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| Title: | Europe-Swas-Artificial-Intelligence |
|
| Moderator: | HERON::BUCHANAN |
|
| Created: | Fri Jun 03 1988 |
| Last Modified: | Thu Aug 04 1994 |
| Last Successful Update: | Fri Jun 06 1997 |
| Number of topics: | 442 |
| Total number of notes: | 1429 |
353.0. "FWD: Market Trends Newsletter" by ULYSSE::ROACH (TANSTAAFL !) Wed Jul 17 1991 20:27
I N T E R O F F I C E M E M O R A N D U M
Date: 17-Jul-1991 07:07pm CET
From: BEANE
BEANE@BIGRED@MRGATE@DPD05@DPD
Dept:
Tel No:
TO: See Below
Subject: FWD: Market Trends Newsletter
<<forwarding, distribution deleted>>
Author: GIL PRESS
Date: 25-Jun-1991
Posted-date: 01-Jul-1991
Precedence: 1
Subject:
Corporate Market Analysis (CMA) is a new function within
Digital's Market Information Services Group (MISG). CMA was
asked by George Chamberlain and Terry Fink to provide A/IMG
senior management with objective and independent market
analysis, including market size and growth, market trends,
and emerging markets.
In answer to this request, CMA will produce the following:
* Market Trends: A monthly summary of key facts about market
segments and general trends in the IT industry
* Market Opportunities: A quarterly summary of fast-growth
and new IT market segments.
* Market Insights: Periodical assessments of major trends and
issues in the IT industry.
Attached are prototypes of all three publications. Your
comments will be greatly appreciated. CMA is prepared to
deliver presentations on topics discussed in these documents
or answer specific questions. Contact Gil Press @PKO (DTN:
223-5894).
MARKET TRENDS
Gil Press
Corporate Market Analysis
June 1991
Highlights
* WW to 1995: The software and services markets will grow
annually by 17% and 13.6%, respectively, while the hardware
market will grow only by 9% annually (See Section 1.3).
* US to 1995: The software market will have a CAGR of 15.1%
and the services - 12.9%, while the hardware market will grow
annually by 6% (Section 1.3).
* "Downsizing," defined as the replacement of a larger system
with a smaller one, is not extensive (Section 2.1).
* In the US and Europe, shipments of systems primarily using
the UNIX operating system will reach $51.2 billion by 1995, a
growth rate of 21.3% annually over 1990 (Section 1.3).
* IT spending decisions are influenced more by the specific
economic and competitive conditions of the firm rather than
general economic conditions or IT issues (such as "confusion
over standards"!) (Section 2.2).
1. MARKET SEGMENTS
1.1 HISTORICAL
* US, 1979-1989: Software and services grew from a third to
half of the market. (IDC)
* US, 1979-1989: from almost entirely proprietary market to
about 60% "open" (UNIX and MS/DOS-OS/2). (IDC)
* US, 1984-1989:
Declining segments: Medium systems ($100,000 to $1M)
(IDC);
Fastest-growing: LAN Hardware, Professional Services,
PC/Workstations. (IDC)
Note: "Professional Services" include contract
programming/design, facilities management, and systems
integration.
1.2 CURRENT
* US, 1988-1989: Hardware grew 3.7%, Software 6.2%,
Data communications 5.2%, and Services 12.2%. Fastest growing
segments were Professional Services (17%), LAN Hardware
(12.7%), and PC/Workstation (9.9%). Declining segments
include Medium Systems (-4.8%) and Small Systems (-1.2%).
(IDC)
Industry segments in 1989: Manufacturing 28.2%, Government
13.7%, Services 13.7%, Retail/Wholesale 13%, Insurance and
Financial Services 9.4%, Banking 6.3%, Communications and
Utilities 5.3%, Transportation 3.9%, Education 2.8%, Health
Services 1.5%, Agriculture/construction/mining 1.4%, Other
0.7%. (IDC)
* Total WW 1989-1990 unit growth: US 2.8%, Japan 20.1%,
Europe 8.4%, Rest of the World 27.6%. (IDC)
Note: Medium Systems - $100,000 to $1 Million, Small Systems
- $10,000 to $100,000.
