CASE STUDY 1 IN PRAISE OF THE PURPLE COW For years, marketers have talked about the "five Ps"

(actually, there are more than five, but everyone picks their favourite handful): product, pricing, promotion, positioning, publicity, packaging, pass along, permission. Sound familiar? This has become the basic marketing checklist, a quick way to make sure that you've done your job. Nothing is guaranteed, of course, but it used to be that if you dotted your is and paid attention to your five Ps, then you were more likely than not to succeed. No longer. It's time to add an exceptionally important new P to the list: Purple Cow. Weird? Let me explain. While driving through France a few years ago, my family and I were enchanted by the hundreds of storybook cows grazing in lovely pastures right next to the road. For dozens of kilometres, we all gazed out the window, marvelling at the beauty. Then, within a few minutes, we started ignoring the cows. The new cows were just like the old cows, and what was once amazing was now common. Worse than common: It was boring. Cows, after you've seen them for a while, are boring. They may be well-bred cows, Six Sigma cows, cows lit by a beautiful light, but they are still boring. A Purple Cow, though: Now, that would really stand out. The essence of the Purple Cow -- the reason it would shine among a crowd of perfectly competent, even undeniably excellent cows -- is that it would be remarkable. Something remarkable is worth talking about, worth paying attention to. Boring stuff quickly becomes invisible. The world is full of boring stuff -- brown cows -- which is why so few people pay attention. Remarkable marketing is the art of building things worth noticing right into your product or service. Not just slapping on the marketing function as a last-minute add-on, but also understanding from the outset that if your offering itself isn't remarkable, then it's invisible -- no matter how much you spend on well-crafted advertising. This is an essay about what it takes to create and sell something remarkable. It is a manifesto for marketers who want to make a difference at their company by helping create products and services that are worth marketing in the first place. It is a plea for originality, for passion, guts, and daring. Not just because going through life with passion and guts beats the alternative (which it does), but also because it's the only way to be successful. Today, the one sure way to fail is to be boring. Your one chance for success is to be remarkable. And that means you have to be a leader. You can't be remarkable by following someone else who's remarkable. One way to figure out a great theory is to look at what's working in the real world and determine what the successes have in common. With marketing, it's puzzling though. What could the Four Seasons and Motel 6 possibly have in common? Other than the fact that both companies have experienced extraordinary success and growth, they couldn't be more different. Or Neiman Marcus and Wal-Mart, both growing during the same decade? Or Nokia (bringing out new hardware every 30 days or so) and Nintendo (marketing the same Game Boy for 14 years in a row)?
1 OEAEL

It's like trying to drive looking in the rear-view mirror. Sure, those things worked. But do they help us predict what will work tomorrow? The thing that all of those companies have in common is that they have nothing in common. They are outliers. They're on the fringes. Superfast or super slow. Very exclusive or very cheap. Extremely big or extremely small. The reason it's so hard to follow the leader is this: The leader is the leader precisely because he did something remarkable. And that remarkable thing is now taken -- so it's no longer remarkable when you decide to do it. Stand out from the herd I: Going Up! Elevators aren't a typical consumer product. They can easily cost more than a million dollars, they generally get installed when a building is first constructed, and they're not much use unless the building is more than three or four stories tall. How, then, does an elevator company compete? Until recently, selling involved a lot of golf, dinners, and long-term relationships with key purchasing agents at major real-estate developers. No doubt that continues, but Schindler Elevator Corporation has radically changed the game by developing a remarkable Purple Cow. Every elevator ride is basically a local one. The elevator stops 5, 10, 15 times on the way to your floor. This is a hassle for you, but it's a huge, expensive problem for the building. While your elevator is busy stopping at every floor, the folks in the lobby are getting more and more frustrated. The building needs more elevators, but there's no money to buy them and no room to put them. Walk into the Times Square offices of Cap Gemini Ernst & Young and you're faced with a fascinating solution to this problem. Schindlers insight? When you approach the elevators, you key in your floor on a centralized control panel. In return, the panel tells you which elevator is going to take you to your floor. With this simple pre-sort, Schindler Elevator Corporation has managed to turn every elevator into an express. Your elevator takes you immediately to the 12th floor and races back to the lobby. This means that buildings can be taller, they need fewer elevators for a given density of people, the wait is shorter, and the building can use precious space for people rather than for elevators. A huge win, implemented at a remarkably low cost. Is there a significant real-estate developer in the world who is unaware of this breakthrough? Not likely. And it doesn't really matter how many ads or how many lunches the competition sponsors: Schindler now gets the benefit of the doubt. The Sad Truth about Marketing Just About Anything Forty years ago, Ron Simek, owner of the Tombstone Tap (named for a nearby cemetery) in Medford, Wisconsin, decided to offer a frozen version of his pizza to his customers. It caught on, and before long, Tombstone Pizza was dominating your grocer's freezer. Kraft eventually bought the brand, advertised it like crazy, and made serious dough. This was a great American success story: Invent a good product that everyone wants, advertise it to the masses, and earn billions. That strategy didn't just work for pizza. It worked for most everything in your house, including aspirin. Imagine how much fun it must have been to be the first person to market aspirin. Here's a

2 OEAEL

product that just about every person on earth needed and wanted. A product that was inexpensive, easy to try, and promised huge immediate benefits. Obviously, it was a big hit. Today, a quick visit to the drugstore turns up lots of aspirin and aspirin-like products: Advil, Aleve, Alka-Seltzer Morning Relief, Anacin, Ascriptin, Aspergum, Bayer, Bayer Children's, Bayer Regimen, Bayer Women's, BC Powder, Bufferin, Cope, Ecotrin, Excedrin Extra Strength, Goody's, Motrin, Nuprin, St. Joseph, Tylenol, and, of course, Vanquish. Within each of those brands, there are variations, sizes, and generics that add up to more than 100 different products to choose from. Think it's still easy to be an analgesics marketer today? If you developed a new kind of pain reliever, even one that was a little bit better than the ones that I just listed, what would you do? The obvious answer, if you've got money and you believe in your product, is to spend everything you've got to buy tons of national TV and print advertising. There are a few problems that you'll face, though. First, you need people who want to buy a pain reliever. While it's a huge market, it's not for everyone. Once you find people who buy pain relievers, then you need people who want to buy a new kind of pain reliever. After all, plenty of people want the "original" kind, the kind they grew up with. Finally, you need to find the people who are willing to listen to what you have to say about your new pain reliever. The vast majority of folks are just too busy and will ignore you, regardless of how many ads you buy. So you just went from an audience of everyone to an audience a fraction of that size. Not only are these folks hard to find, they're picky as well. Being first in the frozen-pizza category was a good idea. Being first in pain relievers was an even better idea. Alas, they're both taken. Which brings me to the sad truth about marketing just about anything, whether its a product or a service, whether its marketed to consumers or corporations: Most people cant buy your product? They don't have the money, they don't have the time, or they don't want it. And those are serious problems. An audience that doesn't have the money to buy what you're selling at the price you need to sell it for is not a market. An audience that doesn't have the time to listen to and understand your pitch treats you as if you and your product were invisible. And an audience that takes the time to hear your pitch and decides that they don't want it . . . well, you're not going to get very far. The old rule was this: Create safe products and combine them with great marketing. Average products for average people. That's broken. The new rule is: Create remarkable products that the right people seek out. As I write this, the top song in France, Germany, Italy, Spain, and a dozen other countries in Europe is about ketchup. It's called "Ketchup," and it's by two sisters you've never heard of. The number-two movie in America is a low-budget animated film in which talking vegetables act out Bible stories. Neither is the sort of product you'd expect to come from a lumbering media behemoth. Sam Adams beer was remarkable, and it captured a huge slice of business from Budweiser. Hard Manufacturing introduced a product that costs 10 times the average (the $9,945 Doernbecher crib)
3 OEAEL

