The Cambridge Container Company: managing customer-centric information integration

International Journal of Accounting Information Systems 4 (2003) 309 – 330

The Cambridge Container Company: managing customer-centric information integration Amy W. Ray*, Mary Ann Robbert, Jason Brocious Bentley College, 323 Smith Technology Center, Waltham, MA 02452-4705, USA Received 1 June 2002; received in revised form 15 March 2003; accepted 13 May 2003

Abstract This case illustrates the efforts of the Cambridge Container Company, a fictitious manufacturer of plastic containers, as they consider methods for moving organizational decision-making toward a more customer-centric focus. Cambridge has four independent manufacturing units, each of which currently bases all operational decisions on internally generated cost and profitability information.1 In 2000, Cambridge established a special enterprise level division to consider best practices for collecting qualitative product and service feedback from customers and to subsequently consider how to best integrate such nontraditional, nonfinancial information into their own operational decision models. This realistic scenario gives students an opportunity to consider the financial and managerial implications of moving to customer-centric operational decision-making. Business articles on the advantages of customer centricity abound, but few sources consider the financial and managerial consequences beyond increased customer loyalty and satisfaction. In actuality, this current business trend requires significant reengineering of information systems and management practices. Consequently, accounting methods must be re-evaluated for accuracy and fit with new systems and management practices. At the heart of this case is an opportunity for students to consider the appropriate balance of traditional financial and customer-driven nonfinancial information in management decision models for optimal profitability of the company and its individual units. In addition, the instructor can delve into a number of internal control and political issues related to information sharing. There is also opportunity for students to consider at a high level the complexities of balancing open information sharing and information security. Several alternative questions and suggested solutions are provided for the

* Corresponding author. Tel.: +1-781-891-2811. E-mail address: [email protected] (A.W. Ray). 1 While the Cambridge Container Company is fictitious, the issues addressed in this case are representative of problems and concerns of real companies encountered by the authors during various consulting engagements. 1467-0895/$ – see front matter D 2003 Elsevier Inc. All rights reserved. doi:10.1016/j.accinf.2003.05.003

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instructor at the end of the case. We suggest that instructors select only three or four of the questions so students can spend more time on each selected issue. This case is adaptable for use in managerial accounting, accounting systems or management systems courses at the undergraduate or graduate levels. D 2003 Elsevier Inc. All rights reserved. Keywords: Customer-centric; Information integration; Management

1. Prologue As Jessica Johnson pulled to the curb at the front steps of the elementary school, her thoughts were preoccupied with the 9:00 meeting she had been dreading all week. She had already endured several long and contentious meetings over the relative benefits of focusing on customers versus focusing on internal profit. Today’s head-to-head meeting with leaders from both camps would likely be the worst yet. Most of all, she feared that if the millions of dollars spent on capturing detailed product and service preference information from customers went to waste, she would certainly lose her job. ‘‘Have a good day at work, Mom,’’ her daughter said. Jessica smiled, but thought to herself that the odds of having a good day were pretty slim. That same morning, Brian Augustine pondered what life would be like at Cambridge Container Company in 6 months’ time. As he polished off his last pancake, he couldn’t help but feel angry. Why, he thought, do those executives who are so far removed from operations think they know what the customers want better than he and the other operations managers? After all, Brian had worked closely with Habit Cola and all the other customers for years without any serious problems. Why give up on a strategy that has worked for years?

2. Cambridge and their customer relationships Cambridge Container Company is a large, publicly traded manufacturer of a variety of plastic containers. Most of Cambridge’s customers are also manufacturers that use Cambridge containers to package their own products. Percentage distributions of the company’s product base for 2001 and 2000 are shown in Tables 1 and 2.

Table 1 Cambridge Container Company distribution of revenues (%) Type of container

2000

2001

Carbonated beverages Other beverages (juice, sports drinks, etc.) Food Personal care products

62% 15% 14% 9%

66% 14% 13% 7%

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Table 2 Cambridge Container Company customers and revenue ($000) by PU, fiscal year ending 2001 Production unit

Customers

Annual revenues ($)

Carbonated beverages Other beverages Food Personal care Total

230 70 150 120 570

544,817 115,567 107,312 57,784 825,480

The primary manufacturing facility of Cambridge is organized into four physically separate production units (PUs)—one for each of the four primary types of containers described in Tables 1 and 2. As shown, the Carbonated Beverage Container Production Unit provides the largest percentage of revenues for Cambridge. It is also interesting to note that approximately 10% of the Carbonated Beverage Container customers generate 90% of the unit’s revenues on an annual basis, so maintaining positive relations with these customers is also critical to the success of the entire firm. In fact, loss of one of the major carbonated beverage container customers could have a devastating impact on the firm overall. The criticality of a few customers to the financial success of Cambridge motivated the establishment of a new service division called the Customer Response Division (CRD). The CRD was established in 2000 and was given the following missions:   

Explore best practices for capturing and organizing feedback from customers on specific dimensions of product and service quality. Identify strategies for applying customer feedback to production decision-making. Capture feedback from customers on product and service quality and deliver it to PU managers in whatever is deemed the best method possible.

