1.6 billion, a giant savings but severely short of the company's predictions. Moreover, much of that saving resulted from internal Web use. Analysts say that perhaps $1 billion of the savings came from Web-based production efficiencies within GE's 20 major business units--sharing design plans and best practices, monitoring performance data, and automating and consolidating procurement. These gains will start leveling off within the next few years.

Although e-commerce sales amounted to 10 percent of GE's $130 billion in total revenue, connecting GE's suppliers and customers to its Web trading systems has been a major problem. For example observers claim GE has only been able to connect about 25 percent of its suppliers, with another 25 percent still using traditional private networks. That leaves about 15,000 of the 30,000 suppliers using nonelectronic methods of selling to GE. Suppliers appear to have two main reasons for not using the Web. First, using the Web presents complex changes to link the GE Web purchases to the suppliers' own back-end systems. Second, and perhaps more important, GE relies on electronic auctions, and the increased competition by using the Web is reducing GE's purchase prices, making electronic methods more unattractive to the suppliers. Analysts believe that only 60 percent of GE suppliers will switch to electronic methods and that the Web will not enable GE to expand into new markets.

GE continues to have faith in e-commerce and e-business. It has budgeted about $3 billion for computer spending in 2001, an increase of about 12 percent over the previous year. It also has indicated it will design and offer to its customers Web-based systems, such as monitoring airline, hospital, and auto production equipment purchased from GE. Customers will be supplied with software that they can use to constantly keep tabs on their businesses while linking with GE systems. GE is also developing a new system that supposedly will enable its suppliers to be paid in 15 days instead of the usual 60 days. The effect will be that the supplier will no longer have to sell its debts to a factoring company that charges a fee to collect these debts. GE and its suppliers would split the savings from not selling debts, and GE projects an annual accounts payable savings of 12 percent.

Some of GE's remaining hurdles are cultural. In the past, GE achieved major breakthroughs under Jack Welch. Will GE's bet on Internet technology pay off? Only the future will tell whether his successors can provide the same kind of exceptional leadership.

Sources: Tom Kaneshige, "New Man, Same Plan," Line56, September 15, 2001; Matt Murray and Jathon Sapsford, "GE Reshuffles Its Dot-Com Strategy to Focus on Internal 'Digitizing,'" Wall Street Journal, May 4, 2001; Matt Murray, "Why Jack Welch's Leadership Matters to Business World-Wide," Wall Street Journal, September 5, 2001; Chuck Moozakis, "GE Scales Back," Internet Week, May 10, 2001; Bob Tedeschi, "GE Has Bright Ideas," Smart Business, June 2001; Mark Roberti, "General Electric's Spin Machine," The Industry Standard, January 15, 2001; Ramona Dzinkowski, "Removing Boundaries to Learning," Knowledge Management, May 2001; Meridith Levinson, "Destructive Behavior," CIO Magazine, July 15, 2000; Jon Burke, "Is GE the Last Internet Company?" Red Herring, December 19, 2000; Geoffrey Colvin, "How Leading Edge Are They?" Fortune, February 21, 2000; Cheryl Dahle, "Adventures in Polymerland," Fast Company, May 2000; David Bicknell, "Let There Be Light," ComputerWeekly.com, September 7, 2000; David Drucker, "Virtual Teams Light Up GE," Internet Week, April 6, 2000; David Joachim, "GE's E-Biz Turnaround Proves That Big Is Back," Internet Week, April 3, 2000; Mark Baard, "GE's WebCity," Publish, September 2000; Faith Keenan, "Giants Can Be Nimble," Business Week, September 18, 2000; Marianne Kolbasuk McGee, "E-Business Makes General Electric a Different Company," Information Week, January 31, 2000; Marianne Kolbasuk McGee, "Wake-Up Call," Information Week, September 18, 2000; Pamela L. Moore, "GE's Cyber Payoff," Business Week, April 13, 2000; Srikumar S. Rao, "General Electric, Software Vendor," Forbes, January 24, 2000; and Jim Rohwer, Jack Welch, Scott McNealy, John Huey, and Brent Schlender, "The Odd Couple," Fortune, May 1, 2000.

Case Study Questions

Use the value chain and competitive forces models to analyze GE and its business strategy. Summarize the business and technology conditions causing GE to launch its Internet initiative.
How is GE using Internet technology in its internal and external business processes? How is the Internet related to its business strategy? How is it changing the way the company conducts its business?
What management, organization, and technology issues did GE have to address in its Internet initiative?
Evaluate GE's Internet initiative. Has it been successful? Is the company transforming itself into a digital firm? Why or why not?

Case Study

Chapter 4

The Collapse of Webvan

The grocery business is gigantic, with annual retail store sales that are estimated at $650 billion. However, it is a very tough business because the profit margins are tiny, only 1 to 2 percent of sales. Moreover, the industry is very price competitive. Yet Webvan, which was founded in late 1996, chose groceries as the way to establish itself as a Web-based powerhouse.

Aside from the tiny profit margin, on-line grocery sales face other problems. Most successful Web retail sales involve delivery several days after ordering via parcel delivery services such as UPS or FedEx. Yet people usually need grocery delivery right away, and the groceries usually include such spoilables as milk, ice cream, fresh vegetables, and meats.

A number of companies, including Peapod, HomeGrocer.com, Kozmo.com, and Safeway have struggled to establish on-line grocery businesses. Webvan Group Inc. of Foster City, California (in the Silicon Valley), was the brainchild of Louis Borders, the cofounder of the very successful Borders bookstore chain. Webvan's founders and management believed they could succeed where others were faltering by using a different business model. The company carried about 20,000 high-quality grocery items, including fresh fruits and vegetables, meats, and frozen foods, and delivered the orders to customers throughout a large metropolitan region. Webvan had no retail outlets, but instead it operated out of massive regional distribution centers of about 350,000 square feet each

Management claimed one distribution center could sell as many products in one day as 18 metropolitan-area supermarkets. Orders could be entered on the Internet 24 hours per day, every day, and the goods would be delivered from the distribution centers. The company expected to have only about 900 to1,000 employees per center, compared with about 2,200 to 2,700 for the supermarkets. The company kept real estate costs low by having only one large site per metropolitan region, and the sites were located in low-cost industrial areas rather than in high-priced residential neighborhoods. Thus Webvan would achieve a much higher operating margin than supermarkets, more than enough to pay for such added expenses as software and delivery.

The grocery business is difficult to break into. Customers expect high quality and yet prefer not to pay extra for convenience. Polls show the majority wants to smell the strawberries and squeeze the tomatoes before purchasing them. The most difficult challenge is breaking consumers' habits of actually going to the store.

Webvan's top management believed that the leverage in groceries was distribution. The company decided on a hub-and-spoke model in which orders would be filled in the massive warehouses and then taken to tiny transfer stations that served specific neighborhoods where they would be transferred to a leased fleet of Webvan trucks for delivery. Thus, Webvan could efficiently serve a 60-mile, heavily populated radius. Time-starved shoppers would be lured by the convenience of being able to order products 24 hours a day and having the goods home delivered exactly at the time of their choosing.

The original plan was for a rapid rollout in 26 U.S. metropolitan areas by the end of 2001. Customers included not only people who are at home but also office workers who would use their work computers to order groceries for home and even order lunches and snacks for the office. The long-range plan was to expand into other businesses. If Webvan could deliver groceries to a number of places in a neighborhood, it was set up to deliver other products as well.

The model relied on extremely sophisticated, highly automated information systems centered in the warehouses. An in-house engineering team worked with Optimum Inc. of White Plains, New York, to design and build systems for warehouse management, routing and scheduling, and for communication with suppliers. The systems were designed to handle as many as 50,000 items, leaving plenty of room for expansion into nongrocery products. A data repository in San Jose, California, served as the information center for all the warehouses.

The warehouses had three temperature zones for shelf items, fresh items (such as vegetables and meats), and frozen foods. Every warehouse had 12 huge carousels, each of which held up to 7,500 items. An employee stationed at each carousel could stand still rather than having to move around to pick the items. When they were picked, the items were placed in totes and moved around using the warehouse's 4½ miles of conveyer belts.

The ordering process began when customers placed their orders on Webvan's Web site. When the order was completed, customers selected an open 30-minute delivery time slot in any of the next seven days. The delivery optimizer marked slots as taken if they had already been reserved or if they were too far away from the delivery location of the new order for on-time delivery.

The order was electronically transmitted to the relevant warehouse where it would be filled. The software system devised an optimal picking plan, and the totes were automatically marked with a barcode, tying them to a specific order. The totes were color-coded to identify the type of products that were in them. The software determined how many totes were needed. Webvan stored data on many characteristics of each item. For example, it needed item size to determine if that item would fit into the tote, whereas weight was needed to be certain the tote would not become too heavy for the staff to lift. Some items could not be split, such as watermelons. "Crushability" was necessary to track that fragile items, such as eggs, would be on top of the totes, and heavy items, such as big cans would be on the bottom. Totes for frozen items were styrofoam-lined and contained dry-ice packs. Shelf items were collected in sequence according to the picking plan, and then the tote was conveyed to the carousel station where the picker checked the products from a list and loaded the remaining items (often working on more than one order at a time). When a tote was completed, the picker closed it and placed it on a conveyor that moved it to shipping. The system even calculated the amount of picking time required for each part of the order. Based on the scheduled delivery time and workload, it determined when to start loading each tote to arrive at shipping at the proper time. The totes were then rolled onto a truck designated for the specific transfer station where they were placed on delivery trucks and delivered according to a route prepared by route optimization software. This complex system was unprecedented.

Delivery was technically complex as well. Webvan's software optimized delivery schedules so that deliveries could be made every 10 to 30 minutes. Webvan used sophisticated route-planning software to map out the most efficient delivery route for each order. The driver's location was monitored by dispatch using the Global Positioning System (GPS) in each van. When an unplanned delay occurred, dispatchers called to inform customers who could choose either to accept a late delivery or to reschedule it. The drivers also used the GPS to plot alternate routes to circumvent traffic problems, thereby more easily meeting their schedules. At the home, the driver carried the totes inside and unpacked them. Alternatively, the customer could have the totes left unpacked for a small deposit per tote. The driver then used a handheld wireless device to print out a receipt and an itemized order list. The device also notified dispatch that the delivery was completed.