and opened up an entirely new segment of the hospital-crib market. The electric piano let Yamaha steal an increasingly larger share of the traditional piano market away from the entrenched leaders. Vanguard's remarkably low-cost mutual funds continue to whale away at Fidelity's market dominance. Bic lost tons of market share to Japanese competitors that had developed pens that were remarkably fun to write with, just as Bic had stolen the market away from fountain pens a generation or two earlier. Stand out from the herd II: Mail Call Very few organizations have as timid an audience as the United States Postal Service. Dominated by a conservative bureaucracy and conservative big customers, the USPS has an awfully hard time innovating. The big direct marketers are successful because they've figured out how to thrive under the current system, and they're in no mood to see that system change. Most individuals are in no hurry to change their mailing habits either. The majority of new-policy initiatives at the USPS are either ignored or met with nothing but disdain. But "zip + 4" was a huge success. Within a few years, the USPS was able to diffuse a new idea, making the change in billions of address records in thousands of computer databases. How? First, it was a game-changing innovation. Zip + 4 makes it far easier for marketers to target neighbourhoods and much faster and easier to deliver the mail. The product was a true Purple Cow, completely changing the way customers and the USPS would deal with bulk mail. It offered both dramatically increased speed in delivery and significantly lower costs for bulk mailers. That made it worth the time it took for big mailers to pay attention. The cost of ignoring the innovation would be felt immediately on the bottom line. Second, the USPS wisely singled out a few early adopters. These were organizations that were technically savvy and that were extremely sensitive to both pricing and speed issues. These early adopters were also in a position to sneeze the benefits to other, less astute, mailers. The lesson here is simple: The more intransigent your market, the more crowded the marketplace, the busier your customers, the more you need a Purple Cow. Half-measures will fail. Overhauling the product with dramatic improvements in things that the right customers care about, on the other hand, can have an enormous payoff. Why There Are So Few Purple Cows If being a Purple Cow is such an effective way to break through the clutter, why doesn't everyone do it? One reason is that people think the opposite of remarkable is "bad" or "poorly done." They're wrong. Not many companies sell things today that are flat-out lousy. Most sell things that are good enough. That's why the opposite of remarkable is "very good." Very good is an everyday occurrence, hardly worth mentioning -- certainly not the basis of breakthrough success. Are you making very good stuff? How fast can you stop? Some people would like you to believe that there are too few great ideas, that their product or their industry or their company simply can't support a great idea. That, of course, is absolute nonsense. Another reason the Purple Cow is so rare is because people are so afraid.

4 OEAEL

If you're remarkable, then it's likely that some people won't like you. That's part of the definition of remarkable. Nobody gets unanimous praise -- ever. The best the timid can hope for is to be unnoticed. Criticism comes to those who stand out. Playing it safe. Following the rules. They seem like the best ways to avoid failure. Alas, that pattern is awfully dangerous. The current marketing "rules" will ultimately lead to failure. In a crowded marketplace, fitting in is failing. In a busy marketplace, not standing out is the same as being invisible. In Marketing Outrageously (Bard Press, 2001), author Jon Spoelstra points out the catch-22 logic of the Purple Cow. If times are tough, your peers and your boss may very well point out that you can't afford to be remarkable. There's not enough room to innovate: We have to conserve, to play it safe. We don't have the money to make a mistake. In good times, however, those very same people will tell you to relax, take it easy. There's not enough need to innovate: We can afford to be conservative, to play it safe. So it seems that we face two choices: Either be invisible, un-criticised, anonymous, and safe or take a chance at true greatness, uniqueness, and the Purple Cow. The point is simple, but it bears repeating: Boring always leads to failure. Boring is always the riskiest strategy. Smart businesspeople realize this and work to minimize (but not eliminate) the risk from the process. They know that sometimes it's not going to work, but they accept the fact that that's okay. Stand out from the herd III: The Colour of Money How did Dutch Boy Paint stir up the paint business? It's so simple, it's scary. They changed the can. Paint cans are heavy, hard to carry, hard to close, hard to open, hard to pour, and no fun. Yet they've been around for a long time, and most people assumed that there had to be a reason why they were so bad. Dutch Boy realized that there was no reason. They also realized that the can was an integral part of the product: People don't buy paint, they buy painted walls, and the can makes that process much easier. Dutch Boy used that insight and introduced an easier-to-carry, easier-to-pour, easier-to-close paint jug. "Customers tell us that the new Twist & Pour paint container is a packaging innovation that was long overdue," says Dennis Eckols, group vice president of the home division for Fred Meyer stores. "People wonder why it took so long for someone to come up with the idea, and they love Dutch Boy for doing it." It's an amazing innovation. Worth noticing. Not only did the new packaging increase sales, but it also got them more distribution (at a higher retail price!). That is marketing done right. Marketing where the marketer changes the product, not the ads. Why It Pays (Big) to Be a Purple Cow As the ability to be remarkable continues to demonstrate its value in the marketplace, the rewards that follow the Purple Cow increase. Whether you develop a new insurance policy, make a hit

5 OEAEL

record, or write a groundbreaking book, the money and satisfaction that follow are extraordinary. In exchange for taking the risk, creators of a Purple Cow get a huge upside when they get it right. Even better, you don't have to be remarkable all the time to enjoy the upside. Starbucks was remarkable a few years ago. Now they're boring. But that burst of innovation and insight has allowed them to expand to thousands of stores around the world. Compare that growth in assets to Maxwell House. Ten years ago, all of the brand value in coffee resided with them, not with Starbucks. But Maxwell House played it safe (they thought), and now they remain stuck with not much more than they had a decade ago. Once you've created something remarkable, the challenge is to do two things simultaneously: One, milk the Purple Cow for everything it's worth. Figure out how to extend it and profit from it for as long as possible. Two, build an environment where you are likely to invent an entirely new Purple Cow in time to replace the first one when its benefits inevitably trail off. These are contradictory goals. The creator of a Purple Cow enjoys the profits, accolades, and feeling of omniscience that come with a success. None of those outcomes accompany a failed attempt at a new Cow. Thus, the tempting thing to do is to coast. Take no chances. Take profits. Fail to reinvest. AOL, Marriott, Marvel Comics, Palm, Yahoo -- the list goes on and on. Each company had a breakthrough, built an empire around it, and then failed to take another risk. It used to be easy to coast for a long time after a few remarkable successes. Disney coasted for decades. Milton Berle did too. It's too easy to decide to sit out the next round, rationalizing that you're spending the time and energy to build on what you've got instead of investing in the future. So here's one simple, tangible suggestion. Create two teams: the inventors and the milkers. Put them in separate buildings. Hold a formal ceremony when you move a product from one group to the other. Celebrate them both, and rotate people around. Stand out from the herd IV: Chewing my own cud So, how does an author get his new book to stand out from all of the other marketing books? By trying to create a remarkable way to market a book about remarkable marketing. How? By not selling it in stores. Instead, a copy of the book version of Purple Cow is available for free to anyone reading this article. You pay for postage and handling ($5), and the publishers will send you one copy of the book-length version of this article for free (visit www.fastcompany.com/keyword/purplecow67 for details). How does this pay? Visit the site and I'll show you my entire marketing plan. What It Means to Be a Marketer Today If the Purple Cow is now one of the Ps of marketing, it has a series of big implications for the enterprise. In fact, it changes the definition of marketing. It used to be that engineering invented, manufacturing built, marketing marketed, sales sold, and the president managed the whole shebang. Marketing, better called "advertising," was about communicating the values of a product after it had been developed and manufactured.