1.3 FUTURE
* WW to 1995: The software and services markets will grow
annually by 17% and 13.6%, respectively, while the hardware
market will grow only by 9% annually. Fastest growing
sub-segments are: Application tools (19.4%), Application
Solutions (18.2%), Professional Services (16.8%),
Systems/Utilities (13.2%) and PC/Workstations (12.7%). (IDC)
* WW to 1995: Market shares of individual countries will
change somewhat, but their ranking will stay the same: US
(From 37.6% of worldwide IT market in 1989 to 34.6% in 1994),
Japan (18.4% to 21.1%), Germany (7.4% to 7.2%), UK (6.1% to
5.8%), France (6.1% to 5.6%). (IDC)
* US to 1995: The software market will have a CAGR of 15.1%
and the services - 12.9%, while the hardware market will grow
annually by 6%. Fastest growing segments are Professional
Services (17.2%), Application Solutions (16.6%), Application
Tools (16.4%), Systems/Utilities Software (12.5%), and
PC/Workstations (9.8%). (IDC)
* UNIX: In the US and Europe, shipments of systems primarily
using the UNIX operating system will reach $51.2 billion by
1995, a growth rate of 21.3% annually over 1990. There will
be a shift from technical to commercial applications (65% vs.
48%). (IDC)
* Hardware market drivers to 1995: Need for more storage,
MIPS; Portable PCs; home computing, multimedia, workstations
for commercial applications, parallel processing, small
businesses, developing countries. Hardware market inhibitors:
price/performance improvements, saturations. (IDC)
* Software and services market drivers to 1995: Growth of
hardware platforms, OS convergence, standard software for
portables, multimedia, development of core activity
applications and new computing structures, integration
services, CD-ROM applications for home PCs, service and
manual worker software. Market inhibitors: saturation, price
declines. (IDC)
Note: "Application Tools" are programs that allow users to
retrieve, organize, manage, and manipulate data and databases
(E.g., DBMSs, EIS, CASE); "Application Solutions" are
programs designed to provide packaged solutions for specific
problems inherent in an industry or a business function
(e.g., accounting, word-processing, vertical industry
solutions).
2. GENERAL TRENDS
2.1 MANAGEMENT OF INFORMATION TECHNOLOGY
* "Downsizing": Users' hardware dollars for new systems have
been steadily going to less expensive systems. For the past
couple of years, however, small-scale systems ($10,000 to
$100,000) have lost their share of this trend. PCs and
workstations seem to have drawn more business from
small-scale systems than they have been able to take from
medium-scale ($100,000 to $1M). However, client/server
computing may revive somewhat the small-scale systems
segment. (IDC)
* "Downsizing," defined as the replacement of a larger system
with a smaller one, is not extensive: In the US it occurs
most frequently in the $15K-$35K price and the $75K-$200K
price bands but still accounts for only 6-10% of shipments in
these price bands. In Europe, downsizing does not exceed 1-5%
of any price band. (Inteco)
* Drivers for "Downsizing" defined as moving applications
from large to small systems: "Better end-user access to data"
(improved user control and flexibility, cost, performance,
functionality, speed of applications development,
standardization). (Inteco)
* Drivers for "Upsizing" defined as moving applications from
small to large systems: "Better corporate control of
information" (increased reliability, security, integrity, and
control, performance, previous systems obsolete). (Inteco)
* "Upsizing": Increasingly users, especially at mainframe
sites, are consolidating their MIS applications on fewer,
more powerful systems. As a result, the large-scale systems
market segment has maintained a slow growth rate. (IDC)
* "Upsizing," defined as the replacement of a smaller system
by a larger one, represents a significant portion of the over
$75K priced systems in both the US and Europe. The largest
upsizing impact occurs in the over $500K price band, with
31-40% of the shipments in the US and 21-25% of the
shipments in Europe going to upsizing. (Inteco)
* The PC market is not "saturated": only 28% of respondents
to an IDC survey said "we are essentially saturated;" 32%
indicated that they "still have many terminals to replace."