Managers of the new CRD enthusiastically embrace the management philosophy that provision of customer value2 is the key to greater profitability. They believe that retention of key customers should be the number one priority of production managers. Yet production managers currently base operational decisions entirely on short-term measures of internal efficiency and profitability. CRD managers believe that this style of management is antiquated and needs to be changed. They believe that exceeding customer expectations for product and service quality should drive production decisions because this focus reduces the risk of losing key customers and is ultimately a more profitable strategy for the long run. As a starting point, the CRD decided to assess the current strengths and weaknesses of their current methods for collecting what they refer to as the ‘‘voice of the customer.’’ Prior to the development of the CRD in 2000, Cambridge relied entirely on its Sales Force Automation (SFA) system for capturing information from customers (see Fig. 1). The SFA system is a proprietary, custom-built system equivalent to a forms-based email system. A 2 Customer value is a term that generally refers to how customers evaluate the benefits and costs of one company’s products and services relative competitor’s products and services.

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Fig. 1. Sales force automation interface.

salesperson can log into the SFA system from either a remote location or from the central office to complete a set of notes regarding a customer request, complaint, or comment (see Fig. 2). Currently, only 50% of the sales personnel use notebook computers and only 10% of all entries into SFA are done from remote locations.

Fig. 2. Sales force automation usage.

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SFA forms contain fields to capture general information such as the name and address of the customer, the identification number for the salesperson filing the form, and a large textbox for entering the customer information. The reasons for filing forms via the SFA system include everything from recording customer preferences for the way deliveries are unloaded from the trucks to requested changes in container strength, weight, size, or shape. All of this textual information is captured sequentially by date and time of entry and is stored in a centralized indexed sequential data file at corporate headquarters. Information can be sorted by customer contact or by product line, but there are no standards set for keyword use. Because information in the SFA does not have any information content-based search capabilities, it is difficult to make comparisons across forms or to analyze the information in the SFA for patterns and trends in requests or complaints made by customers. Also, entries into the SFA system are usually made when there is a problem or complaint. CRD managers want to be proactive about meeting customer needs and want to build mechanisms for capturing what customers value about Cambridge products and services—not just a repository for customer problems. The SFA system is still used extensively by Cambridge, and the CRD believe the SFA should remain with the company as an important system for capturing the voice of the customer. However, they plan to also investigate specific dimensions of product and service offerings that Cambridge customers value most, starting with the largest customers of the carbonated beverage containers unit. While keeping key customers happy is their number one goal, CRD management also believes that much of what is learned from working with these few high volume customers will trickle down into benefits for all Cambridge customers. The first step CRD managers took was to prepare and send surveys to key customers, asking them to compare Cambridge with their primary competitors (see Fig. 3) on a list of multiple attributes including:     

Price Design Quality Delivery terms Helpfulness of sales staff

Fig. 3. Market share of top competitors in the container industry.

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They hope that the results of this survey will help them better understand their competitive strengths and weaknesses through the eyes of their customers. The CRD put another initiative in place right away; they decided to equip all sales personnel with notebook computers and encourage personnel to enter customer information at the customer site to expedite feedback collection and reduce loss of information resulting from time delay in data entry. The protocol for collecting information in the SFA system remains the same though. All text information captured electronically in the field is sorted by date and time and saved in batches to the file. CRD managers are considering several possible follow-up investments to the survey, including the purchase of a customer relationship management (CRM) system. However, the CRD managers have several reservations about jumping into a CRM. First, there are numerous CRM vendors offering a wide range of products, none of which fits exactly with Cambridge’s needs. Since no CRM system is an exact fit, yet any CRM is a major investment, CRD managers think that for the short term, further developing their own proprietary customer information systems is probably a better idea. Another concern about CRM systems is that they are most valuable when tied into existing transactional systems, and the CRD managers are not certain that the Cambridge IT personnel have the time or the skills to undertake such a major integration project. In addition to identifying new ways of capturing qualitative information, CRD managers have recently been asked by the executive board members to research possible customer relationship outcomes of a potential business-to-business (B2B) initiative with the largest customer of the carbonated beverage containers unit, Habit Cola. Habit has the greatest share (56%) of the national cola market and numerous container suppliers vie for Habit’s business. Building a B2B information-sharing network for order replenishment would likely ensure continued business from Habit, but building the infrastructure to connect Habit and Cambridge’s dissimilar systems would be very costly, especially for Cambridge. Executive management has asked CRD personnel to assess whether B2B integration with Habit will allow Cambridge to improve responsiveness to this very important customer. CRD has also been asked to investigate whether Habit will agree to an exclusive partnership where Cambridge is the sole supplier of containers to Habit within the United States, if Cambridge agrees to make the substantial investment to ensure successful B2B integration. Additional issues that CRD managers are researching for Executive Management include: 1. Will Habit allow tie-in to their production information systems and if so, can access to those systems help Cambridge improve overall capital budget and new product development decision-making on product lines purchased by Habit? 2. If Habit and Cambridge go forward with integration, is there any way that Cambridge can compare the profitability of their strategic partnership with Habit to the profitability of business with other customers? In other words, can the relationship with Habit be used as a testing ground for assessing the real value of this level of customer centricity? 3. What information is available from Habit’s information system and what can and should be collected electronically?

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Fig. 4. Production unit organization chart.

4. What political, managerial, and internal control issues surround direct electronic exchanges of business data between the two companies? 5. How can managers be motivated to use externally generated information for making critical business decisions?

