American Airline

The most cited case of the successful strategic use of IT is probably American Airlines (AA). In the 1970s
airlines in the USA were in a fiercely competitive situation which was about to worsen on account of
deregulation. What was the basis on which airlines competed?

On any given route, say Boston to Chicago, airlines mostly used the same Boeing 727 aircraft, employed
mostly identical cabin crew trained to smile with seemingly identical smiles and mostly used the same airport
terminals. It seemed that cost must be the basis of competition.

Consequently AA developed a computerized reservation system with the intention of reducing clerical staff.
The system would carry out all the main clerical tasks associated with booking a seat on a flight: record seat
availability, issue confirmation letters, issue invoices, etc. When a travel agent contacted AA to make a
booking on behalf of a passenger, a clerk sitting at a computer terminal would enter the details into the system
which already contained data about flights. The automation of the process would reduce the number of clerks
needed.

The system was logical, and successful in achieving cost reductions. But the next step was revolutionary. The
quantum leap was that the terminals were installed on the travel agents' desks. The purpose was the same as
before: there would be further cost savings because the travel agents, rather than AA staff, would be doing
the clerical work. However, this move took AA into new territory.

The system gave AA competitive advantage not because of cost reductions but because it transformed the
way business was done and gave a significantly better service to travel agents and passengers. The travel
agent much preferred the system to the previous telephone manual procedures; it saved his time in looking up
manuals of fares and schedules and allowed him to make immediate bookings. Passengers also preferred the
new system; it allowed them to know immediately whether seats were available on particular flights and
generally gave a range of other useful facilities. The result was that AA's market share increased.

The system had another significant advantage for AA. It allowed them to use differential pricing. The system
gave up-to-the-minute booking information. Knowing that a particular flight was likely to be half full, AA
were able, at short notice, to offer discount seats; knowing that another flight was likely to be full, all further
discount seats could be withdrawn. On the same flight AA were able to pick up customers willing to pay
$1,000 and those willing to pay no more than $100. `Cut-price' rival airlines were filling their flights entirely
at the $100 price. The result was inevitable: greater profitability for AA, bankruptcy for some others.

However, the story went much further. It was difficult for other airlines to catch up. They would need a lot
of money and time to develop their own system. And even when they had systems of their own, they still
had to persuade travel agents to have other terminals installed in their branches. Some airlines did go ahead
with their own systems. Others negotiated with AA to include their own flights on the AA system. This
suited AA well. If an AA flight was full the travel agent could find a seat on another airline; if the passenger
wanted to fly beyond Chicago to Cedar Rapids, a booking from an AA flight through to a Mississippi Valley
Airlines flight could be made in the one transaction. All in all it added to the service given to customers and
made it unnecessary for travel agents to consider installing other systems. Moreover, AA charged these other
airlines a fee whenever one of their seats was booked on AA's system.

Other issues arose which demonstrate the major role information systems play in the airline industry. One
was the question of the presentation of flight booking information. AA listed the airlines in alphabetical
order and so AA was always the first to appear on the screen. Research showed that 90% of all bookings
were made on the basis of the first screen shown. Other airlines took legal action to ensure that they had a
reasonable chance of being the first airline shown.

The situation is now that AA make a significant proportion (in some years a majority of) their profit from the
reservation system. The Chief Executive Officer of AA is alleged to have said recently that, given a choice
between selling his aircraft or selling his information systems, he would sell his aircraft.
Banking Industry
A similar process was seen in the development of information systems in retail banks in the United Kingdom,
but the outcome was rather different. In the 1960s and 1970s the banks started to computerize their customer
accounts in order to improve

This led to the development of Automatic Teller Machines (ATMs) which allowed customers to take advantage
of some banking services 24 hours a day, 7 days a week, and without entering the bank. The view was that
technology was cheaper than manpower and that it would be more efficient if customers used ATMs. Like
American Airlines some banks tried to achieve competitive advantage by being the first to have a nationwide
network of machines.

However, three factors were very different. First, the system did not have the expected impact on costs. ATMs
made it easy to withdraw money, check balances, request statements, etc. so that customers used the services
more frequently. Instead of withdrawing £100 to last a week, customers would withdraw £30 every other day.
This pushed up technology costs as computer capacity needed to be expanded.

Second, it was easy (albeit expensive) for other banks to catch up would-be leaders. These other banks had
branches of their own where ATMs could be installed: the problem of persuading third parties (travel agents) to
use other systems did not exist.

Third, if customers no longer came into banks, how were banks going to sell other products such as pensions
and mortgages for which the basic current account was often a loss leader? The banks had to re-think their
marketing. This included re-training cashiers, expert in back-office transaction processing but now made
redundant by the computerization, for the very different front-office job of direct marketing.

The end result is that all banks have expensive systems: banks are spending up to 10 07o of their revenue on IT
plus additional large sums on training. Some efficiency benefits have been achieved but there is no competitive
advantage, and the banks are locked into continuing massive expenditures to maintain the systems. The main
benefits seem to have accrued to customers who are receiving a much better service. Recent belated attempts by
banks to pass on the costs of these services are meeting fierce resistance. The competitive situation is not much
changed – except that expensive systems are a pre-condition of playing the game.
Winchester Tyres
The automobile industry has become a global business. One of the effects of this was felt by the
US tyre industry around 1980 as Far Eastern competitors entered the US market. US tyre
manufacturers reacted in a variety of ways: the industry rationalised — and major IT investments
were made.

The market for tyres is in two broad segments: tyres purchased by car manufacturers for new
vehicles and tyres purchased by countrywide dealers for replacement of wornout tyres. One tyre
manufacturer, fictitiously named Winchester Tyres, installed an Electronic Data Interchange
(EDI) system to computerize the sales ordering links with the car manufacturers. EDI allows
orders to be made, delivery instructions given and invoices issued, all electronically.

Like American Airlines they installed terminals in the major car manufacturers' plants. The aim
was to gain efficiency benefits and competitive advantage. They failed on both counts.

First, the Sales clerical staff Winchester planned to eliminate had to be transferred to Marketing as
support staff for the car manufacturers in their use of the EDI systems.

Second, the car manufacturers used the system to eliminate their own inventory of tyres. Given the ability to
order tyres at short notice the car manufacturers took full advantage to adapt Just-in-Time procedures.
Meanwhile Winchester's inventory increased: stock had been shifted to Winchester who had not altered their
own manufacturing methods. Third, when inevitably other tyre manufacturers adapted EDI systems, the car
manufacturers played one off against the other, as they had always done, but EDI allowed them to do so more
efficiently. However, another tyre manufacturer constructed his system in such a way and with appropriate
discounts that he was able to pick up the steady, stable business whilst Winchester received the last-minute
unstable orders.

The overall result was that Winchester incurred the costs of the IT and the extra stock, without any
compensating benefits or competitive advantage. Worse, they had allowed another tyre manufacturer to gain a
competitive edge.

The above three examples are highly similar, involving the computerizing of links with customers where the
links are extended outside the organization and moved closer to customers. But the end results are very
different. Why did Winchester fare so ill? What are the reasons behind? What are the factors which govern the
success of IOS in a firm?