Seven-Eleven's Digital Transformation: Can It Sustain Its Competitive Edge?

Seven-Eleven Japan is considering installing an e-commerce software package to bulk-buy goods and services for its employees. The company has been successful in integrating technology into its operations, such as using bar-code recognition systems and turning stores into payment points for utility bills. It has also successfully integrated the internet into its brick-and-mortar stores by allowing customers to pick up and pay for online purchases at Seven-Eleven locations. However, the company's latest projects, including an e-commerce site called 7dream.com, have raised questions about whether it can effectively integrate the internet into its operations and use technology to reduce costs while maintaining a focus on improving service.

Question 1.
Assume you are a Consultant to the new President of Seven Eleven (see case
attached), and you are presenting to the President and Executive Committee. Assess
the pros and cons of Seven Eleven’s Internet and digital approach to retailing, and
what recommendations would you make to apply it outside Japan. Be specific.
Question 2: Choose either Part A or Part B
Question 2 – A
“A business model reflects management’s hypothesis about what customers want,
how they want it and what they will pay, and how an enterprise can organize to best
meet customers needs, and get paid well for doing so.”
Do you agree with this statement? Why? Be specific. Feel free to use examples.
Question 2 - B
“The management of companies with unrelated diversification, and they are several
around the world, leads to a basic problem: they experience difficulties such that all
of the pieces of the strategic puzzle fall away together.”
Explain why this problem can exist, and what it means for share prices. Be specific.
Seven-Eleven - How to blend e-commerce with traditional retailing
JUST as the Internet penetrated different countries at different
speeds and in different ways, so its impact on traditional
companies, has varied from one part of the world to another.
Consider Seven-Eleven, a convenience-store operator, which
snatched the title of biggest retailer in Japan from Daiei, a
troubled supermarket giant.
Seven-Eleven's e-strategy is built mainly around proprietary
systems. For the most part, it has used the Internet to talk to
its retail customers, not to run its business. Yet few companies
in Japan have been more admired for their use of electronic
communications.
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Unlike Daiei, and many other retailers, Seven-Eleven has
managed to overcome a stuttering economy and spiralling
deflation to raise sales and profits by 4% and 15% - its pre-tax
profits were more than double those of Fast Retailing, a
clothing outlet that holds the second spot.
One reason for Seven-Eleven's sparkling performance is its
cautious management. Other Japanese convenience stores,
such as Lawson and FamilyMart, the second- and third-biggest,
expanded recklessly over the past decade. They have recently
announced the closure of hundreds of stores. In contrast,
Toshifumi Suzuki, Seven-Eleven's chairman, says that he would
stop opening new stores if sales at existing ones declined
sharply. His caution is reflected in Seven-Eleven's finances,
which are largely debt-free.
Yet solid management is not the only contributor to Seven-
Eleven's success. The chain's other distinction lies in its deft
use of electronics. It pioneered many techniques for using the
Internet that are still ahead of the curve.
Seven-Eleven Japan was set up in 1973. By the mid-1980s it had
already replaced old-fashioned cash registers with point-of-sale
(POS) systems that monitor customer purchases. By 1992, it
had overhauled its information-technology systems four times.
But the biggest overhaul of all took place in 1995. With
hindsight, the timing looks bad: that was the year when the
Internet wave was beginning to swell in the United States but
had barely begun to touch Japan's shores. The new system that
Seven-Eleven installed was therefore based on proprietary
technology—albeit state-of-the-art—rather than on the still
barely tested open structure of the Internet.
Convenience online
Back in those days—and indeed, even now—it would have been
hard to build on the back of the Internet alone a system that
satisfied all Seven-Eleven's complex demands. It wanted an
easy-to-use multimedia system with pictures and sound, since
most workers are part-timers with scant computer skills. It also
wanted a system that could quickly repair itself if something
went wrong.
Then the chain needed a network to speed up the transmission
of orders, ideas and feedback. It wanted all the companies in its
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supply chain to use one common system, and it wanted a
system that could be easily updated to take advantage of
technological advances. Then it wanted the system to run for at
least 15 years.