3. Cambridge’s organizational structure Cambridge’s management structure is organized around product groups instead of processes. Each of the four primary manufacturing units is fully staffed with the employees necessary to run that unit autonomously. For example, there is an entire staff of production managers, engineers, accountants, marketing managers, and information systems personnel who are dedicated full-time to the development and sales of carbonated drink containers for that unit. All product-level decisions are initiated by PU managers and are subsequently submitted for approval by executive management. Fig. 4 illustrates the organizational structure of the PUs and Fig. 5 illustrates the organization of executive management.

Fig. 5. Organization of executive management.

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Table 3 Carbonated beverages division consolidated statements of income (figures in thousands) Net sales Cost of goods sold Marketing, general and administrative expenses Interest expense Income tax expense Net income

1999 ($)

2000 ($)

2001 ($)

554,183 450,520 28,802 23,612 18,962 32,287

557,220 447,890 29,872 24,397 20,373 34,688

544,817 433,776 30,842 25,011 20,420 34,768

Currently, all PUs are profit centers and PU managers base all business decisions on financial information. For example, two key production goals for the carbonated beverage container unit are management of raw materials costs, which average 55 cents per pound, and management of transportation costs, which currently run from 3 to 5 cents per pound. The PU managers generally focus on squeezing out operational inefficiencies as the means for meeting and exceeding their annual profit targets. Migration to customer-driven decisionmaking will require PU managers to change their current predisposition toward use of internally gathered and purely financial information. PU managers are having difficulty understanding the need to reengineer decision-making models, as they believe the current system still serves them well—‘if it ain’t broke, don’t fix it’. Income statements for the past 3 years for the Carbonated Beverage Container PU are included in Table 3 and comparative Table 4 Cambridge Container Company balance sheet (figures in thousands), fiscal year ending 2001 Production unit

Assets Cash Accounts receivable Inventory Total current assets Plant and equipment Less: Accumulated depreciation Net fixed assets Total assets Liabilities and net worth Accounts payable Short-term notes Accrued expenses Total current liabilities Long-term debt Capital surplus (retained earnings) Total liabilities and net worth

Carbonated beverages ($)

Other beverages ($)

Food ($)

Personal care ($)

40,000 104,000 118,000 262,000 1,100,000 (500,000) 600,000 862,000

10,000 20,000 50,000 80,000 480,000 (60,000) 420,000 500,000

9000 14,000 38,000 61,000 390,000 (60,000) 330,000 391,000

6000 9000 22,000 37,000 230,000 (30,000) 200,000 237,000

40,000 52,000 80,000 172,000 200,000 490,000 862,000

12,000 24,000 14,000 50,000 60,000 390,000 500,000

9000 19,000 12,000 40,000 63,000 288,000 391,000

3000 11,000 8000 22,000 47,000 168,000 237,000

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Table 5 Carbonated beverage unit accounts receivable, December 31, 2001 Customer

Accounts receivable balance ($)

Days past due

Habit Cola Snap Cola Peppy Co Sodi Sodas Tenga Cola Bright Cola Live Bevs Buzz Beverages

35,000 21,000 15,000 12,000 9000 7000 2000 3000 104,000

15 10 5 Current 7 5 Current

balance sheets for all four PUs are included in Table 4. Accounts receivable for the Carbonated Beverage Container PU are included in Table 5. The PUs are large enough that there are generally several layers of management for each function within the PUs, and managers are typically in one level for 3 to 5 years. Managers of the product units are evaluated on profit contribution to the firm and are awarded annual bonuses equal to a percentage of reported division earnings based on annual profit and loss.3 Executive management believes that Cambridge’s greatest competencies include strong management teams, a good customer interface through their sales force, and knowledgeable information systems personnel.

4. Cambridge’s information systems Each PU has its own information systems group. All information systems are backed up on corporate level master data files at the end of the day for data protection and to assess corporate-wide performance on a daily basis. However, electronically sharing information from one PU to another during the course of a day is difficult, at best. Each PU has their own IS group who maintains an independent operational system. For example, if two PUs use identical raw materials, it is not possible to directly share raw materials inventory information on a real time basis (Fig. 6). While it would seem logical to find a way to share this information, there is, in fact, a disincentive to do so. Since all PUs operate on a profit-center basis, there is some competition between units. However, as the need for interorganizational information sharing increases, executive level management is facing the fact that they need to integrate existing PU systems. The short-term plan is to continue managing the flow of information by PU. However, some of the systems personnel from the PUs are in discussions with the corporate-level systems staff to consider systems integration and to plan future 3

Divisional earning, for purposes of establishing management bonuses, is determined in the same manner as operating profit is determined for reportable industry segments in accordance with SFAS-14, Financial Reporting for Segments of a Business.

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Fig. 6. Information architecture at Cambridge.

technological investments. Cambridge’s corporate-level systems staff currently consists of approximately 15 employees with another 16 personnel divided among the PUs. IS personnel are dedicated to each of the PUs based on the size and work complexity of the unit. The central IS personnel are focused on three major projects along with regular operational issues:   

PU connectivity to the developing CRD information databases. Cost analysis of B2B integration between Habit Cola and the Carbonated Beverage Container Unit. Feasibility of investment in CRM.