6 OEAEL

That's clearly not a valid strategy in a world where product attributes (everything from service to design) are now at the heart of what it means to be a marketer. Marketing is the act of inventing the product. The effort of designing it. The craft of producing it. The art of pricing it. The technique of selling it. How can a Purple Cow company not be run by a marketer? Companies that create Purple Cows, such as JetBlue Airways, Hasbro, Poland Spring, and Starbucks, have to be run by marketers. Turns out that the CEO of JetBlue made a critical decision on day one: He put the head of marketing in charge of product design and training as well. It shows. JetBlue sells a time-sensitive commodity just like American Airlines does, but somehow it manages to make a profit doing it. All of these companies are marketers at their very core. The geniuses who managed to invent 1-800-COLLECT are true marketers. They didn't figure out how to market an existing service. Instead, the marketing is built into the product -- from the easyto-remember phone number to the very idea that MCI could steal the collect-call business from the pay-phone companies. But isn't the same idea true for a local restaurant, a grinding-wheel company, and Citibank? In a world where anything we need is good enough and where just about all of the profit comes from the Purple Cow, we must all be marketers. You've got a chance to reinvent who you are and what you do. Your company can reenergize itself around the idea of involving designers in marketing and marketers in design. You can stop fighting slow growth with mind-numbing grunt work and start investing in insight and innovation instead. If a company is failing, it's the fault of the most senior management, and the problem is probably this: They are just running a company, not marketing a product. And today, that's a remarkably ineffective way to compete. 10 ways to raise a purple cow 1. Making and marketing something remarkable means asking new questions -- and trying new practices. Here are 10 suggestions. 2. Differentiate your customers. Find the group that's most profitable. Find the group that's most likely to influence other customers. Figure out how to develop for, advertise to, or reward either group. Ignore the rest. Cater to the customers you would choose if you could choose your customers. 3. If you could pick one underserved niche to target (and to dominate), what would it be? Why not launch a product to compete with your own that does nothing but appeal to that market? 4. Create two teams: the inventors and the milkers. Put them in separate buildings. Hold a formal ceremony when you move a product from one group to the other. Celebrate them both, and rotate people around. 5. Do you have the email addresses of the 20% of your customer base that loves what you do? If not, start getting them. If you do, what could you make for them that would be superspecial? 6. Remarkable isn't always about changing the biggest machine in your factory. It can be the way you answer the phone, launch a new brand, or price a revision to your software.
7 OEAEL

Getting in the habit of doing the "unsafe" thing every time you have the opportunity is the best way to see what's working and what's not. 7. Explore the limits. What if you're the cheapest, the fastest, the slowest, the hottest, the coldest, the easiest, the most efficient, the loudest, the most hated, the copycat, the outsider, the hardest, the oldest, the newest, or just the most! If there's a limit, you should (must) test it. 8. Think small. One vestige of the TV-industrial complex is a need to think mass. If it doesn't appeal to everyone, the thinking goes, it's not worth it. No longer. Think of the smallest conceivable market and describe a product that overwhelms it with its remarkability. Go from there. 9. Find things that are "just not done" in your industry, and then go ahead and do them. For example, JetBlue Airways almost instituted a dress code -- for its passengers! The company is still playing with the idea of giving a free airline ticket to the best-dressed person on the plane. A plastic surgeon could offer gift certificates. A book publisher could put a book on sale for a certain period of time. Stew Leonard's took the strawberries out of the little green plastic cages and let the customers pick their own. Sales doubled. 10. Ask, "Why not?" Almost everything you don't do has no good reason for it. Almost everything you don't do is the result of fear or inertia or a historical lack of someone asking, "Why not?" What would happen if you simply told the truth inside your company and to your customers? Now That's Remarkable Schindler Elevator Corporation When is a bank of elevators more than a bank of elevators? When it's smart enough to tell you which elevator will provide the quickest ride to the floor you need to reach. A product that smart changes how people move, how buildings get designed -- and how companies, in this case Schindler Elevator Corporation, market their innovation. Tombstone Pizza It's good to be first with an innovation that the world is hungry for. Ron Simek learned that lesson when he launched the first successful line of frozen pizza. The product was a hit. Kraft bought it and advertised like mad. The rest is history. Of course, 40 years later, introducing another brand of frozen pizza seems less appetizing. Me-too products lead to also-ran companies. U.S. Postal Service The runaway success of "zip + 4" might give new meaning to the term "going postal." This simple innovation makes it quicker for the Postal Service to deliver mail, easier for marketers to target neighbourhoods, and cheaper for marketers to send bulk mail. But the innovation would never have taken hold without savvy marketing by an organization not famous for its savvy ness. Adapted from the book, Purple Cow: Transform Your Business by Becoming Remarkable (Do You Zoom, February 2003) QUESTIONS FOR DISCUSSIONS

8 OEAEL

1. Is the purple cow concept applicable to this part of the world or do you think that marketability is still to mature here? 2. How would brand building be different from building a purple cow? 3. What would happen if you actually told the truth inside your company and to your customers? 4. What does the author mean when he says, You've got a chance to reinvent who you are and what you do! CASE STUDY 2 WHISTLEBLOWER IS THE REAL 'EMBARRASSMENT' TO BOEING By David Coursey March 10, 2005 There is something troubling about the ouster of Harry Stonecipher at Boeing for violating the company's ethics code. It's not that the ex-CEO is gone, though strictly speaking I don't think employees' consensual sex lives are an employer's business. What bothers me is that the letter complaining about Stonecipher's affair with an employee included what is described as "a packet" of information documenting the affair, including copies of e-mails. According to AP, "Stonecipher resigned Sunday at the board of directors' request after acknowledging the affair, which was initially reported to company officials in a letter from an employee that was accompanied by a packet of material as evidence. "Boeing officials have not disclosed more details. But the company source said Wednesday that 'inappropriate' e-mail exchanges between the two, included in the tipster's packet, 'played a part' in Stonecipher's ouster," the wire service said. Am I mistaken, or does this suggest the "whistleblower" in this case somehow acquired e-mail messages that weren't intended for him or her? And, if so, how does one come into possession of such messages without violating the same ethical rules Stonecipher himself violated, an omnibus clause that forbade doing anything that might "cause embarrassment to the company." Strictly speaking, it's not the affair that made the company look bad so much as the whistleblower "helpfully" making it public by informing the Boeing's board, an ethically reborn bunch of hairtrigger moralists. And it's not that Boeing's board is concerned about morals, it's that the loss of government contracts forced them down the straight-and-narrow. Where was Boeing's board when the real misdeeds were committed? As for the new rules, I'd love to see Boeing's "morals" clause tested in court. That policywhich Stonecipher implemented to help clean up scandal-ridden Boeingis supposed to have been signed by 160,000 Boeing workers, some of whom probably thought they were being treated like children because their big bosses had slimed everyone's good name. That might make someone angry enough to take a shot at a huge target, which indeed Stonecipher had become. This is, after all, a man whose previous business strategy had earned him the nickname "Hatchet Harry." Given a chance to take the guy down, I bet there would have been a long line of volunteers.
9 OEAEL

I think Hatchet Harry got what he had coming. Not because of the affairthat's between the parties involved but because he wasn't smart enough to realize what a target he'd become. If you're going to shake up a company on morality issues, you'd better lead by example, if for no other reason than because there will be unhappy people aiming for your back. But Stonecipher still gets credit. When confronted with the evidence he confessed and resigned. The real slime in this matter is the whistleblower, who, in taking the rules into his or her own hands, committed a far greater sin than Hatchet Harry. I am much more concerned about authorized access to company informationregardless of how it's used short of reporting a felonythan I am about Harry and his friend. There are worse things than reading other people's e-mail, but it's still a firing offence. Even at companies without Boeing's moral fervour. DISCUSSION QUESTIONS 1. What have been the moral issues involved in this case? 2. Do you or do you not agree with the author and why, that it was not only "Hatchet Harry" to blame? 3. Do you agree with introducing 'ethical hacking in such instances? (The ethical hacker is a computer and network expert who attacks a security system on behalf of its owners, seeking vulnerabilities that a malicious hacker could exploit.) CASE STUDY 3 ALIGNING STRATEGY AND PEOPLE AT UNILEVER Judith Chapman Unilever is a highly successful multinational company producing packaged food, such as Lipton tea and Magnum ice cream, as well as home and personal care products, including Omo detergent and Organics shampoo. It operates in 88 countries with more than 1000 brands that are tailored for different regions and countries. Despite its success, constant change is needed to ensure that the company remains in tune with its markets and stays ahead of the competition. In the mid 1990s growth and profit figures were slowing. As a result of a strategic review a decision was made to sell off facilities that were not a part of the core business. Plans were also prepared for improving economies of scale and synergies around the globe, and developing a greater capacity to meet the complex and diverse challenges of the contemporary business environment. Over the next few years a portfolio of 400 products was selected for special innovation and brand development, manufacturing was reorganised into regional networks, IT systems were reconfigured worldwide, and greater use of e-business techniques was implemented. By 2001 Unilever had consolidated its strategic direction by forming into two global divisions (1) food and (2) home/personal care. The people management implications of these changes were vast. Unilever wanted its 19 000 managers to think and operate more strategically, be more aware of international issues and trends,
10 OEAEL

