Retail

The Internet:
Bringing Dramatic Changes to Retailing

The Internet and networked applications have created a new economy for retailers, with significant opportunities to transform the way people do business.

There may be no industry that has felt the impact of the Internet as strongly as the retail industry.

Indeed, the Internet and networked applications have created a new economy for retailers, with significant opportunities to transform the way people conduct business.

As recently as five years ago, retailers used the Internet simply to create "vanity pages"-static information without interaction or transaction capabilities, and with little impact on sales or profits.

Over the last five years, however, retailers have found that the Internet allows them to do business and service consumers in new and innovative ways. For one thing, they immediately gain global 24-hour access to consumers. Beyond that, they can transform their traditional business models through the use of networked applications that allow them to acquire and retain customers; interact with current and new customers regardless of time and distance barriers; and customize interactions to enhance customer experiences.

In the retail industry, perhaps the best evidence of the Web's significance is the fact that Internet retail revenues are projected to reach $2.9 billion during the 1998 Christmas season. This is nearly triple the $1 billion Web merchants took in last year, according to the research firm Jupiter Communications.

In just the last three years, the amount of business conducted annually over the Internet has increased from $1 billion to $30 billion, with an 80 percent to 20 percent mix of business-to-business and business-to-consumer transactions, according to Forrester Research.

Forrester projects, moreover, that sales generated via Internet commerce will likely reach $350 billion in 2002. The U.S. Commerce Department, meanwhile, foresees consumer traffic on the Internet doubling every 100 days, and estimates a billion people will be online by 2002. The projected $70 billion Internet commerce consumer market presents both opportunities and challenges to retailers.

Unprecedented Adoption by Retailers

The speed at which retailers are moving to Internet and Internet-based applications is unprecedented.

Today, retailers take advantage of the Internet, not just for e-commerce, but to further integrate their supply chains and redefine business processes to improve profitability. They extend physical store processes into the Internet through such applications as bridal registries and "buy here/pick up there" reservation systems-applications that not only increase profitability, but also enhance customer service.

In all cases, the key to rapid application deployment is the development of a corporate intranet. Like a highway system, an intranet provides a vital basic infrastructure. Without it, moving from place to place would take a lot longer, and retailers and customers would surely miss opportunities along the way.

Examples of retailers leveraging intranets to gain significant advantage include Wal-Mart, which transmits daily merchandise scorecards to each of its stores, and JCPenney, which links buyers and merchandisers to greatly reduce cycle time through its JWeb network. These and other retailers, including the giant drug store chain Walgreen, are finding that focused network applications that support the stores not only pave the way for e-commerce, but also help pay for the investments.

Most retailers today know the time has come to get serious about reinventing their businesses for the Internet. But they don't always know how to go about developing a strategy and road map. The pages that follow will take an in-depth look at the world's leading networking vendor, Cisco Systems, and how the company reinvented itself in ways that can serve as a model for retailers.

Cisco: Reaping the Rewards of the Internet

Cisco has used its own networking technology to build Internet business solutions that have allowed it to redefine how it shares relevant information with key business customers, suppliers, partners and employees.

No high-tech company has practiced what it preaches more heavily than Cisco Systems, and certainly none has gained as many benefits.

Cisco, based in San Jose, Calif., is the leading worldwide vendor in networking for the Internet. Cisco hardware and software solutions are used to link computers and networks so that information is easily accessible, regardless of differences in time, place or type of computer system. More than 80 percent of the Internet backbone is networked with Cisco products, and virtually all of the Internet traffic travels across the world over Cisco equipment.

Cisco has used its own technology to build Internet business solutions that have allowed it to redefine how it shares relevant information with the key constituents in its business-not just with its internal functional groups, but also with its customers, partners and suppliers-and also how it integrates systems to add extra value.

Cisco's own experience and success in building Internet business solutions have made it a technology leader that is uniquely capable of understanding the needs and issues of its retail customers, including:

• How to increase sales and profitability.
• How to improve customer service by enhancing the buying experience and exceeding expectations, there by increasing customer loyalty.
• How to significantly save time, labor and other business costs.
• How to improve inventory management.
• How to improve quality control.
• How to develop an image of being the best choice among competitors.

Cisco was driven to develop Internet business solutions because of significant challenges it began to face in the early 1990s. First, Cisco needed to find a way to scale its operations in the face of explosive growth in the networking industry. Second, customer satisfaction, although respectable, was stagnant. Finally, Cisco realized it needed to focus on its core competence-product design and innovation. This meant manufacturing would have to be outsourced to a select group of partners, while Cisco kept a close eye on the quality of output from those partners.