Webvan also developed a system of ordering products from its suppliers. Webvan determined what to order based on both actual and expected demand. If an item was not in the warehouse at the time a customer ordered it, Webvan used a rapid and reliable communication Web site (harbinger.net) to automatically inform suppliers. Harbinger software formatted orders for all suppliers and forwarded the orders to them. When goods arrived at a warehouse, receiving opened the cartons and scanned the products. Shelf items were put into trays, and the system used a very complex "round-robin" algorithm to assign each tray to a specific carousel. However, like many of its supermarket rivals, Webvan did little else to automate its supply chain because it was too small to force its suppliers to invest in supply chain technology.

Webvan took its first orders on June 2, 1999, in the San Francisco Bay area, and by the end of June it had nearly $400,000 is sales. On July 8, the company signed a blockbuster $1 billion deal with Bechtel to design and construct 26 distribution centers within the next two years, reflecting both the large amount of capital Webvan had raised and its plan for rapid expansion. In October, George Shaheen, the former CEO of Andersen Consulting (now Accenture), became the CEO of Webvan. The company was flying high, even though it had no profit and was spending investor capital rapidly, much of it devoted to building warehouses.

In February 2000, Webvan announced its average order size had risen from $72 to $80. By June Webvan had spread to Atlanta, Georgia, and Sacramento, California. At the same time it purchased a rival, HomeGrocer.com, allowing Webvan to move into Dallas, Los Angeles, San Diego, Seattle, Portland, and Orange County, California, at a very low cost while eliminating the need to compete with HomeGrocer for customers.

However, Webvan's situation was worsening. On February 21, Webvan shut down the Dallas operation. Atlanta was receiving only half the number of orders it needed to break even, and no site had yet become profitable. Unintimidated and confident of its future success, in August Webvan opened in Chicago. The San Francisco area facility had failed to break even as had been predicted, and the company curtailed its growth plans in order to preserve cash, delaying expansion into Washington, D.C., Baltimore, and New Jersey (even though each had $35-million warehouses). In November Webvan announced that its average order had risen only to $91. In addition to groceries, the company was selling drugstore and pet items, books and CDs, electronics, games, and toys. Webvan stock kept plummeting.

Webvan was forced into brutal cost cutting. More Webvan centers closed—Dallas on February 21, 2001, and Sacramento and Atlanta in April of that year. The company slashed marketing expenses and started charging for deliveries. Borders had been replaced by Shaheen as CEO, and Shaheen resigned on April 16, replaced by COO Robert Swann. The company noted that only 6.5 percent of San Francisco households had ordered from Webvan, and less than half of them had placed a second order.

On July 9, 2001, Webvan ceased all operations, laying off 2,000 employees and announcing plans to file for Chapter 11 bankruptcy protection. During its short life it had burned through $1.2 billion in investor capital, making it one of the most spectacular dot.com failures on record. Since then, the company has been liquidating its assets.

Does Webvan's demise mean that on-line grocery retailing is a dead end? Or was the problem Webvan's ambitious business model? One of the few on-line grocers to turn a profit is Tesco.com, the on-line arm of the British supermarket chain. Tesco.com serves nearly 1 million registered customers in the United Kingdom and handles 70,000 orders per week. It is ringing up annual sales of $420 million. Tesco.com moved slowly into on-line retailing. It experimented with having customers order groceries on-line and having their groceries prepackaged and waiting for them at an existing Tesco store. Customers saved time by not having to cruise around supermarket aisles to pick out products, and Tesco was able to use its existing infrastructure to provide the groceries. Tesco recently started to deliver groceries to customer homes near their stores but charges delivery fees. Shopper order sizes actually grew because households wanted to get maximum mileage for the delivery charge. Tesco's on-line customers have increased purchases from the stores, and people who used to shop in the stores have increased their shopping on the Web. Tesco used technology to make the existing shopping process more efficient rather than trying to create an entirely new shopping process unfamiliar to people. But Tesco also benefits from higher profit margins in grocery retailing in the United Kingdom, which run around 8 percent. This means that Tesco could lose close to 6 percent on its on-line operations and still reap the same percentage of profit as U.S. grocery retailers.

Sources: Christopher T. Heun, "Delivery, Anyone?" Information Week, July 16, 2001; "What Webvan Could Have Learned from Tesco," Knowledge@Wharton, October 1023, 2001; "Why Webvan Crashed," FTDynamo, July 25, 2001; Miguel Helft, "The End of the Road," The Industry Standard, July 23, 2001; Ronna Abramson, "Webvan Checks Out of Dallas Market," The Industry Standard, February 20, 2001; Saul Hansell, "Some Hard Lessons for Online Grocer," New York Times, February 19, 2001; Miguel Helft, "Amazon.com Sues Webvan over Marketing Deal," Computerworld, April 3, 2001; Andrew Edgecliffe-Johnson, "Webvan Job Cuts Dent Online Grocery Dreams," Financial Times, April 27, 2001; Jen Muehlbauer, "Webvan Delivers Corporate Welfare," The Industry Standard, May 17, 2001; "Disaster of the Day: Webvan," Forbes.com, January 10, 2001; Nick Wingfield, "Grocer Webvan Reveals Initiatives for Recovery, Including Job Cuts," Wall StreetJournal, April 26, 2001; Jean V. Murphy, "Webvan: Rewriting the Rules on 'Last Mile' Delivery," Global Logistics & Supply Chain Strategies, August 2000; "Unlike Many, Grocers Haven't Given Up on the Net," Forbes.com, April 23, 2001; Miguel Helft, "Webvan's CEO Resigns," The Industry Standard, April 13, 2001; Jim Carlton, "Stalled, Webvan Hits New Roads," Wall Street Journal, July 31, 2000; Miguel Helft, "Going the Last Mile," The Industry Standard, November 10, 2000; "Webvan Fails to Deliver," The Industry Standard, October 18, 2000; "Webvan Goes Shopping," The IndustryStandard, July 10, 2000; Christine McGeever, "Online Grocer Inks Deals with Consumer Goods Makers," Computerworld, January 25, 2000; Jen Muehlbauer, "Webvan's Knockin', But Is It Rockin'?" The Industry Standard, June 27, 2000; Don Tapscott and David Ticoll, "Retail Revolution," The Industry Standard, July 24, 2000; and Rusty Weston, "Return of the Milkman," Upside Today, February 18, 2000.

Case Study Questions

Describe the Webvan business model and then analyze it using the value chain and competitive forces models.What were the assumptions that drove this business model?
Describe the role of technology in the Webvan model. What Webvan problems could computer technology solve, and what could it not solve? Explain your answer.
Critique the Webvan strategy and give your views as to whether this strategy is or can ever be viable. Explain your answer.
What management, organization, and technology factors were responsible for Webvan's failure? Explain.

Case Study

Chapter 5

Is FBI's Carnivore Eating Our Privacy?

In the 1960s the U.S. Federal Bureau of Investigation (FBI) began compiling files on citizens considered a threat to U.S. security. Its secret files included thousands of Vietnam War protestors, civil rights activists, and such celebrities as Albert Einstein, Rock Hudson, and even Henry Ford. The Privacy Act of 1974 later became law in order to forbid the collection of such information unless the Justice Department could show reason to suspect that the person had committed a crime.

Starting in the 1960s many people feared the FBI because it had gained a reputation of being antiprivacy, mismanaged, and even inept. Strong opposition to the FBI's ability to secretly collect data on ordinary citizens surfaced in 1999 when the FBI admitted that it had developed and was using a computer product it named Carnivore (also known as DCS1000) to secretly collect e-mail information. However, the growing fear of the FBI may have been reversed when terrorists attacked the World Trade Center and the Pentagon on September 11, 2001. Many appear to be reevaluating how much privacy they are willing to surrender in order to gain more security.

Carnivore, which is used to eavesdrop on communication flowing through the Internet, is a computer-age version of wiretapping. Wiretaps gather analog information (voices) from telephones, whereas Carnivore gathers digital information from e-mail and other network traffic flowing to or from a specific user or Internet address. The FBI named it Carnivore because, they say, Carnivore finds the "meat" in "suspicious" or "interesting" communications. However, the two have two major differences. First, wiretaps require high-level court orders because they give the FBI the right to listen to all telephone call conversations on the tapped line of the person being investigated. Carnivore court orders are easier to obtain because they only grant permission to gather certain data from e-mail headers and not from the content of the message itself.

Second, the two differ in their methods of collection. Wiretaps are placed on the telephone line(s) of individuals under investigation. The FBI taps Internet communication by installing Carnivore on a special computer at the site of the target's Internet Service Provider (ISP). There it must review the headers of all messages that pass through the ISP's computer (multiple millions of messages daily for larger ISPs) in order to identify those that fall within the court order. When identified, Carnivore will select those messages and their contents.

Why would the FBI seek only the header information? First, because the legal standard for court orders on collecting header information is much lower than that for the message itself. To meet the higher standard needed to read e-mail and other messages, the FBI would have to prove "probable cause" (strong evidence of possible criminal activity). Second, according to the FBI, header information has proven valuable in its pursuits. Opponents do point out, however, that although Carnivore has been used about 30 times, the evidence it collected has never been cited in a single court trial.

Many believed the use of Carnivore was an invasion of personal privacy partly because Carnivore is controlled by FBI agents, and much of the data Carnivore collects may not even be within the scope of the court order. Headers often contain more data than that allowed in the court order, illegally giving the FBI access to data it has no right to see. Also, because Carnivore must access every header for all e-mails to locate the ones authorized by the court order, the agents could illegally use it to select data from any of the headers they desire, and only the FBI would know. Donald Kerr, the director of the FBI lab division, agreed that Carnivore enables FBI agents to use the system illegally to check up on someone's ex-spouse or political enemy. Nonetheless, he claimed, it was very unlikely to happen because agents who acted illegally would face heavy fines and up to five years in prison.

