Analysis of Information Technology Role for Global Retailer

Analysis of Information Technology Role for Global Retailer PART 1: INTRODUCTION 1.1 Purpose of report: This report has been requested by Mr Frank Hedge, the CEO of Myer Department Stores- Australia. The reports purpose is to investigate and analyse the strategic role of information technology (IT) to Myers business, including an IT infrastructure audit. Cloud computing is evaluated, and recommendations made for its partial adoption. 1.2 Limitations: This report is limited by the lack of IT infrastructure details provided by Myer. Assumptions were made when required, to enable completion of the report. 1.3 Scope of the report: This report focuses on Myer and the potential use of cloud computing within its IT infrastructure. Divided into four main sections, the report covers Myer; IT infrastructure challenges; cloud computing costs/ benefits and recommendations for cloud computing adoption. It has been compiled from research literature and phone/email interviews with two Myer store managers. 1.4) Myer and its industry Homepage URL; http://www.myer.com.au/ Myer is Australias largest department store group with 65 stores and approximately 14,000 employees. It is present in 25 of Australias top 30 retail centres and attracted 185 million customers in 2009 (Myer 2010). Myer generated net profits of $106.8 million for the first half of the 2011 financial year (AAP 2011). Myer operates across major segments of the Australian non-food retail industry as a department store chain. This industry consists of four segments; household goods, clothing soft goods, department stores and other (eg newspapers, books) (Myer 2010). Myer competes with other department stores, discount department stores, and single store operators as well as internet retailers and direct retailers. Within the department store segment, David Jones is Myers main competition though the former targets a slightly higher income group (Myer 2010). Competition exists with other retailers on price, store location, product range and customer service. Additionally, consumer demand hinges on factors such as disposable income which are sensitive to macroeconomic conditions eg interest rate rises (Myer 2010). The industry has struggled recently, due to weak consumer confidence and increased competition from cheaper overseas internet retailers (GST free and strong Australian Dollar) (Brooks 2010). 1.5) Myers products services: Myer offers approximately 600 000 product lines from 800 suppliers globally including categories such as; clothing; beauty and cosmetics; electrical and homewares (Myer 2010). Myer provides additional products and services such as; Myer One customer loyalty program, over 3 million members. Gift cards Myer corporate sales- eg corporate gifts, office fit outs, VIP nights Insurance (home, contents, travel, car) Bridal gift registry Myer Visa Card (Myer 2010). 1.6) Myers corporate mission corporate structure: ‘At Myer we strive to offer customers a wide and relevant choice of brands, rewards and ideas in a way that makes them feel both welcome and inspired, (Myer 2010, p.3). Myers corporate structure is shown in Figure 1.1. Head office operates under a hybrid of divisional (eg apparel, electrical division) and functional groups (Finance, marketing etc). A national retail store manager oversees regional store managers, who oversee individual store managers. Head office functional groups, directly manage their particular function (eg HR) in the individual stores (Myer 2010; S Johnson 2011, pers. comm., 20 April). (Adapted from: Myer 2010, pp. 25-7). 1.7) Myers major business processes: Laudon and Laudon (2010), note business processes are sets of activities to produce a product or service. Due to its variety of offer, Myer has many business processes such as; Sourcing product to offer in store. Automating administrative processes. Reducing stock theft. Creating visual merchandise displays. Analysing potential sites for new stores. Refurbishing existing stores. Making sales (Myer 2010). 1.8) Myers business strategy Myer has invested substantially in its business since 2006 ($500 million) realizing a world class supply chain, improved retail execution and focused customer service (competitive advantages) (Myer 2010). Myer aims for additional margin and sales growth using specific strategies of; Opening 15 new stores in next five years. Revitalizing instore environments for a better customer experience. Expanding the Myer One program. Implementing a new point of sale system (POS) improving productivity customer service. Implementing a CCTV system to reduce losses (Myer 2010). 