Friday, 29 September 2006
Enterprise resource planning
I originally wrote this article, “Enterprise Resource Planning” in October 2003 when I analysed the Fast Food Industry’s business models using the competitive forces and value chain analysis models. I explained that an Enterprise Resource Planning System would provide a good solution to McDonald’s challenges. The critical success factors driving technological were identified and reasons for the failure of information systems, within the fast food industry, were given. The managerial, organisational and technology factors that caused these problems were explained. The role and impact of alternative information systems development projects were evaluated in terms of the future strategic directions to be taken by McDonald’s and Burger King. The undertaking of risk evaluations are recommended with each project. Finally, I recommended an approach to prevent the negative impact of technology upon the people concerned, including the financial performance of the stock.
BUSINESS MODEL ANALYSIS
Competitive forces model
The competitive forces within the fast food Industry can be analyzed using Michael Porter's competitive forces model, described by O'Brien (2003:p.42). These forces are the bargaining powers of customers and suppliers, competitor rivalry, new entrant threats and the threat of substitutes.
Customer bargaining power is high and created by fast food outlets being located in close proximity to each other. Prices are readily displayed, giving the customer a real choice of which outlet to buy from.
Supplier bargaining power is low because of the concentration of suppliers and the availability of substitute suppliers.
Competitor rivalry is high because it is difficult for fast food companies to distinguish themselves from their competitors, so the challenge has intensified.
The threat of new entrants is caused by the relatively low entry barriers into the fast food business. MOS Burger and Wendy's are examples of new entrants.
The threat of substitute fast food products is affected by trends, such as increased health consciousness, and cost changes.
Using Michael Porter's above model; competitive strategies of cost leadership, differentiation, innovation, growth, alliances and other tactics are used in the fast food industry to counter the actions of the above competitive forces.
A cost leadership strategy used by fast food companies requires efficient facilities, cost reduction programs and tight cost control by a structured organization with defined responsibilities.
An example of a differentiation strategy is that used by McDonald's to distinguish it's products and services from Burger King, etc. by introducing wholesome foods, re-introducing hostesses to carry trays and exploiting the Ronald McDonald mascot for the brand experience.
Innovative strategies employed by fast food companies include; operating units in non-traditional markets, dual branding, food science experimentation and test marketing of new products to adjust to the consumer's changing food tastes. For example, on 8th October 2003, McDonald's appointed a Director of Worldwide Nutrition to help guide McDonald's nutrition and active lifestyle initiatives, McDonald's (2003c).
The growth strategies of a fast food business expand the company's ability benefit from the economies of scale, product integration and global expansion. Both McDonald's and Burger King see the Eastern Hemisphere as a place to expand and compensate for the more saturated market in America and Europe.
Alliance strategies are becoming more prevalent in the fast food industry. Competitors like KFC and Pizza Hut share common locations and home delivery services. McDonald's have more than 800 restaurants in Wal-Mart stores.
Another strategy used by McDonald's to counter competitive forces is sponsorship. For the first time, the company became the exclusive worldwide sponsor of the Olympic Day Run, in addition to being committed to the International Olympic Movement for more than 30 years, McDonald's (2003b)
Value chain analysis model
The business model within the fast food Industry can also be analyzed using Michael Porter's value chain analysis model, described by Kotler (2003:p.70), as a tool for identifying ways to create more customer value. The primary activities in the generic value chain are in bound logistics, operations, outbound logistics, marketing, sales and service. The support activities are firm infrastructure, human resource management, technology development and procurement.
Using McDonald's as an example of a fast food business, the primary activities of logistics and operations are decentralized whereas sales, marketing and service are centralized, according to Lorentzen (2000). Each region of restaurants manages its own supply of materials and operational efficiency to create customer value, but sales, marketing and service are centralized.
The fast food business support activities are usually centralized, with the exception of procurement. McDonald's implements a centralized Supplier Social Accountability Program and Supplier Product Quality Program, reports Beurskens (2002), as a condition of doing business with the company. However, whilst a supplier is in compliance with these procurement programs, buying from these suppliers is controlled regionally.
An ERP as a good solution to McDonald's challenges
McDonald's has 10 challenges:
Customer satisfaction - McDonald's has been ranked the worst company for customer satisfaction in America for a decade.
Franchisee monitoring standards - The company has no system for monitoring standards, so as to avoid trouble with the franchisees.
Investor relations - McD's share price has underperformed the S&P500 for several years. Investors want a tighter, more centralized McDonald's. Instead of aggressive expansion, investors want the company to concentrate on the profitability of existing stores, The Economist (2001).