Carnivore does not produce audit trails. Many have viewed the system as "the electronic equivalent of listening to everybody's phone calls to see if it's the phone call you should be monitoring," according to Mark Rasch, a former federal prosecutor. Opponents also feared that local law enforcement agencies could begin to use Carnivore, noting that the Fourth Amendment, used to protect privacy, only applies to the federal government and not to state or local governments. According to Paul Bresson, an FBI spokesperson, the FBI position was that it was seeking ways to modify Carnivore so that it would only collect information on targeted people. He said, "We never denied that it had the capability to capture more [data than an investigation requires]. What we maintained was that it had the filtering devices to capture only the data pertaining to the court order." The view of David Sobel, the general counsel of the Electronic Privacy Information Center (EPIC), a Washington D.C.based electronic privacy group, was, "If it's that easy for the FBI to accidentally collect too much data, imagine how simple it would be for agents to do so intentionally."

Before the September 11 terrorist attack, congressional fears were strong, as expressed at a July 2000 House of Representative hearing on Carnivore. "There's new legal ground that you all are trying to break here where you are saying you have the authority to harvest large quantities of information, then you filter out what you want," explained Bob Barr, a Republican Representative from Georgia. "Those are two very, very large steps we are taking here. I don't think this has been well thought out." At a September 2000 Senate hearing, Orin Hatch, Republican Senator from Utah and chair of the Senate Judiciary Committee, said, "I don't want to have 1984 in 2004. We're already there with technology." However, on October 26, 2001, President George W. Bush signed a new bill to combat terrorism, a bill that had passed the Senate 98 to 1 and the House 356 to 66. The bill, which was passed in reaction to the terrorist attacks, expands the government's ability not only to detain immigrants and penetrate money-laundering banks but also to conduct more electronic surveillance. For example, it authorizes the government to approve wiretaps even if intelligence gathering is only a minor purpose. The new law does include a sunset provision, however. The increased power to keep more computers and telephones under surveillance will expire in 2005.

The FBI's position is simple: ISPs must allow the FBI to install and control Carnivore. Even at the 2000 hearings, the FBI refused to give any information on Carnivore technology or on its uses. It simply claimed Carnivore was necessary to catch drug dealers, pornographers, and terrorists. Most ISPs have been in opposition.

Even prior to the September 11 terrorist attacks, some organizations had agreed to use Carnivore because they believed they had no alternative even though they still did not like it. "There's no way to stop Carnivore. It's become a fact of life," said Steve Lopez, the vice president of technology services for the National Board of Medical Examiners in Philadelphia. "It's being forced down our throats." That view seems to have been strengthened for many people since the terrorist attacks. But strong opposition does remain. Patrick Leahy, the chair of the Senate Judiciary Committee, said, "We must not let the terrorists win." He explained, "If we abandon our democracy to battle them, they win." David Boaz, a vice president of the conservative Cato Institute still said after the attacks, "We need strong protections against government access to information about individuals."

Clearly, the FBI already does gather a lot of other information. For example, they use the immense Lexis-Nexis database that contains legal briefs, newspaper articles, and other public records. They also gather such data as taxpayer assets, credit card charges (including activity locations), telephone numbers, and even driving histories. Because it is illegal for government organizations (including the FBI) to collect much of this type of information themselves, they outsource the collection, purchasing such data from commercial organizations that legally collect them for their own use or for sale to their customers, of which the government is one. However, many people have opposed this method.

One publicly held company that sells such data to the FBI is ChoicePoint Inc. of Alpharetta, Georgia. It supplies its commercial customers with information primarily to enable them to check out prospective clients and partners, and it claims its dealings with government organizations are "a natural extension" of its business. Derek Smith, ChoicePoint's CEO, maintains it helps the government to unearth fraud and to convict criminals. The FBI contends it has "located nearly 1,300 subjects of criminal cases using these kinds of searches." John Collingwood, another FBI spokesperson, adds that this method "saves countless hours of manual record checks, a process the FBI has relied on for decades." The federal Health Care Financing Administration also relies on information from ChoicePoint. It compares its data with ChoicePoint's 2 million "high-risk and fraudulent business addresses" to help locate fraud.

One problem is the potential for inaccurate ChoicePoint data. In 2001 the NAACP sued both ChoicePoint and the state of Florida, charging the data supplied to Florida in 2000 contained faulty information on criminal records causing thousands of voters to be illegally purged from Florida voter rolls. ChoicePoint admitted supplying some faulty data, and that data may have helped swing the presidential election from Albert Gore (Democrat) to George W. Bush (Republican).

Many ways currently exist for criminals and terrorists to circumvent the use of Carnivore so that the FBI would not be able to collect header information. First, Carnivore cannot even read many Web-based e-mails, such as those sent from Hotmail and Yahoo! This may be overcome as technology increases in sophistication. Second, effective software to encrypt messages, such as PGP, is easily obtainable. Individuals can even download PGP for free. Programs even exist that can collect and deliver the information the FBI requires without using Carnivore and without each ISP developing its own system. One such program is Altivore from Network Ice, which is a leading developer of security-related software.

One issue that has only emerged since the terrorist attacks is the great power of steganography, the embedding of secret messages within other more public messages. Computer technology now enables users to hide messages within digitized, written, graphics, and even music documents, and they are virtually undetectable, making it even more difficult to find the message than to decode it. In 1998, referring not only to encryption but also to steganography, the then FBI director Louis Freeh told the U.S. Senate Judiciary committee, "Not just Bin Laden, but many other people who work against us in the area of terrorism, are becoming sophisticated enough to equip themselves with encryption devices."

Sources: David Armstrong and Joseph Pereira, "FBI Gives Carriers Access to Watchlists; Database Plays New Role After Attacks," Wall Street Journal, October 23, 2001; Ariana Eunjung Cha and Jonathan Krim, "Privacy Trade-Offs Reassessed," The Washington Post, September 13, 2001, and "Terrorists' Online Methods Elusive," The Washington Post, September 19, 2001; Nick Wingfield, "Some Fear Fight Against Terror Will Imperil Privacy," Wall Street Journal, September 13, 2001; Adam Clymer, "Antiterrorism Bill Passes; U.S. Gets Expanded Powers," New York Times, October 26, 2001; Adam Clymer, "Bush Signs Bipartisan Bill to Combat Terrorism," New York Times, October 26, 2001; Larry Kahaner, "Hungry for Your E-Mail," Informationweek.com, April 23, 2001, and "Taking a Bite Out of Carnivore," Informationweek.com, April 23, 2001; Glenn R. Simpson, "FBI's Reliance on the Private Sector Has Raised Some Privacy Concerns," Wall Street Journal, April 13, 2001; Jennifer DiSabatino, "Carnivore Probe Mollifies Some," The Industry Standard," November 23, 2000; Bill Frezza, "Carnivore Takes a Bite Out of the Fourth Amendment, TechWeb, August 7, 2000; David Johnston, "Citing FBI Lapse, Ashcroft Delays McVeigh Execution," New York Times, May 13, 2001; Margret Johnston, "Lawmakers Find Carnivore Unappetizing," The Industry Standard, July 25, 2000; Larry Kahaner, "Carnivore's Legal Teeth," Informationweek.com, April 23, 2001; Declan McCullagh, "Ashcroft to Chew on Carnivore" Wired News, January 27, 2001; Declan McCullagh, "Bin Laden: Steganography Master?" Wired News, February 7, 2001, and "Regulating Privacy: At What Cost?" Wired News, September 19, 2000; Mary Mosquera, "Lawmakers Want Privacy Protections with Carnivore," TechWeb, September 6, 2000; and Peter Rojas, "Is It Spam or Spammimic?" Red Herring, February 15, 2001.

Case Study Questions

Does Carnivore present an ethical dilemma? Explain your answer.
Apply an ethical analysis to the issue of the FBI's use of information technology and U.S. citizens' privacy rights.
What are the ethical, social, and political issues raised by the FBI tapping the e-mails of individuals and collecting personal data on them?
How effective is Carnivore as a terrorism and crime-prevention tool?
State your views on ways to solve the problems of collecting the key data the FBI can gain through Carnivore without interfering with the privacy of people not related to the crime involved.

Case Study

Chapter 6

Enerline Turns to an ASP

The oil and gas industries have always had to face an expensive and time-wasting problem—failure of the pipes used in the drilling and pumping of oil as well as in the pipelines used to transport the oil from the well to another place. The cost of replacing them is extremely high, entailing the cost of new pipes, excavation, labor, and most important of all, downtime. Other industries, such as water utilities and companies that produce industrial waste, also face the problem. In 1995 Enerline Restorations, Inc., of Calgary, Canada, was founded specifically to meet this market need.

The company currently produces three products: EnerCore for lining downhole tubes, EnerLiner for lining pipelines, and EnerBore, for lining casings. At first Enerline products were manufactured in Calgary, but in 2000 the firm opened a newly constructed manufacturing plant in Stettler, Alberta. Enerline started by selling its products in the major oil-producing areas of Alberta, where Calgary is located, and nearby Saskatchewan. It reached an agreement with C. E. Franklin to distribute its products through Franklin's 40 Western Canada locations. Because of the quality and cost effectiveness of its products, Enerline's sales took off and its products now sell in the United States, South America, Europe, and even Africa. However, start-up is normally slow and difficult, and Enerline is actually still a very small company.

In May 1996, when Enerline began to sell its products, it had only three employees, and its sales were only about $2 million (Canadian). Sales topped $7 million in the year 2000, a triple-digit growth rate. In 1998, when Enerline had expanded to 30 employees, Ron Hozjan joined the company as chief financial officer. Hozjan reported to Graham Illingworth, the president of Enerline, and to the five-member board of directors; all other employees reported to Hozjan. Hozjan was explicitly assigned to making the company more efficient and competitive, and the overall business of the company became his responsibility.

