Draft Corporate It Strategies in the Global Business Environment (1) Essay Example

Draft Corporate It Strategies in the Global Business Environment (1) Essay Example Draft Corporate It Strategies in the Global Business Environment (1) Essay Draft Corporate It Strategies in the Global Business Environment (1) Essay Technology In The Global Environment Topic: Corporate IT Strategies in the Global Business Environment Professor: Dr. Ata Doven * Globalization * Competitive Environment * Developing a Global Strategy * Toyota Global IT Strategy * Sanwa Bank and Citigroup IT Strategy Multinational enterprises (MNEs) are the key drivers of globalization, as they foster increased economic interdependence among national markets. The ultimate test to assess whether these MNEs are global themselves is their actual penetration level of markets across the globe, especially in the broad ‘triad’ markets of NAFTA, the European Union and Asia. Yet, data on the activities of the 500 largest MNEs reveal that very few are successful globally. For 320 of the 380 firms for which geographic sales data are available, an average of 80. 3%of total sales are in their home region of the triad. This means that many of the worlds largest firms are not global but regionally based, in terms of breadth and depth of market coverage. Globalization, in terms of a balanced geographic distribution of sales across the triad, thus reflects a special, and rather unusual, outcome of doing international business (IB). The regional concentration of sales has important implications for various strands of mainstream IB research, as well as for the broader managerial debate on the design of optimal strategies and governance structures for MNEs. GLOBALIZATION: Globalization refers to the process of integration across societies and economies. The phenomenon encompasses the flow of products, services, labor, finance, information, and ideas moving across national borders. The frequency and intensity of the flows relate to the upward or downward direction of globalization as a trend. There is a popular notion that there has been an increase of globalization since the early 1980s. However, a comparison of the period between 1870 and 1914 to the post-World War II era indicates a greater degree of globalization in the earlier part of the century than the latter half. This is true in regards to international trade growth and capital flows, as well as migration of people to America. If a perspective starts after 1945- at the start of the Cold War- globalization is a growing trend with a predominance of global economic integration that leads to greater interdependence among nations. Between 1990 and 2001, total output of export and import of goods as a proportion of GDP rose from 32. 3 percent to 37. 9 percent in developed countries and 33. 8 percent to 48. 9 percent for low- to middle-income countries. From 1990 to 2003, international trade export rose by $3. 4 to $7. 3 trillion. RATIONALE A primary economic rationale for globalization is reducing barriers to trade for the enrichment of all societies. The greater good would be served by leveraging comparative advantages for production and trade that are impeded by regulatory barriers between sovereignty entities. In other words, the betterment of societies through free trade for everyone is possible as long as each one has the freedom to produce with a comparative advantage and engage in exchanges with others. This economic rationale for global integration depends on supporting factors to facilitate the process. The factors include advances in transportation, communication, and technology to provide the necessary conduits for global economic integration. While these factors are necessary, they are not sufficient. Collaboration with political will through international relations is required to leverage the potential of the supporting factors. HISTORICAL BACKGROUND Globalization from 1870 to 1914 came to an end with the World War I as various countries pursued isolationism and protectionism agendas through various treaties- the Treaty of Brest-Litovsk (1918), the Treaty of Versailles (1918), the Treaty of St. Germain (1919), and the Treaty of Trianon (1920). U. S. trade policies- the Tariff acts of 1921, 1922, 1924, 1926, and the Smooth Hawley Tariffs of 1930- raised barriers to trade. These events contributed to the implosion of globalization for more than forty years. Toward the end of World War II, forty-four countries met in an effort to re-establish international trade. The milestone is referred to as Bretton Woods, named after the New Hampshire country inn where the meeting was held. Results of Bretton Woods included the creation of the International Monetary Fund (IMF), the World Bank, and subsequently, the General Agreements on Tariffs and Trade (GATT). In 1948 the International Trade Organization (ITO) was established as an agency of the United Nations, with fifty member countries and the Havana Charter to facilitate international trade but it failed. As a result, GATT rose to fill the void as a channel for multilateral trade negotiations and recognition of Most Favored Nation status that applied the same trading conditions between members that applied to other trading partners with most favored partner standing. GATT involved a number of different multilateral rounds of trade negotiations to reduce trade barriers and facilitate international trade. In the first round, the twenty-three founding members of GATT agreed to 45,000 tariff concessions affecting 20 percent of international trade worth $10 billion. Many of GATTs trade rules were drawn from the ITO charter. Subsequent trade rounds involved more members and additional issues, but the basic foundation of GATT remained the same. In the second round, the Kennedy Round of the mid-1960s, the focus continued with tariff reductions. In the third round, the Tokyo Round (1973–1979), 102 countries participated to reform the trading system, resulting in tariff on manufactured products reduced to 4. 7 percent from a high of 40 percent at the inception of GATT. Important issues revolved around anti-dumping measures, and subsidies and countervailing measures. The reduction of trade barriers enabled about an average of 8 percent growth of world trade per year in the 1950s and 1960s. In the fourth round, the Uruguay Round (1986 to 1993), 125 countries participated to develop a more comprehensive system. On April 15, 1995, in Marrakesh, Morocco, a deal was signed to create the World Trade Organization (WTO), which replaced GATT with a permanent institution that required a full and permanent commitment. The WTO encompasses trade in goods, services, and intellectual property related to trade with a more efficient dispute settlement system. COMPLEXITIES AND CONTROVERSIES: The increase of globalization surfaced many complex and controversial issues as economies and societies became more interdependent with greater frequency of interactions between one another. A number of important trends make up globalization including: (1) location of integration activities; (2) impact upon poorer societies; (3) flow of capital; (4) migration of labor and work; (5) diffusion of technology; (6) sustainability of the natural environment; (7) reconfiguration of cultural dynamics; and (8) development of organizational strategies for global competition. Expansion of MNCs in the 1990s encompassed highly skilled workers, service work, and global virtual teams. Firms started to outsource information technology (IT) functions as early as the 1970s, but a major wave of outsourcing started in 1989 with the shortage of skilled IT workers in developed countries. At the same time, the trend of shifting work around the globe to leverage the different time zones began with the financial industrys ability to shift trading between the various stock exchanges in New York, Tokyo, and Hong Kong, and London. Technological innovations in computers and the internet enabled other industries, such as software engineering, data transcription, and customer service centers to also shift work around the globe. Higher education and high-skill health care jobs are also embarking on global outsourcing. In 2001, outsourcing expenditures amounted to $3. 