However, in certain markets, it has changed directions:
almost all NEW PCs in the US and Japan are portables (82% and
78% of new sales) but not in Europe and Rest-of-the-World
(28% and 12%). (IDC)
* Major IS issues in 1990 (IS managers): Open systems
migration, Client/Server adoption, use of system integrators,
outsourcing options, centralization vs. decentralization,
software development/acquisition strategies. (IDC)
* Major issues in 1990 (CIOs): Reshaping business processes,
aligning IS and corporate goals, instituting cross-functional
systems, boosting software development productivity,
utilizing data (information used by the right person at the
right time). Issues increasing in importance: Improving
software development quality, integrating information
systems, managing dispersed systems, determining the value of
IS. (Index)
2.2 CUSTOMERS' BUYING DECISIONS
* 61% of CIOs agree with the statement: IT spending outside
of the IS budget will increase five years from now. (Index)
* Internal spending on IT (mainly staff and overhead) has
been slowly, but steadily shrinking to about 27% of total IT
spending in 1990. Spending on software is divided as follows:
Packaged - 36%, Outside contractors - 16%, Internal
Development - 48%. (IDC)
* IT spending decisions are influenced more by the specific
economic and competitive conditions of the firm rather than
general economic conditions or IT issues (such as "confusion
over standards"!). (IDC)
* Why the industry may become more correlated with economic
changes? Higher levels of market penetration (especially in
the application of IT to administrative and support
functions), diminishing impact of product cycles, more mass
market buying patterns, IT markets' rising shares of capital
spending, increasing share of software and services (which
may be viewed as discretionary spending). (IDC)
* At the end of 1990: Budget growth is weakest in three-year
period. IS budgets are expected to rise an average 5.3% in
1991, down from projected 6.9% in 1990 and 7.5% in 1989. By
Industry: Computers 10.5, consumer products 8.8, telecomm
8.4, pharmaceuticals 8.5, airlines 8.1. Aerospace -3.0, media
and entertainment -0.9, transportation 1.3, banks 2.2.
(Index)
* Where do large US companies make new IT investments?
In business functions and processes closest to the customer
(in declining order of importance): Order processing, systems
development, customer service (post-sale), product
delivery/logistics, manufacturing/operations, sales, customer
service (pre-sale). (Index)
2.3 CUSTOMERS' BUSINESS ENVIRONMENT
* Capital investment in large industrial economies will grow
by 2.5% of GNP in 1990-1996. Reasons: Companies' fear of
labor shortages should spur more productivity-boosting
investment; companies desire to expand abroad spurred by
1992, Eastern Europe and a liberalizing third world; a
further fall in the relative price of capital goods.
(Fortune)
* Trends in the US labor market to 2000: The number of
workers will fall; The average age of workers will rise; More
women will be on the job; One-third of new workers will be
minorities; There will be more immigrants than any time since
WWII; Most new jobs will be in the services and information;
The new jobs will require higher skills. The ability of
companies to effectively compete in the years ahead will be
determined in large measure by their success in hiring and
retaining talented and productive workers in a labor market
characterized by scarcity, skills deficiencies, and
demographic diversity. (Hudson Institute)
MARKET OPPORTUNITIES
Gil Press
Corporate Market Analysis
June 1991
Executive Summary
This document describes briefly the market opportunities in
commercial systems integration, electronic information
services, open systems interconnection, multimedia, network
integration, and electronic data interchange.
Highlights:
* These market opportunities have 1990-1995 CAGRs of 20% to
42%.
* Service industries will provide new growth opportunities
for systems integration and EDI.
* Major enhancements of OSI functionality are not expected
before 1994.
* An important assumption behind forecasts for multimedia
growth is the adoption of standards by early 1992.