Given its rapid growth and the increased number of employees, Enerline needed more computerization. It had only one office that housed all of its employees and a single stand-alone desktop computer running the Microsoft Office PC productivity tools, a small accounting package, and on-line banking software. Inventory reports, reports informing customers of delivery schedules, timely production reports, and other essential tasks were both difficult to accomplish and very time consuming. For example, 40- to 80-page weekly production reports had to be faxed to Calgary where they were then keyed into a spreadsheet, a time-consuming and error-prone process. "If you hold up a customer for a few hours, you'll lose them forever," explained Hozjan. "An idle service rig or a well that's not fully productive can cost an oil and gas producer thousands or millions of dollars every day. We can't afford to keep them waiting." As demand for its money-saving products grew, it became more and more difficult for Enerline to satisfy its customers. To continue its growth, it became obvious that Enerline had no choice but to upgrade its information systems and information technology infrastructure.

Computerization can be very expensive, and a company as new and as small as Enerline needed to concentrate its assets on growing the business—marketing, sales, production, and research. Building the necessary IT infrastructure meant not only purchasing six or more desktop computers and server hardware and software, it also meant purchasing business and communications software and hardware, obtaining access to the Internet and a Web site, and installing computer backup facilities and security software. In addition Enerline would require hiring new staff to support the system and time to train them. Hozjan determined that the cost during the first year would be $80,000, an amount that should increase every year as the company grew. Hozjan did not want to commit so much of his company's limited resources to support when growth was the critical issue. He began to look around for an alternative, one that met most if not all of his requirements. He wanted to find a company that would supply his hardware, software, and communications needs, as well as give his company maintenance, backup, and full-time support. He also wanted consulting services whenever Enerline needed them. Finally, because his company was gaining customers on four continents, he wanted his services to be accessed over the Internet. He believed he found the solution in an application service provider (ASP).

An ASP manages applications and computer services for clients from its own site, delivering these services over the Web or over private networks. ASPs normally not only own the software and hardware but also manage the systems. They either charge the client a per-transaction fee or a set monthly fee. Hozjan later pointed out that "the ASP computing model helped his firm quickly improve its market position and prepared it to serve new, larger and more geographically dispersed customers. Enerline was given a state-of-the-art infrastructure that it did not have to worry about so it could focus exclusively on serving customers. The ASP field only began about the same time as Enerline was founded, and so very few such companies were yet established. Hozjan's choice was further limited because he much preferred a Canadian-based firm, which would have made it easier for the two companies to work together. He really only had one Canadian company to look at, and that company was FutureLink.

Happily for Hozjan, FutureLink met most of Enerline's requirements. It was already supporting mission-critical systems for several other companies, it enabled its customers to work over the Internet, it gave what it called 24/7 free support, and it even guaranteed 99.8 percent uptime in its contract. In addition it had six offices already operating around Canada. Hozjan found that FutureLink was flexible and easy to work with. The biggest problem Enerline had was finding an appropriate accounting system. Hozjan wanted one that had a good reputation and was designed for the oil and gas industries. He finally selected PriceWaterhouseCooper's Qbyte system, and FutureLink had no problem installing it and then supporting it.

Enerline was up and running on the FutureLink system within 30 days. The software it had selected included Qbyte as well as Microsoft Office, Outlook, and Internet services. The company had no start-up costs (except for some time from its own staff)—Enerline did not have to pay FutureLink any start-up costs. However, it did have to sign a three-year contract for the services. Its cost was $1,800 a month for the first year, for a total of $21,000, and $1,600 per month for the remaining two years, totaling $38,400 for those two years, amounting to a three-year total of $60,000. The costs were to be paid out on a monthly basis, instead of paying $80,000 in the first year alone if Enerline had built its own systems.

FutureLink also helped Enerline set up a Web site where customers could find out where their tubulars were in the production cycle and visualize the progress of their pipelining projects. Customers could also submit questions about their projects through this Web site and receive rapid project quotes from Enerline.

Hozjan was pleased that Enerline e scaled up from one to six computers overnight without any capital expenditures and has access to better technology than some companies five to ten times its size in Alberta. Hozjan also said "We have phenomenal access to technology for a company our size with our budget." Enerline was recently awarded a project in Africa that probably wouldn't have been available without the ASP approach. Employees are able to work much more efficiently. Production reporting and quotes are now done on-line and so are never faxed or rekeyed. Production decisions are made much more easily, quickly, and accurately because of the information that is readily available. And customers can simply go on-line and obtain the information they need immediately and with little effort.

A major problem in relying on FutureLink emerged in September 1999, only seven months after Enerline had begun operating its computer systems through FutureLink. Cameron Shell, FutureLink's founder and at that time its president, informed Hozjan that FutureLink was facing major financial adversity, although Shell assured Hozjan it would not affect the FutureLink's service to Enerline. FutureLink was experiencing serious losses, and they were actually increasing as competition in the ASP business also grew. FutureLink's financial difficulty was a complete surprise to Hozjan. Two months later FutureLink merged with Citrix iBusiness, an ASP company headquartered in Irvine, California. Most of the FutureLink employees were replaced by Citrix employees, and even Shell left. In the year 2000 FutureLink's losses continued to grow. Hozjan noted that Although 1999 was a bad year for FutureLink, Enerline was still receiving reliable service, and the new management was still agreeable to changes that were requested in Enerline's business agreement." In the spring of 2001 FutureLink underwent a major restructuring and moved out of the ASP market in the United States. Hozjan expressed concern about their ability to continue serving Enerline. "They're basically our IT department, " he said.

Sources: Evan Koblentz, "ASP Shakeout Could Benefit Buyers," eWEEK, April 8, 2001; Citrix Case Studies; Enerline; FutureLink Case Studies; and Jane Movold and Scott Sschneberger, "Enerline Restorations Inc: Stay with an ASP?" Richard Ivey School of Business, University of Western Ontario, 2000.

Case Study Questions

Analyze Enerline and its business strategy using the competitive forces and value chain models. How well did Enerline's information systems support its business model and strategy?
Why was Hozjan concerned with computer system issues when the company had no real competition?
Why did Hozjan turn to working with an ASP? Was this a good decision? Identify the issues that were involved in this decision. What were the potential benefits of working with an ASP? The potential problems?
Was FutureLink a good choice of ASP for Enerline? Should Enerline continue working with FutureLink? Describe the implications of the changes in FutureLink's business plans for Enerline.
If Enerline decides to sever ties with FutureLink, should it switch to another ASP or build its own IT infrastructure? What management, organization, and technology issues should be addressed in answering this question?

Case Study

Chapter 7

Ford and Firestone's Tire Recall: The Costliest Information Gap in History

On August 9, 2000, Bridgestone/Firestone Inc. announced it would recall more than 6.5 million tires, most of which had been mounted as original equipment on Ford Motor Co. Explorers and other Ford light trucks. Bridgestone/Firestone had become the subject of an intense federal investigation of 46 deaths and more than 300 incidents where Firestone tires allegedly shredded on the highway. The Firestone tires affected were 15-inch Radial ATX and Radial ATX II tires produced in North America and certain Wilderness AT tires manufactured at the firm's Decatur, Illinois, plant. This tire recall was the second biggest in history, behind only Firestone's recall of 14.5 million radial tires in 1978. The 1978 tire recall financially crippled the company for years to come and the August 2000 recall threatened to do the same. Consumers, the federal government, and the press wanted to know: Why didn't Ford and Firestone recognize this problem sooner? Let us look at the series of events surrounding the tire recall and the role of information management.

1988—Financially weakened from its 1978 tire recall, Firestone agreed to be acquired by Bridgestone Tires, a Japanese firm. To increase its sales, Firestone became a supplier of tires for Ford Motors' new sport-utility vehicle (SUV), the Explorer.

March 11, 1999—In response to a Ford concern about tire separations on the Explorer, Bridgestone/Firestone (Firestone) sent a confidential memo to Ford claiming that less than 0.1 percent of all Wilderness tires (which are used on the Explorer) had been returned under warranty for all kinds of problems. The note did not break out tread separations from other problems but did say this "rate of return is extremely low and substantiates [Firestone's] belief that this tire performs exceptionally well in the U.S. market."

August 1999—Ford Motors announced a recall in 16 foreign countries of all tires that had shown a tendency to fail mainly because of a problem of tread separation. The failures were primarily on the Ford Explorer, and the largest number of tires recalled was in Saudi Arabia. Firestone produced most of the tires. (A year earlier, Ford had noted problems with tread separation on Firestone tires mounted on Explorers in Venezuela and had sent samples of the failed tires to Bridgestone for analysis.) Ford did not report the recall to U.S. safety regulators because such reporting was not required.

May 2, 2000—Three days after another fatal accident involving Firestone/Ford Explorer tread separations, the National Highway Transportation Safety Administration (NHTSA) opened a full investigation into possible defects with the Firestone ATX, ATX II, and Wilderness tires. The agency listed 90 complaints nationwide, including 34 crashes and 24 injuries or deaths. NHTSA also learned of the foreign recalls.

August 2000

August 9—At a news conference, Firestone announced that it would recall about 6.5 million tires that were then on light trucks and SUVs because they had been implicated in more than 40 fatalities. The company said it would replace all listed tires on any vehicle regardless of their condition or age. Firestone said it continued to stand by the tires. One Japanese analyst estimated the recall would cost the company as much as $500 million.

Firestone emphasized the importance of maintaining proper inflation pressure. Firestone recommended a pressure of 30 poundspersquare inch (psi), whereas Ford recommended a range of 26 to 30 psi. Ford claimed its tests showed the tire performed well at 26 psi and that the lower pressure made for a smoother ride. However, Firestone claimed underinflation could put too much pressure on the tire, contributing to a higher temperature and causing the belts to separate. Ford pointed out that, although NHTSA had not closed its investigation, the two companies did not want to wait to act. NHTSA had by now received 270 complaints, including 46 deaths and 80 injuries, about these tires peeling off their casings when Ford SUVs and some trucks traveled at high speeds.

August 10—Press reports asked why Ford did not act within the United States when it took action to replace tires on more than 46,000 Explorers sold overseas.

August 13—The Washington Post reported that the Decatur, Illinois, Firestone plant, the source of many of the recalled tires, "was rife with quality-control problems in the mid-1990s." It said, "workers [were] using questionable tactics to speed production and managers [were] giving short shrift to inspections." The article cited former employees who were giving testimony in lawsuits against Firestone.

