Wriston, Walter B.
Long before one of your governors, Elbridge Gerry, gave his name to what could politely be called the reassignment of political districts, he received a letter from his friend, Thomas Jefferson, who opined that "Banking establishments are more dangerous than standing armies." This early political assessment of your industry, like many current ones, makes up in rhetoric what it lacks in substance. Whatever the merits of the assessment may be, it is beyond argument that today the industry is beset on all sides with competitors not constrained by the same regulations. While the political process goes about sorting out conflicting claims, bankers have to look for any comparative advantage they can get.
While there is very little argument among economists about the importance of comparative advantage in business, there are lots of different ways to get or preserve it. Robert Leone has pointed out that "for some businesses, profits increase when government acts; for others, profits fall. Who wins and who loses is by no means accidental; rather, it is the predictable consequence of the interaction among individuals, corporations, and political organizations that often knowingly and sometimes unwittingly take political and economic actions to shape these gains and losses." The banking business has been in the thick of these political battles for years. They have ranged from the demise of Regulation Q to the current dialogue about non-bank banks and the Glass-Steagall Act. As politics is a continuing phenomenon we will always be involved in this process which is so important for the future of the industry. While effective and continuing involvement in the political process is of vital importance to our future, what else can we do within our businesses to get or to maintain a comparative advantage? What I would suggest to you today is that a real understanding and use of information technology may well prove to be one of the most important ways to assure that you will still be in business tomorrow.
No one has to remind this audience that all business is undergoing fundamental change. Competition has moved from next door to anywhere in the world, and world class competition now can, and does come from anywhere on the planet. The whole structure and pattern of business is undergoing radical changes. We see bitter competitors of yesterday forming "strategic alliances" to compete in a global market; we see suppliers and customers changing roles and becoming competitors. In your business many will remember that years ago the banks taught industrial companies how to set up their own finance companies, initially to finance their own receivables. Today these captive companies finance everything from venture capital startups to jet airplanes, and many now have a cost of funds lower than banks. To compound the problem, these captives are backed by the huge cash flows of companies like General Motors or General Electric.
These giant captive finance companies now out-earn most banks and compete on a range of financial products that is broader and more diverse than that permitted to banks. The fact that GMAC is the second largest originator of home mortgages in the United States today is only one illustration of how far these companies, that banks helped create for others, have come. This is but one facet of the changing competitive environment.
It is not an accident that this revolution in the competition in global markets is contemporaneous with the explosion in the use of information technology. Those who used to be thought of as data center managers have now moved in successful competition into the main stream of management. The person who truly understands the impact of technology has become a vital part of the whole strategic business process. In successful companies we see electronic customer demand management as the new way of life. Paperless order systems and inventory control have become routine. In addition to the way business is done, we see new corporate structures developing to manage new products and delivery systems. Indeed, 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 markets. Layers of managements which used to do nothing but relay information from one level of management 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.
Tasks that were once, and still are, important are being performed in very different ways. This phenomenon is not limited to business. Once the prestigiuos list of Presidential appointments included lighthouse keepers whose importance to commerce was thus recognized at the highest level in Washington. Commerce is still vital to America, but in July this year, the Coast Guard announced that the remaining 18 manned lighthouses would be phased out and replaced by electronic equipment. These hardy lighthouse keepers have a lot of company. Some 600,000 people left the employ of the Fortune 500 companies between 1985 and 1986, and this trend is far from having run its course. No one who has sat in, or even visited a modern trading room can fail to understand the revolution in the handling of information. Not only do the screens light up with online information from all over the world, but position limits can be programmed into the software and a running total of positions can be always available. This is a far cry from the old position and contract departments. This new technology will not prevent loss, but it does furnish a rational online record of where one stands. All of these are examples of the automation of jobs that used to be performed by hand. The real revolution, however, runs much, much deeper than that. The very nature of the business we are doing has been transformed. Examples abound. Since all good businesses are customer driven, knowing all one can know about a customer's needs is vital to success. The air frame business is a clear illustration of this concept. Ian Sharp has built a data base containing information about every commercial airplane that took off in the last 15 years in the United States. There are 70 pieces of data about each flight, ranging from time of takeoff and landing, to number of passengers carried, yield per passenger, fuel consumed and time and distance of flight. Other than an historical record, what good is it to the management of business? In the tough, competitive world of designing, building and selling commercial airplanes, the information on this data base can make a difference. For example, when an airplane manufacturer starts to design a new airplane, it is necessary to target specific routes and build to satisfy the airline's requirements for a cost effective plane. One has to know how many passenger seats will be filled and, thus, how large a plane to build. What fuel economies will be required to let the airline turn a profit? This data can make the difference between selling many planes or none, since knowing one's market and building to suit is what it is all about. The difference in this approach and just building a new airplane which one hopes to sell, may very well be the margin between success and failure.
Sometimes, however, information technology can have a profound effect on the nature of business itself. In order to capitalize on new business opportunities, it is important that senior management see information in a strategic context--something that may well determine the future of their corporation--rather than as an operating process to be contained within some technical department. The difference is critical.
Information technology can and does change not only the way we do things, but perhaps, more importantly, what we do. Automating yesterday does not produce tomorrow's products, although sometimes it will suggest what they might be. J.C. Penney has achieved one of the truly remarkable uses of information technology to let the company do more business in a better way in more places. Everyone who ever tried to sell anything knows that the closer one gets to the customer, the better one's information is about the consumers' likes and dislikes. In the ideal world of management text books, store managers who know the community in which their stores are located should pick out the merchandise assortments most pleasing to local tastes. If their judgments are correct, sales increase, markdown decreases, 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 buyers in New York. Standing in a Penny TV studio on Sixth Avenue, 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.