7 trillion and the estimation for 2003 is $5. 1 trillion. The impact of global outsourcing is not just a relocation of jobs, but also a dampening of employee compensation levels in more developed economies. For example, in 2000, salaries for senior software engineers were as high as $130K, but dropped to about $100K at the end of 2002; and entry-level computer help-desk staff salaries dropped from about $55K to $35K. For IT vendor firms in countries like India, IT engineering jobs command a premium Indian salary that is at a fraction of their U. S. counterparts. In sum, migration of labor and work create complex globalization dynamics. For a company to make profit, it requires its reach more customers . In other words it requires to expand its customers base. It has to enter the global market. To enter a global market for expansion certain issues at regional level should be considered. These include understanding the geographic scope of the industry and structure analysis. Geographic scope of industry In the international context it is necessary to define the geographic scope of the industry and those factors that may change the scope of the industry. The factors that shape the internationalization of the industry include: Market similarity Scale/scope comparative advantage Regulation Market stability: The upper vertical dimension is the market condition, whether the market is effectively one or several geographically defined segments because of similarities or dissimilarities in taste, requirements, communication channels etc. Within the same region the market conditions are similar than other regions. Scale/scope: The left horizontal dimension refers to the sources of increasing returns to scale in production process. Businesses in close proximity have the advantage of increasing economies of scale in production of process in companies in same region. Comparative advantage: The right horizontal scale refers to comparative or competitive advantage of a particular location. These include dynamic changes resulting from experience especially in periods of significant technology change. Regulation: The lower vertical dimension refers to regulation intervention that limits the geographic scope of the industry such as tariffs and non-tariffs to trade and limits on cross border investment. A bigger diamond on globalization map may indicate that the industry is more receptive to global competition pressure. Application to sample of industries: Market similarity Commercial aircraft Soft drink Scale/scope comparative advantage Regulation The commercial aircraft industry is more global in terms of sales by virtue of market integration and, large scale economies and knowledge advantage. Soft drinks are smaller on these dimensions. Industry structure analysis The competitive forces in an industry determines the degree of inflow of investment ,return to free market and thus the ability of firm to sustain above average returns. Michael porter described five forces to analyze the industry structure. The five competitive forces- entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors shows the high level of competition . All five competitive forces jointly determine the intensity of industry competition and profitability and strongest forces or force governing and crucial in strategy formulation. For example, even a company with strong market position in an industry where potential entrants are no threat will earn low returns if it has a superior, lower cost substitute. Even with no substitute and blocked entry intense rivalry among competitors will limit the returns. New Market Entrants * entry ease/barriers * geographical factors * incumbents resistance * new entrant strategy * routes to market The underlying structure of an industry reflected in terms of forces should be distinguished from many factors that can affect the profitability and competition. Each firm has its weaknesses and strengths in its industry structure. A number of technical and economical characteristics of an industry are important for the strength of these forces. Buyer Power * buyer choice * buyers size/number * change cost/frequency * product/service importance * volumes, JIT scheduling Competitive Rivalry * number and size of firms * industry size and trends * fixed v variable cost bases * product/service ranges * differentiation, strategy Supplier Power * brand reputation * geographical coverage * product/service level quality relationships with customers * bidding processes/capabilities Product and Technology Development * alternatives price/quality * market distribution changes * fashion and trends * legislative effects Supplier Power Any business requires inputs- labor, parts, raw materials, and services. The costs of inputs have a significant effect on company’s profitability. The strength of suppliers determines the whether the cost would be hig h or low. Suppliers have the most power when: The input(s) are available only from a small number of suppliers. For example, if you are making computers and need microprocessors, you will have little or no bargaining power with Intel, the world’s dominant supplier. The inputs are unique, making it costly to switch suppliers. If you use a certain enzyme in a food manufacturing process, changing to another supplier may require you to change your entire manufacturing process. This may be very costly to you, thus you will have less bargaining power with your supplier. If input purchases don’t represent a significant portion of the supplier’s business. If the supplier does not have dependency then there is less power to negotiate and vice-versa. For example,. Wal-Mart has significant negotiating power over its suppliers because it is such a large percentage of suppliers’ business. Suppliers can sell directly to customers.. For example, a manufacturer could open its own retail outlet and compete against you. Difficult to switch to another supplier. Lack of knowledge of supplier’s market. There will be little information about market demand, prices, and supplier’s costs. Reducing the Bargaining Power of Suppliers Most businesses don’t have the resources to produce their own inputs. If you are in this position, then you might consider forming a partnership with your supplier. This can result in a more even distribution of power. For instance, Dell Computer uses partnering with its components suppliers as a key strategy to be the low-cost/high-quality leader in the market. This can be mutually beneficial for both supplier and buyer if they can: Reduce inventory costs by providing just-in-time deliveries, Enhance the value of goods and services supplied by making effective use of information about customer needs and preferences, and Speed the adoption of new technologies. Another option may be to increase your power by forming a buying group of small producers to buy as one large-volume customer. If you have the resources, you may choose to integrate back and produce your own inputs by purchasing Bargaining Power of Buyers Buyers have more power when: Industry has many small companies supplying the product and buyers are few and large. For example, there is little negotiating power if several competing companies are trying to sell similar products to one large buyer. The products represent a relatively large expense for customers. Customers may not price shop for a quart of oil, but they will price shop if purchasing a new vehicle. Threat of entry Success may inspire others to enter the business as a competitor. The threat of new entrants is the possibility that new firms will enter the industry. New entrants bring a desire to gain market share and often have significant resources. Their presence may force prices down and put pressure on profits. Analyzing the threat of new