be team focused, and have a greater commitment to their own professional development. It was to become a contemporary international company whose managers had a sound knowledge of their local markets and consumers while applying insights gained from exposure to other countries, peoples and cultures. To this end, the company designed an integrated management development system that encompassed career planning and progression, learning and development, and remuneration and reward systems. The overall aims of the system were to develop the future leaders of the business while giving individuals from diverse backgrounds room to realise their full potential. It also recognised different individual aspirations, and valued self-determination and a balance between the private and professional spheres of life. A change in the management structure signalled the advent of the new management development system. Seventeen job classes at managerial level were now reduced to just four (below business group president). For professionals in the marketing field, for example, from lowest to highest these were product manager, marketing manager, marketing director and operating company chairman (e.g. Australian manager of a product division). Each job class was distinguished by its level of accountability and breadth of responsibility, its operational versus strategic focus, and the extent of resource delegations. Moving from one job class to the next was therefore a significant milestone. However, climbing the ladder upward was just one available career path. Depending on individual aspirations and personal growth needs, managers could choose to stay within a job class and develop a deep level of expertise and understanding in their field. Because it was still possible to earn an excellent salary, there was less reason to move up before gaining as much as possible from diverse assignments in the current class. In fact, the emphasis in the management development system was on building a professional skills base early in the career. Salaries are now clearly linked to performance. Managers in any job class who can sustain a high level of performance, or are considered to have strong potential, are well rewarded financially. This policy requires a performance evaluation system that is transparent, well managed and widely regarded as fair by employees. There are several components to Unilevers performance remuneration system. Annual targets are set in consultation with every manager: these provide a focus and set priorities for the role, and are the basis for the performance review. Just as important is the personal development plan for building skills, competencies and experience. The plan is developed annually as a means of targeting areas for future improvement. Ample opportunities for self-directed learning are available. Training courses are provided across Unilever. In addition, the company has developed two tools: a competencies dictionary for 10 professions including finance, HR and purchasing and a job skills profile specifying eight skills for each profession. These tools are applied to all managerial jobs worldwide. And because they are freely available on the company intranet, each manager has a powerful tool for selfdevelopment, a practice that is strongly encouraged. Indeed, management development is regarded as a shared responsibility. Individuals are expected to take the initiative in regard to their own learning, to seize opportunities to broaden their experience, and to be up front about their personal plans, expectations and wishes. Senior management, on the other hand, is responsible for integrating the management development
11 OEAEL

process with the strategic direction of the company. They meet frequently to assess the program. This involves profiling overall strengths and weaknesses across the company, identifying high flyers and special assignments, and reviewing succession plans for filling senior management vacancies. Continuing changes in the business environment mean that the management development program will need to evolve to retain its relevance for supporting the strategic direction of the company worldwide. QUESTIONS FOR DISCUSSIONS 1. 2. 3. 4. In what ways does the new management development system complement the strategic focus of Unilever? How does Unilever motivate its managers? In your answer, you should refer to relevant theories of motivation. Unilever places a strong emphasis on self-development. Discuss. Based on the information from this case study, provide a brief statement of Unilevers policies in relation to the following: career development; cultural diversity; learning; personal growth; and extrinsic rewards.

CASE STUDY 4 NESTL Nestl, the world's biggest consumer food company, reported a 22 per cent rise in full-year earnings and said real internal sales growth had surpassed the company's long-running target of 4 per cent. The company also announced details of a 10-for-one share split designed to improve liquidity of Nestl shares, which rose about one per cent in morning trading to SFr 3,584. Net profit was SFr 5.76bn ($3.41bn) against SFr 4.7bn, in line with expectations. Sales rose 9 per cent to SFr 81.4bn - driven by strong real internal growth of 4.4 per cent compared with 3.6 per cent last time. Nestl said fourth-quarter growth was five per cent, beating rivals Unilever and Danone and reflecting the company's decision to withdraw from slow-growing agribusinesses and move into the faster-growing field of nutrition and well-being products. Profit margins improved from 6.3 per cent to 7.1 per cent. Net debt dropped to SFr3bn from SFr6.2bn, reflecting strong cash flow generation and tighter control of working capital. Emerging markets including Eastern Europe, Asia and Latin America performed particularly well. Nestl attributed the buoyant results to efficiency improvements made in purchasing, supply chain management and the ongoing restructuring. Peter Brabeck, chief executive, said: "Nestl has achieved record levels of growth and profits. We are now harvesting the results of our relentless push for continuous improvement."

12 OEAEL

Last year, Mr Brabeck unveiled one of the largest reorganisations in Nestl's history. Called the Globe project, it was designed as the successor to Nestl's MH 97 programme, which has reduced the cost base by SFr2.2bn over the past three years. Mr Brabeck had little new information on Nestle's $33.50 per share offer for Ralston Purina, the US pet food group. He said Nestl was in the process of filing its case with various regulators and awaiting approval of the deal from Ralston Purina shareholders. Earnings per share rose 22.1 per cent from SFr122.1 to SFr149.1. The dividend was raised from SFr 43 to SFr55, an increase of 27.9 per cent. QUESTIONS FOR DISCUSSIONS 1: What are emerging markets? 2: Suggest why agribusiness is a slow growing sector while nutrition and well being is a fast growing field. 3: Explain why the shift from agribusiness to nutrition and well being has improved growth performance. 4: How would profit margins be influenced by efficiency improvements in purchasing and supply chain management? CASE STUDY 5 ORACLE: GLOBALISATION, VIRTUALISATION AND MANAGING INDIVIDUALS Denise Jepsen Like many large organisations, Oracle Corporation, the worlds second-largest software company, is grappling with issues relating to management of a worldwide workforce. Headquartered in the United States and led by founder and Chairman Larry Ellison, annual revenues exceed US$ 9.7 billion. 1. The company now operates globally in 44 countries with 60 offices, with approximately 43 000 employees worldwide. 2. Originating in North America, Oracles software applications follow technological expansion into global markets. As knowledge management becomes a science and global knowledge-based economies emerge, applications suppliers such as Oracle enable businesses to benefit from the technologies. Originally a company of many separate business groups, each managed by selfreliant autonomous generalists, Oracle has become a company of interdependent business groups managed by specialists and valuing knowledge and teamwork. Oracle has all its business application products on the Internet, and now boasts 100 per cent globalize IT systems, which are hosted in the US. Marketing, customer support, sales, buying and HR functions are carried out on the Internet by Oracle employees around the world. Strong leadership and direction are provided by head office, while empowerment within geographic regions is encouraged. Global initiatives at times require change management when implemented in other parts of the world.
13 OEAEL

The company is structured using both functional lines and geographic regions, resulting in a complex organisational structure. 3. Sales and consulting functions are organised around geographic regions (Africa/Middle East, AsiaPacific, Europe, Latin America and North America), with multiple countries reporting in each region. Other support functions such as marketing, human resources and legal divisions have dual reporting lines. They report vertically through global (not geographic) divisional vice presidents. Their primary accountability is to their globally headed vertical line of business, but they also have client responsibility to their local countries. Consequently, countries are headed by a managing director who has direct influence over the sales and consulting organisations reporting to him or her, and indirect influence over the support functions that report vertically. Adding further complexity, technology groups such as product development and information technology teams report globally with few geographic limitations. Such a structure differs markedly from organisations of the 1980s, including Oracle itself, in which all functions reported to the country managing director. Both global and geographic virtual teams are dynamically formed across the organisation for purposes of client focus, problem solving, projects or company initiatives. This means individual team members come and go from the team as projects, needs and circumstances change. Technology as an enabler Teams are able to operate globally owing to leading-edge communications technology. With 100 per cent of employees online, communication is achieved through email, regular conference calls and net meetings. Additional regular communication globally using interactive web seminars provides an effective way to keep up to date and to clarify understanding of functional directions. Smaller global teams and virtual teams take the opportunity to meet at a mutually convenient location when projects require a concentrated effort over several days. Such meetings will generally include team building as part of the meeting agenda. A vast array of information is provided and accessible on the company web site. Leadership Early attempts at globalisation created some initial tensions. Strong leadership in Oracle in earlier days introduced global initiatives prescriptively, which resulted in some resistance by country management. Like many national managers, local country managers sometimes felt their local differences werent given due consideration. They were most familiar with the local territory, customs, culture and language and felt head office were not in touch with the local conditions. This problem has evolved over time with the increased emphasis on change management and a consultative process at both geographic regional level and globally. Such tensions are a result of an expected resistance to change. Tensions tend to resolve as trust and knowledge build. The directive approach has become more consultative: a plan rather than a directive becomes a proposed plan, local feedback is requested and plan developments are regularly communicated. 4 Global management has matured.

