As long as People Express (PE) had only six airplanes and was just offering $23 flights between Buffalo and Newark or Norfolk and Newark, the major airlines made no competitive response. But in 1983, PE began to compete directly with American Airlines (AA), United Airlines (UA), and Northwest Airlines (NWA) by flying from Newark to San Francisco, Los Angeles, Chicago, and Minneapolis. The reaction was swift and, for PE, terminal.
NWA undercut PE’s $95 fare between Newark and Minneapolis. AA, with its advanced pricing systems, matched the PE fare between New York City and Chicago, taking enough customers from PE that its flights became unprofitable. With the fare the same, and the AA flier getting frequent-flier miles, a meal, and bags checked for free (remember this was 1983), its seats sold quickly. And as having 60% of your seats filled was considered good at the time, there were plenty of seats left over for AA to use to pick up a little extra revenue. UA acted similarly, matching PE’s fares on some seats to protect its Chicago and San Francisco operations.
AA’s system repriced thousands of seats every day on every flight for 11 months according to the rate at which the seats were selling and the fares its competitors were charging. UA’s systems were nearly as sophisticated as AA’s and far better than PE’s. As Donald Burr, founder and CEO of PE, later conceded, the computer programs of the major carriers allowed them to match or undercut his prices immediately. Burr had not understood the power of IT and had underinvested in it. In 1986 PE was purchased by Texas Air and merged into Continental Airlines.
AA is one of the very few airlines that survived deregulation. Not coincidentally, it had a CEO who understood that IT would be strategic, and one of the most innovative CIOs of the era, Max Hopper. Airlines that did not understand the power of IT, or couldn’t make the investment in capital and people, failed.
Around the same time, another visionary CEO, Fred Smith, started a business. He made the strategic decision to invest in a strong IT capability and hired a string of world-class CIOs to help build it. Today, FedEx is still an IT leader.
Missing the IT Boat
In 2003 DHL entered the U.S. domestic pickup and delivery market, a battleground between FedEx and UPS and, to a lesser degree, the U.S. Postal System. DHL’s strategy was to be the lowest-cost provider, but the price of doing that was underinvesting in the computer systems that could manage its aircraft and truck operations effectively, price its services correctly, and provide its customers with accurate information about their shipments. Consequently, DHL got its clock cleaned.
The systems DHL did have caused more problems for its customers than they solved. For example, a cell-phone company was shipping thousands of phones with DHL every day, taking advantage of DHL’s lower cost, which FedEx declined to match. But DHL struggled to reach 90% on-time delivery and sometimes dropped to 80%. (FedEx had a 99%+ delivery record.) When customers called to complain, DHL’s tracking systems were so inadequate that the cell-phone company often had no choice but to ship a second phone. Add in the additional costs the company assumed due to the returns, lost phones, and the need to hire extra customer-service staff, and it’s not surprising that the cell-phone company returned to FedEx despite its higher shipping-price point.
By January 2009, DHL announced its exit from the U.S. domestic pickup and delivery market. In six years it had lost approximately $10 billion.
When Not Making a Decision Is a Decision
CFOs should know that a decision not to invest in IT is a strategic business decision. Granted, there are always more factors to business failure than the decision not to invest in developing an IT capability. Nevertheless, IT is transforming more industries than ever, and businesses that fail to make the necessary investments and transformations risk everything.
IT can provide competitive advantage in many ways. PE flew its planes just as well as the major airlines, but because the majors’ IT systems were better at pricing, they could sell just enough seats to gain a price advantage over PE on any given flight, on any given day, at any specific time.
IT can also transform an industry in unexpected ways. When did the music industry start thinking of Apple as a controlling channel? When did Borders recognize that Amazon.com would be a serious threat and that e-books were for real? Obviously, as Borders closes up shop, it figured it out too late. But there was nothing Apple or Amazon did that couldn’t have been done by anyone else in the music or book industry.
Borders and Barnes & Noble could have jumped into e-commerce early and learned just like Amazon did. Either company could have become Amazon (have you seen all the things Barnes & Noble sells today?) if they had had the vision and had built the IT capabilities. Apple did not invent the MP-3 player, the iPod’s predecessor, but it improved it and changed the way one bought music. The inventiveness of both Amazon and Apple lay not in their technology but in how they exploited it to create uniqueness in the marketplace.
Right Thinking on IT Strategy
The lesson for CFOs is that if an IT capability is not part of a growth agenda, part of improving the customer experience, or part of developing innovative new products or services, it’s worse than a cost center; it’s a strategic liability. And it’s not a liability that you can just close down or outsource to someone and consider the job done. The decision to make IT a more efficient cost center is a decision to cede innovation to companies that can build an IT capability into a strategic asset.
An IT capability has to be matched to, and be part of, the business strategy. In some cases, that might mean rebuilding the IT capability. It may mean investing more in technology and IT personnel. Whatever it means for a company, the CFO, responsible for those investments, needs to be at the table, if not leading, when those discussions take place. Because there is another long list of companies that were overenthusiastic about IT, bet their business on a major project, and lost.
Larry Tieman has been a senior vice president at FedEx, a CIO, and a CTO for the past 20 years. He can be reached at [email protected].