ERP-1 InternationalCase

CHINA TELECOM TURNS TO ENTERPRISE RESOURCE PLANNING

China Telecom Corporation, the worlds largest operator of fixed-line communications, was formed when the stateowned China Telecommunications Corporation reorganized. China Telecom employs 350,000 workers throughout China, who attend to the companys operations in domestic and international fixed-line networks; fixed-line voice, data, and information services; and the settlement of international telecommunications accounts. The company has maintained steady growth despite heavy competition from mobile phone services. In 2002, the company became a public company listed on the New York Stock Exchange. That same year, the United States granted China Telecom a license to provide international telephone and Internet service between the countries. These steps were part of a transition from a traditional state-run enterprise to a modern enterprise based on larger profits and a wider customer base. However, to succeed as an international telecommunications powerhouse, China Telecom had to solve several problems. First, the company required a state-of-the-art IT infrastructure. Second, it needed to comply with international reporting regulations for publicly traded companies. Third, it needed to integrate all of its business functions and enable real-time management. Together, these initiatives would increase organizational efficiency, tighten control over internal operations, and promote better collaboration among different departments. For a solution, China Telecom decided to invest in enterprise resource planning (ERP) software. The company could have written its own software to link its different business functions and organizational units, but this would have been very costly and time-consuming. It was much easier to use an ERP software package from a recognized vendor. The software is based on best-practice business processes, which would help the company meet international reporting requirements. According to Shiping Liang, director of the application division at China Telecom, the company chose mySAP ERP from SAP as the backbone system because of its powerful functionality and integration capabilities. Among the core business processes that mySAP ERP supports for China Telecom are engineering project management, finance, controlling, procurement, and human capital management. SAPs ERP financials module supports local currencies, markets, and languages, including Chinese. The SAP human capital management module automates human resources processes and integrates them across global operations. The software meets regulatory requirements for more than 50 countries. To promote data integration, China Telecom also adopted two components of SAP Netweaver: SAP Business Intelligence (SAP BI) and SAP Enterprise Portal (SAP EP).

SAP Netweaver uses XML and Web services to link the enterprise system with a companys existing systems to create new cross-functional applications. SAP Enterprise Portal provides a single point of access to data from multiple systems, integrating the data in a single view for the user. SAP Business Intelligence provides data warehousing capabilities to integrate business data from multiple sources for company-wide reporting.
After considering a number of vendors, China Telecom selected Hewlett-Packard (HP) hardware to run its ERP software because of its scalability, flexibility, low total cost of ownership, and ability to support SAP. Specifically, China Telecom chose the HP 9000 server family to run its SAP applications and HP StorageWorks XP128 Disk Array for its network storage infrastructure. Eventually, more than 30,000 employees will use the SAP and HP solution at more than 20 China Telecom subsidiaries. The deployment of the SAP software reflects the needs of each subsidiary. For example, most of China Telecoms business comes through Guangzhou and Shanghai, so those offices will use the financial, operations, human capital management, and analytics capabilities of mySAP ERP. The headquarters in Beijing will use mySAP ERP to run human capital management functions to centralize human resources management and consolidate enterprise-wide information. The integration of data from mySAP ERP has accelerated the flow of information among accounting, procurement, and engineering management functions and encouraged collaboration among departments. Integration of data between the human resources and accounting functions facilitates analysis of personnel costs and performancebased compensation plans, which were previously very time-consuming. The software provides users with quick and easy access to unified data and applications through a Web browser. The hardware platform has stood up to the test of making large volumes of critical data available 24/7. Going forward, China Telecom will focus on using mySAP ERP to further integrate with other systems so the company has a complete view of all its processes with customers, employees, and supply chain partners. Sources: SAP Customer Success Story: China Telecom Corporation, www.mysap.com, accessed June 14, 2005; Le-Min Lim, China Telecom Seeks Partner for Expertise, Bloomberg News, May 26, 2005, www.iht.com, accessed June 16, 2005; Hou Mingjuan, China Telecom Gets US License, China Daily, June 9, 2002, www.chinatelecom.com.cn, accessed June 15, 2005; and Chinas Telecom Industry

Faces an Engagement with All Rivals, Peoples Daily Online, english.people.com.cn, May 17, 2005, accessed June 16, 2005. To Think About: What problems did China Telecom face? How did these problems affect China Telecoms business? How has the company chosen to solve these problems? What other solutions might the company have tried? Analyze the solution that China Telecom chose from the people, technology, and organization perspectives. Did China Telecom choose the best solution? Explain your answer.

