7-Eleven Japan, Eli Lilly, Mohegan Sun, UPS, Vanguard, Carls by kpy54980


									                                               7-Eleven Japan, Eli Lilly, Mohegan
                                               Sun, UPS, Vanguard, Carlson

REAL WORLD                                     Companies, and Raytheon: The
                                               Portfolio Approach to IT Investment
 CASE                                          Planning and Management

W               hen the weather is hot, 7-Eleven Japan’s stores
                in Tokyo have plenty of bento boxes—Japan’s
                cold boxed meals of rice, pickles, and other
foodstuffs—while on cold days there are lots of hot noodles for
sale. The stores’ operators always seem to have plenty of what
                                                                     track record of industry-leading financial returns. The
                                                                     convenience-store giant blends its IT investments with a
                                                                     range of assertive IT practices and capabilities: everything
                                                                     from the counselors’ visits that increase the store operators’
                                                                     IT skills to the “transparency” of an information infrastruc-
their customers want; in fact, they order and receive fresh food     ture that links 70,000 computers in stores, at headquarters,
deliveries three times a day. It is no coincidence that the com-     and at supplier sites.
pany is the nation’s most profitable retailer. Its 2004 gross mar-       Peter Weill and Sinan Aral of the MIT Center for Infor-
gins topped 30 percent—six times its 1977 gross margins.             mation Systems Research identify four broad classifications of
     7-Eleven Japan is, to put it simply, very savvy about us-       IT investments that can be managed as a portfolio to optimize
ing IT. At least twice a week, every one of its 10,000-plus          their business risk and return: transactional, informational,
mostly franchised stores gets a visit from a 7-Eleven Japan          strategic, and infrastructure. Transactional investments are
“counselor”: The counselor works with the store manager or           used primarily to cut costs or increase throughput for the
franchisee to improve the business, often by using data from         same cost (for example, a brokerage firm’s trade processing
the store’s information systems to manage and order more             system). Informational investments provide information for
effectively.                                                         purposes such as accounting, reporting, compliance, com-
     By matching local practices and preferences to IT               munication, or analysis. Strategic investments are used to
investments, the store can continually introduce and succeed         gain competitive advantage by supporting entry into new
with new product lines. The typical store adds 70 percent            markets or by helping to develop new products, services, or
new items for sale each year, a higher rate than that of any         business processes. And infrastructure investments are the
other retailer in Japan, and this helped double the average          shared IT services used by multiple applications (such as
store’s daily sales from 1977 to 2004. The store managers            servers, networks, laptops, customer databases). Depending
regularly receive graphical data showing recent sales,               on the service, infrastructure investments are typically aimed
weather conditions, and product range information, so they           at providing a flexible base for future business initiatives or
always know just how many bento boxes to order.                      reducing long-term IT costs via consolidation.
     7-Eleven Japan makes effective IT investments, planning             Pharmaceuticals leader Eli Lilly and Company has used
and managing them as a “portfolio” of different categories of        the portfolio approach since 1999 to categorize its IT invest-
investments that continually matches information technol-            ments. “We tend to want to have 5 percent of our projects in
ogy to its business strategy. But the company’s well-managed         strategic areas, 15 percent to 20 percent in the informational
IT investments are only part of the story behind its 20-year         category, and the remaining percentage split between the
                                                                     infrastructure and transactional,” explains Sheldon Ort,
FIGURE 11.1                                                          Lilly’s information officer for business operations.
                                                                         The technique is also engaging business leaders in IT
                                                                     investment decisions at Mohegan Sun, the Connecticut-
                                                                     based casino. CIO Dan Garrow reflects on the experience:
                                                                     “Comparing our strategy against our plans for expenditures
                                                                     in each of the four management objectives for IT invest-
                                                                     ments, we realized there was a disconnect between our long-
                                                                     range plans and our resource allocations, both human and
                                                                     financial. Portfolio thinking helped us bring the day-to-day
                                                                     activities back into alignment with our long-range objectives.
                                                                     Portfolio thinking helps us determine what type of company
                                                                     we are and the level of risk we’re willing to take, particularly
                                                                     around our strategic business efforts.”
                                                                         Each portfolio category of IT investment is linked to dif-
                                                                     ferent types of business value. For example, companies that
                                                                     invest more heavily than their competitors in transactional IT
                                                                     have lower costs. Logistics leader UPS offers a good example:
  The portfolio approach to IT planning can help
                                                                     The company uses IT to cut business costs and increase pro-
  companies make better use of IT to support their                   ductivity. For instance, it provides free package tracking in-
  business success.                                                  formation on its Web site or integrated into its customers’
                                                                     enterprise resource planning systems. Before online tracking
                                                                     was offered, customer calls to the company’s call center cost
Source: Tom Wagner/Corbis.
416    ●   Module IV / Development Processes