* Success factors in the network integration market include
articulating the benefits to the end user and understanding
the information flow within the customer's organization.
I. COMMERCIAL SYSTEMS INTEGRATION
CURRENT MARKET
US (1990): Commercial - $3.9B; Federal - $2.5B (Input)
WW (1990): Commercial - $3.3B; Federal - $5.5B (Gartner)
EXPECTED GROWTH
1990-1995 US CAGR: Commercial = 23% ($10.8B); Federal = 13%
($4.6B) (Input)
1990-1995 WW CAGR: Commercial = 24% ($9.7B); Federal = 8%
($8.1B) (Gartner)
1990-1995 US CAGR by industry: Banking/Finance (28%), Retail
(28%), Business Services (28%), Discrete Manufacturing (25%),
Insurance (25%), Personal/Consumer Services (24%), State and
Local Government (23%).
MARKET DRIVERS: Competitive and business requirements, need
for sharing risks with vendors, complexity of technology,
lack and costs of internal resources, greater awareness of SI
success.
MARKET INHIBITORS: Fear of giving up control, costs,
awareness of failures.
TRENDS/ISSUES: Due to increased complexity of applications,
average contract size will increase significantly during the
next five years (from about $3M-$5M to $10M-$15M in 1995);
Industries that are today not too active in SI will become
more involved; SI buying decisions are increasingly made by
end-users with complex technology needs that cannot be met by
the internal IS organization.
SOURCE: Gartner Group, Input.
II. ELECTRONIC INFORMATION SERVICES
CURRENT MARKET
1990 (U.S.-based vendors): $9 billion. Electronic Information
Services are provided through various media including online
interactive delivery (80%), CD-ROM, magnetic tape, floppy
disk, interactive voice/audiotext, and online broadcast.
EXPECTED GROWTH
CAGR through 1995 is expected to be 20%. The audiotext (voice
information services) market is expected to reach $3 Bil in
1993 and the CD-ROM market - $1.2 Bil.
MARKET DRIVERS
General economic conditions, awareness and acceptance of
electronic forms of information, wider use of personal
computers, availability of diverse telecommunications
services, continued improvements in technology.
MARKET INHIBITORS
Regulatory and legislative changes; issues of consumer
security and privacy; consumer groups' complaints of vendors'
fraudulent and misleading practices.
TRENDS/ISSUES
By early 1990, the number of home subscribers to fee-based
videotext systems had reached 1.9 million. Of the 4,000
databases available in the world, the U.S. produces 56%,
Western Europe 32%, Canada 6%, Japan 2%, and the rest of the
world 4%. U.S Firms will face increased competition from
European and Japanese firms.
SOURCE: US Industrial Outlook 1991.
III. OPEN SYSTEMS INTERCONNECTION (OSI)
CURRENT MARKET
WW 1989: Total - $97 Mil (mainframes - 1.4; superminis - 7.5;
Minis - 28; workstations - 10; PCs - 50; Europe - 79; North
America - 13, Pacific Rim - 5).
EXPECTED GROWTH
WW 1994: Total $1,763 Mil (mainframes - 20; superminis - 73;
minis - 696; workstations -1,155; PCs - 595; Europe - 722;
North America - 547; Pacific Rim - 494).
MARKET DRIVERS
Rising functionality of the OSI standards; rising
availability; falling costs (the average selling price of OSI
products is expected to decline by 10% from 1989 to 1994);
decreasing complexity.
MARKET INHIBITORS
Technical difficulties associated with implementation will
not be solved; products will be shipped without comprehensive
testing by vendors.
TRENDS/ISSUES
Early implementations are expected to be mostly minicomputers
and workstations followed by superminis and personal
computers. The majority of mainframe shipments are forecasted
to occur beyond 1995 as OSI functionality matures. Network
management, network security, very large-scale network
routing, enterprise directory services and transaction
processing are not anticipated before 1994.
SOURCE: Gartner Group
IV. MULTIMEDIA
CURRENT MARKET
Multimedia applications accounted for 13% of the PC software
market or $740 Mil in 1990 (Inteco).