August 15—The NHTSA announced it had now linked 62 deaths to the recalled Firestone tires. It also had received more than 750 complaints on these tires.

September 2000

September 4—The U.S. Congress opened hearings on the Firestone and Ford tread separation problem. Congressional investigators released a memo from Firestone to Ford dated March 12, 1999, in which Firestone expressed "major reservations" about a Ford plan to replace Firestone tires overseas. A Ford representative at the hearing argued it had no need to report the replacement program because it was addressing a customer satisfaction problem and not a safety issue. The spokesperson added, "We are under no statutory obligations [to report overseas recalls] on tire actions."

Ford CEO Nasser testified before a joint congressional hearing that "this is clearly a tire issue and not a vehicle issue." He pointed out that "there are almost 3 million Goodyear tires on Ford Explorers that have not had a tread separation problem. So we know that this is a Firestone tire issue." However, he offered to work with the tire industry to develop and implement an "early warning system" to detect signs of tire defects earlier, and he expressed confidence this would happen. He said, "This new system will require that tire manufacturers provide comprehensive real world data on a timely basis." He also said that in the future his company would advise U.S. authorities of safety actions taken in overseas markets and vice versa.

Nasser said his company did not know of the problem until a few days prior to the announcement of the recall because "tires are the only component of a vehicle that are separately warranted." He said his company had "virtually pried the claims data from Firestone's hands and analyzed it." Ford had not obtained warranty data on tires the same way it did for brakes, transmissions, or any other part of a vehicle. It was Firestone that had collected the tire warranty data. Ford thus lacked a database that could be used to determine whether reports of incidents with one type of tire could indicate a special problem relative to tires on other Ford vehicles. Ford only obtained the tire warranty data from Firestone on July 28. A Ford team with representatives of the legal, purchasing, and communication departments; safety experts; and Ford's truck group worked intensively with experts from Firestone to try to find a pattern in the tire incident reports. They finally determined that the problem tires originated in a Decatur, Illinois, plant during a specific period of production and that the bulk of tread separation incidents had occurred in Arizona, California, Texas, and Florida, all hot weather states. This correlated with the circumstances surrounding tire separations overseas.

Firestone's database on damage claims had been moved to Bridgestone's American headquarters in Nashville in 1988 after Firestone was acquired by Bridgestone. The firm's database in warranty adjustments, which was regularly used by Firestone safety staff, remained at Firestone's former headquarters in Akron, Ohio.

After the 1999 tire recalls in Saudi Arabia and other countries, Nasser asked Firestone to review data on U.S. customers. Firestone assured Ford "that there was no problem in this country," and, Nasser added, "our data, as well as government safety data, didn't show anything either." Nasser said Ford only became concerned when it "saw Firestone's confidential claims data." He added, "If I have one regret, it is that we did not ask Firestone the right questions sooner."

September 8—The New York Times released its own analysis of the Department of Transportation's Fatality Analysis Reporting System (FARS). FARS is one of the few tools available to the government to independently track defects that cause fatal accidents. The Times found "that fatal crashes involving Ford Explorers were almost three times as likely to be tire related as fatal crashes involving other sport utility vehicles." The newspaper's analysis also said, "The federal data shows no tire-related fatalities involving Explorers from 1991 to 1993 and a steadily increasing number thereafter which may reflect that tread separation becomes more common as tires age."

Their analysis brought to light difficulties in finding patterns in the data that would have alerted various organizations to a problem earlier. Ford and Firestone said they had not detected such a pattern in the data, and the NHTSA said they had looked at a variety of databases without finding the tire flaw pattern. According to the Times, without having a clear idea of what one is looking for makes it much harder to find the problem. The Times did have the advantage of hindsight when it analyzed the data.

The Department of Transportation databases independently track defects that contribute to fatal accidents, with data on about 40,000 fatalities each year. However, they no longer contain anecdotal evidence from garages and body shops because they no longer have the funding to gather this information. They only have information on the type of vehicle, not the type of tire, involved in a fatality. Tire involvement in fatal accidents is common because tires, in the normal course of their life, will contribute to accidents as they age, so that accidents where tires may be a factor are usually not noteworthy. In comparison, Sue Bailey, the administrator of highway safety, pointed out that accidents with seat belt failures stand out because seat belts should never fail. Safety experts note that very little data is collected on accidents resulting only in nonfatal injuries even though there are six to eight times more such accidents than fatal accidents. Experts also note that no data is collected on the even more common accidents with only property damage. If more data were collected, the Times concluded, "trends could be obvious sooner." Until Firestone announced its tire recall in August 2000, NHTSA had received only five complaints per year concerning Firestone's ATX, ATX II, and Wilderness AT tires out of 50,000 complaints of all kinds about vehicles.

Although Firestone executives had just testified that Firestone's warranty claim data did not show a problem with the tires, Firestone documents made public by congressional investigators showed that in February Firestone officials were already concerned with rising warranty costs for the now-recalled tires. September 12—Yoichiro Kaizaki, president of Bridgestone (parent of Firestone), acknowledged inadequate attention to quality control. "The responsibility for the problem lies with Tokyo," he said. "We let the U.S. unit use its own culture. There was an element of mistake in that."

September 19—USA Today reported that in more than 80 tire lawsuits against Firestone since 1991, internal Firestone documents and sworn testimony had been kept secret as part of the Firestone settlements. Observers noted that had these documents been made public at the time, many of the recent deaths might have been avoided.

September 22—The Firestone tires that were at the center of the recalled tires passed all U.S. governmentrequired tests, causing NHTSA head Sue Bailey to say, "Our testing is clearly outdated."

During September, both Bridgestone and Firestone announced they would install supply chain information systems to prevent anything similar happening in the future. Firestone started spending heavily to make its claims database more usable for safety analysis.

January 2001—Yoichiro Kaizaki, the president and chief executive of the Bridgestone Corporation, resigned.

May 22, 2001—Bridgestone/Firestone ended its 100-year relationship as a supplier to Ford, accusing the automaker of refusing to acknowledge safety problems with the Explorer.

June 23, 2001—Sean Kane, a leading traffic safety consultant and a group of personal injury lawyers disclosed that in 1996 they had identified a pattern of failures of Firestone ATX tires on Ford Explorers but did not report the pattern to government safety regulators for four years. They did not inform the NHTSA, fearing a government investigation would prevent them from winning suits against Bridgestone/Firestone brought by their clients. Professor Geoffrey C. Hazard, Jr., a leading expert on legal ethics, said the lawyers had "a civic responsibility" to make their findings known but had not broken any laws by withholding this information.

June 27, 2001—Bridgestone/Firestone announced it planned to close its Decatur, Illinois, factory where many of the tires with quality problems had been produced.

October 4, 2001—Firestone announced it would replace an additional 3.5 million Wilderness AT tires made before 1998.

Sources: Kenneth N. Gilpin, "Firestone Will Recall an Additional 3.5 Million Tires," The New York Times, Octoer 5, 2001; Keith Bradsher, "S.U.V. Tire Defects Were Known in '96 but Not Reported," New York Times, June 24, 2001; David Barboza, "Bridgestone/Firestone to Close Tire Plant at Center of Huge Recall," New York Times, June 28, 2001; Mike Geyelin, "Firestone Quits as Tire Supplier to Ford," Wall Street Journal, May 22, 2001; Miki Tanikawa, "Chief of Bridgestone Says He Will Resign," New York Times, January 12, 2001; Kenneth N. Gilpin, "Firestone Will Recall an Additional 3.5 Million Tires," The New York Times, October 5, 2001; Matthew L. Wald and Josh Barbanel, "Link Between Tires and Crashes Went Undetected in Federal Data," New York Times, September 8, 2000; Robert L. Stimson, Karen Lundegaard, Norhiko Shirouzu, and Jenny Heller, "How the Tire Problem Turned into a Crisis for Firestone and Ford," Wall Street Journal, August 10, 2000; Mark Hall, "Information Gap," Computerworld, September 18, 2000; Keith Bradsher, "Documents Portray Tire Debacle as a Story of Lost Opportunities," New York Times, September 10, 2000; Ed Foldessy and Stephen Power, "How Ford, Firestone Let the Warnings Slide By as Debacle Developed," Wall Street Journal, September 6, 2000; Ford Motor Company, "Bridgestone/Firestone Announces Voluntary Tire Recall," August 9, 2000; Edwina Gibbs, "Bridgestone Sees $350 Million Special Loss, Stock Dives," Yahoo.com, August 10, 2000; John O'Dell and Edmund Sanders, "Firestone Begins Replacement of 6.4 Million Tires," Los Angeles Times, August 10, 2000; James V. Grimaldi, "Testimony Indicates Abuses at Firestone," Washington Post, August 13, 2000; Dina ElBoghdady, "Broader Tire Recall Is Urged," Detroit News, August 14, 2000; "Ford Report Recommended Lower Tire Pressure," The Associated Press, August 20, 2000; Caroline E. Mayer, James V. Grimaldi, Stephen Power, and Robert L. Simison, "Memo Shows Bridgestone and Ford Considered Recall over a Year Ago," Wall Street Journal, September 6, 2000; Timothy Aeppel, Clare Ansbery, Milo Geyelin, and Robert L. Simison, "Ford and Firestone's Separate Goals, Gaps in Communication Gave Rise to Tire Fiasco," Wall Street Journal, September 6, 2000; Matthew L. Wald, "Rancor Grows Between Ford and Firestone," New York Times, September 13, 2000; Keith Bradsher, "Questions Raised About Ford Explorer's Margin of Safety," New York Times, September 16, 2000; "Sealed Court Records Kept Tire Problems Hidden," USA Today, September 19, 2000; Tim Dobbyn, "Firestone Recall Exposes Flaws in Government Tests," New York Daily News, September 22, 2000; Bridgestone/Firestone, Inc., "Statement of February 4, 2000," Tire-defects.com.