Cambridge has seen many dramatic changes in technology and management over the last several years. Implementation of SAP was completed in 1999, just in time to ensure Y2K compliance. That investment threw everyone in the organization into a tailspin—the system ultimately cost Cambridge three times what they originally budgeted. Despite the expensive and challenge of implementing SAP, Cambridge managers now see numerous related IT investment opportunities as a direct result of having an ERP system in place. For example, Cambridge would not be able to consider B2B integration with Habit if they did not have SAP installed because integration with their former legacy system would have been impossible. Executive managers feel that they will never really have an accurate financial account of the benefits they are now reaping from the investment in SAP, but they want to make sure that they capture the costs and benefits of subsequent investments as accurately as possible. Indeed, dramatic changes in the use and management of information are taking place across the board at Cambridge. Currently, Cambridge must prioritize the three major possible investments in IT and to plan for future projects as best as possible. Demands from Habit and CRD both seem pressing, but the IT budget is not unlimited. 4.1. Cultural dynamics Amidst all the process change considerations, frustrations, and differences of opinion emerge from all levels of management across the organization. In particular, there is some

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tension between executive management and the PU managers about competitive strategies. Most of the PU managers contend that they must focus most if not all of their attention on being the low-cost leader and that internal and external information integration is a waste of time and money. On the other hand, the corporate VPs would like to see managers throughout the organization embrace other customers’ needs as part of Cambridge’s own strategy and feel that they are already losing competitive ground by focusing entirely on traditional business management practices. 4.2. Overheard in a recent business meeting

Cast of Characters Jessica Johnson—Vice President. Primary responsibility: oversight and management of all product unit operations. Jeffrey Parise—Vice President. Primary responsibility: sales and customer satisfaction. Hanneli Weber—Executive Director. Primary responsibility: liaison between manufacturing managers and all other division managers. Brian Augustine—Senior Manager. Primary responsibility: capital planning for carbonated beverage containers. Nathan Lipton and Cheryl Smith—PU managers. Primary responsibility: oversight of operations for carbonated beverage and food container manufacturing processes, respectively.

Jessica (VP, Operations): ‘‘Thanks for attending the meeting today. As you now know, Cambridge is currently rethinking the way we gather and utilize information for decision-making purposes. The objective of our organizational study is to find a way for employees to access whatever customer information or internal, operational information needed to improve effective and efficient delivery of the highest quality products. It’s not enough to just capture customer, or any other qualitative information, and make it available to PU managers. The key is to integrate new customer information with existing operating information in such a way that it is easy to link the two—to see how they affect each other. That’s the only way that changes in decision-making can really take place. In any event, I believe that if we don’t move to a more customer-centric way of thinking very soon, we are going to lose our position as an industry leader. Ultimately, I’d like to see our systems capture the sort of customer information that will allow us to know what products to build in the future. This is a step beyond customer feedback on current operations, but we should consider this as we go forward with systems design and implementation. Having said all of this, it is also important to note that we need to move out of analysis and into action as quickly as possible.’’ Jeffrey (VP, Sales): ‘‘One advantage we already have is our innovative management structure, but it could be more fully utilized. We need to work on being more responsive to

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customer needs. We need to focus on producing what our customers want instead of simply producing what we have the capacity to produce.’’ Brian (Sr. Mgr, Carbonated PU): ‘‘We can’t become so focused on pleasing the customers that we lose sight of our own strategic development and long-term P&L. These have always been our most important evaluation points.’’ Hanneli (Exec. Director): ‘‘We are an industry leader right now, but if we ignore the fact that most of our products are commodity products for which customer switching costs are low, we could lose our position very quickly. Our competitors dauntlessly pursue our customers. We have to find better ways to build customer loyalty.’’ Cheryl (Manager, Food PU): ‘‘We already have several customer loyalty strategies such as ‘load trucks in the exact order that customers want them unloaded’ or ‘package containers so that the number of containers matches the amount of their product produced per batch’. What more can we do? We can’t budget production entirely based on what customers want! Plant capacity and usage has to be determined on a financial basis in order for the company to remain profitable!’’ Hanneli: ‘‘But these methods aren’t serving us that well. Predictions based on capacity do not relate to sales demands—6 months ago we weren’t producing enough; now we’re producing too much. If we could get a handle on swings in sales from our customers, wouldn’t that be a better basis for scheduling our own production? Plus, knowledge about what our competitors are doing is difficult to obtain; you have to be secretive when you are producing primarily commodity products.’’ Cheryl: ‘‘On the other hand, when you produce commodity products, you must be the low cost producer; you have to exploit economies of scale and make as few products as possible to remain efficient. Better throughput and better efficiency lead to higher profits, while surveys on color, shape, etc. are worthless. What you are talking about is increasing information processing requirements, which costs money—lots of money. Habit won’t pay more for Nathan’s products just because we started asking them how they feel about us.’’ Nathan (Mgr, Carbonated PU): ‘‘Ha! Cheryl’s right! Cozying up to Habit is like cozying up to a snake—everybody thinks you’ll make more money by having warm, fuzzy relations with customers. You think ‘we’re in this together through thick and thin,’ but that’s simply not true—especially with companies as powerful as Habit. If your costs go up, you take the hit. Habit would go to another supplier in a heartbeat if they could get the same product cheaper. And why shouldn’t they? It’s dollars and cents—good business in other words.’’ Cheryl: ‘‘Promising manufacturing flexibility based on customer whims isn’t the best option for another good reason—we can’t always deliver. For example, consider the production of our polypropylene containers. Customer surveys indicated that we had a market for 150 types of polypropylene containers, but we couldn’t get the production switchover costs down. Ultimately, we had to drop production to 20 standard-sized containers in order to be profitable. We offered our customers choice, they took us up on it, and we couldn’t deliver. We ended up creating more disappointment than satisfaction.’’