entrants involves examining the barriers to entry and the expected reactions of existing firms to a new competitor. Barriers to entry: 1. The costs and/or legal requirements needed to enter a market. These barriers protect the companies already in business by being a hurdle to those trying to enter the market. In addition to up-front barriers, a new competitor may inspire established companies to react with tactics to deter entry, such as lowering prices or forming partnerships. The chance of reaction is high in markets where firms have a history of retaliation, excess cash, are committed to the industry or the industry has slow growth. . Unique Barriers Entry barriers are unique for each industry and situation, and can change over time. a). Well established brand names and fully differentiated products,: as a potential market entrant it will require an expensive marketing campaign to introduce new products. Barriers to entry are usually higher for companies involved in manufacturing than for companies that provide a service because there is often a significant expense in setting up a production f acility. b). Regulatory. To produce organic food there is a three-year wait before land may be certified. During the waiting period, producers must raise the crop as organic, but may not market it as organic until the three-year â€Å"cleansing process† of the land is completed. Overcoming barriers to entry may involve expending significant resources over an extended period of time. Industries based on patentable technology may require an especially long-term commitment, with years of research and testing, before products can be introduced and compete. Factors Affecting the Threat of New Entrants The threat of new entrants is greatest when: Processes are not protected by regulations or patents. In contrast, when licenses and permits are required to do business, such as with the liquor industry, existing firms enjoy some protection from new entrants. Customers have little brand loyalty. Without strong brand loyalty, a potential competitor has to spend little to overcome the advertising and service programs of existing firms and is more likely to enter the industry. Start-up costs are low for new businesses entering the industry. The less commitment needed in advertising, research and development, and capital assets, the greater the chance of new entrants to the industry. The products provided are not unique. When the products are commodities and the assets used to produce them are common, firms are more willing to enter an industry because they know they can easily liquidate their inventory and assets if the venture fails. Switch ing costs are low. In situations where customers do not face significant one-time costs from switching suppliers, it is more attractive for new firms to enter the industry and lures the customers away from their previous suppliers. The production process is easily learned. Competitors are attracted to an industry where the production process is easily learned. Access to inputs is easy. Entry by new firms is easier when established firms do not have favorable access to raw materials, locations, or government subsidies. Reducing the Threat of New Entrants Enhancing marketing/brand image, utilizing patents, and creating alliances with associated products can minimize the threat of new entrants. Setting a price that earns positive but not excessive profits could lessen the threat of new entry in your industry. Threat of Substitutes Products from one business can be replaced by products from another. If a commodity product is undifferentiated, customers can easily switch away from product to a competitor’s product with few consequences. In contrast , there may be a distinct penalty for switching if product is unique or essential. Factors Affecting the Threat of Substitution Substitutes are a greater threat when: Product doesn’t offer any real benefit compared to other products. It is easy for customers to switch. Customers have little loyalty. Reducing the Threat of Substitutes Staying closely in tune with customer preferences and differentiating product by branding. Rivalry among Competitors Companies in an industry are mutually dependent; actions by one company usually invite competitive retaliation. Rivalry among competitors is often the strongest of the five competitive forces, but can vary widely among industries. This measures the degree of competition between existing firms. Rivalries can occur on various levels. In some industries, rivalries are centered on price competition- especially companies that sell commodities such as paper, gasoline, or plywood. In other industries, competition may be about offering customers the most attractive combination of performance features, introducing new products, offering more after-sale services or warranties, or creating a stronger brand image than competitors. In some cases the presence of more rivals can actually be a positive- for instance in a shopping area, where attracting customers may hinge on having enough stores and attractions to make it a worthwhile stop. Rivalry will be higher if: * There are a large number of similar sized firms (rather than a few dominant firms) all competing with each other for customers * The costs of leaving the industry are high e. g. because of high levels of investment. This means that existing firms will fight hard to survive because they cannot easily transfer their resources elsewhere * The level of capacity utilization. If there are high levels of capacity being underutilized the existing firms will be very competitive to try and win sales to boost their own demand * The market is shrinking so firms are fighting for their share of falling sales * There is little brand loyalty so customer are likely to switch easily between products Developing a Global Strategy The first approach is the top-down approach. It treats sourcing as strategy and integrates the business’s strategic plans with its sourcing plans. The second approach discussed is the bottom-up approach. This approach, building upon the idea of zero-based sourcing, is a methodology for identifying those areas of the business that are least likely to be providing unique competitive advantage when done internally. Both approaches work and can be used simultaneously. And two other important management ideas. The first is that of an outsourcing framework. The outsourcing framework provides a structure for mapping the activities of an organization so that they can be consistently examined from a sourcing perspective, whether that perspective is the top-down approach, the bottom-up approach, or both. The other key idea introduced is the often overlooked opportunity for creating competitive advantage through unique ways an organization combines its internal and external sources. Top-Down Approach Strategy is essential to the success of any organization. It answers the critical questions about what’s happening in the environment and marketplaces the organization serves, how it makes a unique and competitively viable difference in serving the needs of the customers in those markets, and how it allocates and invests its resources toward the achievement of those ends . any organizations view sourcing as an operational decision made only in response to the business’s strategy. Sourcing as strategy suggests that, instead, outsourcing is an integral part of the development of that strategy; that an organization’s sourcing decisions are essential to its ability to create competitive advantage. This changes when in the strategic process the question of the sources of c ompetitive advantage gets asked and answered. Sourcing as strategy is, then, a top-down approach to identifying the sources of competitive advantage- both internal and external- and then ensuring that the organization’s investment and execution plans are aligned with this strategy. Instead of positioning business process outsourcing as an outcome of the organization’s investment decisions, sourcing as