1989 US sales of "personal computers used in (but not
dedicated to) video production and delivery" were estimated
at $234 Mil (Multimedia Computing).
EXPECTED GROWTH
The multimedia market (applications for education and
training, presentations, and information retrieval -
excluding consumer products) will reach $6.1 Bil by 1995, a
CAGR of 42%. (Gartner)
Multimedia applications will account for 42% (or $5.5 Bil) of
the PC software market in 1994.
MARKET DRIVERS
Widespread adoption of multimedia standards by early 1992;
low-cost support systems (e.g., storage, cameras, scanners);
cultivation of new distribution channels including
electronics retailers, video systems dealers, and AV
production houses; local and wide-area networking of
multimedia "kiosks"; availability of applications development
tools (treating video/image as standard data types).
In education: curriculum-related material; networked PCs and
training for teachers; success stories form PC labs.
MARKET INHIBITORS
Hardware costs; complex infrastructures are needed; in
education: Inertia in the buying process; older teachers
(50%) fear technology; younger teachers are weary and
over-loaded.
TRENDS/ISSUES
Multimedia adds the two most popular non-print media - audio
and video - to information systems. It is a set of enabling
technologies that make new applications practical. Early
efforts focus on asymmetrical solutions to lower the costs of
the playback units. Long-term growth depends on symmetrical
solutions that will empower many users to become authors.
SOURCE: Gartner Group, Inteco
V. NETWORK INTEGRATION
CURRENT MARKET
The Network Integration market is estimated to be $1.8
billion in 1990 (U.S.) (Input).
EXPECTED GROWTH
Network Integration in the U.S. will have a CAGR of 27%,
reaching $5.9 billion in 1995.
MARKET DRIVERS
Business trends: Increasing complexity, globalization,
organizational downsizing; technological changes: robust
public networks, enhanced value-added networks, increased PBX
functionality, enhanced local-area networks, intelligent
multiplexers, PC/Workstation growth.
MARKET INHIBITORS
User perceptions regarding vendors' lack of multiproduct
capability; reluctance to turn over to vendors networks that
are considered very important.
TRENDS/ISSUES
Vendors should: focus on building network platforms;
articulate the benefits to the end user; understand the
information flow within the customer's organization; provide
network support.
SOURCE: Input.
VI. ELECTRONIC DATA INTERCHANGE (EDI)
CURRENT MARKET
1990:
EDI vendor revenue: $346 mil.
User spending: $1,600 mil (including reseller markups and
systems integration projects).
Number of companies using EDI: 12,000.
EXPECTED GROWTH
1995:
EDI vendor revenue: $1,117 mil (34% CAGR).
User spending: $5,300 mil (35% CAGR).
Number of companies using EDI: 24,000.
MARKET DRIVERS
Business requirements; established standards.
MARKET INHIBITORS
Fragmented standards; poorly integrated products;
inability/unwillingness to justify expenditures, resistance
from employees, low penetration, perception of small
companies that EDI is a "big company" program; large firms
investing internally in private networks and clearinghouses.
TRENDS/ISSUES
EDI growth will move from manufacturing and transportation to
service industries; over 70% of the benefits of doing
business electronically come from combining multiple
technologies (e.g., EDI, EFT, E-mail).
SOURCE: Gartner Group.
MARKET INSIGHTS
THE SLOWDOWN IN THE IT INDUSTRY: ARE CUSTOMERS CONFUSED OVER
PRODUCTS OR OVER THEIR OWN BUSINESS DIRECTIONS?
Gil Press
Corporate Market Analysis
June 1991
THE SLOWDOWN IN THE IT INDUSTRY: ARE CUSTOMERS CONFUSED OVER
PRODUCTS OR OVER THEIR OWN BUSINESS DIRECTIONS?
EXECUTIVE SUMMARY
US companies are "confused" not over standards or platform
changes, but over the actions they should take in response to
the breakdown of Mass Production, their old management model.
