Virtual Integration 

Competition

It's easy to show that telecommunications is the single most significant factor in creating basic changes in the nature of competition in virtually every industry; and that it has also removed many of the traditional competitive barriers, allowing outside companies to use their telecommunications advantage to capture market share. A classic instance is British Airways using its international airline reservation system to add international hotel reservations at low incremental cost and thereby being able to charge hotel chains such as Marriott a commission that is higher than the reservation fee the hotel receives from the guest. Marriott lost control of its own product and was pushed into a catch-up effort that become one of the most expensive project disasters in the history of information technology.

The breakdown of industry boundaries through IT is most marked in the financial services sector in the United States, where two of the top three issuers of credit cards are AT&T, a "phone" company, and Sears, a "retailer." General Motors is also a leader. GM and Ford together hold 60% of all United States consumer loans; in some years General Motors has made more money from financing cars than from making and selling them. Fidelity Investments built up a strong banking base through telephone services as the core of its customer service. Fidelity had no branches; its computers and telecommunications are its organization, and it has more programmers than any other staff function. Merrill Lynch's success in taking $80 billion of savings and deposits away from banks through its Cash Management Account is well-known and was one of the first examples of telecommunications used as a new competitive weapon.

Infrastructure

While telecommunications is not the only factor in all these examples, it is the main enabler and accelerator. British Airways, for instance, was able to preempt the hotel chains and move towards being an integrated travel provider because of its telecommunications infrastructure. Fidelity Investments, First Direct, USAA and Merrill Lynch are new entrants into banking whose entire strategy was built on, and made possible only by, telecommunications. Marriott's inability to respond to British Airways' move just as equally indicates the value of a first-rate integrated computer and communication resource as a sustainable source of competitive advantage and flexibility.

Telecommunications is a major element in how cities and countries compete in the global marketplace. The rapidly growing software export industry of India, is an example, as are Singapore's rise to becoming the largest port in the world through Electronic Data Interchange and Rotterdam's and Amsterdam's comparable strengths in international cargo. Ireland, for decades a country with a very weak economy but with one of the best educated labor forces in Europe, has become the electronic back office for many US insurance firms, handling their claims processing via telecommunications. London's dominance in foreign exchange and securities trading and Frankfurt's comparative weakness in a far stronger economy with a far stronger and more important currency explicitly rested on the UK's early deregulation of telecommunications and its provision of best cost, best quality telecom services. London handles 40% of the world's foreign exchange trading, equal to Tokyo and New York combined. Its securities trading is greater than the rest of the European Union (KU) total combined.

Organization Structure

It's less easy to show exactly how telecommunications changes the basics of organizational structure, coordination, hierarchy and culture. But there can be no doubt that it is stimulating major shifts in all these areas, with the virtual corporation here today, and not merely a wild-eyed prediction. By removing time and location as constraints on organization structure, coordination and service, telecommunications have enabled Nike to become a huge manufacturing company that does no manufacturing itself. Rosenbluth Travel created an electronic alliance of small travel agencies that together comprise a multi-billion dollar force in the industry, operating in effect as a global local area network. Verifone, the provider of almost all credit-card authorization devices, has built up a "large" world-wide company with no offices and secretaries; it operates through electronic mail, with budgets, hiring, manufacturing and sales coordinated electronically.

Telecommunications ends the old organizational dichotomy between centralization and decentralization, allowing Asea Brown Boveri (ARE) - among the most decentralized of all firms in its management philosophy and operations - to centralize global sourcing of materials, exploiting not only price variations across the world but also currency rate changes. This central functioning in no way intrudes on business unit autonomy nor does it add administration and bureaucracy. The network handles what used to require a bureaucracy.

In company after company, the telecommunications network is now in effect the organization structure in action, and telecommunications handles the coordination functions that previously were managed through the hierarchy and central staff. Groupware, in roughly the same stage of penetration and impact as personal computers were in1985, is already transforming the very nature of coordination and collaboration in large firms.

Deregulation

In Europe, many of these forces that push telecommunications to the forefront of business and organization have been slowed or disguised by a lack of competition. Today this has changed, both in business and in telecommunications. Deregulation is everywhere, with globalization acting as a form of deregulation rather than a geographic concept. NAFTA, the Scandinavian entry into the KU, the opening of India's markets and the prospect of the removal of all barriers to (1) entry from anywhere to anywhere, (2) sourcing of manufacturing, (3) sourcing of skilled labor, and (4) location of key functions.