strategy positions it as an essential driver of those decisions. The first step of the process is to segment the organization’s marketplace. This segmentation is typically done by identifying the combinations of customers served and the products and services with which they are served. These groups may then be further broken down by geographies or other delineations unique to the markets that the organization operates in or intends to operate in. When complete, this segmentation may result in as little as two or as many as dozens of segments. The identification of these segments is the essential first step in developing the organization’s strategy and is the basis for all the steps that follow. The second step is to project the changes in these segments over the planning period. Typically, this planning period can be no more than two to three years. This shortened strategic planning time frame is a direct result of the hyper-competitive environment. It is also a key reason that internal investments, which typically require much longer periods to achieve a full return, can no longer, be the default option for organizations. The potential changes in the environment are looked at in terms of projected changes in society, business, and their overall structures; changes in the customers themselves, including their needs, preferences, and financial situations; and, of course, changes in technology and its potential impact on all of the other factors being considered. There need not be only one projection. Scenario planning can be used to describe more than one possible future along with the unique characteristics and probabilities of each. The third step is to assess each of the segments in terms of their over- all size and growth. Just as importantly, each segment must be looked at in terms of the current competitors, likely future competitors, and how each competitor may fair in terms of its market share. The fourth step is to decide, based on the opportunity available to the organization, which segments to pursue and what it will take to dominate in each. The former means selecting those segments that are most attractive in terms of growth and opportunity. The latter means deciding what competitive advantages the organization needs to have in order to not only successfully compete, but to move itself toward a position of leadership. These needed competitive advantages should be stated in specific, measurable terms. If cost is an element of advantage, then what cost points does the organization need to hit to be uccessful? If differentiation is the road to dominance, then specifically what will that differentiation be? Will it be design, features, performance, quality, ease of use? Prestige, speed, customer service, guarantees, or other characteristics? And, how are they to be objectively measured? At the end of step four, the organization has created a list of market segments it desires to serve and what it believes is needed to compete and win in those segments. The fifth step, source, is then the essential link between the market-facing side of the organization’s strategy and the sourcing side. It is the mapping of the required competitive advantages across the operational activities of the business to determine where and how each advantage will be created. Some of these competitive advantages may be found in the organization’s internal operations, but others are just as likely to be sourced through external relationships, while still others may come from unique ways the organization blends its internal and external sources. All other activities- those that need to be done and done well but offer little or no opportunity for creating a competitive advantage- are nonstrategic and should be sourced at the operational level on a purely competition-driven basis. Sourcing as strategy is a senior- level executive process, competing nonstrategic, commodity activities is an operational-level process. The sixth step is to forecast the business outcomes from these decisions about segments and sources of competitive advantage. For commercial organizations, this forecast is in terms of revenue, costs, profit, and other key financial indicators. For noncommercial enterprises, these outcomes may be forecasted in different terms, such as budget targets and the number of constituents served. This is the process of taking the strategic plan and turning it into a set of forecasted outcomes. This can be expected to create a slight Iterative loop where the segments served and sources of competitive advantage get adjusted to bring the forecasts in line with intended outcomes. The seventh and last step of the top-down process is to invest in execution. This means allocating all the forms of investments available to the organization: its capital, its operating funds, its people, and its intellectual properties. This alignment- this fit, if you will- between the organization’s strategic plan and its execution plan is the essential step in transforming strategy into action. This seven-step process makes sourcing an integral part of strategic planning. It expands the view of the sources of competitive advantage available to an organization, thereby enabling it to better compete in the market segments it chooses to pursue. It also elevates the organization’s outside relationships so that the ones that contribute competitive advantage are treated as an integral part of the organization’s strategic planning process and as part of its network of strategic assets. The top-down approach also requires that the strategic plans of the organization and of its key outside sources be connected. The result is a weaving together of a network of relationships at the highest levels of the organization. Bottom-Up Approach The bottom-up approach does not mean that decisions are made at lower levels of management. What it does mean is that the process used for identifying outsourcing opportunities focuses on selecting activities that do not contribute a unique competitive advantage, and then competing these commodity-type activities against the marketplace of providers. It represents a zero-based sourcing approach where all areas that do not deliver a unique competitive advantage are evaluated from a competitive sourcing perspective. Since they were first introduced by the author in 1996, the following three questions have been used by hundreds of organizations to determine the areas of the business that are least likely to deliver a unique competitive advantage: 1. If starting from scratch today, would we really build the capability inside? 2. Are we so good at it that others would hire us to do it for them? . Is this an area of the business from which our future leaders will come? If the answer is yes to all three questions, then the activity is either a source of unique competitive advantage or close enough to one to remain internally sourced until evaluated from a more strategic, top-down perspective. If the answer is no to any of the three, then looking at what the marketplace of external service providers has to offer is appropriate. The first question of the three-question test captures the essence of zero-based sourcing. It asks what the organization would do if it was being formed today. Would it invest in creating the capability internally or would its leaders’ first inclination be to look for sources available in the external marketplace? It also tests the organization’s existing sourcing choices against what new competitors entering its marketplace are doing. Are new competitors also building this capability for themselves, thereby validating its unique? contribution or suggesting that adequate external sources are not available, or are they acquiring the capability from the outside and then focusing heir internal investments elsewhere ? The importance of this single question in properly shaping a company’s investment decisions has recently been revalidated by the venture capital market. Many venture capital firms now require that companies they