Case Study Questions

Briefly summarize the problems and major issues in this case.
To what extent was this crisis an information management problem? What role did databases and data management play?
Explain why the growing trend of deaths was not spotted for a very long time. Why do you think it took so long for the issue to come to the attention of the general public?
List the different databases the parties had at their disposal as the problem grew, and list the data elements in those databases that were key to finding the tread separation problem earlier. Ignoring for the moment all other data problems, what critical data elements were these organizations not storing? For each one, why do you think it was critical and why it was not being stored?
Make a list of useful questions that these organizations might have asked of the databases but did not. Discuss why you think they did not ask these questions.
Evaluate the types of data collected and the questions asked in analyzing the data by each of the key organizations (Firestone, Ford, the U.S. government, and the legal community).
How did the relationships among Firestone, Ford, the U.S. government, and the legal community affect the development of the problem? The decisions on action that needed to be taken?
What data-related changes and improvements did the various parties and reporters suggest? Name other changes you believe should be made.

Case Study

Chapter 8

Schneider National Keeps on Trucking with Communications Technology

Schneider National is far-and-away the largest trucking firm in the United States, with about 19,000 employees and a fleet of nearly 15,000 trucks (cabs) and 43,000 trailers. The company is so large that it is $1 billion larger than the next two largest trucking firms combined. Headquartered in Green Bay, Wisconsin, Schneider National services two-thirds of the Fortune 500 corporations, including such major clients as General Motors, Wal-Mart, Kimberly-Clark, Procter & Gamble, Chrysler, Sears Roebuck, and Staples. The company is privately owned and had annual sales in 2000 of about $3.1 billion, a growth of nearly 11 percent from the previous year.

Schneider National was a major trucking firm with Don Schneider as its CEO when, in the 1980s, the federal government deregulated the trucking industry, revolutionizing the business environment of the industry overnight. Interstate trucking firms no longer had to follow the rules of a regulatory bureaucracy about what kinds of freight to carry and where to take it. These rules had made it difficult for customers to change carriers because only certain trucking firms could meet these regulations. Competition for customers heated up. Schneider National responded to these demands with a multipronged strategy based on the use of information technology, so that computer systems were now playing a powerful role in Schneider National's operations. Moreover the company also began treating its employees differently, a major step toward democratizing the company. The company made a paradigm shift. Several other competitors responded to deregulation by merely lowering rates. They went bankrupt.

CEO Don Schneider's business philosophy emphasizes IT. Basic to his philosophy is Schneider National's communications with its customers. In its giant headquarters building, the ground floor contains its call center, a full acre in size, where 600 customer service representatives work. Using computers, they have easy access to any customer's history, enabling each customer service representative to answer customers' questions. The result is that the customer is satisfied and the jobs of Schneider National reps are eased. New customer service reps are given 4 to 6 weeks of training, much of it on the use of both the company's computer systems and the Web.

In 2000, 50 percent of Schneider National's customer orders were received either on the Web or on its electronic data interchange (EDI) system. Through the use of these electronic connections, the order automatically arrives in Schneider National's computer system, resulting in improved ordering accuracy and higher productivity, thus lowering the cost of the whole ordering operation. Moreover, within 15 to 30 minutes of sending an order electronically, customers know what truck will arrive and when. The system also includes electronic invoicing. The reason electronic orders encompass only 50 percent of the total orders received is because the Web system is new whereas EDI is an older technology, dating from the 1960s, that is very expensive, so the small companies cannot afford it. However, the Web is very inexpensive and easy to use, and Schneider is trying to get all of its customers to use the Web ordering system. In fact the goal for 2001 is to have 60 percent of Schneider orders arrive electronically, with the gain being through the Web.

Schneider's Web site was created by Schneider Logistics, a company spun off from Schneider to provide information technology and supply chain management services to Schneider and other companies. Its concept is for the transactions to be completely paperless. Ultimately, it will enable customers to enter their orders, check the status of their shipments—what truck or railroad car their goods are on, where they are now, and when they are scheduled to arrive—as well as check proof-of-delivery. All future services will be built to execute within a Web browser.

To make available the information that its customers require, and to plan its pickups, deliveries, and routes, Schneider National must gather a great deal of information about the trucks, both cabs and trailers. "Trucking companies are asset-intensive businesses," explained Donald Broughton, a senior transportation analyst at A. G. Edwards & Sons. He emphasized how crucial the use of the cabs and trailers can be when he added, "The guy who has the higher rate of asset utilization wins."

In 1998 Schneider National became the first fleet trucking company to use OmniTracs. OmniTracs is a satellite-based communications and positioning system produced by QualComm, the San Diego-based wireless communications company. Schneider National worked with QualComm in the development of the product. For it to operate, each tractor has a radio frequency identification tag, a computer with keyboard in the cab, and a satellite antenna with a GPS (global positioning system) on the back of the tractor. Using this system, the company knows where every truck is within 300 feet at all times. The driver and headquarters communicate as often as required. The dispatchers can send information to the driver on how to get to the delivery spot (if there is a problem), the location of the next pickup (usually from someplace nearby), directions to the pickup spot, the necessary papers (if any are required), and even traffic and road problems. The driver can respond with approval and raise any questions about the instructions, the truck, or the road. Schneider National sends and receives about four million messages per month.

The cost of OmniTracs system was $30 million. Schneider thought the drivers' response to the system might be negative, but he was wrong. "We thought drivers wouldn't know how to use it or want to use it," he said. "What we found was exactly the opposite," because they were frustrated at having to stop along the road and call headquarters at telephone booths every few hours. In fact the system has been such a success that by 2001 more than 1,250 fleet trucking companies had started using it.

Schneider National worked with QualComm again to develop SensorTracs in order to collect engine data, such as speed, RPMs, and oil pressure, via satellite. The data not only contribute to better maintenance of the engines but also help drivers to drive more safely and to take better care of the vehicles. The system can even increase the drivers' incomes. One element of a driver's monthly bonus is based on staying within certain key factor ranges when operating the vehicle.

Currently, Schneider National is working with QualComm to develop a trailer-tracking system. It too is wireless. Each trailer has a radio frequency identification tag, which is read by devices that are placed at various points along the rail lines and in the rail yards. The data are directly linked to Schneider National's fleet management and logistics systems. They tell the dispatchers and the customer reps if the trailers are empty or full and if they are hooked onto a cab, sitting in a yard, or rolling on a train. "Ultimately revenue is the measurement of how well we load and move these trailers, " said Paul Mueller, president of Schneider Technology Services, a unit of Schneider Logistics. "It is not uncommon to have to send drivers off-route to get [empty] trailers. When they arrive, the trailer isn't there or it might be loaded." Schneider National sees the new trailer-tracking system as a way to improve customer service through more on-time deliveries and better in-transit knowledge. It should increase drivers' satisfaction by increasing their billable miles and so their earnings. Ultimately it will increase trailer utilization and efficiency. The company does not intend to use it to reduce the number of trailers it owns because its orders are increasing. However, it does want to reduce the number of new trailers it needs to purchase so that it can use the saved funds elsewhere.

Schneider's Global Scheduling System (GSS) helps to optimize the use of both the company drivers and the loads throughout the country. The system processes about 7,000 load assignments daily, looking at all the possible combinations of drivers and loads on any one day. It accesses more than 7,000 possible combinations of drivers and loads per second, and of course the loads and trucks are at different locations each day. Its primary value is servicing customers by satisfying their requests to move freight. However, the GSS can also save the company money because fuel is expensive, and the system makes it more likely that when the trucker delivers his or her load, the next load to be picked up is close by.

Information technology is also being used to help Schneider retain drivers. There is an industry shortage of 80,000 to 100,000 drivers a year. The company's Touch Home program uses the existing in-cab computer technology to give the drivers e-mail access via satellite. The system thus enables drivers to stay in contact with their families.

The company is forging ahead. For example, currently it is working with Network Computing magazine on a Web site in which the entire logistics transaction will be accomplished electronically, including the order, its acceptance, pickup, delivery, billing, payment, and reporting. "Then order management will be a no-touch process from front to back," declared Steve Matheys, Schneider's vice president for application development. "That's a huge cost-saver and customer satisfaction play."

Sources: Todd Datz, "In IT for the Long Haul," Darwin Magazine, September 2001; Paul Musson, "Schneider National Partners with Sun for Service and Support," Serverworld Magazine, January 2001; "Schneider National Selects QualComm Trailer Tracking Solutions," www.qualcomm.com/press, April 9, 2001; "Schneider National, Inc.," The Industry Standard, August 29, 2001; Bill Roberts, "Keep on Trackin'," CIO Magazine, June 15, 2000; Joel Conover, "Network Computing and Schneider National: Building an Enterprise Proving Grounds," Network Computing, July 20, 2000; Kelly Jackson Higgins, "Schneider National Rolls into the Web Age," Network Computing, February 7, 2000; Douglas Hubbard, "Try Simulation," CIO Magazine, June 15, 2000; and Esther Shein, "Smooth Operators," CIO Magazine, August 15, 2000.

Case Study Questions

Analyze Schneider National and its business model using the value chain and competitive forces models.
What business strategy did Schneider National adopt? What is the role of telecommunications and information systems in that strategy?
How did Schneider's information systems change its business processes?
What management, organization, and technology issues did Schneider National have to address when information technology became so pervasive in its operations?
Has Schneider National's reliance upon information systems been successful? Is the company transforming itself into a digital firm? Why or why not?

Case Study

Chapter 9

General Motors Takes a Test Drive on the Internet

General Motors (GM) is the world's largest automaker, with 386,000 employees in 50 countries. GM vehicle brands include Chevrolet, Pontiac, Buick, Cadillac, Saturn, and GMC Trucks. GM also has vehicle production relationships with Opel, Vauxhall, Subaru, and Alfa Romeo. Its nonvehicle ventures include Allison Transmission (manufacturer of medium and heavy-duty transmissions), GM Locomotives, and a 35 percent share of Hughes Electronics (producer of satellites and communications). GM's subsidiary, GM Acceptance Corp. (GMAC) is a major financing organization that specializes in financing GM vehicle purchases and home mortgages.

GM's auto sales have been declining, from about 60 percent of the U.S. vehicle market in the 1970s, to only 28 percent today. The company continues to face stiff competition from Ford, Daimler Chrysler, and the Japanese, all of which have lower production costs than GM--and cars with better styling and quality.