Such connectedness—hooking up suppliers, stores, staff and
even banks—is the sort of thing that most retailers can still
only dream of, even with the Internet around to reduce the cost
and the complexity. What made Seven-Eleven's task more
daunting was that the system had to serve some 6,000 stores
(the figure is now more than 8,500 and growing) scattered
across Japan.
It built the system itself, creating the hardware with NEC, a
consumer-electronics company. Coming up with the right
software was harder, and it eventually asked Microsoft,
America's software giant, to help it build a tailor-made
Windows-based system.
By 1996 the software was being installed in some 61,000
computers at Seven-Eleven's stores, head office and vendor
firms. By 1998, the overhaul, which cost ¥60 billion ($490m),
was complete. The new system replaced the ragbag of systems
used before. A pipeline to Microsoft's offices in Seattle
provided instant support. The software back-up constantly
monitored and automatically rebooted the system when it
crashed and alerted local maintenance firms if such errors
occurred more than twice.
All Seven-Eleven stores now have a satellite dish. Cheaper than
using ground cables, this is often the only option for shops in
rural areas. And in earthquake-prone Japan, the satellite dish
provides an extra layer of safety on top of two sets of telephone
lines, and separate mainframes in Tokyo and Osaka.
Win-win-win-win
Seven-Eleven's new technology gave it four advantages. The
first was in monitoring customer needs, which were changing
as deregulation made shoppers more demanding. “We believed
that the nature of competition was changing. Instead of
pushing products on to customers, companies were being
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pulled by customer needs. In this environment, the
battleground was at the stores themselves—the interface
between businesses and customers,” says Makoto Usui, who
heads the information-systems department at Seven-Eleven.
Second, Seven-Eleven uses sales data and software to improve
quality control, pricing and product development. Thanks to its
systems, the company can collect sales information from all its
stores three times a day, and analyse it in roughly 20 minutes.
This has helped it rapidly to discern which goods or packaging
appeal to customers. “Seven-Eleven's merchandising and
product-development capabilities are formidable. Its ability to
sense new trends and churn out high-quality items is far
superior to other operators,” says Michael Jacobs, an analyst at
Dresdner Kleinwort Wasserstein, an investment bank. Now
Seven-Eleven is using these skills to increase its own-brand
products, which have higher profit margins.
Third, technology has helped to predict daily trends. As
customers become more fickle, product cycles are shortening.
Fashions in boxed lunches, riceballs and sandwiches, which
make up almost half of a convenience store's daily sales, are
especially short-term. Most last about seven weeks, but they
can be even shorter.
Seven-Eleven says it can keep abreast of these partly by
keeping an eye on the weather. Five reports a day arrive
electronically at its stores from hundreds of private weather
centres, each covering a radius of 20km (13 miles). This is
useful in Japan, where temperatures between towns 40km apart
can vary by as much as 5°C. The reports also compare today's
temperature with yesterday's. “The same 10°C can feel very
different depending on whether it was 1°C or 20°C the day
before. This is critical for predicting food purchases,” points
out Mr Usui.
Finally, Seven-Eleven's electronic investment has also improved
the efficiency of its supply chain. Orders flow quickly. Those
sent in by 10am, for delivery after 4pm, are electronically
processed in less than seven minutes. They are sent to 230
distribution centres that work exclusively for Seven-Eleven.
Truck drivers carry cards with bar codes that are scanned into
store computers when they arrive with a delivery. If a driver is
often late, the operator will review his route and might add
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another truck to lighten the load. Seven-Eleven folk boast that
their trucks run even more punctually than Japan's on-time
buses.
In the same way, Seven-Eleven also helps vendors and
manufacturers to control their inventories. It uses its database
to instruct them on all sorts of small details, such as what
sauce to put into its ready-made noodles in order to maximise
sales.
As well as the system that links together its supply chain,
Seven-Eleven has worked hard to use technology to improve
communications and training. Multimedia tools have helped to
train store attendants, always a difficult task for a business
with lots of stores and part-time workers. Technology has also
provided a way for store workers to keep in touch. That is
important in a business which runs round the clock, with stores
manned by a dozen or so workers, some of whom never see
each other.
What about the Internet?