plan to invest in externally source all of their non-differentiating functions, such as finance, accounting, human resources, and ba sic information technology services. The second question gets at the very heart of organizational hubris. Successful organizations are, often because of their very success, filled with a belief that because they are successful, they must be good at everything they do, and that the unique ways they do things directly contribute to that success. This belief is often reflected in statements such as â€Å"we are different† or â€Å"we are unique. † One great way to challenge this hubris is to simply ask if other companies would hire yours to perform that internal function for them. Could your company sell this activity as a service in an open, competitive marketplace? Could it successfully compete against the marketplace of service providers that do it for a living? Would another company hire yours to process its receivables, payables, or payroll? Is there a marketplace for your organization’s real estate portfolio management services? Are your assembly and test capabilities markedly superior to the norm for the industry? Are they superior to the top companies that perform that work for your competitors? Finally, the third questions establishes just how valued the skills needed to perform the activity are to the organization. Are they the skills that are so highly prized that they are reflected in the knowledge- and experience- set of the company’s top leaders? In its chief executive officer? Activities that are based on highly valued skills naturally receive the lion’s share of internal funding for their development and support. The people in those areas are likely to be able to see a career path leading to the company’s corner office. The organization is likely to be attracting the best and brightest in those fields. Whereas the top-down approach examines sourcing as a contributor to competitive advantage, the bottom-up approach sets out to separate the areas that the organization is performing internally more out of habit than out of need. It results in the creation of a list of activities that should at least be tested more thoroughly as potential areas for improved performance through business process outsourcing. As pointed out earlier, the bottom-up and the top-down approaches are not mutually exclusive. The bottom-up approach can be used to quickly move the organization in the direction of better leveraging its assets through outside relationships. The top-down approach can be used to turn sourcing into a competitive advantage. Toyota Corporation IT Strategy Mr. Hiroshi Okuda, chairman of Toyota, Speech When the Ground Rules Change (as he titled a 1998 speech at the Yale School of Management), and the implications that has for Toyota and the global automobile industry. He sees three watersheds in the history of the automobile industry. Each time, a new business model changed the ground rules for the industry. Each time, the new model seemed invincible. And each time, it gave way to changing circumstances and a new business model. Our old business model is breaking down for four main reasons. One, we need to decentralize our manufacturing and RD activities. Two, the product and process paradigms that Henry Ford established are themselves breaking down. Three, information technology is transforming the inner workings of the automobile. It is also transforming the way we develop and make and sell our products. And four, the changing product paradigm and the growing role of information technology will open our industry to a vast array of competitors. Gone are the glory days of the early 1980s when any Japanese car could sell in the U. S. market at a premium. A strong yen, the collapse of Japans bubble economy, and a depressed Japanese auto market significantly changed the industrys structure, and now only Toyota and Honda remain as independent Japanese producers. Toyotas response is a strategy that, in the next two decades, will have significant impact on the global industry and on transportation and logistics generally, and will ensure the companys position as the industry leader. Intelligent Transportation System (ITS) ITS is a concept being pursued in several venues rather than a well-defined term. However defined, it has two principal components: an onboard system for managing the car and an external traffic management system. In its ultimate form, which requires both components, actual driving is automated: the driver becomes a navigator, and then only to the extent of entering a destination or indicating the desire to pull over at a rest stop. There are many features that partially automate driving or provide navigational assistance short of this, and all can be termed aspects of ITS. As part of a larger strategy, Toyota has been developing a packaged system for each of the two principal components. In Japan ITS is organized around VERTIS (Vehicle, Road, and Traffic Intelligence Society), an organization set up by the government, companies, and universities in 1994. In 1996 Japan passed a Transportation Efficiency Act. Similar legislation was passed in the United States in 1991- the Intelligent Systems Transportation Efficiency Act (ISTEA)- allocating $60 million a year for six years. The idea was that each country would do R;D and system research, then meet and exchange information on the status of their projects. The acts cover more than just ITS, but most government involvement relates to ITS. ITS Strategy Toyota has been exploring the development and use of ITS since the mid-1970s (that is, from just after the first oil crisis). Hidekazu Ohe, manager of Toyotas ITS project, has worked on the system since its inception. However, it is only since the mid-1990s that ITS has become an actual part of its commercial products. As of 1998 Toyota had spent over $1 billion on the project (more recent data have not been released). By 2015, it expects the Japanese market for ITS-related products and services to exceed ? 60 trillion, with the rest of the worldwide market even larger. Toyota wants to establish a transportation infrastructure through which the highway can sense and communicate with each vehicle. It will then be easier to introduce more advanced functions as they are developed or as permission to use them is obtained from governments. In 1993 Toyota summarized its evolving smart car approach as responding to the needs of our information-oriented society in which automobiles are now increasingly equipped with navigation systems and sophisticated communication devices. Cars are gradually becoming intelligent vehicles. Toyota is developing and introducing car electronics to enhance communication between people, automobiles, and society. To make this vision a reality, the company has divided ITS into five basic work areas. By coordinating and managing the interactive relationships among them, Toyota intends to achieve growth and development as a total mobility company. The first area is the intelligent car, a vehicle that incorporates sophisticated an d complex systems and functions. These include the onboard computer, sensors, and other elements that control the cars various functions. It thus supports, and is the foundation for, the other areas. Second is multimedia for the vehicle- the Internet on Wheels, which represents a new arena for mobile communications. The third area covers support facilities that will achieve smoother traffic flow by coordinating vehicles and the transportation infrastructure. Fourth is business and organizational logistics, where Toyota will work with other firms to develop a comprehensive set of tools that will support more efficient transportation of goods and services through improved utilization of the existing road system. In the fifth area, new or radically improved transport, Toyota will work to develop transport systems for the next generation. Matsushita and NEC are involved in building the electronics and computer systems for the project, including the navigation system that is part of the onboard computer. Nomura Research Institute and Mitsubishi Research Institute are involved in software development. Reflecting the importance of communications to ITS, Toyota had an ownership interest in IDC Telecommunications (the company was purchased by Cable and Wireless in 2000). CW will continue IDCs support of Motorolas cellular system in Japan. Toyota also invested in telecom provider DDI (now part of KDDI, having merged with IDO and KDD in December 1999. ) Navigation Systems Japan has a high-level navigation system developed by the auto industry with Japans Vehicle Information and Communication System (VICS), a public corporation. Planning began in 1990, and the system was introduced in 1996 in the countrys three principal metropolitan areas: Tokyo-Yokohama, Osaka-Kyoto-Kobe, and Nagoya. Since early 2000 all of Japan has been included. The government allocated ? 