2-1 Questions:

What is Canada’s position in the airline industry?
The Canadian airline industry was characterized by high government regulation with many unprofitable rural routes supported by federal subsidies. Canadian carriers flew approximately 2% of the world’s passengers (1993) and 25 billion passenger miles compared to the US airlines that handled 40% of the world’s market. The American companies controlled the transborder routes that flew between Canada and the United States, which generated $2.3 billion in revenue.

Since the late 1980’s the Canadian airline industry consisted of two major carriers. They were Canadian Airlines which was a subsidiary of Pacific Western Airlines (PWA) and Air Canada. The government’s approach to avoid too much direct competition between the two airlines was to “divide the skies” assigning Canadian Airlines the Pacific and South American routes and Air Canada the US, Atlantic and Caribbean flights. The domestic flights were also divided in order to minimize head to head pricing wars. Air Canada received most of the profitable routes between Canada’s major cities in exchange for servicing the many remote locations of the North West Territories while Canadian received the remaining cities and most of Asia.
What are the core IT issues facing the two airlines?

A. Whether to develop and implement their own CRS or to partner with the American CRSs, SABRE or APOLLO, owned by American Airlines and United Airlines, respectively

B. Whether to attempt to overcome their mutual dislike and distrust for each other to work cooperatively on a CRS, or to each develop their own, individual CRS, which might not be as competitive as a cooperative CRS;

C. Given the competitive disadvantages under which they must operate relative to the US airlines, they need to ensure that their CRS’s routing and seat scheduling programs generate optimum load factors so as to maximize revenue and profits. They also need to ensure that their IT infrastructure allows the airlines to determine changing seat demands so that they are able to develop better models for predicting future demand; and

D. They need to ensure that their IT infrastructure allows for open channels of communication between the airlines and the travel agents. This is important because the airlines need to provide the travel agents with responsive service so that they are able to develop a strong ongoing working relationship with the travel agents and, in the words of the case, “lock them in.” This will decrease the likelihood that the travel agents will abandon the Canadian airlines’ CRS in favor of the American CRSs.

How important is a good reservation system?
A modern CRS is an extremely important factor with regard to both the short- and long-term profitability of a modern airline. CRSs enable the airlines to “lock in” travel agents, who are then able to determine seat availability on a specific flight, and on some CRSs, to even reserve hotel rooms and rental cars – thus providing much better service to airline passengers. The data generated by the CRS, in turn, gives the airlines greater control and understanding of the changing market for seats. CRSs give a huge competitive advantage to their member airlines, and so may be used anticompetitively by excluding other airlines from joining the CRS or by charging them a large fee to join. One American CRS alone, SABRE, handles over 60 million transactions a day, and provides its parent airline, American Airlines, with huge profits.
Do you agree with Ottawa court?
The Ottawa court had to decide the issue of whether Canadian Air could survive without the AMR deal, and what the effect would be on Gemini and its other partners if PWA were allowed to leave the partnership. The court ruled that to preserve airline competition, the AMR deal had to proceed and if Air Canada would not release Canadian from its obligation to Gemini through a negotiated settlement, then Gemini would be dissolved.

We agree with the Ottawa court for the following reasons: If PWA was not allowed to leave Gemini to consummate its deal with AMR, it is likely that PWA would have gone out of business. This would have had a deleterious effect upon Canadian consumers, as well as upon the Canadian economy as a whole. By allowing PWA to leave Gemini, the court essentially ensured PWA’s long-term survival. Although allowing PWA to leave Gemini without question had an adverse effect upon the Gemini partnership, the court balanced this potential adverse effect against the near certainty that PWA would cease to operate if it were not allowed to leave Gemini, and so in our opinion made the proper decision.

2-2 Questions:

1. What have been H.E. Butt’s key systems innovations in the past decade? What has been their payoff? What are the keys to their success?

HEB had long recognized how important information technology (IT) was to control costs and keep prices low. Management felt strongly that maintaining low prices was critical for the company’s long-term success and this was best done through controlling and/or reducing costs. HEB was a leader in the grocery industry in implement point-of-sale (POS) scanning in the 1970s and had implemented POS at all stores during the 1980s. In addition, automated time and attendance reporting, direct stock delivery receiving and invoicing, and e-mail led to information systems (IS) becoming integral to store operations. HEB initially used minicomputers to link the stores to the corporate office and to all other IS used in the company. HEB installed a VSAT communications system in the early 1990s and this caused a drastic increase in the flow of internal information at a low cost and allowed the corporate office and all stores to be linked together. This communications system was a major reason that HEB did not have to increase the management ranks in spite of dramatically increased sales. The system also allowed a store manager to communicate with other store managers.

The biggest and most important IS innovation came when HEB teamed with P&G in a continuous replenishment (CRP) relationship at the end of 1989. While P&G had already established this relationship with Wal-Mart prior to dealing with HEB, the implementation of this strategy was done nearly simultaneously. This agreement allowed P&G to supply HEB with products based upon warehouse data received directly instead of via receipt of generated purchase orders. By linking their IS, HEB and P&G eliminated up to 10 days from the order cycle. HEB also had a financial incentive to develop this CRP program in that P&G provided a better price on all products. The major benefits of this system were reduced ordering and logistics costs and a significant reduction in inventory levels.

Electronic data interchange (EDI) played a major role in the success of CRP due to the volume of data transmission and the frequency of data interchange. This new system increased the flow of data 100 fold versus the old way of purchasing products. EDI was also important because errors or breakdowns in the system could lead to store stockouts. HEB was also able to run this IS on a PC and avoid investing large amounts of capital in expensive mainframe computer systems. However, this actually caused difficulty as the number of vendors increased. In 1991, HEB began developing a mainframe system to handle the increasing number of vendors utilizing CRP. By the end of 1993, 30% of HEB’s product purchases used CRP. This caused inventory turnover to increase to 23.4 from 11.3 in only 2 years. The volume of CRP purchases had increased to 60% by August 1994 and this method had become the standard practice of the organization. The improvements that HEB realized from implementing CRP surprised many people. One example was in the inventory of a beverage product, which a pre-CRP turnover rate of 25 times per year. After CRP was implemented the turnover increased to over 100 times per year.

The biggest key to HEB’s success is senior management’s commitment to using technology to keep prices low to improve customer loyalty and to improve the company’s profitability. The case specifically mentioned that the company had a compulsive focus on using IS to achieve the company’s strategy of controlling costs and keeping prices low. By being on the leading edge of utilizing IT to improve profitability, HEB was able to develop strong relationships with its vendors as the both worked to develop the best and most efficient systems. It also was important that store managers were willing to rely on technology support.

2. What key technology challenges do the company’s management face in the future? What advice do you have for them?
The company needs to incorporate new software that will allow the CRP system to be modified for periods of high inflations. During periods of high inflation the company can save large sums of money by buying in larger quantities and holding the inventory. Electronic Data Interchange (EDI) needs to be incorporated to expand on present capabilities and allow interfacing with invoicing, receiving, and payment. Any time a company has several information systems operating independently the company is losing efficiency and there is a greater chance of missed data or incompatible date between the systems.

Formulate a Strategic Management Plan that identifies HEB’s goals or desired outcomes. In addition, HEB is doing well at incorporating this new technology but they need to formulate a firm plan in writing of where they want to go and how the new technology will help achieve this. For example, “The companies’ goal is to be a major grocery store in the southeast over the next ten years. “As a company we will expand our CRP system along with extensive investment and cooperation form outside firms to improve HEB’s EDI systems.”