• Cisco took its first step in leveraging the Internet and networked applications in 1992, when it established an electronic bulletin board for customers. Later, after browser technology was introduced, Cisco allowed registered users to access limited online support via the World Wide Web. In 1994, the company unveiled Cisco Connection Online (CCO), an award-winning interactive Web site providing 24-hour, seven-day global service and support in 14 languages. Through CCO, users link to Cisco's internal operational systems and databases and can access a wide variety of support materials and applications.

The Internet business solutions Cisco has deployed on CCO since 1994 clearly played an instrumental role in the company's success. Cisco quadrupled in size from 1994 to 1997, and has emerged as one of the world's leading electronic merchants. The company is consistently rated high in customer satisfaction surveys, has a much lower expense base than its competitors and requires much shorter lead times to build new and custom products.

Clear Financial and Strategic Benefits

As of October 1998, 70 percent of Cisco's business has been conducted over the Internet-about $15 million per day with an annual run rate of more than $5.5 billion-making Cisco's Web site one of the highest-volume e-commerce sites in the world. And that's just the beginning. The company anticipates that orders received over the Web will constitute more than 80 percent of its revenues by the end of its fiscal year 1999 (July). Cisco has enjoyed many financial and strategic benefits thanks to its Internet business solutions, including:

• Company bookings have doubled since 1996, while the customer call center has grown by only 10 percent. This translates to about $10 million in avoided annual operating costs.
• Online ordering saves an estimated $2.5 million in annual payroll costs by electronically processing 1000 orders daily. All told, Cisco estimates that the financial impact of its Internet business solutions is more than $550 million in cost savings, and that its employee productivity rates are three times those of competitors 3Com, Nortel/Bay and Lucent.

What's more, Cisco has helped its own retail customers achieve similar benefits from its network-based solutions. One major retail chain, for example, has greatly increased its profitability through the use of a sophisticated Cisco-technology-based network.

The chain can monitor stock levels, reduce inventory costs, and maintain adequate on-hand levels, leading to direct savings. By better monitoring sales, the chain quickly identifies its stores' selling trends and relays the information to its head office, which can immediately respond to maximize opportunities.

Cisco Internet business solutions include three major processes (supply chain management, Internet commerce and customer care) as well as two processes that span across the enterprise (communications and collaboration, and employee services). Here's a detailed look at how Cisco handles several of these processes internally, and how Cisco's retail customers leverage these processes.

Internet Commerce

A suite of networked commerce tools enables Cisco customers to configure, price, route and submit electronic orders directly to Cisco. Tools include:

• The order status tool, which allows customers to track progress or check order status using purchase order numbers.
• The pricing and configuration tools, which allow direct customers and partners to configure and price Cisco products online.
• The order placement tool, which lets customers "drop" selections into a "shopping cart" in Cisco's virtual marketplace.
• The service contract tool, which allows users to find information about specific service contracts, orders and pricing.
• The invoice tools, which provide online access to track invoices, and view credit and debit memos.

Many of Cisco's retail customers have used Cisco's approach to Internet commerce as a model for their own approach-employing innovations such as electronic shopping carts and order status tools. With these innovations, they can shift focus from reacting to customer requests and handling administrative tasks to proactively managing customers.

Customer Care

The goal of automating customer care was to scale Cisco support operations to meet customer needs while improving customer satisfaction and reducing support costs.

Tools and services include:

• The installation and configuration tool, which eliminates hard-copy documentation and replaces it with Web-based instructions and procedures, creates a correct configuration online, eliminating order errors.
• The software library, which electronically distributes Cisco network software, significantly lowers time required for network upgrades. (About 90 percent of all software distributed by Cisco is now provided through this service.)
• CiscoWorks, which allows customers to walk through a detection routine, helps identify likely causes of a problem. o Bug Navigator, through which Cisco reveals all its bugs to customers, enables users to identify, prevent, and repair them.
• Problem resolution tools offer quick access to information and answers to technical problems. Today, a majority of Cisco support is performed online, and the company requires only 1,000 engineers worldwide to handle support issues.

Because so much of support is automated, live engineers can concentrate on the most difficult problems. For Cisco, the annual cost savings from online customer support amounts to more than $365 million.

Cisco's self-service model has increased customer satisfaction substantially. The system handles more than 1 million log-ins per month by registered users, and 70 percent of support calls are successfully handled without human intervention.

One of Cisco's major retail customers has used its Cisco-technology-based network to enhance customer care by providing accurate on-order information to its store salespeople, who can knowledgeably respond to customer inquiries. Armed with accurate information about product availability, salespeople are better prepared-which directly leads to better customer service, an enhanced customer buying experience and increased customer loyalty.