ERP-2 InternationalCase
1

CELANESE RECENTRALIZES WITH A NEW ENTERPRISE SYSTEM

At the end of 2003, Celanese AG, a global chemical company, had about $5 billion in annual sales and about 9,500 employees. Celanese is headquartered in Kronberg, Germany, and has 30 facilities in 11 countries on 6 continents, although most of its facilities are located in North America. Celanese had been part of Hoechst AG pharmaceuticals since 1979. However, it was spun off in 1999 when Hoechst merged with Rhne-Poulenc to create a new pharmaceutical company, Aventis. Celanese is a rather complex multinational organization with five main businesses: Celanese Chemicals, consisting of Acetyl Products, which processes natural gas and ethylene used in products for manufacturing industries, and Chemical Intermediates, which produces specialty chemicals for paints, coatings, agrochemicals, and textiles; Celanese Acetate Products, which manufactures cellulose acetate filament and tow; Ticona Technical Polymers, which makes chemical products for the electronics, telecommunications, automotive, and medical industries; Performance Products, which produces ingredients for food products, such as the Nutrinova sweetener used in Pepsi One; and Celanese Venturs, specializing in research and development, including artificial fibers and alternative energy. Celanese, like many large corporations, had focused on decentralization during the 1980s and 1990s, and, as a result, its corporate headquarters operated largely like a holding company. Its highly independent units implemented enterprise systems from SAP, the leading enterprise software company. Each unit had its own separate system, and each felt free to modify the SAP package software to meet its own requirements.

To complicate matters even further, Celanese had grown during those 20 years partly by purchasing smaller companies, many of which already had their own enterprise systems. Altogether, Celanese enterprise systems totaled 13 in 2000 (reduced to 10 by 2002 when Celanese sold one of its business units) and were in five different computer centers. By 2000, as the U.S. and world economies began weakening, many companies began looking for ways to reduce their expenses in the face of declining sales. Centralizing these companies became popular as a way to reduce costs once the expenses of centralization had been absorbed. This approach was very popular in the chemical industry, partly because its raw materials costs were rising at the same time that sales were dropping. When Celanese was spun off, its management set a formidable goal of doubling its sales in five years. To enable the company to achieve that goal, some of the increased sales would have to come from acquisitions, and that meant its stock price would have to go higher for it to afford such purchases. How could centralization help Celanese reduce its costs? There were numerous ways. The most obvious one was to make the various units of Celanese use the same version of SAP. Versions of the software used by Celanese units varied from version 3.1 to version 4.6. It was expensive to obtain so many different versions. However, the expense was even higher when so many of the IT staff had first to learn and then to support all of these versions at different Celanese units. Having only one version running on one computer for the whole company would mean far smaller IT staffs within InternationalCase 1 CELANESE RECENTRALIZES WITH A NEW ENTERPRISE SYSTEM
the various units. But there also were other less obvious costs that could be significantly reduced. Under the decentralized approach, for corporate managers to collect all the financial information they needed was not only time consuming, and, therefore, expensive, but also it increased the likelihood of errors in that data. In addition, different units used different names for what were really the same pieces of data. For example, price in one system might be cost or purchase price in another. Furthermore, many of the units often failed to take advantage of some of the useful new features of their SAP systems. For example, one new function in SAP in 2003 was its supply chain event management (SCEM), an ERP component that enables a company to better forecast its supply needs and so better manage its supply chain while reducing its inventory costs. The problem in a decentralized environment is that some units adopt that feature, whereas others will not. And some that do adopt it might use it to benefit their own

needs rather than using it to benefit the organization as a whole. Another hidden cost of separate ERP systems was that they prevented the company from obtaining a single companywide view of customers that might indicate opportunities to cross-sell and upsell customers between business units. In late 1999, when Hoechst spun off Celanese, the company management initiated a new project to recentralize the company, which it named One Celanese. They then began searching for a new global CIO who could reduce the companys costs by integrating many of its information systems. Karl Wachs was hired and given a simple instructioncut costs. Wachs quickly decided to roll up all the units disparate enterprise systems into a single system, and he named the project OneSAP. With the aid of 70 people, Wachs began the process of actually initiating the project, saying, This is not a four-week decision cycle. It should take a year for approval. In fact, it took 11 months. The project was not cheap. According to Wachs, at the height of the project, it was costing Celanese between $100,000 and $200,000 a day. One of the project managers said the overall cost would be about $60 million. However, Celaneses management concluded OneSAP would pay for itself in two years once the project was completed. How did Wachs and the Celanese information systems unit go about rolling up the various SAP systems into one? The technical aspectsinstalling new SAP software so that the various units could begin to use itwere far from the most difficult. Much greater challenges were posed by the organizational cultures of the disparate Celanese operating units. Employees were comfortable using enterprise systems, and they were not necessarily ready to change their way of working to fit a standard set of business processes. The various units were intensely independent; they were not used to thinking of Celanese first but rather of the needs of their own units. According to the employees old way of thinking, if something went wrong with a transaction that was not in their own unit, it was someone elses responsibility. That thinking had to change. Moreover, in the past the Celanese culture had been one of building consensus, an approach that cannot work in a situation where people are told to make changes they