Global Business Integration

In every single one of these areas, telecommunications is the key resource and often the fastest source of opportunity and innovation. This means that globalization of business and telecommunications move together and that a global telecommunications strategy is fundamental to a global business strategy - to the extent that the telecom strategy determines the firm's degrees of business freedom and its practical range of business options. British Airway's advantage, and its ability to respond to the moves of existing and new competitors, as well as Marriott's corresponding disadvantage, are clear illustrations of this phenomenon.

The simple figure below shows the two dimensions of global business and global telecommunications as a space. The business space ranges from closed - the old India, Brazil, or China - to the semi-regulated economies that marked most of the world of yesterday and much of today, with Japan an example. The business space is not under the control of individual firms but it sets the rules of competition or lack of competition. The telecommunications space used to be largely out of the control of companies. It ranges from domestic reach, with minimal international capabilities, to limited international reach and quality, to global reach. In Mexico until recent years, even domestic communications were a hazard. and in many nations international telecommunications is still restricted to slow, expensive and unreliable public packet-switched data networks. Most countries now provide businesses with adequate international reach, most national telecommunications agencies are racing to match the best levels of international practice, and an increasing number are now able to offer a global presence.

Fig. 19 - New Business Space

Figure 19 shows a world which is now gone: the protected domestic economy with only domestic telecommunications. The boundaries of both dimensions have moved; and each shift has immediate implications. A firm in this well-bounded environment need be concerned only with domestic competition, customers, and suppliers. Consider the three firms shown below, competing in an economy which is still partially regulated and protected but is rapidly liberalizing both business and telecommunications, which is the norm today. In Figure 20, Firm 1 remains the same in this new business space as it did, but everything has been changed for it. The opening up of the business space brings in such competitors as E and new supplier such as F. In addition, though, the opening up of the telecommunications space brings such suppliers as A+O directly into the old domestic business space.

Firm 1 regards itself as domestic but it has just been globalized. Competitors 2 and 3 have many more choices of sources of supply in the very same business space; they can thus compete effectively in Firm 1's domestic territory. JC Penney, for instance (a company that matches Firm 3) uses videoconferencing and high-speed digital fax(which provides color photo quality documents design for the design of fashion goods.

The diagram below completes the scene. The firm which tries to operate as a traditional domestic player is a loser unless it has a special and localized niche. Even then, its growth guarantee is limited and it is vulnerable to three types of competitors that may attack on a "niche by niche" basis: one that exploits the opening business space to enter the previously closed domestic market, one that uses its broader telecommunications space to operate in the domestic market via international capabilities and one that combines international business strengths and telecommunication strengths. In the diagram, the "domestic" competitor is a sure loser in almost all industries. The ones that operate in the global business space may not be losers but will surely become laggards.

This last point is not a prediction, but a statement of what is already happening. It would be easy to provide twenty pages of examples of where this has happened.

The issue, then, is not that telecommunications is an important business resource but that, given its importance, companies must exploit the many opportunities it opens up and meet the many competitive threats it creates. Every leading company today has access to the same technology as its competitors. In that context, competitive edge comes from the management advantage, not the technology advantage.

Competitive Advantage

In each of the examples where telecommunications creates leadership for a company like Direct Line or British Airways, there are corresponding losers. These losers are often previous leaders whose executives and staff view their continued leadership as guaranteed if they continue to operate as before - based on their previous strengths. Marriott, for instance, has been a superb hotel chain. Its leaders did not recognize that telecommunications was already a potent force in airline marketing, distribution and customer services and that British Airways, among just a few airlines that owned the needed computer and telecommunications infrastructures, had already targeted "co-providing" all types of travel-related services over its reservation systems as the next move in its strategic future. Marriott's leaders were too locked into an industry mindset to spot the new obvious. Similarly, it is only in the early 1990s that leaders in banking and insurance have spotted the obvious, that bricks and mortar branches are becoming an increasing liability, in an era where service and customer contact can gain value through phones and credit cards, and that many nonbank companies were better positioned than they to capture the customer at that moment of value. Where the customer is, at the time the customer wants the service is where banks can bring the highest value. First Direct should have come from within not outside the insurance industry.

Management Focus

Together, telecommunications, globalization as deregulation and the breakdown of industry barriers change the rules of the competitive game. What, then, is the CEO's agenda? How can top managers ensure that their firms are not victims to predators from outside their traditional industry. How can they prevent the situation that Marriott experienced - where the lack of a telecommunication infrastructure prevented them from responding to a competitive move. This company did not have the time to catch up, and made itself a victim - rather than an ally - of change.