GM's sheer size has proved to be one of its greatest burdens. For 70 years, GM operated along the lines laid down by CEO Alfred Sloan, who rescued the firm from bankruptcy in the 1920s. Sloan separated the firm into five separate operating groups and divisions (Chevrolet, Pontiac, Oldsmobile--which is being phased out--Buick, and Cadillac). Each division functioned as a semiautonomous company with its own marketing operations. GM remained a far-flung vertically integrated corporation that at one time manufactured up to 70 percent of its own parts. This model of top-down control and decentralized execution had once been a powerful source of competitive advantage, enabling GM to build cars at lower cost than its rivals. Over time, however, it worked against the company. Domestic competitors such as Chrysler were able to make vehicles at lower costs because they could purchase their parts from outside vendors and bargain on pricing. GM was not able to move quickly to update its selection and styling, and the quality of its cars lagged behind Japanese and even U.S. rivals. It took GM more time and money than competitors to produce a car because the firm was saddled with a lumbering bureaucracy and inefficient production processes.

GM's information systems reflected its welter of bureaucracies. At one time, GM had more than 100 mainframes and 34 computer centers but had no centralized system to link computer operations or to coordinate operations from one department to another. Each division and group had its own hardware and software so that the design group could not interact with production engineers via computer. GM had more than 16 different electronic mail systems, 28 different word processing systems, and a jumble of factory floor systems that could not communicate with management. Most of these systems were running on completely incompatible equipment.

Since the early 1980s GM's management has tried to standardize and integrate its systems. GM first used Electronic Data Systems (EDS) of Dallas (which it had briefly owned) to consolidate its computing centers into 21 uniform information-processing centers. EDS then consolidated 100 different GM networks into the world's largest private digital telecommunications network. In 1993, EDS replaced GM's hodgepodge of desktop models, network operating systems, and application development tools with standard hardware and software for office technology. GM has also been replacing 30 different materials and scheduling systems with one integrated system to handle inventory, manufacturing, and financial data.

GM's current chief information officer Ralph Szygenda has continued to work on streamlining the firm's information architecture and information technology infrastructure. Under his leadership, GM further trimmed the number of vendors of hardware, software, and services for its desktops and networks, and developed common business processes and systems. Szygenda's IS group replaced more than 50 systems with standard packaged software for personnel, payroll, and material management, including enterprise software to tie together human resources management and financial systems. GM replaced 26 different CAD/CAM systems with a single system. Customer data were fragmented among thousands of disparate databases maintained by GM's car and truck divisions and its leasing, home mortgage, and credit units. Szygenda initiated projects to integrate and standardize these data to provide a complete company-wide picture of the entire customer experience. Now GM can see which customers purchase vehicles frequently using GM financing and link each order to a customer's entire car buying history. Before consolidating legacy systems and databases, this information would have been impossible to obtain.

In August 1999 GM added a new division devoted to the use of the Internet and e-commerce, known as eGM. Mark Hogan was named the head of the division and a corporate group vice president. In February 2000, 47-year-old Rick Wagoner was appointed CEO of GM, replacing Jack Smith. At that time Wagoner stated four main goals for the corporation, including his intention to focus on innovative products and services and the development of e-business. Wagoner's management team believes that by intensively weaving Internet technology into all of its business processes, GM can become a smarter, leaner, faster company, more in tune with customers. It also hopes this technology will help GM reduce from 24 to 12 months the time to design, engineer, and manufacture a new vehicle, cutting up to 10 percent of the cost of making a vehicle by eliminating supply chain inefficiencies. GM would use the savings produced from this skillful use of technology to increase spending on its vehicle designs. Although GM has the broadest vehicle lineup in the industry (49 models), it has lacked the resources to keep its models fresh.

Internet technology could be the catalyst for GM to reconstruct its entire value chain, transforming itself into a customer-focused business that provides many different electronic services to consumers, as well as cars. Indeed, more and more of GM's revenue comes from other sources, including the Internet. For instance, in April 2000 GM announced it would move into the world of on-line mortgages, cellular services, and information delivery, as well as selling its vehicle-based Internet technology. Ultimately, some think, all of this might make it the world's largest e-commerce company. Let us examine some of GM's Internet initiatives.

Selling vehicles on-line. The role of dealers is fundamental to the sale of automobiles. In fact, the laws in most states make it extremely difficult for anyone other than licensed auto dealerships to sell new vehicles, thanks to the lobbying power of the National Auto Dealers Association (NADA). Recently, GM has been experimenting with ways to sell vehicles on-line, although mostly with opposition from its dealers. They are concerned about GM trying to bypass them by selling vehicles on-line, a channel conflict. Hogan, however, describes GM's relationships with its dealers as "strong."

In March 1999, GM established GMBuyPower.com, a Web site where visitors can browse for GM cars; search by color, options, and availability; and find a dealer in their area that stocks the car they want. By autumn 2000, with the site receiving about 1 million hits per month, the company decided to use the site to make another try at selling vehicles on-line. This decision was partly in response to growing sales through such Web sites as Autobytel.com. GM is working on pilot programs to enable customers to purchase vehicles on-line through local dealerships. GMBuyPower.com attracted an average of 558,000 unique visitors per month between May 2000 and May 2001, more than double the volume of Ford's FordDirect.com dealer referral site. GM is now rolling out GMBuyPower.com to 45 global markets covering 95 percent of the car-driving world.

Dealers are vital to GM for several other reasons, including their close connection to their customers and to the automobile-purchasing public. "They understand what the on-line consumer is looking for," claims Scott McDonald, GM's director of e-sales. In addition, the dealers are essential because of their role in vehicle inventory. The process of making decisions about how many and which vehicles to produce requires a large inventory. The auto producers begin by making a guesstimate as to the number of each model to produce each year and in what color and with what options. The dealers in turn decide which of these vehicles they think they can sell and then make their purchases. Only then do customers begin to purchase, selecting from dealer inventories. To make the system work, the industry maintains about a two-month inventory of new vehicles. The value of GM's inventory is usually about $40 billion according to Hogan, making inventory costs very high. The dealer's' role is crucial, because dealers hold most of this inventory and so assume much of the risk and expense of owning the vehicles.

Building vehicles to order. One major weakness in the system of determining what to build is that if the manufacturers or the dealers guess wrong on total demand or on style, color, and other options, they must offer costly incentives to prod consumers to purchase these products. Auto producers are anxious to make cars that customers have actually ordered. "Build-to-order" has been around the auto industry for a long time, but only for very expensive cars, and it required a waiting period of two to three months before delivery. U.S. automakers have recently reduced wait time for ordered vehicles to six or seven weeks, and Toyota North America, the real leader, delivers a built-to-order vehicle in less than a month. Build-to-order would greatly reduce finished vehicle inventory costs as well as generate other production cost savings, potentially saving GM $20 billion per year. GM is so committed to build-to-order that it has assigned 200 people the goal of selling 80 percent of all GM new car purchases within three years.

Achieving this goal will require heavy reliance on GM's Internet infrastructure and extensive organizational change. The company will have to be able to take orders on-line, link its factories and suppliers on-line, change vehicle designs so they can be built more easily using modules, and greatly cut shipping times. Build-to-order requires producers to carry larger work-in-process inventories, a reversal of the 20-year trend of just-in-time component supply deliveries. According to James Mateyka, an automotive consultant at A. T. Kearney, "You would now need to hold, skillfully, inventories of certain kinds of parts [modules], such that you can be flexible enough to take a generically defined car, then at the last minute suddenly have a defined car."

In order to link factories to suppliers via cyberspace and reduce procurement and inventory costs, GM and other major auto manufacturers have established Covisint (see the Window on Organizations in Chapter 4), a massive net marketplace. GM spends $87 billion per year on raw materials and components and believes Covisint could cut the cost of producing each vehicle by perhaps $1,000 (estimates vary) as well as reduce the time from receiving a car order on-line to delivery from about 45 days to 10 days. Covisint is linked to GM's own private industrial network, called GMSupplyPower. This extranet gives suppliers access to the latest information on production scheduling, inventory, and the quality of their parts.

Locate-to-order. Build-to-order is not yet a reality, and so the immediate problem is quickly finding the desired car, a strategy known as locate-to-order. To achieve this approach, GM must create a regional inventory of the pool of available vehicles using the Internet. The pool will be displayed on the Net so potential buyers can select the car they want regardless of its location. Customers then buy it through their local dealer According to Gary Dilts, Chrysler's senior vice president of e-commerce, 98 percent of the vehicles customers want are already available somewhere. Ultimately, however, GM will have to build-to-order because inventory cost savings are so compelling.

OnStar. Another information age venture GM has established is its wholly owned subsidiary, OnStar. It is a telematics system with onboard navigation, Internet, safety, and communications capabilities accessed through three buttons on the vehicle dashboard. A GPS (global positioning system) keeps the system constantly informed as to the location of the vehicle on the road. OnStar provides such services as emergency roadside assistance, stolen-vehicle tracking, and concierge support, such as making dinner reservations.

OnStar Personal Calling enables drivers to make and receive hands-free calls with voice-activated phones. The OnStar Virtual Advisor service allows users to retrieve personal data on the Web, including e-mail, news, stock quotes, and traffic and road-condition reports within a given radius of the driver's location. Whether the hardware is standard or an option, any user of OnStar will pay an annual subscription fee, ranging from $199 to $399 depending on the services taken.

With OnStar, GM cars become a platform that generates a continuous stream of high-margin revenue from drivers downloading and paying by the minute for Internet, data, and telecommunications services. With 70 percent of wireless telephone minutes logged in vehicles, GM could eventually become the largest reseller of cellular minutes in the United States. The service already has close to 1 million subscribers. GM has licensed OnStar to Honda and Toyota, and it will also be providing them such services as roadside assistance as well.

Internal uses. General Motors created an intranet portal called Socrates that enables users to search all of GM's internal sites from one starting point. Today 100,000 GM employees around the globe can access more than 500 internal GM sites through this portal. Employees can use Socrates to access their human resources information, participate in on-line training programs, and search through a repository of best practices. Socrates has capabilities for enabling employees to tailor the information they obtain to their own needs, making it easy for them to use. GM is even subsidizing the cost of home access for its employees because it wants to make the Internet a more integral part of their daily lives.