14 OEAEL

Remote team management Managing teams remotely is the logical consequence of the organisational structure for some teams in Oracle and other, similar organisations. For example, a global information technology (IT) manager based in Melbourne may have staff reporting to him or her from Singapore, Taiwan, India, Sydney and other parts of the world. In some instances such team members may operate alone in their country of residence or have team colleagues in their own location. Oracle provides managers with training in how to manage performance remotely, and how to engender a sense of belonging across vast distances, creating a team with common purpose. Cross-cultural issues are directly addressed and differences between countries are taught using a Cultural Intelligence specialist. Country-specific cultural issues such as communication (verbal, written, nonverbal and body language), time orientation and power distance (degree of respect for leaders) are considered. Managing individuals Increasingly, global and AsiaPacific managers have common and specific standards for employee performance, no matter where in the world team members reside and what individual and country cultural differences exist. Functional Scorecards for team performance are being introduced in some lines of business, supported by online reporting tools. 5 Managers are encouraged to implement individual development plans, provide regular feedback (including six- or twelve-monthly appraisals), use non-financial rewards and coach employees. The company provides generous benefits and invests in developing their employees. Online tools and training programs support employee development. Managers are developed through both internal Oracle and external programs, and are offered self-assessments and survey tools to highlight potential areas for further development. Oracle attracts high-quality, talented applicants for vacancies and boasts low employee turnover. Senior managers have the opportunity to network with others through industry and peer networks, mixing with others experiencing similar changes in their organisations. This provides an effective way to maintain perspective and to develop effective personal and organisational strategies for managing the changes that globalisation brings. Organisational goals reflect market changes Oracle has evolved from a company primarily focused on database technology to an organisation that supplies both technology and applications solutions for businesses. With that change has come, the need to better understand their customers and to work more closely in partnerships with their clients. This development has had implications for Oracle employees, who have changed their focus accordingly, listening and responding to customers requirements and working more closely with their client groups. Over time, subtle and not-so-subtle market changes will continue to affect the business, which needs to be able to adapt and respond flexibly. Summary Globalising a workforce is not as simple as issuing directives from head office and expecting immediate compliance. A great deal of effort at all levels is required to deal with the technology, communications and management issues that arise from a complex globalised workforce. Oracle

15 OEAEL

continues to work to build a workforce that can respond to changing customer and organisational needs to support the organisation and its customers around the world. Questions for discussions 1. What is a traditional structure for an international organisation? How might Oracles structure differ from a traditional international structure? 2. If you were the IT manager in Melbourne, what non-technical training or development might help you manage your workplace challenges?

3. Not all international organisations have the technology of Oracle. Speculate on the impact of that technology as an enabler for Oracle. How does an international organisation without these technologies manage its globalised workforce? 4. Oracle is on the leading edge of technology. What lower technology activities do other organisations engage in? 1 Oracle Corporation (2003); Oracle Asia Pacific www.oracle.com (accessed 24 January 2003). CASE STUDY 6 NETNOIR INC. E. David Ellington, 39, is the cofounder, chairman, and CEO of NetNoir Inc., a San Francisco multimedia services company focusing on black culture and lifestyle and providing marketing opportunities, market research, and media solutions to other companies targeting the AfricanAmerican market. He holds a bachelor's degree in history from Adelphi University, a master's in comparative politics and government from Howard University, and a J.D. from Georgetown University Law Centre. Prior to founding NetNoir, he practiced entertainment law in Los Angeles. He writes as follows. Before starting my company, NetNoir, I practiced entertainment law. Then I was introduced to a friend of a friend who was getting a master's in computer science and taught me a great deal about CD-ROM technology and multimedia. Eventually, we decided to build a business together. NetNoir, an online multimedia service based in San Francisco, focuses on black culture and lifestyles and provides market research and media solutions to other companies that target the same market. As my business became successful, I saw that many people of colour were not participating in the digital revolution. I saw a need in the community that I wanted to address. Since I come from a pretty humble background myself, I tried to figure out how to bring people of colour and other disadvantaged folks into this industry, where they can participate and not get squeezed out. our group***************

16 OEAEL

In 1997 I met Dan Geiger, consultant to the Bay Area's Local Economic Assistance Program (LEAP), who wanted to start a training program to get minorities involved in Internet businesses. I told him, "No, that's a mistake." Nonprofits and government entities are not taken seriously in this industry. What they do best is raise money. What we do best, is to train people and give them jobs. A Model that Benefits Everyone Because I run an Internet company, I know there is a need for skilled workers at a certain level -for example, programmers who have had some formal education and who can write code. However, in this burgeoning industry, I also know there is a middle layer of jobs, such as managing Web sites, that does not require any kind of degree to do. So, with Dan and LEAP, we founded OpNet (www.opnetwork.org), a model that benefits both the new-media industry and low-income youth. What we're trying to do is make sure that disadvantaged young people between the ages of 17 and 24 get trained not just for a job, but for a career shift. We plug these people into work that usually includes stock options, so they can participate financially in the new economy. There's a five-week training component in professional skills: how to use a laptop, how to use Photoshop and do Java scripting and basic coding in HTML. There's also some basic social training, such as learning how to answer a phone, how to dress appropriately, and how to get to work on time in the morning. After that, we get the trainees into companies. We characterize it as an internship, not a job, because that allows the employer to get out of it if the person doesn't work out. What has happened, though, is that the internships have turned into permanent jobs. 80% of our trainees have been placed in internships, and about 55% subsequently obtained full-time employment. Bring People into the Mainstream. Once people learn these basic skills, those skills can be upgraded over time -- they just have to have the desire to learn. And it's not just about working for Internet start-ups. Trainees can work anywhere. They can work at a bank, because banks need people to run their Web sites. They can work in city government -- people are needed to run the city's Web sites and change the content every day. OpNet has staff members who maintain relationships with each of the graduates and have weekly meetings with them. There's a contract, and they're monitored heavily. If they're not performing, they get fired. We also maintain a regular dialogue with the employer, so there's a burden on the trainees, and they're tracked to make sure they perform. But OpNet isn't just about training. OpNet is about wealth creation. The nature of Internet start-ups is such that while you may get lower pay, you also get stock options. That's where you create real wealth. That's what I wanted these folks to get exposed to. Moving beyond the focus on "ordinary income," OpNet also teaches trainees how to make investments, and how to manage this new money they're getting, because they've never had it before.