do not want to make. If we tolerate business units explaining why their outputs are different so that they dont have to change their inputs, Wachs concluded, then we have lost. The mistake of the past was trying to adapt software to the business. Now the company would have to adapt the business to the software. To accomplish these cultural changes required a lot of explanation, a lot of education, and also clear and absolute orders from the very top. The project was divided into seven tracks, including finance, supply chain management, manufacturing, order-to-cash, business intelligence reporting, technology, and change management. Each track had several functional stakeholders who were given the responsibility for that tracks progress. Each track also had one person responsible
2INTERNATIONALCASE:Germany

POS
CASE: Bills Hardware
to accompany CHAPTER 3: Process Strategy

It had been a very busy week at Bill Murtons hardware store. A storm had blown through early in the week, and sales of tools and repair parts had been brisk. This morning was relatively quiet, however, so Murton was using it as an opportunity to look over his shelves to get an idea of inventory levels. Some items had sold much less than he would have expected; others had sold out completely. I sure wish I could predict what will be sold each week, he mused. It seems like I always have too much of some things and not enough of others. I wonder if the POS system that our cooperative is considering would help me deal with this uncertainty. Bills Hardware is a member of a hardware store cooperative, a group of more than 300 independently owned hardware stores that banded together for greater buying power and better merchandise distribution. Many of the items carried by a typical hardware store are similar. By buying these items as a group and storing them at a few centrally located distribution centers, individual stores can achieve economies of scale, allowing them to compete better with large nationwide chains. The cooperative is member owned. An annual membership fee and a service charge are applied to the cost of the items that a store purchases through the cooperative. Any revenues generated beyond the cooperatives operating costs are returned to members as a dividend.

Typically, a member store reviews inventory once a week and places orders that will bring stock back up to a target level. That level is the quantity of an item that, based on the time of year, the store owner wants to have on the shelf. Owners place orders by using a PC-based software program and a modem over a dial-up telephone connection to the cooperatives computer. The cooperative leases a fleet of trucks to deliver goods weekly to member stores from one of three distribution centers. Each geographic area receives shipments on a designated day. Surges in demand, if detected, can be met by midcycle orders shipped via UPS. Target inventory levels are based on forecasts made from historical information kept in the stores inventory database. These forecasts are adjusted by the owners past experience and information gleaned from trade journals and from listening to customers. Additionally, the cooperative makes aggregate sales data from member stores available, along with projected demand trends. The challenge for the store owner is to project weekly requirements accurately and to detect unusual demand for items that exceed inventory in time to avoid stockouts. THE POS SYSTEM The cooperatives directors have formulated a plan to obtain and install point-of-sale (POS) technology in members stores. The motivation is to take advantage of technology that can allow the distribution center to know, in real time, what items are being sold in various stores. Armed with this information, the cooperative can improve its product forecasting, make better purchasing decisions, and reduce the chance that an item will be out of stock at distribution centers. Although the original plan was to make installation of the system mandatory, the cooperatives directors decided that such a requirement could place an excessive burden on some of the smaller or less profitable stores. Consequently, installation will be optional. The POS system is to comprise a scanning device attached to a cash register that operates with a microprocessor. This cash register will be networked to a PC so that an items current price can be obtained for checkout and a perpetual inventory maintained. Each night, the distribution center will telephone the stores computer, which will answer and download the days sales. At the end of the business day, the store owner can also review the days sales and determine current inventory levels. The system will be designed to detect any items likely to sell out. The owner can tag any item, permitting an order to be placed that night (when the distribution center calls) for midcycle delivery. The cost of the POS system will be borne by individual stores but, because of combined purchasing power, systems can be obtained for 40 percent less than list price. The cooperatives directors propose that each distribution center contract with an installer to do on-site equipment installation at individual stores. However, individual store owners would be allowed to have local technicians do the installation. The cost of system installation at the distribution center will be borne by a one-time assessment of all member stores, whether or not they install and use the system. A two-day training session will be conducted at distribution centers whenever five or more store owners have installed the system and are ready to learn how to use it. Optionally, store owners can travel to the POS vendors home office in Atlanta

at their own expense for a two-day training session, which is to be offered once a month. A vote has been scheduled prior to the cooperatives annual members meeting. Members are asked to vote yes or no on the proposal, and a majority of those voting will determine the outcome. As Bill Murton completes his shelf scan and returns to his office, he thinks to himself: Since the new POS system will automatically track inventory, I wonder if I will still be able to get a gut feel for what is selling and what is not. There is nothing like examining the shelves like I just did and talking to customers to understand what I should be stocking. And, I wonder how much it will cost to run the system once it is installed?