The responses of US companies to the profound changes in
their business environment were first favorable, then
unfavorable to IT investment. This explains the growth of the
IT industry in the late 1970s and beginning of the 1980s and
its slowdown in the late 1980s.
To succeed in the new business environment businesses must
shift to "Mass Customization": producing low-cost,
high-quality products, customized to fit the needs of small
groups of customers. The IT industry (or the significant
portion of the industry accounted for by US-based companies'
purchases) will not regain its traditional growth rates (and
its traditional profitability) before US companies will fully
understand the strategic actions required for this shift and
the importance of IT for their successful implementation.
THE SLOWDOWN IN THE IT INDUSTRY: ARE CUSTOMERS CONFUSED OVER
PRODUCTS OR OVER THEIR OWN BUSINESS DIRECTIONS?
The more-than-250-billion-dollars question that everybody is
asking nowadays is why has the previously spectacular growth
of the IT industry slowed down in the late 1980s?
Explanations abound, including
* the state of the economy
(although the slow down in the IT industry has started when
the economy was still expanding);
* "maturation"
(although this infant, 4-decade old industry still enjoys a
constant 30-40% yearly increase in the demand for computer
power);
* "downsizing"
(although only a small percent of shipments is aimed at
replacing an existing system with a smaller one and a
significant percent of shipments is aimed at "upsizing" -
replacement with larger systems);
* "confusion over standards"
(although a survey of IS managers showed that their budgeting
decisions are influenced mainly by their companies' current
financial situation and its strategies to improve it, and
only little by uncertainty over standards or product
changes).
All of these explanations probably account for some of the
truth, but not all of it. Are we missing an important factor?
Is there a broader explanation that will account for both the
growth of the industry in the late 1970s and early 1980s
(when other sectors of the economy were depressed) and the
recent slowdown? It is interesting to note that in an era
where computer vendors are supposed to shake the product
habit and understand better their customers' business needs,
most explanations revolve around technology and product
trends. They ignore the profound changes in what is most
important to the buyers of information technology: their
business environment.
Put simply, US companies are "confused" not over standards or
platform changes, but over the actions they should take in
response to the breakdown of Mass Production, their old
management model.
The success of this management model was depended on the
existence of a large, homogenous market and on stable growth
in demand. These two pillars of the Mass Production model
were shattered in the 1970s. Higher levels of income and
changing values and life-styles produced an ever increasing
variety of markets and constantly changing customer wants and
needs. Higher levels of saturations for certain products and
successive economic downturns disrupted the previous stable
growth in demand. These changes, coupled with process
innovations by new competitors from Japan, caused the net
income of US nonfinancial corporations to fall during the
1970s and early 1980s by about a third from the highs of the
late 1960s. The turmoil was such that one third of the
Fortune 500 audit accounts in 1970 had vanished as companies
by 1981.
In the new business environment demand is unstable, markets
are constantly fragmenting, and the "market niches"
(previously left for the "little guys") are becoming the
market. Products have short development cycles and short
life-cycles. The manufacturing process must be flexible with
short production runs, short changeover times, and minimal
work in progress. To succeed, businesses must shift to "Mass
Customization": producing low-cost, high-quality products,
customized to fit the needs of small groups of customers.
The first reaction of US corporations to this new environment
was to "do more of the same." They stressed even more some
tenets of the old model such as organizational division of
labor (the multi-divisional, multi-functional firm) and
substituting workers with machines (automation). Flexibility
was interpreted to mean functional independence. This may
explain the counter-cyclical growth of the computer industry
in the late 1970s and early 1980s, as functions and
departments bought their own computers, sometimes from a new
vendor who was perceived to have the best computers for the
function (e.g., Digital in manufacturing). This emphasis on
functional excellence fueled also the PC market since this
new technology gave end-users better tools to do their jobs.
Soon, however, US companies discovered that flexibility and
responsiveness are dependent more on cross-functional team
work and enterprise-wide integration than on functional
excellence. They wanted to network their dispersed computer
systems, and computer vendors (such as Digital) who were able
to satisfy this need, enjoyed success in the mid-1980s.