1.9) Myers relationships with external entities: Myer has significant relationships with a variety of entities which include; Its 800 global suppliers (Myer 2010). Global sourcing offices in Hong Kong and Shanghai (Algar 2011). Partnership with Melbourne Institute of Technology for paid internship for students (RMIT 2011). Myers involved with philanthropic and community programs including children and womens charities and Melbourne Christmas Carols (Myer 2010). PART 2: IT INFRASTRUCTURE: ISSUES AND CHALLENGES(727 words) 2.1) Description of Myers IT infrastructure: Laudon and Laudon (2010 p. 191) describe IT infrastructure as, ‘the shared technology resources that provide the platform for the firms specific information system applications. It includes investment in hardware, software, and services†¦that are shared across the entire firm†¦. Myers IT infrastructure was analysed according to Laudon and Laudons (2010 p. 203) model which comprises of seven components. The required information was obtained from Myers Head Office IT department and interviews with two store managers (Appendix 1). A summary of each component is presented in Table 2.1. The IT infrastructure differs between head office and individual stores, due to centralization (Slotty 2009). TABLE 2.1 Summary of Myers IT infrastructure ecosystem. (Adapted: Myer IT department; Interview with two Myer Store managers 2011). The key findings from the analysis of Myers IT infrastructure presented above, are as follows; Computer hardware platforms: Client machines (desktops) are not standardized across Myer. A small number of servers exist at multiple locations (65 stores) doing replicated tasks (localized data storage, networking etc). Operating system platforms: Client and server machine software is licensed per computer with Windows variability on client machines. Large information asymmetry exists between managers and sales staff due to their limited access to software (Laudon Laudon 2010). Enterprise software applications: While an intranet portal exists to link to Myers applications, only newer applications (eg Mymerch- merchandising, POS) are fully integrated. Many legacy systems remain isolated and not integrated. Networking/Telecommunications: Myer operates both analog (phone system) and digital (data) networks using two providers (Telstra and IBM). While Myer accesses the internet, it also operates private networks (intranet) in the form of LANs and WANs. Networking is not possible between individual stores. Consultants System Integrators: Integration and implementation of new IT infrastructure is outsourced to IBM, including training. Data management storage: While the majority of Myers data is stored with a third party vendor, localized data storage occurs at individual stores (65). Internet platforms: Physical infrastructure and maintenance of Myers website is outsourced to third parties. Information asymmetry exists, with very limited access to internet for individual stores. Myers network infrastructure is further illustrated in Figure 2.1, which outlines information flows. Note information does not flow between stores, only between stores and head office. (Adapted: Myer IT department; Interview with two Myer Store managers 2011). 2.2) The issues and challenges of managing Myers IT infrastructure: Myer faces several challenges and issues in managing its IT infrastructure. Laudon and Laudon (2010) identify challenges arising from platform and technology change, management and governance and investing in infrastructure prudently. These challenges are also influenced by the strategic role of IT to the business and the impact of the industry in which the organization operates. By revisiting section 1.8 it can be seen that IT plays an important strategic role in achieving Myers medium term goals of increased operating margins and sales growth by; Facilitating increased supplier and sales volumes from new store initiatives (eg hardware and software required). Optimizing productivity, cost savings and customer satisfaction via implementation of new applications (POS system and CCTV loss prevention system). Catering for an expanded Myer One loyalty program (increased data storage and analysis needs for targeted marketing) (Myer 2010). As a result of ITs important strategic role, the challenges of managing Myers IT infrastructure are intensified. This is best demonstrated by specific examples; The challenge of platform and infrastructure change: To best accommodate expected future growth, improved productivity, cost efficiencies and increased data needs, infrastructure components need to be easily scalable (Armbrust et al 2010). This will be particularly true with regards to Myers hardware software platforms, its enterprise software applications and its networking, internet and data storage platforms. Currently, significant pressures exist within Myers industry. Consumer spending is down and offshore internet retailers are offering cheaper prices due to the strong Australian dollar and absence of GST (Brooks 2010). This poses further challenges to Myer to adjust components of its IT infrastructure quickly to generate database driven marketing programs or improve its operating efficiencies (Myer 2010). If cloud computing platforms are considered as future components of Myers infrastructure, then appropriate use guidelines and practices will be needed. Service level agreements (SLAs) for example would commit cloud computing vendors to minimum levels of performance and reliability for Myers systems (Hinchcliffe 2009). The challenge of management and governance: The management and governance of Myers IT infrastructure is