QUESTIONS 1. How will a POS system enhance the operations of Bills Hardware? How will it enhance the operations of the cooperative? 2. What strategic advantages will the system confer on Bills Hardware? What strategic advantages will accrue to the cooperative? 3. What criteria should be considered when assessing the benefits of the POS technology? What costs should be included? 4. How should Bill Murton vote?

Competitive Advantage
Google Takes on the W STUD The rise of Google, now a $6.1 billion company, has been fast and fierce. Founders
Sergey Brin and Larry Page met in 1995 as Stanford University graduate students. They created a search engine that combined the technologies of Pages PageRank system, which evaluates a pages importance based on the external links to it, and Brins Web crawler, which visits Web sites and records a summary of their content. Because Google was so effective, it quickly became the search engine of choice for Web users. Today, Google handles nearly 50 percent of Web searches. Google stopped displaying the number of Web pages it indexed after the number surpassed 8 billion in 2005, but some estimates now place the number at 25 billion. Googles index also includes one billion images and one billion Usenet newsgroup messages. In addition to searching for Web pages, Google users can search for PDF, PostScript, text, Microsoft Office, Lotus, PowerPoint, and Shockwave files. Google claims to be one of the five most popular sites on the Internet with more than 380 million unique users per month and more than 50 percent of its traffic coming from outside the United States. Googles IT infrastructure is a closely guarded secret because it is part of its competitive advantage. The best guess is that Google has up to 450,000 servers spread over at least 25 locations around the world. These servers use inexpensive off-the-shelf hardware to run a customized version of the Linux operating system and other critical pieces of custom software. These include MapReduce, a programming model to simplify processing and create large data sets; Google WorkQueue, a system that groups queries and schedules them for distributed

processing; and the Google File System, which keeps copies of data in several places so that the data will always be available even if a server fails. According to a widely cited estimate, Google only needs to spend $1 for every $3 its competitors spend to deliver a comparable amount of computing power. This inexpensive, flexible infrastructure explains the speed of Google Web searches and its ability to provide its users with such a vast array of Web-based services and software tools. Most of Googles revenue comes from online advertising and online search services. Google Search Services enable organizations to include the Google search engine on their own Web pages. This is a straightforward technology licensing arrangement not groundbreaking, but profitable. The side of Google that has driven its phenomenal growth and profits is its advertising program. In a fraction of a second, Googles technology can evaluate millions of variables about its users and advertisers, correlate them with millions of potential ads, and deliver the message to which each user is most likely to respond. Because this technology makes ads more relevant, users click on ads 50 to 100 percent more often on Google than on Yahoo!, creating a better return for advertisers. According to eMarketer, Google grabbed about 70 percent of all paid search advertising. In 2000, Google launched AdWords, a self-service advertising program in which vendors bid to have their ads placed alongside the search results for specific keyword queries. In 2002, AdWords Select introduced costper-click (CPC) pricing so that advertisers only pay for their ads when users actually click on them. Google determines the placement of ads through a combination of the CPC and click-through (total number of clicks) rates so that the most relevant ads for a keyword string appear in the most prominent positions. The keyword-targeted ads appear throughout the Google Network, which includes America Online, Shopping.com, Ask.com, The New York Times on the Web, and many other highprofile Web sites. AdWords has come under some fire for being vulnerable to a practice known as click-fraud. A business whose ad receives thousands of clicks from sources that have no intention of making a purchase may run through its marketing budget quickly and have to drop out of the ad game altogether. Unscrupulous businesses have tried to use click fraud to drive up the cost of competitors ads and put them at a competitive disadvantage. Google and its competitor Yahoo!, have been criticized for their vague response to the problem. Google credits customers for invalid clicks. It also has a system in place to detect click-fraud before customers are charged. Google does not disclose details about its antifraud methods to advertisers because of concerns about security Although advertising customers are worried about fraud attacks, Google must be concerned with legitimate offensives from its rivals. Yahoo! has been sponsoring prominent academic economists and other researchers to find new ways of using its data about online consumer behavior to increase market share for its services and the revenue generated by its searches. Microsoft has a history of diminishing or destroying its competitors by exploiting the fact that its Microsoft Windows operating system can be found on 95 percent of the worlds personal computers. Netscape Navigator, Lotus 1-2-3, and WordPerfect have all been defeated in this manner. Microsoft launched MSN Search in November 2004, but this search service made only a marginal dent in the market, accounting for 13 percent of worldwide search requests. Still, that 13 percent could double once Microsofts Windows Vista operating