17 OEAEL

We have people who were literally flipping burgers six months earlier, making $18,000 a year, who got into the program and are now making between $30,000 and $60,000 a year. I have one kid who's now making $75,000! They're doing stuff they never dreamed of. We're trying to get people into mainstream activity, to become self-sustaining and self-sufficient. Build a Sustainable Organization I'm cofounder and chairman of this organization, but I'm not in a position, financially, to sustain it all by myself. My contribution consists more of time and support, providing data to people and making relationships happen. OpNet was initially funded by LEAP, which runs Community Bank of the Bay. We also went out and raised a lot of money. I've gotten a lot of friends who are successful businesspeople to write checks to the organization. We've obtained a variety of grants from foundations. One of our biggest grants came from the Women's Health Network, to train more women. We're actively recruiting young women for this program. Dan Geiger, OpNet's cofounder and CEO, comes from the non-profit side, but he has an M.B.A. and we're very like-minded. We want nonprofits to do good work, but we also want them to be much more accountable and entrepreneurial. We want them to be able to generate their own revenue and try to be sustainable, without always having to beg for grant money. So we're looking at all kinds of revenue models. For instance, there's job placement: If you want OpNet interns, you may have to pay us a fee as well as their salaries. Now people are approaching us, nationally and internationally, to try to franchise this model. It may be possible to have people fund our expertise, to get us to help them build an OpNet in their community in exchange for a franchise and/or setup fee. We're working on the model now. We have both a budget and a growth target. Share Wealth to Improve Lives My message to entrepreneurs is, Bring financial resources to an existing non-profit, or start one your self. Second, give time personally. It's one thing to sit at your desk and write a check and another thing to make the organization part of your life. The entrepreneurial resources of the participants, in helping to drive the non-profit, are equally as important as writing checks. Third, bring the same level of expectation, in terms of entrepreneurial perspective, to the non-profit in which you're involved. Ultimately, philanthropy is self-serving. As a businessperson, I'm focused on turning NetNoir into a business and providing a return on investment for my investors. Through OpNet, I now have a great "feeder" of talent for my business as it grows, and other businesses look to OpNet for new talent the same way. But there has to be personal satisfaction, too. And personal satisfaction comes from community activity, encouraging others to do well and improve their own lives. There's nothing more rewarding than that.

18 OEAEL

We are in the greatest economic boom in our country's history. In this economy, I would hope that entrepreneurs share their wealth and stand as examples so that more people can benefit. As more people benefit, society improves and more people get a shot at a piece of the pie. It helps us all. It may even encourage more young people to become entrepreneurs. In my mind, that would be great. DISCUSSION QUESTIONS 1. Would you subscribe to the view that organisational growth depends on what it draws from Society? 2. Should an organisation subscribe to the development of those who are socially handicapped and at what stage? 3. Giving it back to the Society with full fervour is being too idealistic for an organisation! Please comment. 4. Does it augur well to work for a social cause through a non profit organisation when you are in business?

CASE STUDY 7 RESERVE MANAGEMENT The approach to reserve management as part of exchange rate management and, indeed, external sector policy underwent changes with the adoption of the recommendations of the High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan) in 1992. The focus in deciding on the level of reserves was in fact shifted to ensuring a reasonable level of confidence in the international financial and trading communities in general and a plethora of factors that contribute to such confidence in particular. The extract given below provides evidence of this shift in the approach. It has traditionally been the practice to view the level of desirable reserves as a percentage of the annual importssay reserves to meet three months imports or four months imports. However, this approach would be inadequate when a large number of transactions and payment liabilities arise in areas other than import of commodities. Thus, liabilities may arise either for discharging short-term debt obligations or servicing of medium-term debt, both interest and principal. The Committee recommends that while determining the target level of reserve, due attention should be paid to the payment obligations in addition to the level of imports. The Committee recommends that the foreign exchange reserves targets be fixed in such a way that they are generally in a position to accommodate imports of three months. In the view of the Committee: The factors that are to be taken into consideration in determining the desirable level of reserves are the need to ensure a reasonable level of confidence in the international financial and trading communities about the capacity of the country to honour its obligations and maintain trade and financial flows; the need to take care of the seasonal factors in any balance of payments transaction with reference to the possible uncertainties in the monsoon conditions of India; the amount of foreign currency reserves required to counter speculative

19 OEAEL

tendencies or anticipatory actions amongst players in the foreign exchange market; and the capacity to maintain the reserves so that the cost of carrying liquidity is minimal. As mentioned in the RBIs Annual Report, 199596, with the introduction of the market determined exchange rate, a further change in the approach to reserve management was warranted and the emphasis on import cover was supplemented by the objective of smoothing out the volatility in the exchange rate. Against the backdrop of currency crises in East Asian countries in 1997 and in light of country experiences of volatile cross-border capital flows, it was felt that there was need to take into consideration a host of factors, including the shift in the pattern of leads and lags in payments/receipts during exchange market uncertainties. The RBI Annual Report, 199798, emphasized that besides the size of reserves, the quality of reserves also assumed importance. Thus, unencumbered reserve assets (defined as reserve assets net of encumbrances such as forward commitments, lines of credit to domestic entities, guarantees, and other contingent liabilities) were required to be available at any point of time to the authorities for fulfilling various objectives assigned to reserves. As regards management of external liabilities, the policy of the RBI to keep forward liabilities at a relatively low level as a proportion of gross reserves and the emphasis on prudent reserve management were highlighted in the RBIs Annual Report, 199899. The overall approach to management of Indias foreign exchange reserves had undergone a further change during 19992000, reflecting the changing composition of balance of payments and liquidity risks associated with different types of flows as elaborated in the RBI Annual Report, 19992000. This is evident from the extract as below: The policy for reserve management is built upon a host of identifiable factors and other contingencies, including, inter-alia, the size of the current account deficit and short-term liabilities (including current repayment obligations on long-term loans), the possible variability in portfolio investment, and other types of capital flows, the unanticipated pressures on the balance of payments arising out of external shocks and movements in repatriable foreign currency deposits of non-resident Indians. In recent years, while focusing on prudent management of foreign exchange reserves, there has been an emphasis on liquidity risk associated with different types of flows. In this context, the traditional approach of assessing adequacy of reserves in terms of import cover has been broadened to include a number of parameters that take into account the size, composition, and risk profiles of various types of capital flows, as well as external shocks to which the economy is vulnerable. Governor Jalans statement on Monetary and Credit Policy (April 29, 2002) provides an upto-date and comprehensive view on the approach to reserve management: A sufficiently high level of reserves is necessary to ensure that even if there is prolonged uncertainty, reserves can cover the liquidity at risk on all accounts over a fairly long period. Taking these considerations into account, Indias foreign exchange reserves are now very comfortable. . . . the prevalent national security environment further underscores the need for strong reserves.

20 OEAEL

We must continue to ensure that, leaving aside short-term variations in reserves level, the quantum of reserves in the long-run is in line with the growth of the economy, the size of risk-adjusted capital flows and national security requirements. This will provide us with greater security against unfavourable or unanticipated developments, which can occur quite suddenly. The above discussion points to evolving considerations and indeed a paradigm shift in Indias approach to reserve management. The shift has been from a single indicator to a multiple indicators approach. QUESTIONS FOR DISCUSSIONS 1. 2. 3. 4. Why was focus created towards the reserves? What was the recommended desirable level of foreign exchange reserves? What contingent factors was the policy of reserve management based on? Do you agree that there has been a paradigm shift in Indias approach towards reserves? Justify.

Forward Commitments. Contractual obligations to perform certain financing activities upon the satisfaction of any stated conditions. Usually used to describe a lender's obligation to fund a mortgage Lines of Credit. A type of mortgage loan from which borrowers can write a check or draw funds. Some lines of credit are also balloon loans. Usually the borrower is given 5 to 10 years to use the line of credit. After this period, many lines of credit require the borrower to pay the loan in full. Others may require the loan to be paid in full over the next 10 to 15 years. CASE STUDY 8 PROFESSIONAL VIDEO MANAGEMENT Ever since the introduction of the first home video systems for television, Steve Goodman has dreamed about manufacturing his own video system for professionals. During the early years of home video, Steve watched a lot of his favorite old movies on his home video and planned the eventual development of his own video system. He intended it to be used primarily by television stations, advertising agencies, and other individuals and groups that wanted the best in video systems. The overall configuration of this system is shown in the illustration. The basic system includes a comprehensive control box, two separate videotape systems, a video disk, and a professional-quality television set. All these devices are fully integrated. In addition, the basic system comes with an elaborate remote control device. This device can operate video systems, the video disk, and the TV system with ease. The remote control device works by sending infrared signals to the control box, which in turn controls the other devices in the system. Steve's unique contribution to the video systems is the control box. The control box is an advanced microprocessor with the ability to coordinate the use and function of the other devices attached to it.
21 OEAEL