In addition to changes in the way old businesses, are performing, whole new lines of commerce are appearing for those who seize the opportunity. Recently a business magazine reported on the Sheshunoff's new, value-added information business for banks. They discovered that they could use the Freedom of Information Act to buy a tape for 50 dollars that contained the balance sheets and profit and loss statements of all the commercial banks in the United States. The Sheshunoffs started packaging this data and reselling it to be used for everything from added credit information on correspondent banks to comparative data so one bank manager can compare results against his or her rivals. From this, they moved on to consulting work. This is an almost pure example of how the use of information created a whole new business. There are, across our land, many similar examples. Since banks themselves are giant data bases, there may be many new businesses yet to be born.
Whenever some company gets out in front by investing heavily in technology, there are always competitors whose managements will adopt a wait-and-see attitude. The arguments are familiar. Why spend the money now? Perhaps the competitor may fail in his efforts, but even if successful, we can simply copy them. Let the other companies break trail and we will learn from their mistakes. The trouble with this strategy is that the time needed to bring up major new systems in today's world is no longer measured in months, but in years, and the capital required, not in millions, but hundreds of millions of dollars. In the meantime, the world does not stand still and people playing catch-up are pursuing a moving target which they may never catch.
Since one of the basic laws of technology is the law of convergence, it comes as no surprise that electronic systems tend to move many once disparate businesses closer together. Indeed, many different types of service may now be delivered over the same computer terminal. As services proliferate, new competitors appear. Company executives who focus their attention on traditional old competitors may well overlook, or fail to recognize, formidable new entrants in their market. It follows from this that in today's world, the executive who limits his or her information to narrow areas may wake up too late to save the business. Examples abound. Since all good businesses are customer driven, it should be clear that businesses which are in direct touch with consumers--whether at the check-out counter of a retailer, or on an airline reservation system, or at the teller's window--have a comparative advantage over those which are not. It was not hard ten years ago to predict that retailers would become effective competitors of banks in the 1970s and '80s, yet many bankers refused even to consider this possibility. Today this once heretical view is conventional wisdom, but in the meantime, many banks have lost market share to companies they did not believe were their competitors. As marketing becomes more sophisticated, we are learning that there are all kinds of shares, from share of market to share of mind. Today, there may well be a new measure: share of desk. The placing of your terminal on a customer's desk alters the competitive business balance whether that terminal delivers electronic information about the world markets, a letter of credit, or helps a drugstore keep track of inventory. A terminal helps tie a customer to a single supplier to the obvious detriment of other suppliers. It is a short step from using a retailer's electronic telecommunication system for store inventory control to starting a travel service, an airline reservation system, or credit card processing for a chain of gas stations.
All of this argues for the widest possible focus on the information a modern executive needs. Most management information systems that exist today are too narrowly focused on one's own company. They are good for measuring a steady state of business, but often fail to tell us what we need to know to survive and prosper in rapidly changing markets. The variables your system throws up may not be the variables that are important in changing markets, and, indeed, may even limit what you know.
In the past, many businesses and segments of businesses ignored what turned out to be fundamental tides running in our society and so have joined the list of dead and dying companies littering the corporate graveyards of the world. All of this argues not for or against the future viability of any given business, but rather for the necessity to learn to manage change and to make change your business partner. The only thing we know for sure is that whatever the present trends are, they will not continue forever. We have to study how changes are coming about and then, instead of deploring new developments, think of how we can exploit them. The difference between the winners and the losers in tomorrow's world will hinge on how change is handled. Since much of this change is being driven by technology, this phenomenon cuts across all sectors of society. Even your friendly neighborhood dentist is not immune. For example, those dentists who perceived and understood that the increased use of fluoride in municipal water supplies and toothpaste would, over time, put them out of the business of filling cavities, have already made cosmetic dentistry into a profitable new business. In a similar manner, food companies are capitalizing on a renewed emphasis on health and are pouring advertising and research dollars into low-calorie and low-sodium products.
With the growth of family units in which both spouses work, time often becomes more important than price. Convenience can be merchandised. Banks are generating statements that are easier to read and combine all activity into one statement. This not only saves these families time, but also helps them manage their money in a more efficient manner. The great success of the ATM is but another example of using good marketing information to cater to changing life styles.
All of this suggests that the impact of information technology on our corporations, our nation, and on our world may be as important as previous massive shifts in other energy sources have been. The world has seen a steady shift of energy sources over the years. Human and animal muscles gave way to wind and water power. These, in turn, were succeeded by a shift to coal, oil and atomic power. Each transition had immense consequences for business and for society. Today's information technology is having a not dissimilar effect, but in its own unique way. While information is becoming an ever more valuable and pervasive resource, it is simultaneously becoming easier and faster to distribute widely. It is far too early to say that the age of the fixed work place is over, but in thinking about the future of our business, we, at least, must take this possibility into consideration.
Since no one can predict the future with any accuracy, if we want our business to survive and prosper, we have to structure our corporations to permit the entrepreneurial spirit to flourish. We have to organize our companies around the flow of information rather than the old military model. We have to open our minds to the possibility that what we "know" now may be wrong. We have to be receptive to new knowledge. Many years ago Alfred North Whitehead put it this way: "The rate of progress is such that an individual will be called on to face novel situations which find no parallel in the past. The fixed person for fixed duties, who in older societies was such a godsend, in the future will be a public danger."
If we don't want to become a public danger, we have to foster a corporate climate of innovation, the willingness to take risks, and a management which has a very clear understanding that the information age really is different from the industrial society we have all known in the past.