Doing Business in the Information Age

Wriston, Walter B.


We live in a world full of people who make predictions about the future. Most of these futurists use straight-line projections of today's data to paint a picture of tomorrow. My favorite illustration of this is the recent statement that if George Steinbrenner continues to behave as he has in the past, 70 percent of the male population of New York will have managed the Yankees by the year 2020.

In the real world, things rarely continue on a steady track, but even to suggest that the world may be very different in the future is usually met with disbelief. Examples abound. When the price of oil was headed up from 30 dollars a barrel, those who suggested it would hit $15 a barrel before it hit $50 were dismissed out of hand. This scenario simply did not fit the projections, and yet that is what really happened.

The business of data processing and information is no exception. Many in this room remember when the "experts" predicted the rise of huge computer utilities which would supply data processing to American business, much as the familiar electric utility generates and distributes power. This projected event never happened. Indeed, the world went just the other way. The advent of the P.C. and the work station based on powerful new microchips changed not only how we do our work, but in many cases, the nature of the work itself. The data center manager, who in the early days of information technology was a kind of a technological gatekeeper practicing an arcane art, has now moved into the mainstream of corporate management. The diffusion of computing power tied together with a network that lets one access literally thousands of data bases is having a profound impact not only on business, but on government, and, indeed, on the very concept of the nation state.

Leaving aside for the moment some of the profound political and social changes being driven by information technology, what do these rapidly changing technologies mean for our business? The scope of the revolution through which we are living is so broad that it is fair to say that almost everything we do, and the way we do it, has been or will be impacted sooner or later. At this conference, before this audience it might be most appropriate to start the discussion with marketing.

In thinking about marketing, one often gets back to some of the aphorisms that made Ted Levitt famous. One of these that comes to mind is: "There is no such thing as a commodity. All goods and services can be differentiated and usually are. Whether you agree or disagree with Ted Levitt, most would acknowledge at least a grain of truth in his statement.

If differentiation is the name of the game, how then can we use the modern information technology to enhance our market share? In trying to think through this problem, one is chasing a rapidly moving target. Today the nature and size of the market for just about everything is changing at an accelerating speed. Old benchmarks are shifting and new strategies are required. Competition has moved from next door to anywhere in the world. Suddenly we are finding that world class competition can, and does come from areas that posed no threat only a few years ago. It has now become almost a cliché to say we live in a global marketplace, and although innumerable speeches are made giving lip service to the idea, many people still truly fail to grasp this new reality and continue to operate in the same old way. The very framework of economic analysis is changing. All economic models from Adam Smith to the present are based on the concept of a national economy of a sovereign state. While there are still national economies, there is also a world economy. The relative impact of the world economy on individual nations is growing every day. Borders have become porous, and money and ideas move over and through them with the speed of light. No one who has watched in amazement the action of the Chinese students on television can fail to understand that the new technology has placed powerful new weapons on the side of freedom. While the immediate outcome is not promising, the ultimate outcome is almost assured.

This reality is creating many wholly new situations with which we have to deal. One of the new realities is the speed with which technology moves from the mind to the market.

It used to be that there was a long lapse between the time something was invented and when practical uses were found for it. One would think, for example, that when gunpowder first appeared on the battlefields of the Western World, this powerful new force would have immediately been applied to civilian construction projects, but the world had to wait almost half a century for this to happen. The conventional wisdom almost always rejects new ideas. Two examples serve to make the point. Over 200 years ago, in 1775, a frenchman named Duperron and an American called Bushnell both made significant inventions which were destined to alter the balance of power by changing the way wars were fought. Duperron invented the machine gun and Bushnell the submarine. Despite the constant clamor of all military men for ever increasing destructive power, both inventions were basically ignored for more than 100 years. At the start of World War I, British Field Marshal Douglas Haig opined that the machine gun was "a grossly overrated weapon" and his French colleague, the Director-General of Infantry, told members of the French parliament that "this weapon will change absolutely nothing." Mr. Bushnell's invention fared no better. Even such a futurist as H.G. Wells, as late as 1902, said that his "imagination refuses to see any sort of submarine doing anything but suffocate its crew and founder at sea."

Such misjudgments about the usefulness or impact of new technology are the stuff of history, but they should serve to remind us not to dismiss too quickly contemporary ideas that seem at first to be either impossible or useless.