Steve's professional video system has numerous advantages over similar systems. To begin with, special effects can be introduced easily. Images from the video disk, one of the video systems, and the television system can easily be placed on the other video system. In addition, it is possible to connect the control box to several popular microcomputers including the Macintosh, the IBM PC, the Radio Shack Model 3000, and advanced Zenith and Coleco computer systems. This makes it possible to develop attractive graphics on the microcomputer and to transfer them directly to the video system. It is also possible to hook a stereo system to the control box to integrate the highest quality stereo sound into the system and record it on one of the video systems. The two video systems also offer remarkable flexibility in editing. Several special editing buttons were placed on the remote control station. It is possible to first record a program on one video system and then edit it by using the other videotape system to add and delete sections. One of the best features of Steve's professional video system is the price. The basic system, including the control box, both video systems, the video disk, and the television system, has a retail price of $1,995. Steve found manufacturers for the television system, the control box, and the video disk system in the United States. Because videotape systems are more popular, Steve had more choices. After extensive research, he was able to eliminate all of the potential suppliers but two. Both of these suppliers are Japanese companies. Toshiki is a new company located outside of Tokyo, Japan. Like other suppliers, Toshiki offers quantity discounts. For quantities ranging from 0 to 7,000 units, Toshiki would charge Steve a price of $250 per video system. For quantities that ranged between 7,001 and 8,000 units, the per unit cost would be $230. For quantities ranging from 8,001 to 20,000 units, the unit price drops to $220. For more than 20,000 units, the, per unit price of the video systems would be only $210. The other Japanese supplier is Kony. Although Kony originally started in Japan, also outside of Tokyo, it now has offices and manufacturing facilities around the world. One of these manufacturing facilities is located less than 100 miles north of Atlanta, Georgia. Like Toshiki, Kony offers quantity discounts for its videotape systems. For quantities ranging from 0 to 1,000, Kony's per unit cost is $250. For quantities that range from 1,001 to 5,000 units, the unit cost is $240; and for over 5,000 units, the unit cost drops to $220. Because Kony has manufacturing facilities located in the United States, the cost to place an order and the delivery time are much more favorable than they are with Toshiki. The estimated per order cost from Kony is $40, and the expected delivery time is two weeks. On the other hand, the ordering cost is higher and delivery time is longer for Toshiki. The additional paperwork and problems associated with ordering directly from Japan would increase Steve's cost to $90 per order. Furthermore, the delivery time for Toshiki is three months. Steve estimates that his carrying cost would be 30%. This is due primarily to storage and handling cost as well as the potential for technological obsolescence. For the first year or so of operations, Steve decided to sell only the basic unit: the control box, the television set, the video disk, and the two video tape systems. The demand for the complete system was fairly constant during the past six months. For example, June sales were 7,970; July sales were 8,070; August sales were 7,950; and September sales were 8,010. This demand pattern is expected to continue for the next several months.

22 OEAEL

DISCUSSION QUESTIONS 1. What are the reorder points for Kony and Toshiki? 2. If you were Steve, which company would you choose to supply the videotape systems for your professional video system? 3. Steve is considering several alternative strategies. The first would be to sell all of the components separately. The second strategy would be to modify the control box to allow other videotape systems to be used, as well as the video tape systems supplied by Steve. In general, what impact would the adoption of these strategies have on the reorder point and inventory control for Steve? CASE STUDY 9 HOW TO REALIGN ERP APPLICATIONS AND SLASH COSTS By Mel Duvall September 2, 2004 Here's how Zarlink, a semiconductor maker, met critcal application needs after being told to cut IT spending by 40 percent. The company beat that figure by freezing SAP developmentand increased productivity with specialized reporting apps and databases. Bill O'Connor knew something was wrong when he was summoned to the chief executive's office at Zarlink Semiconductor in April 2001. The economic downturn, in particular the collapse of the technology sector, had hit the Ottawa-based chip manufacturer hard. Revenues had fallen by nearly half from the previous year's levels. Red ink was staining the balance sheet. The market didn't know it yet, but Zarlink would report a first-quarter loss of $116 million (U.S.) on revenue of $105 million for the quarter ending June 29, 2001. That was a stark about-face from the profit of $28 million on revenue of $184 million the company had earned in the quarter a year
23 OEAEL

earlier. Worse, reports from the field indicated that fiscal 2002 would be a bloodbath for the semiconductor industry. The message that newly hired CEO Pat Brockett delivered to O'Connor, his chief information officer, was blunt: Spending in the company's information-technology department had to be slashed, fast and deep. "It wasn't just a matter of cutting spending," says O'Connor. "I was also being asked to increase the level of productivity." Brockett gave O'Connor his marching orders: He had one month to come up with a plan. The company had other challenges. Zarlink had just been spun off from telecommunications company Mitel Networks as a pure-play semiconductor fabricator. During the technology boom in the late 1990s, Zarlink had acquired several competitors but never fully integrated their systems. That meant there was no single view of the newly independent company's financial reporting systems. Reports and records had to be pulled together by analysts to get a complete picture of the company's far-flung operations in North America, Europe and Asia. Brockett, who had headed up National Semiconductor's $1.5 billion analog and wireless group, was hired to begin the new chapter at Zarlink. O'Connor was also fresh onto the scene from Singapore, where he had led Mitel's Asian technology operations. Zarlink's previous CIO had left after the split from Mitel. O'Connor had a background in finance, and Brockett wanted someone who knew how to crunch numbers to plot the company's technology strategy. Zarlink's primary problem, O'Connor recalls, is that as a result of the Mitel spin-off, the company inherited a technology infrastructure built for a much larger enterprise. Mitel had annual revenue of $1.6 billion just before the split, and its semiconductor division was responsible for about $600 million of that figure. But with the economic downturn, Zarlink was on target to record only $222 million in revenue in fiscal 2002. Chief among the inherited systems: an SAP enterprise resource planning system installed in 1999 and 2000 at a cost of $24 million. Of Zarlink's 112-person information-technology staff, 36 were dedicated to the SAP system. The company's annual technology operating budget was $20 million, of which about $6 million was directly attributed to SAP. Not only was SAP eating up a huge chunk of the company's technology budget, it was not delivering an appropriate return on investment. "We essentially had a system that was built for a company twice our size, and we weren't getting the benefits out of it that we should have been," O'Connor says. For $24 million, Zarlink's management expected to have on-demand access to the company's key performance metrics, such as daily sales, receipts, sales backlog and inventory. But because SAP had never been fully integrated with the rest of the company's core applications, such as budgeting and forecasting, inventory management and human resources, reports had to be cobbled together by analysts each week. All told, the company had 70 to 80 different core applications running its operations.

24 OEAEL

"The I.S. organization was struggling when Bill came in," says information-systems manager Macrae Morse, who lived through the spin-off from Mitel. "We were working with I.S. fiefdoms and as a result, there was no single sense of financial truth." Hashing Out a Plan O'Connor huddled with two senior team members, Morse and senior business analyst Paul Donnelly, to plot strategy after the meeting with Brockett. Hashing out their plan on a whiteboard, the team came up with a strategy they believed could dramatically cut costs and improve reporting capabilities. They also knew it would be controversial. Key to the strategy: Freeze further deployment of the SAP system. It would essentially serve as a transaction engine going forward. Halt other non-critical application maintenance and development. Implement a business intelligence strategy to pull information out of existing applications and put in into a central data warehouse, as opposed to rewriting applications to make them more functional. Institute a 90-day development-to-implementation cycle to generate new reporting applications. The business case projected reducing technology spending by $3 million in the first year to $17 million, followed by a further reduction of $3 million in year two and $2 million in year three. By 2004, O'Connor believed he could shrink annual technology spending to $12 million, a savings of about $17 million over the three years. O'Connor presented the plan at a Zarlink managers' meeting, and braced for battle. And he got it, especially from senior managers responsible for purchasing the SAP system. "Doesn't it make more sense to leverage its capabilities rather than freeze development?" they asked. O'Connor's proposal to build custom business intelligence applications to pull information out of the existing applications raised red flags. Some executives were worried about development costs and project failure. "There was a lot of angst around that boardroom table, and most of it was directed at me," O'Connor recalls. Only one person in the room fully supported the plan, but it was the voice that counted. "I love it," Brockett said. O'Connor was told to get moving. The I.T. team met to go over the plans. There was a tremendous backlash. Critics said that freezing further development of the SAP system was a colossal waste of money and good technology. SAP, they argued, should be the primary tool to gain intelligence on the corporation, not just an engine to input orders or track receipts. For many in the 36-person SAP development and support team, O'Connor's pronouncement was tantamount to getting a layoff notice. O'Connor knew he would have to watch for friendly fire. If the project ran into even the slightest problem, a small army of threatened workers would be waiting to pounce.