Threat of substitutes - The future of fast food may be congee, tofu and roast duck as Chinese will displace the burger and pizza, says The Economist (2002a). The Economist (2002b) reports that sales at McDonald's and Burger King are declining and 'fast casual' gourmet sandwich, salad and soup chains are taking market share. McDonald's offering looks increasingly outdated.
Changing customer eating habits - “The world has changed. Our customers have changed. We have to change too", says McDonald's CEO, Jim Cantalupo, in The Economist (2003). There are too many confusing meal choices and variety will be reduced and salads, yoghurts and sliced fruit introduced.
Growth - The company no longer aims to be bigger than everybody else in the fast food industry, just better. A decade of stagnant US store sales was followed by declining sales in 2002. like Coca-Cola or Disney, McDonald's is in the maturity stage of it's life cycle and, as a cash cow, needs milking.
Capital investment - The company massively misallocated capital for decades, according to The Economist (2003), and slashed capital spending by a third, to USD1.2 billion, for2003.
Out-of-date strategies - The Economist (2003) quotes an analyst as saying that McDonald's top management, shaped by previous out-of-date strategies, lacks the vision or stomach to make the necessary changes."
Decentralization - The company decentralized operations in 1998 to rebuild tattered relationships with franchisees. However, this caused reduced service, quality and cleanliness standards. McDonald's new CEO promises improvements in franchisee restaurant management.
Franchisee alienation - The poorly executed and imposed 'Made For You' kitchen initiative had an adverse effect upon franchisee revenue growth and profits.
An enterprise resource planning (ERP) system would provide a good solution for McDonald's 10 challenges. The company's internal businesses would be integrated and improved through a framework. This would enable monitoring of franchisee standards and increase customer satisfaction. An ERP would increase efficiency, thereby reducing costs and improving investor relations. Quick access to sales information would allow the company to develop menus to match the changing eating habits of customers, counter the threat of substitutes and make informed capital investment decisions. The decision support from an ERP would also enable strategies to be adjusted and brought up-to-date. Centralization of the many regional and departmental existing information systems would give greater agility to McDonald's.
Burger King's ERP system, reports Malcom (2003), enables the company to analyze sales trends and track food costs on a daily basis and is also used by marketing to analyze the product mix. A growing number of fast food companies, like Burger King, are standardizing their systems on packaged ERP systems, according to Songini (2002). Burger King uses Microsoft's “Business Solutions” says iStart (2003)
CRITICAL SUCCESS FACTORS
Critical success factors driving technological change
The 'Investor Fact Sheet, McDonald's (2003a) defines the company's critical success factors as being those of McCarthy's Four P Components of the Marketing Mix, Kotler (2003:p.16), plus people - Product, Price, Promotion, Place and People.
The product variety needs to match changing customer tastes and swift fast food outlet feedback is necessary to drive the changing product mix. Product quality requires controlling and customer service needs improving.
The food price is determined by market forces, so costs need reducing through greater operational efficiency. Operating profits and returns on investment call for improvements.
Promotion of McDonald's brands needs re-building to differentiate its products and service from competitor offerings.
The place where customers dine, the McDonald's restaurant, has lost it's status as the gold standard for clean restaurants. It needs re-imaging, rebuilding and renovating.
The people who produce the restaurant food require training to deliver better customer service and educating in the use of technology for logistics, production and sales.
Reasons for failure of IS within the fast food industry
The 6 reasons for failure of IS within the fast food industry are; project cancellation, user resistance to IS, system crashes, user lack of understanding IS, bad system performance and IS not meeting expectations.
Management, organizational, and technology factors
Poor management can cause IS project cancellation. McDonald's wrote off $170 million already spent on a project in 2002 when they unexpectedly realized that the final cost would exceed $1 billion. Taylor (2000) identifies scope management as the leading management activity leading to IS project failure. Companies tend to underestimate the planning complexity, development and training required to change business processes. Compressing new IS roll-out periods, an over reliance upon expensive and external ERP consultants and overstated expectations also contribute to IS failure.
Organizational factors in the fast food industry contribute to IS failure, especially if corporate IT systems are linked to individual stores or franchises that have workers who are relatively unfamiliar with technology, according to Computer Weekly (2002). The non-involvement of affected workers in development and insufficient employee training in ERP can also cause IS project failure.
Technology factors are the least cause of IS failures. Technology problems are only responsible for between 12 and 15 percent of projects that don't work, says Everett (2002).
ALTERNATIVE IS DEVELOPMENT PROJECTS
Role and impact of alternative IS development projects
The role of alternative IS development projects in the fast food industry is to increase revenues and reduce costs.
McDonald's has tested automated order taking machines, using paper money only, says Belilos (1999).
The VISA quarterly report (2002) describes how Burger King and VISA are developing cashless payment.