370 billion for infrastructure investment. Traffic data obtained from the national and local police go to VICS for editing and are relayed to appropriately equipped cars. Toyota has been a leader in navigational systems from the beginning, with a 45% share of the 2 million systems in 1997. By April 2000 the market had grown to 5 million units, and most new cars in Japan come with the capability. During 1999, Toyota and its partners launched a second-generation system that added visual data on gas stations, convenience stores, and other facility ocations to the traffic and weather data. Called nav, it is a subscription service. An option, MONET, can arrange road service, supply data on events, make restaurant reservations, and the like. Nav also can be combined with a cellular phone that gives audio information in addition to the visual display. VICS buys software and hardware from Toyota and its corporate partners. Toyota sells the hardware for this system both in its new cars and on a dealer-installed basis. An affiliate, Toyota Media Station, provides the interactive MONET service. Toyota has formed e-plat, a joint venture with NTT Data, an affiliate of the dominant telecom provider. The company makes the multimedia kiosks that are being installed in many convenience stores (FamilyMart in particular, but not 7-Eleven, which is working with its traditional IT suppliers, NEC and NRI. The hardware is compatible with Toyotas navigation system, so that cars will be able to communicate with the kiosks to order and pay for concert tickets, make hotel reservations, and the like. Toyotas proprietary system for Japan is called Nihon ITS. Several other automakers license it for use on their vehicles. In 2000–01 Toyota introduced a next-generation system in Japan with features such as two-way communications. Initially this is for automatic toll collection, but it can be extended to include automatic account debiting for parking, gas, and roadside services. These capabilities require only a one-way system (such as EZ-Pass, which is used for tolls in the United States), but Toyota sees an advantage to going directly to a two-way system- if only to provide a larger market for two-way services when they are introduced. With a system working in Japan, Toyota plans to proceed outside Japan. To that end, it has joined General Motors North American geo positioning consortium. Daimler-Chryslers ITGS was the first sophisticated navigation system in operation, but Toyota believes it and Japan lead in developing and selling such systems. Comparable systems in the United States have at least two web sites: smartTrek. org and smarttraveler. com. Separate from purely navigational aids, Help me or emergency call systems are offered by Opel, Volkswagen, and DaimlerChrysler in Europe, and by Ford and General Motors (Northstar) in the United States. However, these systems do not have the customer-oriented features of Japans version, nor are they building the basis for a full-fledged ITS using a multiple-function, two-way road communication system. With an installed base of 5 million units, Japan is clearly the global leader. Staying Ahead To maintain its lead in navigation systems and ITS, Toyota is working hard on three major pieces of ITS: an Internet application package, the onboard computers operating system, and the hardware in the car. The project team is pursuing two major avenues in their approach to globalizing ITS. One involves discussions under International Standards Organization for harmonization of traffic information control interfaces. This initiative is composed of 15 working groups, and Japan is pushing to get a single international standard in cooperation with ITS America and Europes ERITCO, which are the equivalents of VICS. The other avenue is a more flexible approach, because there are differences between countries on whether a real-time system such as Japans or a request version such as in the United States is the more appropriate. The U. S. ituation is complicated by the fact that traffic- and automobile-related issues are handled primarily by states rather than the federal government. Toyota therefore is designing its system and introduction strategy to work even if there are multiple standards. This is similar to Nokias approach to developing a phone that can be adapted easily to different technical and regulatory environments (chapter 11). Toyota believes that if it has a syste m that works and can be introduced anywhere, it has a good chance of becoming the de facto global standard, which is a key part of Toyotas long-term strategy. Onboard Computer In current vehicles, each feature has its own controller. Thus, brakes are controlled separately from fuel injection, and the navigation system, telephone, and radio also have their own controllers. If the car is going to be controlled as a whole, there needs to be a single computer directly managing all aspects of the vehicle. Under Toyotas ITS, there would be a single computer for the vehicle, directly linked to the servos that monitor and control the vehicles various functions. It also will have the capability of displaying information to the driver and passengers. Nippon Denso will manufacture the onboard computer to Toyotas specifications, and Higashi Fuji is working with Toyota to develop the software to manage the car and communicate via the Internet. Toyota is building the controllers (two-way communications system) that will line the highways. In developing the operating systems, Toyota has borrowed from existing systems. However, it is modifying them to make its own proprietary systems, based on its knowledge of the car in terms of both mechanics and electronics. The highway operating system will be externally based- supported and controlled by an Internet platform that Toyota is developing. It will communicate with the onboard computer, which has its own operating system, to run the car. The two operating systems are linked and integrated so that the information the highway provides ultimately controls the cars movement. Toyota has found few people in Japan able to develop such software, so once it had developed the basic idea of what it needed, it went elsewhere in Asia and to the United States to get the programs coded. Toyota believes its competitors are significantly behind in developing onboard computers and Internet-based control and communication systems, with Daimler-Chrysler the closest. Automated Driving The technology for automated driving exists and is being used. An automatic driver system is being piloted in Australia and another in Essen, Germany. These cities have built dedicated roadways for buses driven automatically. Called dual-mode buses, when they need to be driven off the special road, a human operator takes control, as on a normal bus. Toyota is involved in the Australia project; DaimlerChrysler, in the German one. Toyota calls its version an intelligent multimode transit system (IMTS) that combines the advantages of trains and buses. IMTS includes the platooning of commercial vehicles. That is, the system