If Seven-Eleven had built its new system three or four years
later, would it have based it around the Internet? The company
says that, even if it were developing a similar system today, it
would not necessarily use the Internet for all its operations. It
prefers the security of a proprietary network. And some of the
advantages of an Internet-based network for American and
European companies are less apparent in a Japanese context,
where supplier relationships tend to be deeper and more
stable. Seven-Eleven sees no virtue in allowing new Japanese
suppliers to put in bids over the Internet.
It is, however, hedging its bets by studying how international
rivals such as Wal-Mart use the Internet for global product
procurement. And it will watch closely what happens at Lawson,
which together with Mitsubishi Corporation, the biggest
trading house, is building a replica of Seven-Eleven's system
based on the Internet.
Seven-Eleven is already using the Internet to lower its annual
overhead costs of around ¥70 billion. It plans to install an e-
commerce software package offered by the Japanese arm of
Ariba, an American e-procurement company, to bulk-buy goods
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and services such as office equipment and insurance policies
for its employees.
The big question is whether Seven-Eleven can integrate the
Internet into its other operations. In the past, it has been
clever at finding new ways to use its technology. Back in 1987,
after installing bar-code recognition systems, Seven-Eleven
turned its stores into payment points for utility bills. Almost 15
years later, the move (which required only a small incremental
investment in software) has given Seven-Eleven 3% of a massive
market that includes big rivals such as banks and post offices
(see chart).
Now the company has increased its customer traffic by turning
shops into payment and pick-up points for Internet shoppers,
not unlike the post office in Germany. This tactic was a clever
move in a country in which people are still wary of using credit
cards over the Internet, preferring instead to pay cash at a
store. Most customers at e-Shopping!Books, an online
bookseller, pick up and pay for their purchases at a Seven-
Eleven store. Indeed, says Seven-Eleven, some 75% of Internet
shoppers pick up their purchases from bricks-and-mortar
stores.
Thanks in part to such tactics, Seven-Eleven's stores now sell
almost 50% more on average every day than those of its closest
rival. Whether its latest projects will be as successful has yet to
be seen. Its Internet site, 7dream.com, was launched last July
with seven other companies, including NEC and Nomura
Research Institute. The site offers a wide range of goods and
services, including books, CDs, concert tickets and travel.
But the site's lack of focus could hurt its ability to develop
specific online brands, argues Mr Jacobs. The company has
already said that the heavy costs it will incur to build up
7dream.com's content mean that its consolidated pre-tax
profits will not grow in the current financial year.
Seven-Eleven has also had problems with its branchless
bank: IY Bank, which opened in May. The bank, officially owned
by its parent company, the Ito-Yokado supermarket chain, had
a struggle to win approval from the authorities (it was the first
non-bank to apply for a banking licence). It is also expected to
have a tough time meeting the strict profit targets set out by
the Financial Services Agency.
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When it comes to running such online businesses, Seven-
Eleven seems likely to have just as much difficulty as others
have done: lots of costs, few customers. For the convenience
store, as for other businesses, the real savings are likely to
come from deploying the Internet as a management tool. It
already knows how to cut costs by replacing paper with
electronic delivery: it has trimmed ¥300m a year over the past
decade by becoming a “paperless” business. Now it wants to
save more.
To do this, however, it will have to answer two more big
questions. First, can it integrate the Internet into its elaborate
proprietary network? Seven-Eleven's managers think it can:
indeed, they claim to have designed such potential for
flexibility into the existing system. But an investment designed
with a 15-year life may be a big psychological barrier to seeing
the Internet's strengths.
Secondly, is Seven-Eleven willing to use technology to cut
costs? The company says—as do many others—that human
capital, augmented by technology, stands at the centre of its
business. Like most Japanese companies, it insists it does not
use technology to lower staff count. The point is to improve
service, not cut staff.
However, only by using technology to expand markets or to
reduce staff can a company earn back the cost of such an
investment. So far, Seven-Eleven has found ingenious ways to
expand its markets. If that were to stop, it might find it needed
less human capital than it has now.
The Economist; London Vol. 359, Iss. 8223, (May 26, 2001): 77-78.
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