INFORMATION

FRESH MIND-SET. In part, the change simply reflects the proliferation of computers. But there’s more to it than that. Information technologies are reaching a critical mass. Business is beginning to reconfigure things from the ground up—this time with the computer in mind. The result: entirely different approaches to existing markets and whole new product lines that didn’t seem a logical extension of the business before. Retailer J. C. Penney now processes credit card transactions for Shell Oil and Gulf Refining & Marketing as a way to leverage its investment in its information network. Who would have foreseen such relationships 10 years ago?

. -How so? Consider three classic cases, mythologized in Harvard business school case studies and preached with evangelical fervor by a growing cadre of information management experts:

O Merrill Lynch & co. used computers to create one of its most successful new products ever~ the Cash Management Account. By combining information on a customer’s checking, savings, credit card, and securities accounts into one computerized monthly statement and automatically "sweeping" idle funds into interest-bearing money market funds, Merrill Lynch has lured billions of dollars of assets from other places since it introduced CMA in 1978. It now manages $85 billion. And though rivals eventually concocted similar offerings, it still has almost 7O% of the market.

o American Hospital Supply Corp., which distributes products from 8,500 manufacturers to more than 100,000 health-care providers, saw its market share soar in the 1970s after it set up computer links to its customers and suppliers. Hospitals could enter orders themselves via AHS terminals. The technology let the company cut inventories, improve customer service, and get better terms from suppliers for higher volumes. Even more important, it often locked out rival distributors that didn’t have direct pipelines to hospitals. Now, AHS. which agreed to be acquired by Baxter Travenol Laboratories Inc. in July, stays ahead of competitors by analyzing the industry data it collects to spot order trends and customer needs more quickly.

0 American Airlines Inc. has used computer and communications technology to build an entirely new business with sky-high profit margins. American provides its Sabre reservation system, which lists the flight schedules of every major airline in the world, to 48% of the approximately 24,000 automated travel agents in the U. S. They pay American $1.75 for every reservation made via Sabre for other carriers. American’s parent, AMR Corp., which earned $400 million pretax last year on $5.3 billion in revenues, expects Sabre alone to earn it $170 million before taxes this year on $338 million in revenues. "We are now in the data processing as well as the airline business," says President Robert L. Crandall, a data processing expert who conceived Sabre a decade ago, when he was American’s marketing chief.

Such success stories have sent companies in every industry scrambling to find ways to harness the power of information technology—from computers and telephones to communications satellites and video disks.

HUNGRY FOR MORE. Although most companies may not have thought of information as a competitive weapon, for years. they have been putting in place the infrastructure needed to make it one. In the past decade, according to Harry F. Bunn, senior vice-president at PA Consulting Services Inc., a management consultant in Princeton, N.J., corporate spending on information processing gear has gone up an average of 16% a year, and raw computer power for crunching data faster has increased 18-fold.

But using technology to gain a competitive edge has gotten its biggest boost from the personal computer. Until the early 1980s. computers were the preserve of distant data processing managers who spoke a different language than managers. Data processing shops had months or years of backlogged requests.

Now, though, managers can manipulate data themselves on personal computers. and they are hungry for more and better information. The most forward-thinking companies have come up with ways to give it to them. The information can come from sources as di-

verse as portable computers for sales. people, in the field, external data bases that provide intelligence on competitors and markets, and • inventory management systems. General Electric Co. found that by creating a toll-free hotline for customer complaints and questions, it could generate a wealth of information that helped it improve old products and develop new ones.

‘NEGLECTED FORCE.’ Others feel Porter’s approach is simplistic. "I would only spend 20% of my time on [the value chain]," says Richard L. Nolan, chairman of Nolan, Norton & Co., a Lexington (Mass.) consultant. "I’d spend the other 80% creating the culture to make it happen." He says employees must be computer-literate and management must have learned how to apply information

With or without a formula, companies are finding they have to be more creative to make information technology part of their business strategies. Irwin J..Sitkin, vice-president for corporate administration at Aetna Life & Casualty Co., now views his company as "one great big information processing business." The game, he says, "has really become ‘Get the right information to the right guy at the right time to make the right decision to beat the other guys out in the marketplace." Aetna now gives customers access to its Acclaims system, which processes group insurance claims. Now the client can do some analysis of his own—on the effectiveness of his own cost containment efforts, for instance—using Aetna’s computer files.