This success, however, was short-lived. US companies needed
more than networking to thrive in the new business
environment. To produce low-cost, high-quality, customized
products, they needed low-cost (standardized), high-quality,
and most importantly, "customized" systems. They wanted to
get the right information to the right people at the right
time no matter where they sat in the organization. They
wanted to connect better to their customers and suppliers who
had systems from other vendors. They wanted a unique solution
that will differentiate them from their competitors. They
wanted what became to be known as "open systems." [1]
That explains the rapid growth in the services segment in the
last few years, especially in systems integration, and the
success of accounting firms, who knew how to speak the
business language. For the most part, however, US companies
had a very natural reaction to not getting what they wanted:
they stopped buying computers.
The heart of the matter, though, was not the failure of
computer vendors to supply low-cost, high-quality, customized
systems (although this was, to some extent, a missed
opportunity on their part). The heart of the matter was the
failure of customers to articulate this need or even perceive
it as one.
Instead, the unrealized (and unrealistic) payoffs they were
expecting when they invested in automation and functional
excellence in the late 1970s and the early 1980s caused them
to give up on IT. More specifically, their "downsizing"
efforts in the 1980s had a double negative impact on computer
purchases.
First, there were less people around, in large companies, who
would use computers. It is estimated that about half a
million middle managers and professionals were eliminated by
some 300 companies between 1984 and 1986. The Fortune 500
alone had a net reduction of 3.1 million people from their
payrolls from 1980 to 1987.
Second, as a recent survey of 1,100 US companies concluded,
"the past decade of layoffs led companies to try to become
more efficient and not just cut out people." While 89% of
companies that "downsized" had "reduce expenses" as their
goal, only 46% thought they achieved it. Another study, in
the retail industry, found that overhead costs remained the
same, even after restructuring and cutting off people.
Given this experience, the conclusion these companies arrived
at was to augment "downsizing" with "cost cutting." Since IT
expenses were not perceived as producing the return expected,
they became a prime candidate for this new goal.
When executives from US manufacturing companies were asked to
rank the payoffs they received from activities they pursued
in 1988-1989 they placed "flexible manufacturing systems" and
"integration of IS" at the bottom of the list. So did
Japanese manufacturing executives when they answered the same
survey. There was a big difference, however, in how this
similar experiences influenced their respective "most
important programs in the next five years." Not quick to give
up, the Japanese executives listed "integration of IS in
manufacturing and across functions" as their top priority for
the near future. There was no mention at all of information
systems on the US list.
The result, across all industry sectors, is a steady decline
in IS budgets. The most recent Index survey of IS directors
in the US found that IS budgets were expected to rise an
average 5.3% in 1991, down from the projected increases of
6.9% for 1990 and 7.5% for 1989.
Perceiving IS to be just another expense to be cut is a
gross business mistake on the part of US companies. Or maybe
it is not a mistake. Until they figure out the best business
strategies for the new business environment, they are
probably better off not investing in IT. A recent
InformationWeek article provided a clear example of the
multiple roles of IT in support of multiple business
strategies (and also an indication that the above discussion
is not limited to US companies, nor to just manufacturing
enterprises). The Bank of Ireland has devoted most of its IT
resources to the development of a comprehensive customer
database. The database will enable BoI to micromarket its
services, allowing it to pinpoint customers' service needs
and the types of accounts they might be interested in well
before other banks. BoI is marketing its "relationship
banking," which makes "each customer feel like they have a
customized relationships with the bank."
But at the same time the bank invests in systems development
to "be able to meet and beat the cost structures around the
world." They use an EIS and expert systems for cost and risk
analysis, CASE tools for reducing application maintenance
tools, and consider image processing as a way to reduce
document expenses.
BoI has discovered that the move to the new management model
of Mass Customization must be supported by investing more,
rather than less, in IT, to achieve the dual business goal of
reduced costs and greater flexibility.