Supply Chain

To scale its supply chain cost effectively while raising its level of quality, Cisco has implemented several changes in the way it conducts business. The company created a "single enterprise" with suppliers, outsourced manufacturing to key supplier partners, involved partners heavily in new product introductions, ensured that its entire supply chain works off a single demand signal and enabled suppliers with the capability to fulfill customer orders directly.

All parties enjoy the significant bottom-line benefits of networking the supply chain. New product introduction time has been shortened by three months thanks to collaborative design tools. Lead times for built-to-order, custom-configured products have gone from six to eight weeks down to one to three weeks. And by eliminating purchase orders and reducing manufacturing costs, Cisco has cut its annual operating expenses by $75 million.

Another large retail customer uses its Cisco-technology-based network to enhance its supply chain operations by supporting a perpetual inventory system that logs a sale, then simultaneously removes the item from inventory and reorders it. This reorder is sent online either directly to the supplier or directly to the home office. This same system allows a store manager to check on product inventory. By scanning a UPC code, the manager can receive an item's inventory status within the store and see if the item is on order or in stock at a nearby store.

The system dramatically improved the chain's efficiency and reduced inventory costs. It helps managers identify out-of-stock problems faster, so they can place reorders before products go out-of-stock. At the same time it prevents over-ordering at the store level because managers rely on data counts, not simply visual inspection of merchandise.

Employee Services

To improve employee productivity and satisfaction-and scale its work force without incurring unnecessary overhead-Cisco re-engineered several of the company's internal processes, making browser technology central to all internal and external employee services.

Via the company's intranet, employees can report travel expenses, access benefits information and make human resource-related queries. They can also access a personnel directory, organizational charts, office locations and phone numbers.

Savings in auditing and travel expense administration alone have totaled almost a half-million dollars annually, and have resulted in higher employee satisfaction and productivity.

Many of Cisco's retail customers have used Cisco's approach to intranet-based employee services as a model for streamlining their own internal operations-for example, supplying store quality control guidelines on the Web, to which employees have instant access.

The Cisco Internet Business Solutions Group: Offering First-Hand Expertise

The transition to a global networked business can be challenging because it may require fundamental changes in an organization's culture and approach to technology.

Cisco, which has thoroughly re-engineered its own business with Internet-based technologies and networked applications, is in a unique position to offer retailers valuable expertise as they seek to develop Internet and networking strategies.

Through its Internet Business Solutions Group (IBSG), Cisco works with leading management consultants, systems integrators and independent software vendors to help retailers understand and apply what the company refers to as its global networked business model.

"Cisco is one of very few high-technology vendors that uses what it sells in such a strategic way," says Pete Solvik, Cisco CIO. "At our customers' requests, we have formed this group to share how we accomplished this ourselves, and to help customers achieve similar results in their own businesses."

An Internet-powered business strategically uses information and communications to build a network of strong, interactive relationships with customers, employees, partners and suppliers. These relationships can increase productivity while cutting costs. The transition to becoming an Internet-powered retailer can be challenging-it may require fundamental changes in an organization's culture and technology approach.

A fundamental principle that has guided Cisco's corporate transformation to a fully global networked business, says Solvik, is the idea that information technology can fundamentally re-engineer relationships within the extended enterprise and should be viewed as more than a cost center. Indeed, IT ideally should be customer focused, and a part of a company's overall business strategy.

Retail executives interested in leveraging the Internet and networked applications to improve and change their businesses often question many aspects of this.

These questions include:

• Are we adequately networked, with major links in our business system, to customers, suppliers, partners and distributors?
• How can we build closer relationships and increase new interactions with our existing customers and prospects?
• Can our employees and partners access enough information to be effective?
• How can information be leveraged to reduce and improve our loss prevention efforts?
• How can we radically improve or change our business processes to drive sales and increase profitability?

Dave Lockhart, Cisco's executive in charge of the retail industry, feels Cisco can address these concerns because the company understands retail business issues and knows how to implement networked solutions. "Because of Cisco's Internet experience, we can provide the blueprint," Lockhart says.

One message Cisco is working hard to deliver to retailers is that they need to view both physical and virtual retailing as part of a total environment. "Too many virtual retailers think of themselves as virtual only, and too many physical retailers think of themselves as physical only. They may invest in the other area, but they don't view it logically as part of a total customer experience to gain market share," he says.

"To be successful going forward, we believe retailers need to think of both physical stores and Web-based stores as part of one customer relationship-and neither type of store should be ignored."