From my own work as an adviser to many top managers in Europe, North America and Latin America, I see four fairly straightforward needs:

• An attention shift: Senior executives must monitor the impacts of telecommunications in their own and other industries almost as closely as they monitor interest rates.
  
  
• An investment shift: They need to view the telecommunications infrastructure as the equivalent of R&D, and as a capital investment not as an expense.
  
  
• A policy shift: They must provide the business directives and policies that ensure an enterprise-wide telecommunications infrastructure instead of the highly fragmented morass of systems that mark the multi-technology chaos created by decentralized business units making, reasonably enough, decentralized decisions about their own computing and communications needs.
  
  
• A design shift: Telecommunications was long seen as an operational overhead, a cost to be controlled and a resource that emphasized the company's own internal needs. Today's networks were built to handle transactions and phone calls, to link operating units and to maximize efficiency. Over time, they have been pushed out from the center - firstly toward the many internal groups that used personal computers and needed access to shared information and communications, and secondly, to the customers and suppliers who increasingly are electronically linked to the firm's key operations and services. These infrastructures now have to be redesigned and built from the other end, from the customer back. Customer access to the firm rests more and more on telecommunications. That access must be simple, reliable and convenient. But all too rarely, is do these three factors come together.

Management Attention

It is difficult for companies to abandon the assumptions that have made them successful, and difficult for senior managers to abandon the assumptions and experiences that got them promoted. When those assumptions don't include telecommunications as a driver of potential, likely and actual business change - and when telecommunications is not part of the management agenda at the level of the organization and in the discussions where the basics are set - top managers continue to carry old assumptions into a new environment. I view this as the single major explanation of how world class companies like Marriott missed the obvious.

It's easy for top executives to resolve this issue. It is primarily one of attention. They need to look actively at other industries and avoid compartmentalization of their own and their staff's thinking. They need to recognize that, fundamentally, telecommunications changes the interactions between customers, products and channels and that the same dynamics occur again and again. Regardless of industry, the differences are mainly ones of timing. Historically, firms put their products or services into their channel to reach their customer. Banks put their standard products into their branch network, customers had nowhere else to go in a regulated environment. Manufacturers put their products into retail channels.

Telecommunications opens up new channels. The traditional industry response to the opportunity may be to add an electronic version of the old channel, thus, banks offer ATMs and cash management.

Owners of an electronic channel, such as British Airways with its reservation capabilities, look to intrude on other industries' traditional territory by by-passing their channels. Owners and non-owners of electronic channels aggressively and sometimes riskily try to extend them; just about every major phone company, cable TV company, publisher, and film studio is looking to get into each others' business, or make alliances to get its products into their channels and lure their customers. Innovations like the Internet open new opportunities for marketing and selling, and for the creation of new products that attract a particular type of customer.

All in all, the main impact of telecommunications is on gaining control of channels and the loss of control of customers. Today, customers have many choices to obtain the same services and goods, and they are increasingly driven by convenience, and the ease of interaction with the company whose goods and services they buy. Senior executives must know about all this. It's not a matter of understanding telecommunications but of understanding business. Just about any major innovation in another industry that affects the basics of competition in it is almost certain to be replicated at some point within the next decade in their own business environment. Many of the innovations are likely to lead to direct efforts to capture other environments' customers, too. Retailers will move more and more into financial services; indeed, just about every firm with a network is looking to add banking services and payments to it. Manufacturers look to link themselves and their key suppliers, and this phenomenon continues right through the chain. The dynamics of telecommunications and change are marked and visible. Senior managers must forget about their own industry and think in terms of: "whose customer, whose moment of value, whose channel and whose product," not which industry.

Management Investment

Top managers need then to ask what capital investments their firms must make in telecommunications as the equivalent of R&D. R&D is a deliberate decision to reduce today's profits to protect and create tomorrow's. A leading pharmaceutical firm like Glaxo, or Intel - the leading microprocessor producer - could immediately double its profits by slashing R&D to the bone. But its stock price would drop at once. Investors know that R&D is the seed of these firms.

Telecommunications is often just as much a seed but is treated as an expense. Obviously, costs need careful controlling and companies want to get the best deal they can in an increasingly competitive market. As with R&D, they need to spend wisely. This means focusing telecommunications investments very carefully in terms of scale, timing, choice of suppliers, moves to adopt new technology, and so on. In the absence of a telecommunications planning process equivalent to that for R&D, today's price dominates all of these factors. Deregulation of telecommunications will cut prices by around 30% within a few years. The accelerating pace of technical innovation cuts them again by that much or more, depending on degree of competition, size of market and practicality of moving from innovation to proven product. The commoditization of parts of the telecommunications market then make it very easy for business executives to view telecommunications in general as a commodity. Raw transmission capacity can be rented and there is no reason to pay extra for basic services.