system enters the marketplace. Microsoft plans to integrate search technology into Windows Vista and into upcoming versions of Office. Two other areas where Microsoft can vault ahead of Google are context-aware searches and deep Web searches. By personalizing search technology, a search engine can return results that accurately match the context of the users query, producing more relevant search outcomes. Because Microsoft has the capital to purchase the rights to copyrighted material and owns powerful digital rights management software, the company is considered a good candidate to become the gateway to the Deep Webs massive quantity of documents and data that are not indexed by search engines. Microsofts battle for Googles market share goes beyond search engines. To Microsoft, Google has ceased being a search technology company and is now a software company, capable of infringing on the markets that Microsoft dominates. In the past, Microsoft has thwarted competition through strategic pricing and feature enhancements, as well as by tying its products together so that they are the most convenient to use. Microsoft may not find it so easy to thwart Google. Other software manufacturers had to rely on Windows as a platform on which to run their products. Since Googles applications are Web-based and not tied to the Windows operating system, Microsoft cant use its operating system monopoly to limit access to Google. Google is giving away its Linux-based programs over the Internet for free. In the spring of 2006, Google introduced Google Spreadsheets, a Web-based spreadsheet application, and also acquired the company Writely, which offers a Web-based word processor. In late August of that year, Google offered a package targeting businesses called Google Apps for Your Domain that bundles e-mail, calendar, instant messaging, and Web page creation services that run on Googles computers. Competition with Microsoft will intensify when Google adds its online spreadsheet, word-processing, and collaboration applications to the Apps suite and markets the whole package to large companies. How far Google can eat into Microsofts software franchise is uncertain. But Microsoft fears Googles Web-based computing model could make it possible for computer users to bypass its products entirely. Google is constantly looking for new ways to grow. Its AdSense program scans Web pages for target words and displays appropriate advertisements, enabling Web site operators to generate revenue from their sites. Google introduced the Google Toolbar, which enables Web surfers to search the Google index without visiting the Google home page.

The toolbar also provided one of the Webs earliest defenses against pop-up ads. Googles image search index launched in 2001 and now archives more than one billion images. In 2002, Google News appeared, becoming the first Internet news service compiled completely by computer algorithms, and offering customized news alerts by e-mail. In April 2004, Google announced its Gmail, Web-based e-mail service, offering free online storage to users. Google made headlines later that year when it released Google Desktop Search, a downloadable program for searching personal files on a computer, including e-mail, productivity files, browsing history, and instant message conversations. The latest version of Google Desktop introduced Gadgets, small applications that bring specific content such as news, weather, or cartoons, along with highly targeted ads, directly to the users desktop. Other popular services that Google has introduced include Froogle, a consumer product locator, and Google Maps, which includes dynamic online mapping and satellite pictures of searchable addresses. Google also acquired and improved Picasa digital photo management software, which is downloadable free of charge and introduced a free instant messaging and voice communication service for personal computers called Google Talk. Instant messaging is now fully integrated with Gmail so users can chat in the same window in which they compose and read email. Taking advantage of the social networking 3 Part Two Information Technology Infrastructure craze started by Web sites such as Friendster and MySpace, Google partnered with Nike to create an online, invitation-only community for soccer fans worldwide called Joga.com. Not all of Googles products have been met with unanimous enthusiasm. Gmail, for instance, raised the ire of privacy advocates because it uses the same technology as AdSense to place advertisements alongside messages. The selection of ads is based on the actual text of the messages, meaning that every Gmail message is read by an automated scanner. Google Checkout, which stores users credit card numbers and shipping information to facilitate online purchases, is forging new relationships with online merchants, who receive a more favorable transaction charge from Google than they would get from credit card companies. Googles roster of paying advertisers continues to grow. Google Video allows users to search for and then purchase TV shows, sports broadcasts, film clips, and music videos. In this area, Google has less experience than Yahoo! in negotiating with content providers, who are particularly concerned with piracy in the digital age. Eric Schmidt, Googles CEO,

says that video search and its corresponding rights issues will be a major story for Google for years. In the meantime, profits continue to soar, and Google will continue to innovate. Schmidt estimates that Google will need 300 years to organize all of the information in the world.