25 OEAEL

The first application had to be rock solid and important enough to quickly win converts. The initial phase involved installing the data warehouse and selecting the business intelligence tools. The team picked Oracle's 8i platform for the database and Cognos for the reporting software. SAP's Business Information Warehouse was considered, but the cost was more than $1 million for the software, hardware and development, compared to just over $100,000 for the Cognos implementation, according to O'Connor. He also liked the fact that Cognos was based in Ottawa and its experts could be called upon quickly. For the first reporting tool, O'Connor decided to build a daily report that could show the company's bookings, billings and order backlog. O'Connor knew the reporting tool would not be accepted unless it was validated. His first project hire was Karyn Houle, an analyst from the company's finance department whose job was to verify that the daily Cognos reports were accurate. The reporting tool was completed within the 90-day time frame, and it was an immediate hit with senior management. Rather than waiting until the end of the week to see an Excel spreadsheet on sales, billings and order backlog, they were now getting graphical reports every morning with the previous day's numbers. The tool also allowed managers to easily drill down to see such items as sales by product, region or customer. The finance department continued to produce its spreadsheet reports in parallel with the new daily reports, but after two months of validating the results, the management team decided to rely solely on the interactive reports. "That was a watershed moment," O'Connor says. "Until that point, there was zero interest in the finance community in what we were doing. Now we had their attention." Over the next two years, the development team methodically produced a stream of other reports and scorecards for areas such as cash flow, accounts receivable, revenue budget and forecast, inventory, material budget and forecast, head count, and compensation planning and analysis. The reports were all designed to be self-serviceeasy enough for managers to use without the need of technical assistance. All development was kept to the 90-day cycle, increasing credibility as each new report was rolled out. In addition, making changes to the Cognos reports was relatively simple. Houle says a change could typically be made in four to six hours, compared to the four to six weeks required to change SAP. The impact was soon felt on the bottom line. Since the SAP system had been relegated to a transaction engine, O'Connor was able to reduce the number of licensed users from 1,090 to 260. In addition, the number of technology staff dedicated to SAP was cut from 36 to just one. No changes were allowed to the SAP system, and it continues to function reliably. Where possible, redundant report applications for areas such as inventory and personnel were eliminated along with their support staff. By the beginning of 2004, O'Connor's I.T. head count had been reduced from 112 to just 34. The $12 million annual-budget target was achieved and taken further. Fiscal 2004 technology expenditures came in at around $7.6 million. The most recent run-rate is $1.5 million per quarter, or $6 million per year, a 70% reduction from 2001 levels. In total, O'Connor says the company invested about $500,000 in the business intelligence project over three years and has generated about $13 million in direct annual savings. Ray Homan, vice
26 OEAEL

president of high tech industries for SAP, maintains Zarlink might have gained greater business benefits if it had expanded the use of sap in areas such as business intelligence, but he admits that business pressures may have forced the company's hand. "At the time the decision was made, it was probably prudent," he says. "It may not turn out to be the best decision over the long term, though." In addition to the information-technology department savings, there have been other significant benefits. Since analysts were no longer required to pull together weekly reports, the finance department was able to cut its staffing roughly in half. The team also implemented a self-service human-resources application that also allowed staff cuts. In all, O'Connor estimates that about $10 million in annual savings were generated elsewhere in the company as a result of the technology overhaul. The staff cuts were difficult but necessary, according to O'Connor. "One of the keys to our success is that each time an application was implemented, we went back through the process and made sure all of the savings were harvested," he says. There is no denying that the past three years have been heart-wrenching for many of the people laid off by Zarlink. But rather than create a dysfunctional technology department, O'Connor maintains the opposite is true. Houle concurs: "We feel we're playing a key role in the company's drive to profitability and future growth." QUESTIONS FOR DISCUSSIONS 1. Key performance metrics were not integrated with costing, budgeting, inventory etc. How was it effecting the requirements versus the cost? 2. What were the points in the key strategy worked out by OConnor and his team, that they were confident about and for what? 3. Was the cost reduction plan approved and was it at the cost of development plans and project failures? CASE STUDY 10 CASE: THE CAMPUS WEDDING On March 31 of last year, Mary Jackson burst into the family living room and announced that she and Larry Adams (her college boyfriend) were going to be married. After recovering from the shock, her mother hugged her and asked, When? The following conversation resulted: Mary: April 22. Mother: What! Father: The AdamsJackson wedding will be the social hit of the year. Why so soon?

27 OEAEL

Mary: Because on April 22 the cherry blossoms on campus are always in full bloom! The wedding pictures will be beautiful. Mother: But honey, we cant possibly finish all the things that need to be done by then. Remember all the details that were involved in your sisters wedding? Even if we start tomorrow, it takes a day to reserve the church and reception hall, and they need at least 17 days notice. That has to be done before we can start decorating the church, which takes three days. An extra $100 contribution on Sunday would probably cut that 17-day notice to 10 days, though. Father: Ugh! Mary: I want Jane Summers to be my maid of honor. Father: But shes in the Peace Corps. in Guatemala, isnt she? It would take her 10 days to get ready and drive up here. Mary: But we could fly her up in two days. and it would cost only $500. She would have to be here in time to have her dress fitted. Father: Ugh! Mother: And catering! It takes two days to choose the cake and table decorations, and Jacks Catering wants at least 10 days notice prior to the rehearsal dinner (the night before the wedding). Mary: Can I wear your wedding dress, Mom? Mother: Well, wed have to replace some lace, but you could wear it, yes. We could order the lace from New York when we order the material for the bridesmaids dresses. It takes eight days to order and receive the material. The pattern needs to be chosen first, and that would take three days. Father: We could get the material here in five days if we paid an extra $25 to airfreight it. Mary: I want Mrs. Watson to work on the dresses. Father: But she charges $120 a day! Mother: If we did all the sewing, we could finish the dresses in 11 days. If Mrs. Watson helped, we could cut that down to six days, at a cost of $120 for each day less than 11 days. Mary: I don t want anyone but her . Mother: It would take another two days to do the final fitting. It normally takes two days to clean and press the dresses, but that new cleaner downtown could do them in one day if we pay the $30 charge for express service. Father: Everything should be completed by rehearsal night, and thats only 21 days from now. I bet that will be a busy day. Mother: Weve forgotten something. The invitations. Father: We should order the invitations from Bobs Printing Shop, and that usually takes 12 days. Ill bet he would do it in five days if we slipped him an extra $35. Mother: It would take us three days to choose the invitation style before we could order them, and we want the envelopes printed with our return address. Mary: Oh! That will be elegant.
28 OEAEL

Mother: The invitations should go out at least 10 days before the wedding. If we let them go any later, some of the relatives would get theirs too late to come, and that would make them mad. Ill bet that if we didnt get them out until eight days before the wedding, Aunt Ethel couldnt make it, and she would reduce her wedding gift by $200. Father: Ugh! Mother: Well have to take them to the post office to mail them, and that takes a day. Addressing would take four days unless we hired some part-time help, and we cant start until the printer is finished. If we hired someone, we could probably save two days by spending $25 for each day saved. Mary: We need to get gifts to give to the bridesmaids at the rehearsal dinner. I can spend a day and do that. Mother: Before we can even start to write out those invitations, we need a guest list. Heavens, that will take four days to get in order, and only I can understand our address file. Mary: Oh, Mother, Im so excited. We can start each of the relatives on a different job. Mother: Honey, I dont see how we can do it. Why, weve got to choose the invitations and patterns and reserve the church and... Father: Why dont you just take $1,500 and elope. Your sisters wedding cost me $1,200, and she didnt have to fly people up from Guatemala, hire extra people, use airfreight, or anything like that. QUESTIONS 1 Given the activities and precedence relationships described in the (A) case, develop a network diagram for the wedding plans. 2 Identify the paths. Which are critical? 3 What is the minimum-cost plan that meets the April 22 date? *******************

29 OEAEL