But assembling the components of the enterprise telecommunications resource is not at all a commodity matter. This statement can be rephrased: If managers think of telecommunications as a commodity, it will indeed become a commodity and the non-commodity elements will be ignored because of commodity thinking and commodity management. Commodity thinking about telecommunications ignores the complex issues of architecture, integration, network management, customer access, security, back up and recovery, routing and many other factors that make telecommunications the platform for a wide range of organizational and competitive capabilities. Shown below is the type of integrated business resource that the world's best organizations have built. It shows three dimensions of capability: Reach, Range and Responsiveness:

Reach defines who can link directly to the firm's business processes and services and from where, along a scale from:

• Within a specific location, such as head office.
  
  
• Across the firm's domestic locations.
  
  
• Across all company locations, domestic and international.
  
  
• To customers and suppliers with a compatible technology base.
  
  
• To all customers and suppliers, regardless of their technology.
  
  
• To anyone, anywhere.

As firms move up this scale, the noncommodity elements of telecommunications become more and more important in planning, design and operation. For example, it is not at all easy to coordinate international telecommunications across many countries and hence many suppliers. Decentralized country-by-country decisions and operation of what must be a "seamless" network makes the whole far less than the sum of the parts. Leading users of telecommunications as an international business resource have good reason to be frustrated by the lack of "one-stop shopping" and the restrictive practices of many countries' telecommunications authorities. This is also why the most proactive PTTs are moving rapidly to provide global capabilities for global business networks, with just one example being the Unisource alliance between Sweden's Telia, Spain's Telefonica and the Dutch and Swiss PTTs with AT&T as a partner.

The second dimension of the business capabilities of an integrated information technology platform relates to which information can be directly, immediately and automatically shared across business processes and services, ranging from:

• None: each major business application has its own information base and cannot crosslink to others. Customers have different account numbers for dealing with different parts of the company. The company does not have a unified customer information base. The many accounting and reporting systems contain duplicate, redundant and even contradictory figures. This lack of information and hence integration of services - is the legacy of decades of ad hoc applications development built on different technology hardware, software and databases.
  
  
• Shared messages and some shared information but not crosslinked transactions.
  
  
• Transaction capabilities within shared data resources but not across them (e.g., the order entry system can crosslink to the accounts payable and payments systems but not to the production scheduling and quality reporting system).

The cross linking of all information across all relevant processes, has to date been achieved by, only a few companies. This gives them a level of customer services, management planning and alerting, flexibility and knowledge of their own business operations that the rest of the market does not yet have. This is a formidable advantage Wal-mart and Sears have and Kmart did not. Telecom allowed Wal-mart to fine tune its entire distribution systems, to put the right goods on the right shelf for the right customers in the right store at the right time at the wrong price. Substitute "wrong" for "right" here and you will understand why only 6 of the top 20 discount retailers in the United States in 1980 were still in business in 1990. The same advantage has made USAA able to bring together - at its customer service agent's finger information about every customer that phones in, even including handwritten letters and being able to answer just about any question and process any transaction at once. At the other extreme of incapability is the bank whose information resources were organized by product. It knew from this that 60% of its products were profitable. When it pulled together from all the data bases a sample of customer information which it painstakingly combined, it found that just 2% of the customers were profitable.

The third dimension of capability is Responsiveness: availability, security, reliability and quality of service. This is increasingly telecommunications-dependent in a world of on-line customer service, cross-functional and international coordination and customer-supplier links. When a bank's ATM or payments network is down, so to is the bank. When one major airline's reservation system was out of service for just four hours twice in a week, it lost six percent market share which it did not regain for six months. When a seven hour outage of the phone system serving Wall Street brought down trading networks, many firms had no choice but to send all employees home. Without telephone links and information, they were out of business in their telecommunications and information economy. Other firms were back in operation in less than fifteen minutes, because their management had approved the substantial investment in network management, backup and recovery capabilities needed to operate a key business infrastructure- rather than save on telecommunications expenses.