CASE STUDY QUESTIONS

1. Evaluate Google using the competitive forces and value chain models. 2. What are Googles sources of competitive advantage? How does it provide value to its users? 3. What problems and challenges does Google face in this case? What management, organization, and technology factors are responsible for these problems and challenges? 4. Does Googles business strategy effectively address these challenges? Explain your answer. 5. How successful do you think Google will be in the future?

Nestl Tries for an All-for-One Global Strategy

Nestl is the largest food and beverage company in the world. Headquartered in Vevey, Switzerland, the company has annual revenues in excess of $70 billion and nearly 250,000 employees at 500 facilities in 200 countries. Best known for its chocolate, coffee (it invented instant coffee), and milk products, Nestl sells hundreds of thousands of other items, most of which are adapted to fit local markets and cultures. Traditionally, this huge firm allowed each local organization to conduct business as it saw fit, taking into account the local conditions and business cultures. To support this decentralized strategy, it had 80 different information technology units that ran nearly 900 IBM AS/400 midrange computers, 15 mainframes, and 200 Unix systems, enabling observers to describe its infrastructure as a veritable

Tower of Babel. However, Nestls management found that allowing these local differences created inefficiencies and extra costs that could prevent the company from competing effectively in electronic commerce. The lack of standard business processes prevented Nestl from, for example, leveraging its worldwide buying power to obtain lower prices for its raw materials. Even though each factory used the same global suppliers, each negotiated its own deals and prices. Several years ago, Nestl embarked on a program to standardize and coordinate its information systems and business processes. The company initially installed SAPs R/3 enterprise resource planning (ERP) software to integrate material, distribution, and accounting applications in the United States, Europe, and Canada. Nestl then extended its enterprise systems strategy to all of its facilities to make them act as a single-minded e-business. Once this project is completed, Nestl will able to use sales information from retailers on a global basis to measure the effectiveness of its promotional activities and reduce overstocking and spoilage caused by having products sit around too long on grocery shelves. Achieving global standardization of operational processes has been a complex task. None of Nestls products is considered a truly global brand, with perhaps the exception of Nescaf, of which 100 million cups are served around the world each year. But even Nescaf is rebranded, repackaged, and reformulated to create over 200 product versions for different regional preferences. This is just a small representation of the complexity that CEO Peter Brabeck wanted to address when he decided to bring a sense of order to the companys business operations. In 1995, Nestl facilities in 14 countries were running their businesses on SAP R/2, an older version of its ERP software. They all ran the software differently and used different schemes for formatting data and managing forms. The system disparity resulted in increasing maintenance costs. Compiling financial reports to gain a company-wide view of performance became more laborious. Between 1994 and 1999, Nestl increased its spending on information systems from $575 million to $750 million. Brabeck arrived in 1997, and while the technology budget was growing, he was actually decreasing the size of the company by selling off Nestl brands. The cost of tracking the sales chain, as a percentage of total sales, rose from 1.2 percent in 1994 to 1.6 percent in 1999. By April 2000, Brabeck had had enough of a corporate philosophy that allowed for thousands of

differently configured supply chains, multiple methods of forecasting demand, and innumerable practices for invoicing customers and collecting payments. The inconsistencies and inefficiencies across the enterprise were chipping away at Nestls profits. Brabeck, chief financial officer Mario Corti, and the entire executive board launched a $2.4 billion initiative to compel its market heads around the world to adopt a single set of business processes and systems for procurement, distribution, and sales management. Chris Johnson, who was in charge of Nestls Taiwan market, was asked to lead the initiative that would come to be known as GLOBE (Global Business Excellence). Johnson was instructed to find a way to harmonize processes, standardize data, and standardize systems. All of Nestls worldwide business units were to use the same processes for making sales commitments, establishing factory production schedules, billing customers, compiling management reports, and reporting financial results. The units would no longer be permitted to adhere to local customs for conducting business except in cases where the laws of a particular country required that they do so. Every Nestl facility would format and store data identically, using the same set of information systems. Johnson would have to oversee the confluence of divergent processes into a single source of truth. Johnson would have three and a half years to deploy the GLOBE strategy at 70 percent of the companys global markets. Such an undertaking was unusual for Nestl. Large projects, such as the construction of a coffee factory, generally cost the company in the range of $30 million to $40 million. Putting up billions of dollars to fund a project was risky, but for Brabeck, the potential benefits were too important. He could significantly curb IT spending, which was growing dangerously. In addition, he could gain an advantage over competitors like Unilever and Kraft Foods in improving operational efficiency while continuing to grow with new markets and new products. Nestl would also be able to reduce its number of suppliers from 600,000 to 167,000, and save hundreds of millions of dollars in the process. The savings would be reinvested in innovation, pleasing its largest customers like Wal-Mart and Tesco, and further strengthening Nestls position among the other global food suppliers. It would be the first global enterprise to conduct business as though it were operating in a single country. The goal was lofty, and previous attempts at cooperative standards had mixed results. Technology experts from headquarters had emphasized standards and best practices to the 14 countries that deployed