This understanding of A. what needs to be done in response to
the new business challenges and B. the important role that IT
plays in this response is not shared at this time by US
companies. The above quoted survey of US and Japanese
manufacturing companies concluded that "Japanese companies
are in the process of creating a 'design factory of the
future;' one which can make fast design changes and provide a
variety of products individualized for each customer. They
are placing primary emphasis on fundamental process
development, as well as better integrated computer systems,
in order to achieve this vision. American manufacturers are
building a 'value factory of the future.' The emphasis here
is on creating responsive organizations that can produce
quality goods at a reasonable price. Critical investments are
being made in building cross-functional teams, empowering and
training workers, and statistical process control."
Obviously, US companies are still struggling with the
heritage of Mass Production, [2] while the Japanese have
moved swiftly to Mass Customization. What is more important
to the IT industry, is the fact that US companies are no
longer considering IT part of the solution, but part of the
problem. Since US companies' purchases still account for the
majority of US-based vendors' revenues [3], their
difficulties in responding appropriately to the new business
environment and their negative perceptions of IT provide an
important (and largely neglected) explanation of the
industry's slower growth.
NOTES:
[1] A prime example is Du Pont. In 1979, its Fibers division
limited its IT suppliers to only two: DEC and IBM. This is
how they describe the decision and its results: "We adopted
the proprietary "standards" of these two vendors, with
Digital supplying technology for Technical and Manufacturing
and IBM supplying technology for Marketing and Business
functions...Throughout the early 1980s, this strategy served
us well... we were primarily concerned with internal
efficiency and quality improvement. Functional excellence was
the byword. An assumption was made that there was little
affinity from an information viewpoint between Manufacturing
and Marketing.... Moving into the mid-1980s, we began to
realize the value of information technology to marketing. We
discovered that EDI with our customers was an important
competitive thrust. We encountered difficulties supplying
product quality information along with our finished products
because the information was across the IBM/Digital functional
boundaries... This functional mind-set, worsened by
vendor-aligned computing cultures within our IS and user
organizations, resulted in data and program designs that were
not supportive of computer-integrated business."
As a result, the Fiber division spearheaded a drive toward
"open systems," a long-term IS strategy now adopted by the
entire Du Pont organization. This is how Du Pont articulates
the business value of this strategy: "Open systems is the
only technical approach which will satisfy Du Pont's most
universal and important business drivers - globalization,
external focus through internal partnering, partnerships with
customers and suppliers, meeting government requirements, and
supporting frequent organizational changes. Most of these
drivers have, at their core, a strong requirement for
universal connectivity - to all data, to all people, and to
all applications which perform tasks in support of Du Pont's
businesses."
[2] This struggle is evident in the findings of the Index
survey. While they cut costs, customers try to move to a new
management model in which they provide low-cost,
high-quality, customized products to their customers. The
same Index survey concluded that "companies plan to spend
heavily in business functions and processes closest to the
customer." The shrinking IS budgets are focused on internal,
"customized" development in the areas of order
processing/handling, product delivery/logistics, sales and
post-sales customer service.
[3] IDC estimates that the US accounted for 38% of the
worldwide IT market (including hardware, software, and
services) in 1989. This is still a significant portion of the
world market (estimated to drop to 35% in 1994). However, it
is based on the geographic destination of computer shipments
and does not reflect the fact that US-based vendors' derive a
major portion of their international sales from the
international business units and subsidiaries of US
companies.
Distribution:
TO:
judy amar@DLB DENNIS DICKERSON@DL STEVE DONOVAN@DLO Tommy Gaut@HSO
DONALD HEIDORN@DYO Ed Hurry@DVO yoshinori ishii@TKO phil james@DLB
norio2 murakami@TKO Louis Pau@VBE jim rather@HSO Pat Roach@VBE
Czarena Siebert@HSO Mike Sievers@HSO Dale Stout@HSO Susan Sugar@MWO
Sherry Williams@HSO Mike Willis@HSO Tom Wilson@HST
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