significant, considering its strategic role, further evidenced by the commitment of $500 million to its IT program since 2006 (Myer 2010). Aspects to be considered include the location of IT control (centralized or decentralized model), the allocation of IT costs to functional groups or stores, the strategies and policies for using IT and measuring effective return on IT investments (Laudon Laudon 2010). The challenge of investing in IT infrastructure prudently: Considering the significance of IT infrastructure for Myer as it seeks its business goals, this is a crucial challenge. Whether Myer should rent or buy its infrastructure components will be further investigated in section 4 of this report. (Laudon Laudon 2010) PART 3: CLOUD COMPUTING ITS BUSINESS BENEFITS COSTS(986 words) 3.1)An overview of Cloud Computing: Zhang et al. (2010) note cloud computing is not a new idea. While many definitions abound, from an organizations perspective, ‘Cloud computing is an architecture in which companies consume technology resources as an internet service rather than as an owned system (Brandel 2009, p. 1). Most people have already experienced cloud computing through the use of Hotmail, Gmail or Facebook (Wyld 2009). Recent improvements in internet bandwidth, virtualization of servers and storage, open source software, adoption of Web 2.0 standards, has pushed cloud computing strongly into the business sphere (Kennedy 2011). Mell and Grance (2011) claim that cloud computing consists of five crucial characteristics, three service models (software, platform and infrastructure as services) and four deployment models (private, community, public and hybrid clouds) which are outlined in Tables 3.1 and 3.2. Potentially cloud computing can deliver to a business most of its IT needs (from computing power to collaboration tools to software) as an on demand service, wherever and whenever required. As long as an internet connection exists, computing becomes location and device independent (Agger 2009). TABLE3.1 The crucial characteristics, and service models of cloud computing. (Adapted from: Mell Grance 2011, pp. 2-3; Department of Finance Deregulation 2011, pp. 12-3) TABLE3.2 The deployment models of cloud computing. (Adapted from: Mell Grance 2011, pp. 2-3; Department of Finance Deregulation 2011, pp. 12-3) 3.2) Current trends in Cloud Computing: Present studies suggest, ‘†¦the number of organizations using cloud computing to rise to 43% within four years as they continue to cut their costs (Cross 2011 p. 1). In addition to greater cloud computing use in general, there are several trends within cloud computing concerning areas such as; User type deployment models- ONeill (2011), notes small to medium enterprises using cloud computing are typically accessing public clouds for cost savings compared with private clouds. Alternatively larger enterprises use private clouds (third party or onsite) for greater control. Governments (federal level) are trialing SaaS and Ouellette (2011) believes state and local governments will soon follow. Purposes for using cloud services- Its principal use remains as a testing/developing environment and/or as a platform for less critical services and applications (Knorr Gruman 2010). Synder (in The Australian 2010) believes moving core applications to the cloud is still to come. ITs changing role- Hakala (2009) believes the need for IT workers performing maintenance tasks will contract as cloud computing is embraced and employees can ‘self serve directly from the cloud. Innovation- Cloud computing will continue to be a conduit for business innovation due to its low costs and rapid scalability of IT resources (Kennedy 2011; Information Age 2011) Pricing- Cloud computing pricing (especially commodity) continues to become cheaper and simpler for users. Thibodeau (2009) suggests models utilizing a set number of hours for a range of cloud services. SLAs improved security- Improving cloud computing reliability via strong service level agreements (SLAs) continues (Hinchcliffe 2009). Colley (2011) Violino (2010) expect most businesses will demand independent certification of cloud providers reliability in next few years. Cloud providers are targeting improved security to allay user concerns. Working groups such as the Cloud Security Alliance are focusing on this issue (Thibodeau 2009). Violino (2010) noted a need for better access control and identity management within and across clouds. Improved performance and service- The performance of cloud services rises, as more managed service providers enter the market (Ouellette 2011) and performance monitoring standardises (Thibodeau 2009). Typically IT staff connect cloud services individually, though cloud aggregators and integrators are emerging to smooth this barrier (Knorr Gruman 2010). 