SAP in the past. The pleas for a unified corporate culture were largely ignored. On the other hand, market managers in Asia had come together to develop a common system for managing their supply chains using software from SSA Global. The Business Excellence Common Application flourished in Indonesia, Malaysia, the Philippines, and Thailand, and even spread to South Africa. The American division of Nestl also standardized its practices using SAP software in a project known as BEST (Business Excellence through Systems Technology). However, it was the Asian effort that would serve as the model due to its success in crossing cultures and satisfying multiple market managers. GLOBE, under the leadership of Johnson, launched on July 4, 2000. Johnson had support from Olivier Gouin, chief information officer for Nestl in France, and a panel of 12 senior executives with various backgrounds who had been chosen specifically for the project. Even before beginning the likely difficult task of convincing market managers worldwide to adopt a centralized culture, the GLOBE team had a more pressing challenge to confront: Was it actually possible to convert 70 percent of the business to a common set of best practices and systems by the December 2003 deadline? There were to be no shortcuts. Everything had to be standardized on the new mySAP Internet-based software. Moreover, the deadline had already appeared in a company newsletter, so changing the date could have damaged confidence in the project. Johnsons team studied the experiences of competitors, and received feedback from consultants at PricewaterhouseCoopers and deployment experts at SAP. Johnson and Gouin were not surprised to determine that the parameters of the project would have to be adjusted. GLOBE required a larger staff, more funding, and a larger window of time than the executive board had allotted. The GLOBE team predicted that its staff would need to grow to a maximum of 3,500 workers. The teams projections also gave rise to the $2.4 billion budget. Gouin softened the blow of the cost by pointing out that the status quo, individual markets managing their own systems, projected to cost $3.2 billion over five years. In the end, considering the scope of the project, Johnsons team also concluded that the schedule was too ambitious. The schedule was revised so that a majority of the companys key markets, rather than 70 percent, would be GLOBE-enabled by the end of 2005, instead of 2003. Instead of technology managers, Johnson tried to build his team from a diverse group of business managers who had experience in a variety of

business sectors including manufacturing, finance, marketing, and human resources. He recruited from Nestl offices all over the world. He went after the best of the bestmanagers that were considered untouchables because they were too valuable in their current capacities to be let go for new projects. Johnson put his first team together in the fall of 2000. By the following winter, the team had added 400 executives with diverse career backgrounds at Nestl covering 40 different countries. In February 2001, this core group began the critical process of compiling the GLOBE Best Practices Library. The 400 were knowledgeable in how the company actually conducted business. They would need to know the processes for everything from calculating product demand and managing the supply chain to generating an invoice and ordering office equipment. Many of these processes had never been documented and were simply passed down by word of mouth. Johnson described the task as converting Nestls oral history into decoding the DNA of how Nestl does business. The 400 executives documented the best ways of performing each process. Then, the GLOBE team brought in experts in each area to challenge the processes, find their weaknesses, and pare the list down to the best practice for each process. In this way, the Best Practices Library evolved into an online database of step-by-step guides for 1,000 processes, divided into 45 solution sets that focused on disciplines such as demand planning or financial reporting. Some best practices, such as getting a product to market, were afforded a degree of flexibility to account for the wide variety of Nestl products and the breadth of markets in which they were sold. Other practices, such as financial reporting, were given no wiggle room. Salespeople were to enter orders with precision in a standard format and by a specific date every month. Financial terms and recording dates were standardized across the enterprise. Johnson later described the accounting software as being kind of like handcuffs in a way to make you do the right thing. It became apparent to Johnson that the greatest challenge of GLOBE might not be technical, but personal. Despite clear support for the project from the highest-ranking executives, including Brabeck, managers resisted the idea of giving up control over their business processes to participate in a centralized solution. They feared the loss of decision-making power. Many thought that making back-office operations identical in so many different countries was impractical. They might agree to standardization, but only if it was their particular practices that were