Contact-less, cashless payment, according to Longini (2002) and Kuykendall (2003), is accepted at certain fast food outlets, e.g. McDonald's in Chicago in the form of a car key fob.
Centralized management of HVAC, lighting and food processing energy conservation systems, reports Sheehan (2001), is being tested by McDonald's at their restaurants in Atlanta, Chicago, Colorado springs and San Francisco.
Ewalt (2002) and Hamblen (2002) say that Burger King uses Palm-100 PDA programmed warming bins in 500 company-owned restaurants and is transitioning to all of it's 8,000 outlets.
McDonald's is looking at putting in an electronic invoicing system that will be integrated into it's network, reports Newman (2002).
Singer (2003a), Black (2003) and Krane (2003) report that McDonald's unveiled wireless hotspots at 10 restaurants in New York and plan to "unwire” 300 restaurants by the end of the year. The New York launch was followed by a similar launch in San Francisco, according to Singer (2003b), and subsequent openings in Chicago, Canada and Australia, reports Kaye (2003).
Burger King, according to Hulme (2003), uses identity and access management systems at a cost of $5 to $25 per employee to protect access to it's systems because of rapid staff turnover.
The impact of automated order taking and cashless payment is to reduce order processing times and cash handling costs. Energy conservation, programmed warming bins and electronic invoicing all reduce operational costs. The impact of WiFi is to increase sales revenue by attracting new customers or retaining existing customers who might be tempted to use the facility elsewhere.
If McDonald's and Burger King choose the strategic directions of cashless payment to reduce costs and WiFi to increase sales revenues then substantial capital investment is required.
Risk associated with each project
Risk evaluation is required at the beginning of each project to evaluate the risk probability and magnitude of effect of the occurrence of the risk associated with each project.
The risks associated with ERP and operational efficiency systems implementation vary according to whether the project has a piloted, phased or 'big bang' roll-out. Risks connected with existing legacy systems, crash contingency plans, stoppages etc. need evaluating. Floyd (2000) says that "the obvious places to start a phased migration are with the 'easy' modules, like Fixed Assets and General Ledger.
Cashless payment IS project risks include system crashes, software and hardware bugs, card theft, communication problems and employee training.
Prevention of negative impact of technology
Technology is prevented from having a negative impact on the people concerned by involving them from conception to completion of each project. Users need to be involved in project development and they need to be trained. Pilot programs require assessing and investors should be kept informed of the hefty financial commitment before the first cheque is written.
McDonald's have introduced e-Ieaming tools in restaurants to bridge the technology skill gap of franchisee employees required to use new information systems. Jones (2001) quotes McDonald's as saying, "This is not a white collar tool. This is a business tool”.
Customer and employee acceptance of new technology can be assessed using pilot programs. For example, a new POS contact-less smart card has been tested by McDonald's and Mastercard in Orlando, says Lingblom (2003).
The financial performance of the stock can be protected by making provisions in several years of accounts for investment in IS. The total costs must be realistic and must include all costs for data conversion, employee training, software, hardware, implementation, maintenance and a risk contingency
List of references
Belilos, C. 1999, 'Technology enhancing service at MacDonald's', CHIC Hospitality Consulting Services, 16th August 1999. Retrieved: from http://www.easytraining.com on 1 th October 2003.
Beurskens, F. 2002, 'Value of Supply Chain Management Issues from the Customer's Perspective', Corn Utilization and Technology Conference 2002, 3rd June 2002. Retrieved: from www.agribiz.com on 1ih October 2003.
Black, J. 2003, ~The Magic of Wi-Fi', Businessweek, 18th March 2003. Retrieved: from www.businessweek.com on 17th October 2003.
'Burger King standardizes ERP menu', Computer Weekly, 9th July 2002. Retrieved: from www.computerweekly.com on 17th October 2003.
Cantalupo, J. 2003, 'McDonaJd's eMac Digital News', McDonald's Corporate Press Release, 20th May 2003.
'Did somebody say a loss?', The Economist, 10th April 2003.
Everett, C. 2002, 'Special Report - The slings and arrows of CRM', Akibia, 18th July 2002.
Ewalt. D. M. 2002, 'PDAs get more innovative, from food-service to life-saving functions', Informationweek, 9th September 2002. Retrieved: from www.informationweek.com on 17th October 2003.
Floyd, T.H. 2000, 'Phased ERP Implementation instead of "The Big Bang"', ERP World West, Anaheim 2000. Retrieved: from www.supgrp.com on 17th October 2003.
Hamblen, M. 2002, 'Field Report: Want Fries With Your PDA?, ComputelWorfd, 29th July 2002. Retrieved: from www.computerworld.com on 17th October 2003.
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