This is as true in business as in politics. As business and government bureaucracies expand and age, they tend to develop a kind of administrative arthritis -- they move slower and are less agile in response to market demands. Examples abound. The commercial banks should have invented the credit card, but they did not. Kodak, which is always at the forefront of technology, was a natural to produce the first instant camera, but it was Dr. Land of Polaroid who brought the idea to market. General Electric should have been the world leader in electronic computers, but it was IBM, without single electronic engineer in 1945, that saw the opportunity and seized the lead. All these companies survived, but the corporate graveyards of the world are littered with other companies that refused to assess the market potential of new technology, and instead relied on some kind of "technology assessment," without thinking of what the market may want. The list of good companies that turned down the Xerox process reads like the Who's Who of American Industry. Even today, the marketing man is often left out when technology assessment committees are formed. Scientists are not always the best judges. Even inventors themselves often fail to foresee how their invention will be used. Edison dismissed the phonograph he invented as an instrument of no commercial value, because he failed to perceive there was a market for recorded music.

A learned committee making a "technological assessment" of the low-tech concept of selling a common, garden variety rock in a cardboard box would have turned the idea down out of hand. A clever package, an improbable set of instructions, and the pet rock was born. In the last ninety days of 1974, one million three hundred thousand pet rocks were sold at $4 each to otherwise rational adults. The Japanese also weighed-in to market a fad product. A man called Hakuto developed a rubber octopus named the Wacky Wall Walker which generated, according to news reports, a profit of $20 million on $50 million of sales. While neither of these fads lasted long, somehow a commodity product was differentiated in the market for a time. In these cases the technology employed was the imagination of a marketing mind.

But fads aside, today's technology, if intelligently applied is helping to build solid market positions in everything from banking to merchandise retailing. And is being used by many companies, at both the front and back end of the process, from design to delivery. J.C. Penney is one company which has made very productive use of information technology to let that company do more business, in a better way, in more places. Everyone who ever tried to market anything knows that the closer one gets to the customer, the better one's information is about the consumer's likes and dislikes. In the ideal world of management text books, store managers who know the community in which their shops are located should pick out the merchandise assortments most pleasing to local tastes. If their judgments are correct, sales increase, markdowns decrease, and profits rise. The problem has been to maintain the leverage of the huge buying power of a central office, while at the same time letting store managers make merchandise selections. Penney built a direct broadcast telecommunication system that links all their stores. The system can be, and is used for inventory control, reorders, accounting and all the standard business purposes. But that is only the beginning. Currently store managers gather in centers fairly close to their stores to view a television screen on which appears the latest merchandise picked out by the buyer in headquarters. Standing in a Penney TV studio, the buyer displays a dress, or sweater or other items, describes the material, the price and delivery times and, in effect, asks for orders. The enthusiasm, or lack thereof, for an item reflects each store manager's assessment of his or her marketplace. Heavy sweaters may be hot items in Minneapolis but of little interest in Houston. The order system itself is basically paperless and a vast simplification of the old many layered process. From a management point of view, the store manager can no longer excuse substandard store results by complaining that some buyer sent out a poor merchandise assortment that had little appeal in his or her particular marketplace. Today managers can be held accountable, while at the same time each store benefits from the mass buying power of the central office. Technology has permitted a widely dispersed organization with about 1,400 stores to follow customer-driven business practice, and gain a very real business advantage.

Once the goods are on the shelf, electronic technology can move directly into the marketing process. It is not too much of an exaggeration to say that there is a revolution in the way in which information about what people are buying is being collected, collated and used for marketing. The awareness of this opportunity has spawned many new companies. According to a recent issue of the Economist, "Today companies spend some $5 billion world-wide hiring outsiders to study advertising, markets and public opinion. Half of that sum is splashed out in America." In our country over 90% of American goods now have a Universal Product Code, which is that familiar black stripe commonly known as a bar code. The productivity involved in using scanners at the check-out counter is enormous, and today more than half of American supermarkets have such equipment. The information created by the scanners about what products are sold, in what volume from what shelf in what store, to what kinds of people, creates a marketing data base which is entirely new in both its scope and usability from anything that we have seen before. The long run impact of this kind of data on the future of broad-based advertising on television or radio spots is something that we do not yet fully understand, but we do know that supermarkets are moving to in-store advertising, which is said to be growing at about 20%. A new company has sprung up using a direct broadcast satellite to furnish music to shoppers, but interspersing the music with custom-made advertising spots tailored to a particular store in a particular market to sell a particular product. There is even a company market-testing a shopping cart carrying a small eight-inch television screen. When the shopper passes a sensor it interrupts whatever program is playing on the tape and sends out a five-second commercial. Whether or not this relatively high-cost marketing gimmick will work no one knows, but it is symptomatic of the kind of shift that is taking place in marketing consumer products close to the point of sale rather than in the public media. It is a short step from this to using the information to optimize shelf space for certain products.