made the GLOBE standard. The resistance was fortified by the fact that each countrys operations would have to spend its own money to pay for the project. In the fall of 2001, Johnson was on the defensive. He was given a full day of a three-day meeting to convince market managers that falling in step with GLOBE was in their best interest and in the best interest of the company. The managers peppered him with questions that were intended to demonstrate how GLOBE would make their jobs more difficult and degrade the performance of their units. Johnson did the best he could to satisfy them, and then took a frank approach. The project was going to proceed. If they did not get behind GLOBE, he would be fired, and Brabeck would select one of them to head the massive undertaking. The other managers were not interested in that outcome. Johnson did receive support that day from Jose Lopez, the head of the Malaysia and Singapore markets, which were being used to test GLOBEs back-office systems. It was too early to measure the benefits of the project, but Lopez expressed his belief in the premise and his willingness to cooperate. A year and a half later in the spring of 2003, the market heads had another opportunity to question Johnson. While there were still plenty of questions, a number of them described the operational efficiencies they had achieved since implementing GLOBE standards. For example, their financial reports and demand forecasts were better and faster. By a third meeting in May 2005, 20 market heads were able to endorse the benefits of GLOBE. In the interim, however, an unwelcome financial problem arose. GLOBE was not controlling information technology costs as expected. As a percentage of sales, costs were approaching 2 percent. Brabeck instituted a cap on information technology expenses at 1.9 percent. In order to meet the cap, Johnson and Gouin revised the schedule of the project again. They set a goal of 80 percent of Nestl being on the GLOBE system by the end of 2006. The extended schedule allowed the GLOBE team to maintain Brabecks spending cap and protect the companys profits. In the fall of 2005, the percentage of Nestl units running GLOBE reached 25 percent and costs were within the limit. To help the rollouts along, Johnson asked each country to name a GLOBE manager who would facilitate the adoption of the system. These managers also provided value to each other by exchanging their experiences with the system and the solutions they employed for specific challenges. Johnson also established a steering committee at company headquarters to schedule and manage the rollouts.

The steering committee oversaw the reduction of company data centers from 100 to four, including the center in Vevey, which stored the GLOBE templates, Best Practices Library, and central functions. One of Brabecks biggest concerns was that the rollouts occur with no effect on customers. A rollout could only be a true success if no one outside the company noticed it. The initial test markets found this daunting because they would have to fix bugs and confront unanticipated problems during the deployment. Nestl also had to implement the new business processes concurrently with the new systems. There was no opportunity to perfect the processes. And, finally, the managers and their workers had no time to train on the new systems before they deployed them and began using them. Despite these challenges, the test markets experienced few problems, and rollouts proceeded around the world. After the test markets, market managers had at least nine months to document their processes and perfect them until they conformed with the GLOBE templates. Along the way, Nestl did encounter some technical issues. For example, Canadian market managers used special promotions liberally to attract business from local and regional grocery chains. The mySAP software was not designed to accommodate the extra data points generated by so many promotions. Nestl worked with SAP to develop a multiple angles approach to allow for such a difference. The approach enabled Nestl to separate the storage of data by market. This way, a country like Canada could have the extra storage space in the central system that it needed for its promotion data. By the end of 2005, Nestl had converted 30 percent of its business to GLOBE, and had the capacity for one major rollout every month. The 80 percent number by the end of 2006 was still looming, but the company had learned how to operate as a single unit on a global scale. Johnson was not entirely satisfied with the results, citing delayed and flawed summary reports compromising the work of factory and country managers. He was also eager to see reports made available instantly on a 24/7 basis rather than having to wait for them to be completed overnight each day. To make sure that the data entering GLOBEs streamlined data centers are accurate and complete, each country has a data manager. Johnson believes that the system will never achieve perfection as long as time constraints remain a factor. However, Nestl is much closer to achieving its goal of standardizing all processes, data, and systems. The closer the company comes to developing the perfect system, the better the company can serve its customers.
Sources: Tom Steinert-Threlkeld, Nestl Pieces Together Its

Global Supply Chain, Baseline Magazine, January 20, 2006; Nestl Group in 2005: Record Sales and ProfitsHigher Dividend Proposed, www.nestle.com, February 23, 2006; and The Associated Press, Nestle Reports 14 Percent Rise in Sales, MSNBC.com, April 25, 2006, accessed October 11, 2006.

CASE STUDY QUESTIONS

1. Analyze Nestl using the competitive forces and value chain models. What challenges did Nestl face? 2. What type of global business and systems strategy did Nestl adopt? Was this strategy appropriate for Nestls business model? 3. What management, organization, and technology challenges did Nestl have to deal with to standardize its business processes and systems? 4. What strategies did Nestl management use to deal with these challenges? How successful were these strategies? Explain your answer.