The predominant view of IT is that it is only useful for cutting costs so tactical thinking about automation and rationalisation overwhelms longer-term decision and strategic plans and goals.[From Finextra: Cost-cutting banks wide open to disruptive IT innovation – Gartner ]
I remember someone telling me about this, using the behaviour of Sainsbury's and Tesco in the UK in the early 1990s as a case study. Sainsbury's, who were then the no.1 supermarket in the UK, decided that IT was just a cost and decided to outsource it. Tesco decided that IT was a strategic component of the business and set about building new services. One of these was the IT-enabled Clubcard, which enabled Tesco to start working on a new business model.
David Sainsbury dismissed Tesco's clubcard initiative as 'an electronic version of Green Shield Stamps'; the company was soon forced to backtrack, introducing its own Reward Card 18 months later.[From Sainsbury's – Wikipedia, the free encyclopedia]
Tesco overtook Sainsbury's in 1995 and a decade later Sainsbury's decided to bring IT back in house.
Sainsbury’s is to terminate its IT transformation outsourcing contract with Accenture and bring its IT in-house. The company initially signed a £1.7bn seven-year deal with Accenture in 2000, before renogiating terms in 2003 and extending the contract until 2010.[From Sainsbury's calls time on IT outsourcing contract – 27 Oct 2005 – Computing]
There is a strategy that businesses can adopt to cut costs to the bone and then attack the overserved customers of rivals, but it really is difficult continue this for the long term, because innovation in technology will inevitably mean that a new lower-cost competitor is on the horizon. There is another strategy that says that coming out of recession is a good time to capture inexpensive resources and invest in infrastructure to enable new business models. You can guess which one I'm in favour of.
Talking about investing in the cards business, I saw this interview with noted investor Warren Buffet on the excellent pymnts.com site. Mr. Buffet has been an investor in American Express for decades, and in this article he was reflecting on Amex's success in the card market. Bear in mind that they were originally building a defensive strategy, because they were worried about their traveller's cheque business.
They actually took over the field by establishing themselves not as the low‑priced competitor but, but as the class competitor. It was a great marketing arrangement. Then it swept the country. The card I carry in my pocket says, “Member Since 1964.”[From Transcript: Warren Buffett on What's Next in the Payments Industry – pymnts.com]
Diner's Club was expensive, so Amex countered by making an even more expensive product! Something to bear in mind as we begin to look at replacing expensive chip and PIN cards with even more expensive mobile phones. Incidentally, and apropos of nothing, that interview Warren Buffet contained a snippet of history that caught my eye.
In 1964, when American Express had what they called the great Salad Oil Scandal, we became this little outfit in Omaha and became the largest shareholders of the American Express Company. I went around to restaurants and service stations, and asked people about whether the Card was losing its appeal because of the scandal that was going around.[From Transcript: Warren Buffett on What's Next in the Payments Industry – pymnts.com]
The "great Salad Oil Scandal"? I'd never heard of this, and I suspect many readers won't have either, so I couldn't resist going to look it up. It turned out to be rather fascinating. It transpires some businessmen in New Jersey have links to organised crime. Who knew? Back in the early 1960s, one particular New Jersey businessperson, Anthony "Tino" De Angelis, hit on a novel way of defrauding banks. He was in the vegetable oil business, and because vegetable oil floats on water he was able to ship tankers full of water with a thin layer of oil on top. Why would anyone do this? Well, banks were happy to lend with the salad oil as collateral. So fill a tanker with water, put a layer of oil on top, and then you could borrow against the value of a tanker full of oil. Tino did this, and use the loans to buy vegetable oil futures in an attempt to corner the market.
De Angelis learned that consumer credit giant American Express was entering the field warehousing business. This appealed to De Angelis because American Express, following inspections, would vouch for the goods of clients that stored inventory shipments in its warehouses. Clients then could use American Express's warehouse receipts to take out loans, putting up the authenticated value of their inventories as collateral.[From What is the salad oil scandal?]
When the total amount of vegetable oil supposedly stored by De Angelis began to exceed the total world output, alarm bells went off and the whole scheme collapsed. Amex were left to cover the bad loans and lost an enormous amounts of money. At which point… "American Express shares dropped sharply and Warren Buffett, value investor extraordinaire, scooped up a 5% interest in the ensuing fire sale". You really do learn something new every day.
P.S. In the old days, obtaining bank loads against worthless assets was considered a bad thing, so instead of getting a taxpayer funded bail out, De Angelis went bankrupt and got seven years in jail.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]