Sometimes, whole new enterprises grow out of systems put in place just to provide information. Citibank, which offers financial services and data, has teamed up with McGraw-Hill Inc., which collects data on commodities, to create a 24-hour commodity trading venture balled Global Electronic Markets Co. Now, traders can not only get information instantly but also make deals and transfer money in minutes. (McGraw-Hill also publishes BUSINESS WEEK.)

Being creative doesn’t necessarily mean being first. In the New York City retail banking market, Chemical Bank was the first to put in automatic teller machines in 1969. Its goal was simply to automate the teller’s job. But it didn’t seem to work, and Chemical pulled back.

Citibank, on the other hand, saw an entirely different opportunity. It thought that the primary value of ATMs lay in customer service and marketing. It did a lot of research on customer responses to technology and created much "friendlier" machines. By blanketing the city with them in the late 1970s, it more than doubled its checking and deposit balances and almost tripled its market share, from 5% to about 13% today. To spot such opportunities, executives don’t necessarily have to know how the technology works. But they do need to understand how to deploy it. Just as no general would leave tactical planning to his quartermaster, executives cannot expect their data processing lieutenants to wage this battle. "The technically sound people are often not creative [in business strategy]," notes Peter Keen, a former Massachusetts Institute of Technology professor who now consults on how to use information technology.

The data processing manager who can talk management’s language and explain how to launch a preemptive attack in the marketplace is an invaluable asset. "Companies are competing on a national basis to find this rare commodity," says Herbert Halbrecht, president of Halbrecht Associates Inc., a Stamford (Conn.) executive search firm specializing in finding technical executives. "Salaries have been escalating very rapidly."

As information technology becomes a strategic tool rather than simply a support function, data processing managers’ roles—and jobs—will have to change, too. "They will have to delight in solving the business problem, not the crossword puzzle that was programming," notes John F. Rockart, a professor at MIT’S Sloan School of Management. William R. Synnott, senior vice-president in charge of information systems at Bank of Boston Corp., wonders how many data processing people will make the transition. ‘A lot won’t," he says. "They have come through the technical ranks and have had little management exposure."

‘BELIEVERS.’ Synnott says his own role has already changed "quite dramatically-" He has become progressively more involved in strategic planning and marketing and now spends an allotted time each month showing senior management how to use information technology. "The people in management have become believers," he says.

The companies that use information technology best are forging just this kind of partnership between their executives and their technical people. "Just as executives have always had to’ cope with operations, strategy, financial planning, and people, now they are going to have to deal with information technology as well," says MIT’s Rockart.’

One executive who spearheaded a technological revolution at his company is Robert F. McDermott, president of the San Antonio-based insurer USAA, formerly’ the United Services Automobile Assn. When McDermott arrived in 1969 and found boxes of paper spilling into the hallways, he vowed to create a "paperless environment" at the company, which then handled most of its promotions and collections by mail, processed by hand.

Early on, USAA entered names, ad-, dresses, and other policy information into computer terminals and cross-referenced them to give service representatives easy access to the data. Other innovations followed. Now the National Insurance Consumer Organization in Alexandria, Va., recommends USAA’s Universal Life Policy to consumers largely because automation lets the company do sales and service over’ the telephone, eliminating agents that boost premiums. Consumers Union, the nonprofit publisher of Consumer Reports, ranks USAA at or near the top in customer satisfaction with automobile and home6wner claims handling.

These companies may be willing to ‘spend more now than ever, suggests Harvey L. Poppel, a partner at’Broadview Associates, a Fort Lee (N. J.) financial consulting firm. "Technology is starting to influence the revenue stream, not just the cost side, and people are becoming less cost sensitive," he says.

RISKY SAVING. But to get into the game, many businesses are going to have to change the way they justify technology expenditures. "The costs are certain, the benefits are not," notes consultant Hammer. Adds Theodore J. Freiser, president of John Diebold & Associates, a New York management consultant: "You have to be willing to make the investment without having a correspondingly measurable return. There’s no measure we can construct that can isolate the contribution of information and not be also attributable to some other factors. It’s subjective."

The long-term implications of this in-formation technology arms race scare some observers. Michael E. Treacy, an assistant professor at MIT’s Sloan School, worries that "the whole thing is being oversold." He fears many industries may cripple themselves. He cites the effects of computerized reservation systems on airlines: "One or two companies have gotten an advantage, but they have decreased the wealth of the whole industry. With all the information they now have access to, customers have a relatively better bargaining position" and prices have been eroding. Airline stocks, even American’s, have performed’ poorly relative to other investments, Treacy says. The stock price of American’s parent, AMR Corp., has risen only 10% since yearend’ 1983, to $40.

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