3.3) The business benefits of Cloud Computing: Cloud computing offers many benefits to business. Leighton (2009 p. 5) asserts, cloud computing will ‘transform the way IT is consumed and managed, promising improved cost efficiencies, accelerated innovation, faster time-to-market, and the ability to scale applications on demand. Sagari (c. 2010) notes the level of benefits cloud computing brings to an organization will vary dependant on the types of services utilized, the business processes evident and the degree of integration achieved. Major business benefits can include; Reduced costs (set up ongoing) * Increased flexibility response times Scalability increased efficiencies * Increased business focus. Increased innovation * Improved mobility Armbrust et al (2010) maintains, one of the most impressive benefits of cloud computing is scalability (elasticity of resources). The business pays for its hardware needs (servers, storage) on demand with the cloud providing great elasticity. Business needs can be scaled up or down as required, saving time, money and improving revenue in peak periods (Zhang et al. 2006; Waxer n.d.). Additional business benefits offered by cloud computing include; Smoothed cash flow * Increased strategic role for IT Reduced business risk * Improved sustainability. Greater computation power * Improved business continuity These benefits are further expanded in Appendix 2 with business examples and their references. 3.4) Cloud computing solutions for Myer: Section 4 details specific cloud computing recommendations to be adopted by Myer. In contrast, Table 3.3, outlines cloud computing solutions best suited to Myer for the aspect identified in column one. The reasons for these choices are as follows; Servers for serving applications- Amazon EC2 has been the market leader in this area and for good reason (Huang 2010). It exceeds Microsoft Azures new offering and it has a superior range of operating systems to use (eg Linux, Myer using), compared with Googles App Engine (Amazon 2011). Servers for storage- Amazon S3 was preferred over Microsoft Azure and Nirvanix for the reasons noted in Table 3.3 eg a price leader, very easy to use and highly reliable, SLA exceeding 99.99% (Huang 2010). Client productivity software- Microsofts new Office 365 retains the known office layout of which Myer staff are familiar. Additionally it incorporates email, calendar collaboration tools. Superior in features to Google Docs or Zoho (McAllister 2010). Private cloud- If recommended to Myer, Amazons virtual private cloud is a good solution. It integrates easily with a firms existing IT infrastructure, including firewalls and security systems (Amazon 2011). Applications- As an application development platform, Force.com has been suggested for its long history of business application development. Furthermore, to use this environment, subscription to Salesforce.com CRM applications are required, which may be beneficial to Myer (Force.com c.2011). TABLE 3.3Most suitable cloud computing solutions for Myer. (Adapted from: Amazon 2011;Force.com c. 2011; Microsoft 2011) 3.5) Costs of cloud computing to Myer: Typically the IT industry uses ‘Total Cost of Ownership (TCO) to determine the total cost of a technology implementation (Laudon Laudon 2010). Table 3.4 provides an estimate of the costs to Myer in implementing the cloud computing solutions listed in Table 3.3. As can be seen, support, maintenance, space and energy costs pass to the cloud provider and hardware and software acquisition costs are essentially avoided. Some training costs of the IT staff involved in implementing and/or the staff using the cloud services would be incurred (Aggarwal McCabe 2009). A small amount of ongoing support to Office 365 users may also be required. Integration issues and costs are not expected, as the servers and software to be sourced via the cloud will not be critical systems. Additional infrastructure costs (eg bandwidth) resulting from cloud computings greater internet reliance, may occur. Downtime estimates from providers SLAs are less than typical IT departments of large companies ie 44hrs/yr (Mann 2010). Moving data into and out of Amazon S3 storage, will incur costs (Amazon 2011). Finally, Aggarwal and McCabe (2009), reported TCO savings of some 50% over four years, for medium sized businesses implementing CRM software from the cloud, compared with on-premise deployment. TABLE 3.4 Total cost of ownership (TCO) for Myers cloud computing solutions. (Adapted from: Laudon Laudon 2010, p. 224; Amazon 2011; Microsoft 2011; Force.com c.2011 ) PART 4: RECOMMENDATION OF CLOUD COMPUTING ADOPTION/ ADAPTION(785 words) 4.1) Competitive forces model for IT infrastructure Investment: Specific recommendations for the adoption of a cloud computing strategy by Myer will soon be made. These recommendations will be based on the preceding analysis and also take into account the ‘competitive forces model for IT infrastructure as described in Laudon and Laudon (2010 pp. 222-3). Table 4.1 summarises the main points of this model as it relates to Myer. TABLE 4.1: Competitive forces model for IT infrastructure investment of Myer Model components Outcome 1) Market demand for Myers services (eg customer, supplier enterprise): Myers point of sale (POS) system supply chain improvements are based on extensive research of their services. These systems improved efficiency speed, and are satisfying customers, suppliers staff (Tindal 2010) Information asymmetry especially with sales staff is affecting performance.