Ralph Szygenda has said that "The [automobile production] company that links design, procurement and sales--and puts it all together electronically--wins." Will his words be borne out? Can GM use the Internet to transform its hidebound bureaucracy? Two decades of restructuring and reorganization have brought about deep changes at GM, paring down the waste and overbloated organization. The company has cut down the time it takes to develop and produce a car from 48 to 18 months, eliminating $1 billion in engineering costs. Can these efforts stop the decline in GM's market share? GM has been losing money and market share in Europe, and risks falling behind Ford as the leader in U.S. sales. Foreign automakers are consolidating their grip on the U.S. auto market. Despite shedding tens of thousands of workers, chopping billions of dollars per year off of costs, and eliminating models, GM still struggles to earn net income of more than three cents on the dollar. (Other automakers generate net profit margins of 6 percent.) Although GM currently is not experiencing a financial crisis, it remains under heavy pressure to boost its mediocre profit margins.

Overall, GM has invested about $1.6 billion in streamlining its IT infrastructure and architecture along with various e-commerce and e-business initiatives. These changes have already reduced GM's IT budget by $800 million each year since 1996. But will this be enough to boost profits over the long run? If GM has the greatest technology and technology services, such as OnStar, but continues to build uninspired vehicles, how much can e-business help?

Sources: John Galvin, "Racing the Clock," Smart Business Magazine, May 2001; Antone Gonsalves, "IT's the Tiger in Their Tanks," Information Week, September 17, 2001; Jason Black, "Build Lasting Partnerships, " Internet World, August 1, 2001; Peter D. Henig, "The New Thin Client?" Red Herring, May 2001; Joseph B. White, Gregory L. White, and Horihiko Shirouzu, "Soon, the Big Three Won't Be, as Foreigners Make Inroads in U.S.," Wall Street Journal, August 13, 2001; Gregory L. White, "In Order to Grow, GM Finds That the Order of the Day Is Cutbacks," Wall StreetJournal, December 18, 2000; Keith Bradsher, "G.M. Phaseout of Olds Is at Center of a Range of Cutbacks," New York Times, December 13, 2000; Dale Buss, "Custom Cars Stuck in Gridlock," The Industry Standard, October 16, 2000; Dale Buss, "The Race to Be Wired," The Industry Standard, September 4, 2000; Lee Copeland, "Automakers Put Workers Online," Computerworld, November 3, 2000; Lee Copeland, "General Motors' CIO Touts Corporate Benefits Portal," Computerworld, November 27, 2000; Lee Copeland, "GM Now Sells Web Technology, Not Just Cars," Computerworld, June, 5, 2000; Lee Copeland, "GM Shuts Doors on GMDriverSite.com," Computerworld, September 4, 2000; Sari Kalin, "Overdrive," CIO Web Business Magazine, July 1, 2000; Julia King and Lee Copeland, "GM Retools for E-Commerce That Goes Well Beyond Cars," Computerworld, April 17, 2000; Todd Lassa, "General Motors Is Making a Major Internet Play, and It's Put a Real 'Car Guy' Behind the Wheel. But Can He Drive an E-Business?" Internet World Magazine, March 1, 2000; Kathleen Melymuka, "GM Deal for Web-Based Dealership Software Falls Through," Computerworld, November 16, 2000; Robert L. Simison, "GM Retools to Sell Custom Cars Online," Wall Street Journal, February 22, 2000; Paul Strassmann, "GM's Info Gamble," Computerworld, June 5, 2000; Lauren Gibbons Paul, "The Biggest Gamble Yet," CIO Magazine, April 15, 2000; Todd Weiss, "GM to Begin Selling Oldsmobiles Online in Web-Site Pilot Program," Computerworld, September 19, 2000; Steve Ulfelder, "Internet Drag Race," Computerworld, March 6, 2000; Ken Yamada, "Shop Talk: Car Dealers, Customers Both Win on Web," Red Herring, September 26, 2000; Eric Young, "Stalled on the Digital Highway," The Industry Standard, September 4, 2000; and Jennifer Zaino, "OnStar Expands Services for Drivers," Information Week, November 14, 2000.

Case Study Questions

Describe the competitive business environment in which GM is operating.
Describe the relationship between GM's organization and its information technology infrastructure. What management, organization, and technology factors influenced this relationship?
Evaluate the current business strategy of GM in response to its competitive environment. What is the role of Internet technology in that strategy? How successful is that strategy?
What management, organization, and technology issues do you think GM has had to face and will need to solve in implementing its Internet strategy?
How will GM have to redesign its business processes to be able to compete successfully and achieve a leading role in the new economy?
In GM's drive to sell cars on-line and to build-to-order, what are some of the problems that technology cannot address?

Case Study

Chapter 10

Frito-Lay's Drive to Repackage Knowledge

Frito-Lay is well known to the general public, with products such as Fritos, Lay potato chips, Doritos chips, Cheetos, Ruffles, Cracker Jacks, SunChips, Grandma's Cookies, and even Tropicana. It is the largest snack-food maker in the world, selling 40 percent of the world's salty snacks in about 120 countries and reaching 60 percent of this market in the United States. Headquartered in Plano, Texas, and with more than 37,000 employees, Frito-Lay had sales reaching nearly $13 billion in 2000, representing about two-thirds of the sales and profits of PepsiCo, its parent company.

The company also enjoys a very good reputation both for its management and its use of computer technology. In 1989, the company installed a data warehouse so it would know the location and price of each bag of chips that was sold throughout the United States. In 1991 Frito-Lay gave its sales reps handheld computers, and pricing and product decision making began to move down the chain of command. The company was one of the first to do so and many companies followed suit. In 1995 Frito-Lay spent $130 million to purchase 15,000 new handheld computers that would enable the company to make even better use of information technology. As technology continued to improve, the decisions moved further down the organization, finally reaching the sales staff working at the individual store level.

Frito-Lay's main goal for its handhelds was to offer its customers, and through them the consumers, as much choice as possible by empowering its field staff, who had the closest contact with its customers. Management also wanted to improve Frito-Lay's product forecasting and improve its inventory management. Using handhelds, the sales staff was better able to track inventories and to improve communication with their retailers. Using handhelds, the sales reps were even able to agree to and lock in specific prices for given products—such decisions no longer needed to be bumped up to regional or national management.

Despite highly acclaimed information systems, Frito-Lay had serious problems managing its data. Data were fragmented among separate national databases for functions such as marketing and accounting. Both its sales staff and sales information were widely scattered around the country. Data about company policies, experiences, and customers were stored in separate systems geographically spread throughout the United States, some being stored in Plano. The scattered data were even captured and stored using an array of disparate technologies. The Frito-Lay sales force found it nearly impossible to gather such data when they were needed. Nor could they easily assemble sales data along with profitability data from the customer's system and competitive and industry information from the Web.

The sales staff also had serious problems sharing information with each other—those assigned to the same company had no easy way to share their knowledge about their customers. Salespeople in different locations would have to do similar research or ask or similar questions of corporate sales, marketing, and operations staffs, a waste of everyone's time and energy. Those questions might include

What are the current consumer trends in this snack?

How do the retail customers of this chain of stores behave compared to other customers?

Why does Frito-Lay want to display some products in different areas of the store?

What stimulates shoppers to select specific products while walking through the store?

Sales staff working with the same customer did not have a way to brainstorm together or collaborate on a particular challenge. Nor did staff members even have ways to identify and consult with internal experts on particular companies or issues. Performance suffered.

In the late 1990s Frito-Lay found itself serving fewer, larger customers who expected suppliers to provide more service. One of the biggest customers reorganized and centralized its purchasing decision making. This unnamed company is a multibillion dollar supermarket chain that is considered a leading marketer and merchandiser. It quickly began making new demands on Frito-Lay, such as wanting to see study results supporting a marketing idea suggested by a Frito-Lay salesperson. "They were pushing us to support [the suggestion] with quantitative and qualitative research," explained Mike Marino, Frito-Lay vice president of customer development "and we had no simple way to obtain that information." Frito-Lay quickly created a few national sales teams to work with this and other such customers on a national basis. Its goal was to provide more information to these large, centralized customers. The members of the new national teams came from the regional teams and remained scattered around the country. They had no experience in working with a customer's national office and found the challenge particularly rough because of the dispersed data. The company simply had not built the information technology infrastructure needed to access that data from other locations. The difficulties became evident in 1998 when, because of strong pressure, the turnover in the new national sales teams reached 25 percent. Frito-Lay had to make its information easily available by building a knowledge management portal.

Frito-Lay's portal would primarily operate on the corporate intranet. The three stated Frito-Lay goals for the portal were to organize knowledge and make it fairly easy to obtain; to utilize customer-specific data; and to increase team collaboration. In 1999 Marino hired Navigator Systems Inc., a Dallas, Texas, consulting firm that focused on business intelligence, enterprise collaboration, and e-commerce applications. A Frito-Lay project team was appointed to work with Navigator Systems in creating the portal.

The portal had to be able to locate information requested by the sales team members. The system would have to search central databases of such departments as marketing, sales, and operations, as well as databases at other locations. Sales team members also had to be able to turn to in-house experts on each topic, and so the project team developed profiles of 100 identified experts on the portal. Once it was created, the project team decided to pilot the portal using the national team assigned to the unnamed national customer whose requests had initiated Frito-Lay's changes. The choice was ideal both because of the size and quality of the customer, and because the 15-member sales team was scattered in 10 locations throughout the country. Marino said, "We knew if we could deliver there, we could satisfy any customer."

Security was also a key function of the portal. The team that worked with the large customer was forbidden to communicate that client's proprietary information about sales performance to anyone outside the group serving that customer. The project built in password protections so that portal users could only access appropriate data. The software the team worked with included Lotus Domino groupware, IBM's DB2 database management software, PowerPoint electronic presentation software and the Autonomy search engine. Navigator used Lotus Domino to build an application that placed descriptions of important documents (promotion strategies, bud

Table of Contents

General Motors Takes a Test Drive on the Internet