The next logical step in the process is to tie the customer to the supplier electronically in order to increase market share and profits. The new tool goes by the name of Electronic Data Interchange, and is moving rapidly across the spectrum of industries. E.D.I. is being used by many companies as a marketing tool for everything from plastics to mortgage servicing. After a business has automated its internal systems, the next question is always how do you move the information it generates to another company. Today about 70% of the Fortune 500 companies are using E.D.I., both on the buy and sell side. People have joined electronic networks, which are basically electronic mailboxes where they can send documents anywhere in the world. The drug business has been particularly active in this, and it is estimated that in the wholesale drug industry customers transmit 95% of all their purchase orders to manufacturers via E.D.I. The major automobile manufactures all use it and, according to press reports, IBM is seeking to connect two thousand of its largest suppliers right after the turn of the decade. Whenever you directly connect your business with another one, it inevitably changes your relationship. Assuming that the technology works, it becomes easier for your vendors and customers to do business with you in cost-effective ways and harder for them to deal with others. All of this can be integrated with the manufacturing process so that the just-in-time inventory process is tied directly to E.D.I. and their vendors. Indeed, this is all happening now.

As the next iteration of technology moves through the business community, even more changes will occur. We have moved in three decades from main frames and batch processing to personal computers and on-line fault tolerant systems. Tomorrow will see much more use of risk technology, integrated networks, and the increased use of expert systems for everything from medical education to credit scoring. And not only is the end not yet in sight, we have only just begun. The users are driving the computer makers toward open standards, although the process has a long way to go.

If you believe as I do, that today really is different from yesterday, then these new realities require that we think anew about many of the old business and marketing concepts that served us well in the past, but may no longer be relevant to tomorrow's business.

A close-eyed view of the world would reveal that the old industrial age is fading and being replaced by a new information society. This transition does not mean that manufacturing does not matter, or that it is not important, or that it will disappear, any more than the advent of the industrial age meant that agriculture disappeared. What is does mean is that like agriculture today, manufacturing will produce more goods for more people with less labor. It also means that the relative importance of intellectual capital invested in software and systems will increase in relation to capital invested in physical plant and equipment. Traditional accounting systems designed for another age no longer reflect what is really happening either in business or in national economies. Many of the words we use today to describe our business and our markets flow from business, accounting, and political systems which have grown up over the years. While these words and systems have served us reasonably well in the past, it can be argued that the numbers produced by our current accounting methodology no longer reflect what is happening in the real world. Everyone knows, for example, that all the lights would go out, that all airplanes would stop flying, and that all financial institutions would shut down if the software that runs their systems suddenly disappeared. And yet these crucial assets, which are essential for the operation of our societies, do not appear in any substantial way on the balance sheets of the world. Balance sheets are full of what in the Industrial Age were called "tangible" assets -- buildings and machinery -- and our mindset suggests that to capitalize anything we can't feel and touch would constitute cooking the books. Nevertheless, as the Industrial Age blends into the new information society, it may be time to rethink not only what constitutes an asset, but also how we manage our institutions to take advantage of the global market. We see new corporate structures developing to manage new manufacturing methods, new products, new marketing and delivery systems. Management structures are already changing dramatically. The old military mode of hierarchical organization charts is giving way to flatter structures designed for faster response times to serve dynamic global markets. Layers of management, which used to do nothing but relay information from one level to another, are beginning to disappear. Business is learning that these positions are no longer needed when information technology allows the rapid transmission of vital information to all levels of management without human intervention.

The good news for the Western world is that this is the kind of development that free societies not only tolerate, but encourage. The sharing of vast data bases--something totalitarian governments cannot tolerate--will give us a huge competitive advantage in the years ahead.

While we all embrace change as a concept, it is often profoundly unsettling to us as individuals. Even moving across the street can be upsetting. The massive changes now in the way the world works, and consequently, in how business leaders must adapt to survive, can be even more difficult. Over the last few decades, we had many theories to business management. We have moved from the concept of centralized control to decentralization, and in some cases back again; we have pursued excellence, studied theory Z, constructed sell, grow and harvest matrices, and even learned to be a one-minute manager. Whatever the popular theory of the moment, the fundamental fact remains that those businesses will survive that make change their partners and use the new information technology to understand their marketplace and serve their customers' needs in a better more cost-effective way. Since the technology that is driving these changes will neither slow down nor go away, it is up to us to position our businesses to take advantage of the global market which is developing, literally before our eyes.

  • The document was created from the speech, "Doing Business in the Information Age," written by Walter B. Wriston for the DMA [Direct Marketing Association] Annual Financial Service Conference on 8 June 1989. The original speech is located in MS134.001.009.00011.
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