allows trucks to safely follow each other much more closely than would otherwise be the case. ) Package delivery service Yamato Transport is said to be ready to use the technology for its intercity trucks once it is available in Japan. Widespread implementation of automated driving requires construction of infrastructure and, particularly for indivi dual drivers, settling of legal questions. These will take several more years . Toyota sees ITS allowing an intelligent parking lot that provides data on parking availability, guides vehicles to spaces, and collects fees automatically. A system in Vienna reports the number of spaces available in nearby garages on streetside display panels, but has no interactive features. ) While waiting for automated driving, Toyota will continue development of features that are entirely onboard the vehicle, such as automatic sensing and adjustment for distance between cars using radar. These are part of its Advanced Cruise-Assist Highway Systems program. IT at Toyota Better communication, improved plant productivity, and increased client satisfaction (that is, better quality at a lower price) are the objectives when Toyota selects, develops, and implements IT. As Kensuke Nagane, head of the IT planning group, explains, the purpose of IT is not to change the system or operation strategy, which works very well, but to enhance them. IT Philosophy The basic IT strategy is to use systems to enhance existing strategies and organizational structures. Behind this is the companys core philosophy: Since its establishment, Toyotas principle has been to strive constantly to build better products at lesser costs. To this end, Toyota has developed its own unique production method. This system is based on the idea of just in time, the idea of Toyota Founder Kiichiro Toyoda. This system also seeks to thoroughly eliminate all sorts of waste in order to reduce prime costs. Toyota also places a maximum value on the human element, allowing an individual worker to employ his capabilities to the fullest through participation in the productive management, and improvement of his given job and its environment. With the motto Good Thinking, Good Products, each individual worker is making his best effort to assure Toyotas customers the highest quality product, with an understanding that it is in his work process that quality is built in (quoted from the companys booklet Opening the Window, p. 3). Toyota shares common IT approaches with other leading software users. They include the creation of large proprietary interactive databases that promote automatic feedback between various stages of the design, order, production, delivery, and service process. Indeed, this kind of iterative routine is fundamental to its smart design and production strategy, and its Level 3 I T approach. Management recognizes that better cycle times between order and delivery reduce costs and improve forecasts. Similarly, more rapid design cycles mean quicker incorporation of new technologies. Customer satisfaction is improved hrough more timely completion of the sales process and constant product enhancement. This outlook helped Toyota become firmly established in the late 1970s as the worlds most efficient and lowest-cost producer of high-quality automobiles. Toyota has taken the lead in extending the lean production paradigm for automobiles into totally integrated management (TIM). Although it is unusual for the leader of one production revolution to lead the next, as indicated by Chairman Okuda at the start of this chapter, Toyota has clearly recognized the need for change and the role of IT in generating this new development. The companys TIM approach, using its new smart cars combined with its smart design and smart-production scheduling, has significantly improved productivity and market advantage through its monitoring, controlling, and linking of every aspect of producing and delivering vehicles and after-sales service. IT Structure Toyotas basic information system is a three-tier mainframe system involving hundreds of millions of lines of code, similar to most other large Japanese companies. The mainframes control the approximately 1000 servers, which control the networking system and communicate with the plants, with their equipment, and with dealers and suppliers. The mainframes schedule production and JIT delivery, as well as track orders. There are some 3000 CAD/CAM terminals. The company put a PC on the desk of every office worker in 1996, about 30,000 altogether, and networked them into the overall system. PC use has reduced paper use. Because it is a real-time, on-line system, it has been totally integrated with Toyotas business operations, as is true for most large Japanese firms. It is completely managed and maintained by Toyotas internal systems group, with internal communication through its own fiber-optic system and with customized middleware providing the interface between users within the company. Overseas operations have their own systems. These are not integrated extensively with the system in Japan, but they are networked for exchanging data on distribution and the total global supply chain in a preprogrammed format. This means, for example, that Toyota in Japan can send information to its U. S. dealer network regarding delivery of specific vehicles. Toyota also can send parts orders to overseas suppliers. Ultimately, the company may divide IT into inside and outside Japan systems. Already, for example, Toyota uses almost 100% Hewlett-Packard hardware outside Japan, whereas inside Japan it does not use much HP equipment. Globalization is one area the IT planning group is working on, because it is often a problem getting domestic and overseas systems to communicate, especially in places where the communication infrastructure is weak. Sourcing Software Software selection is very pragmatic. It depends on the softwares cost versus its contribution to increasing the overall value of the car, or to reducing the cost of designing and producing a car. Decisions to develop in-house or to buy are made case by case, based on experience. This is the same routine Toyota uses to decide between designing-in and ordering customized or standard parts for a car. It also is the decision process that led it to reduce fat design (the number of option choices Toyota allows a customer for items such as steering wheels) when it discovered replacement part inventories were becoming too high. Therefore, it represents Toyotas normal strategic routine for introducing new technologies and innovations, whether organizationally or in the car. Except for the operating systems, Toyota has generally developed its own software and IT systems, and outsourcing has not been considered a real option, except to captive subsidiaries and for components that then typically are customized. This is because software is recognized as an integral element within an overall management strategy, and as such must be controlled directly by the company. Generally, integration is done by first assessing the possible business uses of the software or IT within the organization, its operations, or its products, with particular focus placed on ITs role in enhancing Toyotas ability to develop, produce, sell, and service different types of vehicles. Toyotas overseas operations are independent with respect to their IT systems, although Toyota is introducing a global standard for at least some software. Overseas factories are more likely to use packages for office support, but the systems that run the factories are basically the same as those used in Japan, which means they are company-developed. Toyota decided in the late 1990s to reorganize its software development. As part of this, it spun out five software development subsidiaries, all Toyota majority-owned. The other owners mostly are Toyota-related companies or key suppliers to the venture. Buying New Systems Toyota has bought new PC hardware and software every five to six years, even though new versions are available