UPS about $2 each; sometimes there were two follow-up                proposition than what internal IT resources can offer. As a
calls to locate the package, for a total of $6 for one inquiry.      result, Carlson’s business units use the shared IT services as
Now each tracking request costs UPS only a few cents.                much as possible, even though use is not mandatory.
     Similar evidence applies to the other IT asset classes.              Raytheon Company illustrates how IT infrastructure
Companies such as 7-Eleven Japan that invest more heavily            investments can deliver cost savings and provide a platform
in informational IT have higher quality and larger margins           for business agility, and it shows how business processes and
(net profits per dollar of sales). Strategic IT investments help     decision-making practices must change accordingly. Rebecca
spur innovation and thus position an organization for growth.        Rhoads is vice president and CIO at the $21 billion aero-
For example, Vanguard.com, the website of the mutual funds           space and defense corporation, which has grown significantly
firm, has a customized, password-protected portfolio analysis        through mergers with the defense operations of Texas
tool that offers sophisticated calculations, including com-          Instruments, Hughes, General Dynamics, and E-Systems.
parisons of investors’ current asset allocations versus long-        She explains that the practices guiding Raytheon to a stan-
term goals. Investments in IT infrastructure serve multiple          dardized technology infrastructure after the mergers were
purposes. Some are designed to cut costs through standard-           just a first step in generating value from IT:
ization and consolidation—data center consolidation, for
                                                                         You will outgrow the governance [IT planning and invest-
instance. Others reduce time to market for new business
                                                                         ment management] model that makes you successful. It took
initiatives or provide a platform for delivering companywide
                                                                         me a while to figure that out because we had developed a
initiatives such as a shared customer database for a single
                                                                         governance model that was so effective—everybody was so
point of customer contact.
                                                                         supportive of it. We had buy-in, we had alignment, we were
     Carlson Companies offers a good example of the value cre-
                                                                         moving forward on it. It was a governance model that helped
ated by a shared IT infrastructure. The $20 billion company is
                                                                         us consolidate and shape up the company. So once we reduced
a leader in the marketing, hospitality, and travel businesses; its
                                                                         a couple of thousand legacy applications, once we went from
most recognized brands include Radisson Hotels & Resorts,
                                                                         150 payroll systems to one, 28 e-mail systems to one, we
T.G.I. Friday’s restaurants, Carlson Marketing Group, Carlson
                                                                         reduced IT spend by over forty percent.
Wagonlit Travel, Radisson Seven Seas Cruises, and the Gold
                                                                              That’s what we needed to do over the first three to four
Points Reward Network. Although the businesses are run au-
                                                                         years of being the new company, because if you don’t get the
tonomously, Carlson has captured cost savings and synergies
                                                                         synergy of the merger, you’re not going to come up for air ever.
with a world-class shared services capability, which won the
2004 International Productivity and Quality Council’s award              However, Rhoads now believes that following Raytheon’s
for the “best mature shared services organization.”                  IT cost-cutting successes, its IT planning and investment
     Carlson Shared Services is a division of Carlson set up to      focus needs to shift to business agility—to questions of how
operate as a business, offering IT and financial services. It is     Raytheon might grow and how IT investments could support
governed by a board comprising the CIOs and CFOs of the              that growth.
business units; and its IT organization provides 89 infrastruc-
ture services to Carlson’s businesses. The IT unit compares          Source: Adapted from Peter Weill and Sinan Aral, “Generating Premium
                                                                     Returns on Your IT Investments,” MIT Sloan Management Review, Winter
the prices of its services to those of external vendors, and out-    2006, and NEC Solutions America, “Information Technology Portfolio
sources whenever a vendor can offer a better price or quality        Management,” necsam.com, 2006.

           CASE STUDY QUESTIONS                                               REAL WORLD ACTIVITIES
 1. What is the portfolio management approach to IT                   1. Use the Internet to research the many companies in
    planning? Use the four classifications of IT investments             this case. How are they doing now in terms of business
    and examples of companies in this case to illustrate your            success? See what the business and investment news
    answer.                                                              media say about the status of these companies, as well
 2. What are the keys to 7-Eleven Japan’s great success                  as their own investor reports and press releases. Are
    compared to other retailers in Japan? How does IT                    their investments in IT mentioned? How could IT
    support such success? How could 7-Eleven Japan do                    portfolio management help improve their present busi-
    even better? What role would IT play? Defend your                    ness status?
    proposal.                                                         2. Break into small groups with your classmates, choosing
 3. Compare the IT portfolio investment approaches of Eli                one of the businesses owned by the Carlson Companies
    Lilly, Carlson Companies, and Raytheon. What differ-                 or Raytheon as a company whose business success you
    ences in investment approaches and strategies do you                 will try to improve. What are your suggestions to
    find? Which approach do you prefer? Why?                             improve its performance? What role can IT play to
                                                                         support any of your proposed initiatives? Defend your
                                                                         proposals to the rest of the class.

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