Responsiveness ranges along the scale below:

• Batch processing: hourly, daily, weekly, reducing operations risk at the cost of absence of responsive service and absence of timely information
  
  
• On-line (i.e., immediate) service and information but only within given hours. Since New York is closed for business when Tokyo is open and vice versa, this firm is out of the international markets most of the time
  
  
• 24-hour service, with occasional interruptions because of "crashes" or "scheduled downtime" for maintenance or updating of information files
  
  
• Guaranteed perfect service: the best attainable security, recovery, rerouting, and handling of peak traffic.

From the customer's perspective Reach translates to convenience and ease of access, Range to one-stop shopping - a single point of contact and complete service at the customer moment of value, and Responsiveness to trust. "You can trust XYZ to deliver" becomes "They can't be relied on" when the network is out of service for even ten minutes, or "the phone lines are often busy". Today's' customer service areas depend on time-, convenience and information-dominance.

The integrated high Reach, Range and Responsive IT resource doesn't build itself. It demands a major commitment of resources and authority.

Management Policy

This makes telecommunications a matter of top management policy. It needs top management oversight and top management directives for the business priorities and the organizational ones, too. Telecommunications is complex in its organizational implications, because it has to balance the need for central coordination of the platform with decentralized uses of telecommunications, personal computers and many other tools. The logic of business is towards decentralization, mainly fueled by the personal computer although more and more companies are now recognizing the need to ensure business integration and cross-functional information and communication flows. When this happens, they belatedly realize that telecommunications integration determines the firm's range of business options.

Senior executives need then to take the lead and not sanction picking up the pieces. Below is a checklist of policy issues for top managers. They may not know the answers to the implicit questions the list contains but they need to ask where the firm stands in relation to them and ensure that the telecommunications infrastructures needed to ensure that positive answers are put in place as a policy requirement. They are difficult enough to deal with in a purely domestic operation or one of largely separate international units. They are exponentially harder to address in a complex organization operating across the global business space. If top management doesn't play an active role in the business and organizational policies, the firm is condemned to being at best a laggard in the new environment, by restricting its telecommunications space as shown in the earlier diagrams.

Here are questions that top managers must address, and they alone can ask and act on the answers. Others may ask the questions but can do little if the replies are negative:

• Given the need to integrate our business activities - cross-functional processes, customer services and convenience, streamlined logistics, Just-In-Time everything and international coordination - for any major firm today, does our company have the technology platform to achieve it?
  
  
• Does our combination of Reach, Range and Responsiveness position us to lead or at least move with the mainstream of actual, emerging and likely competitive trends across our business space?
  
  
• Do we understand our technology capabilities, strengths, risks, needs and priorities in business terms?
  
  
• Do we understand our business capabilities, strengths, risks, needs and priorities in telecommunications terms?

Surely, every senior manager must be able to provide at least broad answers to these questions. So, when telecommunications is a key element of how customers access and interact with a firm, in their choice of channels and assessment of quality, services and convenience, then how on earth can a top manager not ensure that telecommunications is high on the strategic business agenda? It is fashionable in information technology circles to talk about "aligning" the IT strategy with the business strategy. This is too late in the process. The time frames for designing and building the telecommunications infrastructure for the world of global competition and rapidly changing business, social and technical environments are 37 years. To find out that telecommunications is needed and lacking to meet competitive opportunities and challenges is to fall behind.

My recommendations here are simple. They amount to top management shifting attention and leading the business deployment of telecommunications so that others can manage its implementation and operation. The management of the telecommunications resource is complex and specialized. It is not the responsibility of top management to get involved in this, only to enable it.

Conclusion

The unwillingness and inability of skilled senior executives to make telecommunications and computers part of their own thinking and own agenda has deep historical roots: these include language and jargon, the often truly awful history of data processing in large organizations. This includes the idea that IT is "different", the lack of a convincing economic model for IT, and the hype that seems intrinsic to the field. Little by little, computers have moved more to the forefront of senior business management awareness and, less so, to management action. Awareness alone is not enough to generate action, as it often creates no more than delegation without policy commitments and statements of business priorities for investing in the right technologies and structures to support them.

Telecommunications remains somewhat of an organizational orphan in many firms. It was for years very slow moving in terms of technological and market change with the firm hand of the PTT monopoly dampening innovation. Its managers hardly deserved this title, being little more than supervisors of a cable, phone and telex utility. The cost, slow speeds of transmission, regulation, and limited capabilities boxed telecommunications in as an organizational resource and the box was tucked far away from the executive suite. Now, telecommunications is out of the box. It's a major and growing competitive force. It's a complex technical and organizational challenge, a key competitive opportunity or constraint. Telecommunications plays a vital business role in every international environment that is, it plays a vital role in every business environment.

And for this reason, it's a top management responsibility.