much more frequently. This is in keeping with Toyotas philosophy of using the simplest way to achieve an objective, and to implement what works. This schedule allows it to get the functionality it wants, without so much time lost to retraining and transferring data. The PCs, which use a Japanese version of Windows, are primarily for e-mail and word processing; most workers do not use the features added in upgraded software. This approach reduces costs: a new PC plus software runs $2000 in direct costs. With 30,000 PCs, that is a $60 million purchase decision. The IT planning group estimates that the total all-in cost of a new PC system- including system integration, training, and support- is almost $7000 per PC, raising the total corporate expenditure to some $200 million. That said, if an employee needs an upgrade or a special computer, the request is evaluated on its merits. The cycle for workstations and CAD/CAM systems needed for design and engineering is much faster, though still driven by the engineering groups actual requirements. Such changes require the IT group to work closely with Toyotas parts suppliers to ensure compatibility, so that design and engineering data can be easily exchanged. Toyotas production IT group meets regularly with the makers of its computers. For mainframes these are Fujitsu and IBM. For backup support, fault-tolerant computers from Tandem (bought by Compaq in August 1997) are used. Sun, Hewlett-Packard, and Compaq (as the June 1998 buyer of DEC) supply CAD/CAM and engineering workstations. The IT planning group sees no reason to switch from UNIX, but would consider alternatives if UNIX ceases to meet Toyotas needs. PCs are from IBM, Hewlett-Packard, and Compaq. International Retail Banking- Sanwa Bank and Citigroup Overview Citicorp is in the forefront of technology in electronic banking and is testing the limits of regulation. It  instills fear in the hearts of competitors. That observation was made by Value Line  in September 1985, and  it  remains true today of its successor, Citigroup. ITs role in consumer banking is the focus of this example, looking specifically at Citigroups international retail banking and at Sanwa Banks retail banking strategies in Japan. Sanwa, now part of the UFJ Group and Financial One alliance, has been the acknowledged domestic leader in using  IT  to  achieve  an  advantage  in Japanese consumer banking. It  is the domestic leader because Citibank is the overall leader internationally, including among international banks in Japan. Citis drive  to  build market share in Japan receives special attention because  it  is  an  excellent example of  how  Citi is using  IT  to  exploit and enhance its advantages in a large and rapidly changing financial services market outside the United States. Japan is Citis highest growth consumer-market segment, with core income increasing 66% in 2000, compared  to  22% for the overall global consumer segment. The number of accounts jumped 85% from 1998  to  2000, going from 1. million  to  over 2. 8 million. Sanwa Bank Sanwa Bank is combining  IT  and a life-cycle approach  to  customers in managing and navigating the competitive pressures of the Big Bang and the even bigger loan-loss problems. However, as a diversified bank with a long tradition of serving corporate clients,  it  is not relying solely on retail banking for survival. Sanwa Bank Ltd. became part of the UFJ Group with Tokai Bank and Toyo Trust effective 1 April 2001. On 15 January 2002,  it  merged with Tokai Bank. The umbrella company is UFJ Holdings Inc. UFJ stands for United Financial of Japan. ) Before becoming part of UFJ, Sanwa was one of Japans  leading  city banks, ranking sixth in assets during the 1990s. Based in Osaka,  it  was formed in 1933 by merger. Tokai was created by the 1941 merger of three Nagoya banks. Neither was part of a prewar  zaibatsu. Not only have Japanese banks been consolidating, they have been affiliating with established  firms  in other market segments  to  offer one-stop shopping. In July 1999, Sanwa agreed with five other  firms  to  form  an  alliance in the retail market and asset management segments. Others have joined since, with several of the brokerage  firms  merging  to create Tsubasa Securities Co. Called Financial One, the Alliance for the Future,  it  includes  firms  from life insurance, property and casualty insurance, securities, trust services, and banking. The goal is  to  have more regular customers with the alliance each are utilizing the services of several alliance members. Sanwa has about 17 million retail and consumer loan accounts (March 2000). Consumer lending of ? 5. 9 trillion was about 24% of total domestic loans outstanding. The majority is for housing. In July 2001 the three UFJ Group members announced that in January 2002 they would completely merge their credit card operations. With 6. 3 million customers,  it will be the third largest issuer in Japan. Global Retail Banking IT Strategy The strategy Sanwa developed is continuing  to  be implemented by UFJ. This is  to  create a competitive  advantage  with what Sanwa calls continuous relationship marketing. This involves emphasizing  IT  and automated branches  to  deliver  an  expanding range of services related  to  Sanwas life-cycle determination of its customers requirements. Because the retail market is less volatile and lower risk than traditional business lending or other banking areas such as derivatives, achieving a strong position can be very beneficial  to  Sanwas, and UFJs, future growth. Success depends on  how  well Sanwa addresses two elements that connect its retail banking infrastructure with its  IT-intensive retail marketing strategy. These are the appropriate stage in a customers life cycle  to  start marketing a product and the most effective way  to  market and deliver a product or service. To  address the former, Sanwas detailed evaluation of Japanese consumers patterns of personal development requires collecting, managing, and analyzing substantial amounts of data. The second related and central concern is for the bank  to  use  IT  to  control the costs of meeting the identified demands. This includes the expense of developing new customers, products, and services, and of delivering a service or product  to  a particular market segment. Sanwas approach  to  addressing these issues has been  to  develop a matrix that identifies different customer groups and their banking needs according  to  current lifestyles. It  cross-matches this with a set of products for which  it  carefully controls costs. The costs and returns are closely analyzed in terms of the two major ways Sanwa can deliver products and services. One way is traditional full-service branches. The other is electronically, via the telephone, mobile phones, the Internet, ATMs, credit cards, mail, and convenience stores. ATMs and automated branches are system-intensive and thus are subject  to  user-base economics. That means their success can create a beneficial loop. The traditional way is expensive. It  is particularly costly relative  to  the potential returns from new customer segments such as young people just starting careers. Yet, Sanwa recognizes  it  is very important  to  capture these people as clients, because this segment is the fastest-growing retail banking market in Japan. Further, as these individuals progress through their lives, their economic needs and earning power will grow, and they will become more profitable customers for financial products ranging from mortgages  to retirement products. Target Market Sanwas main target is the mass of middle-class consumers, especially those  it  can reach electronically and through direct marketing campaigns. Within that group, its focus is those in their twenties and thirties,  to  whom  it  offers  a particular set of products such as ATMs, credit cards, and telephonic banking. To  those in their forties and fifties who have married,  it  wants  to  expand loans for housing, childrens e