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Brian: ‘‘Production of commodity products is more manageable than production of specialty products—especially for us. We have successfully built strategic forecasts for our standard-sized products for 5 to 20 years ahead, and these forecasts are based entirely on ROI.’’ At this point, Jessica and Jeffrey are visibly frustrated. . . Situation and Assignment Your team consists of management consulting and systems specialists with the professional services firm, Thibodeau and Osterheld. You have been engaged by Jessica Johnson to help executive management address problems they are facing as they try to sort out their IT investment and integration priorities. The engagement has been classified as a management advisory (consulting) service. Your analysis and recommendations should include a discussion of general management relations and address the following questions. A list of suggested questions may be found in the teaching notes.

5. Teaching notes 5.1. Synopsis For decades, many large companies have engaged in the practice of electronically sharing financial data. At the same time, sales and marketing personnel of large companies have also engaged in electronic collection and storage of qualitative customer information. However, the cost of both types of investments has historically been substantial enough that relatively few companies could rationalize the investments and even those firms with electronic data collection efforts in both accounting and marketing shared very little information cross-departmentally, as internal networks did not facilitate such sharing of data. Today, advances in Web-based technologies are enabling companies of all sizes to seamlessly collect and share a wide variety of qualitative and quantitative information internally as well as externally with customers and trading partners. As the number of companies engaged in such practices increases, anecdotal evidence is emerging that building customer-responsive management practices may be key to optimizing a company’s earnings potential. In other words, if a company can categorically identify what the majority of its customers value about product and service offerings, and if the company is flexible enough to respond to the results of customer-value analyses, then the company can maximize profit potential. While this is an exciting concept and many CRM systems have been designed to study this behavior, there are several managerial and behavioral hurdles that a company’s managers must cross, in addition to the technological ones, before such integrated systems may result in improved decision making, much less earnings maximization. It is not enough to simply make customer-value information

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available to production and service managers—there must be evidence that use of such information will make their division or group more effective or profitable and there must be appropriate incentives put in place for such managers to change their decision making processes. 5.2. Teaching objectives This case is designed to engage students in discussion regarding the importance of information integration in general and integration of qualitative and quantitative information in particular. The concepts of customer-driven management are logical, but the operational complexities involved in implementation often drive companies back to management by traditional means such as ROI by division. At the heart of this case is the need to prioritize information integration requirements of this large manufacturing concern and to make recommendations regarding the appropriate balance of nonfinancial and financial information in management decision models for optimal profitability of the company and its individual units. Instructors may also choose to have students formally consider the questions posed to CRD and the IS team in the case to help students learn this decision-making process. Students should recognize the financial reporting implications of an organizational change to management decision-making driven by qualitative, intangible assets such as customer value. Lev and others argue that the mismatch between reported financial information and market value is due to the lack of management focus on increasingly important intangible assets. As noted toward the end of this case, Cambridge management realizes that they have done a poor job of capturing the costs and benefits of their ERP system. They would like to avoid making the same mistake with their customer response initiative. The problem is that measures for the value of such assets as ‘customer centricity’ are not readily available. Students need to be aware of this problem facing accounting and other managers today. Students will understand the broad scope of information sharing by delving into a number of internal control and political issues related to information sharing. This offers students the opportunity to consider at a high level the complexities of balancing open information sharing and information security. 5.3. Note This case was first tested in a graduate AIS course with approximately 30 students. It was used as a major written assignment worth approximately 15% of the course grade. A few modifications were made to the case for clarification, and then the case was successfully used as part of a Master of Accountancy program capstone project for 80 students. Again, the project was worth approximately 15% of the course grade. The students seemed to enjoy the case and seemed to gain a better grasp of the measurement and management challenges of moving from a purely internal and financial focus to a more external and customer-centric focus.

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5.4. Suggested study questions These questions are distributed prior to class allowing students sufficient time to prepare for the case discussion. The numbers on the questions correspond to potential classroom discussion questions that follow. 1. Examine the relations among middle and upper management citing examples that indicate the state of the relations. 2. Analyze the comparative income statements of the carbonated beverage container division. Do a time-series analysis. 3. List the procedures used by the information systems staff for the collection and storage of qualitative customer information and indicate those that need revision. 4. Analyze the long-term and short-term values of capturing and utilizing qualitative measures, including customer value. 5. Examine the current management evaluation and compensation plan relative to both the organizational structure and the goal of utilizing customer-value information for the management of the product units. 6. What is a knowledge management system? Obtain information on a knowledge management system from the Web; include features of the system and compatibility with Cambridge’s current architecture. 7. Determine the differences in the challenges facing personnel planning the production budget of specialty products versus those of personnel planning production of commodity products. 5.4.1. Potential classroom discussion questions and suggested answers Questions to present in class and suggested answers and teaching hints follow. Numerous potential questions are provided to allow for differences in instructor interests and objectives. However, it is suggested that instructors select no more than four issues to focus on for one class discussion to allow students time to delve into each more fully. 1. How would you summarize the relations among middle and upper management in Cambridge? Suggest a managerial strategy for synthesizing goals for these two management levels. Relations across management levels are quite strained. Cambridge is caught in a transition period where middle management is following old operational rules but upper management is trying to set new standards for doing business. A big part of the problem is that upper management has not yet defined ways to implement decision-making based on customer value data, even though they have spent a great deal of time and money collecting such data. Also, financial incentives for the management of product units are still based entirely on whether certain financial criteria (e.g. ROA or ROI) are met. Thus, the goals of PU managers are not aligned with those of the organization’s strategic management. There is also an equally important behavioral problem in the organization. There is no evidence that upper management has adequately tried to ‘‘sell’’ their ideas down the chain of authority. Even if upper management could persuade PU managers to adopt these ideas

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through the use of better structured financial incentives, the strategy may fail if all levels of management do not share a single, strategic vision for the company (in this case, one that is customer-centric). As the sample dialogue indicates, managers of individual product units are not convinced that the benefits of implementing qualitative information into their decisionmaking models would outweigh the costs, both in the short run and in the future. Since the company is a manufacturer of commodities, there may always be a fear that if such measures are implemented, expenses may not be held to a level that would keep the corporation competitive in the marketplace and therefore valuable on the trading floor. Managers may be especially hesitant to take such a risk due to the ‘‘healthy’’ competition between units (therefore, such competition may not be healthy after all). To standardize operations, Cambridge would benefit from managing a matrix of teams (cross-functional and multilevel management) through some iterative process where agreement upon standards can finally be made. Students may also suggest the use of Delphi methods, interactive groupware, or simply a series of meetings to help develop the integration of systems. 2. Discuss what you think of the current financial position of the carbonated beverage container PU. If the carbonated beverage container PU continues to rely solely on quantitative information to determine their business strategies, how would you currently evaluate the direction of the division? How would nonfinancial measures improve the managerial information and perhaps change management’s opinion of the division’s current financial health? Time-series analysis should reveal that the bottom line is not a true indicator of the financial health of the organization: although the division has increasing net income and gross profit margin, sales are decreasing. From a short-term perspective, the division is certainly enhancing the company’s profitability. However, it will not be long until the division loses its role as a ‘‘bottom-line enhancer’’ if revenues continue to decline. Display a time-series graph to exemplify this. Then continue the line assuming revenues continue to decline and revenues maintain their current rate. If PU management keeps placing emphasis on cost reduction and process efficiency, that efficiency will soon reach its maximum level, at least until an ERP system is up and running, if they do in fact make this investment. But by that time, so much market share may be lost that it will be hard for the division to recover and sustain profits. Qualitative and other nonfinancial measures, if chosen and structured properly, would show management that the trends currently responsible for the division’s increasing profits are not ones that will contribute positively to the long-term financial health and success of the organization. Have class give examples of such measures (average length of sales contracts and customer survey results). 3. Critique the structure and efforts of information systems staff, concentrating on those procedures used in the collection and storage of qualitative customer information. There are three large issues that come to surface when examining these efforts. The first is that there are currently at least two methods to capture such information. These include the SFA system, and the customer surveys. If this information is going to be used effectively, these methods should be combined into one system, or at the very least, and customer value

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information should be integrated daily by IS personnel into a central repository. Another flaw with respect to data collection is that the information collected by the SFA system is stored by date and time. Although these attributes are very important, perhaps other ways to organize the data, such as by subject keyword or priority, could make its retrieval more effective and efficient. 4. Each product unit has its own information systems staff. What is the optimal size of this group and what is their role? What qualitative measures should the product unit managers be held accountable for? What are long-term and short-term values of capturing and utilizing qualitative measures, including customer value? The case stated that there are as many IS staff members working in individual PUs as there are at the corporate level. This ratio seems to be skewed too highly to the individual units, because two out of three of the largest efforts of the IS staff are to implement the ERP software and to develop enterprise-wide connectivity to the CRD databases. Students should suggest possible roles for the PU IS department? Students may suggest that managers should be held accountable for things like response time to customer questions or complaints, quantified scores from customer service questionnaires, and possibly the loss of customer accounts (depending on the reason). They may also argue that until an enterprise-wide model for customer information is readily available and the current incentive system changes, PU managers should not be held accountable for incorporating any customer information into their decision models. The long-term values of utilizing such information include capturing greater market share and gaining loyalty from existing customers. These goals are vital in order to maintain a steady increase in sales. As mentioned previously, such an increase is ultimately necessary to maintain any individual unit’s profitability. Other long-term values to be considered in utilizing such information are to develop new, innovative products and to identify existing product markets in which the company feels it could exploit a strategic advantage. The shortterm values are more difficult to identify. One possibility is the identification of inefficiencies in the delivery process. For instance, if a customer with a just-in-time inventory system points out ways in which unloading times can be minimized, Cambridge may share the time-saving benefits of implementing the suggestion. 5. List the current management evaluation and compensation plan relative to both the organizational structure and the goal of utilizing customer-value information for the management of the product units and rate the appropriateness of each.. Are traditional financial accounting measures appropriate for evaluating (a) management performance within the new management structure and emphasis on customer value information, and (b) overall firm performance? Suggest a better framework for management evaluation, and include specific examples of criteria. In terms of organizational structure, it may not be wholly appropriate for divisional managers to be rewarded based on the performance of their division alone. In some cases, competition between units may be healthy, but the synergy of the company should never be sacrificed (recall the inability to share raw material inventory information mentioned in the case). A more effective management compensation system may result from combining divisional evaluation with a corporate-based profit-sharing plan. Such a system would

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provide an incentive for cross-divisional communication and cooperation, and thus enhance corporate synergy. A supporting reason to de-emphasize divisional rivalry is to follow the company’s trend towards centralization which includes the ERP system implementation and the centralization found in the CRD. As mentioned earlier, corporate goals are not aligned with goals of PU management—if upper management wants middle managers to evaluate nonfinancial information when making decisions, they should provide an incentive for those managers to do so. The existing criteria for management evaluation, which are strictly based on the financial performance of each division, do not provide such an incentive. Financial accounting measures have historically been used to evaluate firm performance, but they are less appropriate for the evaluation of management performance (which should place more emphasis on long-term measures). However, they should not be completely abandoned within the evaluation/ compensation framework. The company should redesign their management evaluation system to provide compensation for managers’ efforts that result in long-term revenue generation and sustainability of profits. Suggested criteria may include generation or extension of long-term contracts (possibly based on duration and account size), quantified customer satisfaction scores (on multiple factors), and overall revenue growth. These may be implemented in addition to existing criteria, as long as the relative importance of short-term financial measures is significantly reduced. Tactics suggested under Stern Stewart’s EVA (Economic Value Added) framework such as bonus banks and negative bonuses) might be used to promote the emphasis of sustaining profits over longer time periods.4 6. Discuss how a knowledge management (KM) system could improve the way Cambridge utilizes the customer data it has gathered. Suggest some important characteristics such a system should have in order to be successful. The main advantage a knowledge management system could provide Cambridge would be a systematic method for transforming the collected data and information into accessible ‘‘knowledge’’ that managers can use to support decisions. Currently Cambridge is collecting information (what, who, when, where). What they need is knowledge i.e. the strategy, practice, method, or approach (how). As decisions are made and implemented and their results monitored, an intranet-based KM system can be updated to create a repository of successes and failures that managers refer to when making decisions. The key here is that such a system would provide managers with knowledge of everything everyone in the company has learned about the customer, thus enabling them to make an informed decision. In theory, knowledge management is exactly what Cambridge needs, organizational processes embodying the synergistic combination of data and information processing capacity of information technologies, and the creative and innovative capacity of human beings. In reality, Cambridge has the data, some people capable of innovative thinking,

4 See http://www.sternstewart.com for information about their EVA framework for management compensation.

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but lacks the required information technologies. A commitment to purchase these technologies, starting with the database, is required. A simple system as shown would be a start.

Characteristic for a system useful to Cambridge would be: o

o

o

Ease of use. If managers cannot effectively navigate the system, there is not much value in having it. Scalability. As the amount of information and knowledge contained within the system increases, care must be taken to avoid clutter and maintain both its integrity and operability. Proper classification and prioritization. It should be easy for managers to identify which entries are most important with respect to their current situation.

It should be noted that the strategic level of the organization must be able to analyze and plan its business in terms of the knowledge it currently has and the knowledge it needs for future business processes. Cambridge currently does not have this knowledge available and therefore they are unable to make informed strategic decisions. At the tactical level, Cambridge should be concerned with identifying and formalizing their existing knowledge, acquiring new knowledge for future use, archiving it in organizational memories and creating systems that enable effective and efficient application of the knowledge within the organization. This requires a KM system that is supported at all levels. At the operational level, knowledge is used in everyday practice by the sales force and the manufacturing plant managers who need access to the right knowledge, at the right time, in the right location.

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7. The class should discuss the answer to study question 7 first. This will lead into the following discussion. What budget and security issues should Cambridge executive management consider if externally and internally generated information is integrated via Web-based technologies? Discuss the most important issues to be considered when forming a strategic data-sharing alliance with a powerful market player such as Habit Cola. What are the potential advantages and disadvantages to both sides? There should be a wide variety of creative answers from students here. Students should note that commodity products should be cheaper to budget and will probably require fewer set up times and less involvement of customers and their ideas. Customers of commodity products are more likely to complain when products are anything but standard. However, production budgeting for commodities involves some unique challenges. Customer demand for commodity products is often difficult to estimate because of the dependence on the choices made by the commodity producer’s customers. For instance, Cambridge cannot directly affect the worldwide demand for carbonated beverages. This is also a reason strategic alliances (or simply enhanced communications and data-sharing) with customers can prove vital to the success of the company. If Cambridge has information regarding Habit’s sales forecasts, it can more accurately predict the demand for the company’s own products. If not, Cambridge must, at a minimum, be consistently familiar with the company’s marketing strategy and its history of sales trends in order to make a comfortable estimate of demand fluctuation. While there are still a myriad of security issues that must be considered before expanding a company’s online presence, many companies have used Web-based technologies to build intranets for internal communications and to solve a lot of internal networking problems. Internal and external connectivity need to be separate. Students may discuss the importance of such items as routers, firewalls, etc. in the protection of vital information. As mentioned previously, a strategic alliance implementing data sharing (most likely through a virtual private network or extranet) can provide valuable data for production planning to Cambridge. This would aid Habit in two basic ways. First, better production planning would ensure that Cambridge would always be able to supply Habit’s needs for beverage containers. Secondly, since more waste can be eliminated due to less overproduction, Cambridge may be able to pass a portion of the financial savings on to Habit by reducing prices. One potential advantage to both sides is that inventory management can be improved as demand is more accurately estimated, resulting in higher margins. Each company must be very careful not to provide any information that may prove to be disadvantageous. For instance, certain information that could be shared may lead Habit to question Cambridge’s ability to meet its needs in the future. Habit must also be careful not to provide any information about its other suppliers to Cambridge. Sensitive information undoubtedly abounds in both companies, stressing the importance of electronic security issues. If such a strategic alliance eventually leads to Cambridge becoming Habit’s sole supplier of the products it manufactures, or simply leads to more long-term contracts with Habit, it can have a significant impact in reducing business risk for the company. This is because it prevents Cambridge from directly losing business if another supplier suddenly has a sharp

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price decrease or otherwise made it advantageous for a customer such as Habit to switch suppliers under normal circumstances. Any long-term contracts give Cambridge some breathing room by giving the company more time to adapt to their competitors’ maneuvers. 8. This is the wrap up question that can be used at the end no matter what sequence of questions were used. Identify other services Thibodeau and Osterheld can provide that could benefit Cambridge Container Corporation based on the issues and facts presented in the case. Students can discuss a large number of timely, value-added assurance and attest services that apply both directly and indirectly to the case. One obvious choice, attestation of systems reliability,5 surfaces because of the important role played by information systems in the case. Such an engagement would attest to the reliability of information systems against certain measurable criteria. An unqualified report resulting from the engagement would not only allow Cambridge to feel more comfortable about decisions based on information provided by the systems, but may also influence a potential strategic partner such as Habit Cola to pursue electronic information sharing with the company. Another issue raised indirectly is that of business risk. Cambridge relies on certain customers (including Habit) to generate a large portion of the company’s revenues. In a commodity market, this could be a very dangerous situation. Thibodeau and Osterheld may be able to provide a risk assessment assurance engagement that would assess the impact of, and suggest alternatives for, mitigating such risks. Depending on the expertise of the firm, they could also suggest a process quality engagement such as an ISO 9000 attestation. Because Cambridge is a large commodity manufacturer, it is safe to assume the company is ISO 9000 certified. However, if the firm is not the current provider of that service, it may be able to present reasons why it is a better choice than their current service provider in this area. The same applies to the choice of financial statement auditor. 5.4.2. Recommended supplementary readings 5.4.2.1. Financial. Libert, B., S. Samek, R. Boulton. 2001. Cracking the Value Code: How Successful Businesses Are Creating Wealth in the New Economy. Harper Business. This book presents an analysis of the profitability of different operational models employed by client firms. Ultimately the authors argue that the most profitable models are customer-centric. Baruch Lev’s website features a number of working papers and articles on the valuation of intangibles and the relationships among stock prices, reported earnings and measurement of intangibles. http://www.stern.nyu.edu/~blev/intangibles.html. AICPA CPA2Biz resource site: http://www.cpa2biz.com/ResourceCenters/default.htm. 5 See http://www.aicpa.org/assurance/systrust/princip.htm for a description of the AICPA’s SysTrust, their version of a systems reliability engagement.

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This site contains a variety of good resources for students on current financial measurement issues including quality of earnings, business performance measurement, and information technology. 5.4.2.2. Technological. Deck, Stewart. 2001. ‘‘What Is CRM?’’ CIO Magazine. http:// www.cio.com/research/crm/edit/crmabc.html. This article introduces the concepts of CRM systems and subsequently discusses how much they typically cost as well as the keys to successful integration of such systems into organizations. Yee, Andre and Apte, Atul. 2001. Integrating Your e-Business Enterprise. SAMS. Provides an excellent introduction to the technical challenges of integrating applications internally as well as across organizations. The website http://www.vpninsider.com is an online forum for the extensive and varied topics in the VPN industry. The site includes the latest news headlines about VPNs as well as hyperlinks to businesses in the industry. Petersen, Glen S. 1997. High-Impact Sales Force Automation. CRC Press–St. Lucie Press. Discusses how implementing technologies to institute sales force automation (such as Cambridge’s SFA) can create a competitive advantage for a company when the underlying focus is on the customer. McNurlin, Barbara C. and Sprague, Ralph H., Jr. Information Systems Management in Practice, Fourth Edition. Prentice Hall, NJ, 1998. 5.4.2.3. Managerial. Kaplan, Robert S. and David P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action. Harvard Business School Publishing. Provides a measurement system for management that allows companies to track and manage steps to achieve long-term goals. Such a system provides a critical framework for companies undergoing changes in mission and goals such as Cambridge. There are also a variety of articles and cases available on the Balanced Scorecard through the Harvard Business Review. Amrit, Tiwana. 2000. The Knowledge Management Toolkit: Practical Techniques for Building a Knowledge Management System. Prentice Hall. Presents a ten-step framework for instituting a knowledge management system within an organization. Such a system could provide a way for Cambridge to duplicate its successes and learn from its mistakes.