Information
Systems Management
Frito-Lay,
Inc. : A Strategic Transition, 1987-1992
Section 27395
Heather Bacon
Brenda Baker
Amy Detterman
Joe Harrison
Christina
Little
Steven
Schoenherr
Chris Tamlyn
Julie Thomas
Submitted
02/09/99
Frito-Lay, Inc.
History of Business
Frito-Lay, Inc. was formed in 1961 resulting from the
merger of The Frito Company and H. W. Lay Company. In 1965, Frito-Lay, Inc. and Pepsi-Cola Company merged to form
PepsiCo, Inc. In 1989 Frito-Lay, Inc.
restructured into four regional business Divisions - North, South, Central and
West - to be more responsive and closer to other marketplaces. Then, in 1991, Frito-Lay created 22
Sales/Marketing Areas to bring decision-making closer to the retail customer
and consumer (http://www.fritolay.com/fritoco.html).
Frito-Lay’s Mission Statement is “To be the world’s favorite snack and always within arm’s reach” (http://www.fritolay.com/company/text.html). It is this very mission that has helped to create such a successful company. With national headquarters in Dallas, Texas and sales in 1998 of $10.8 billion, a 5.7 percent increase over 1997, it is no wonder why Frito-Lay continues to rank high within the industry (Sales & Marketing Management, July 1999). Frito-Lay creates nearly 40 percent of PepsiCo profits and maintains more than 100 product lines with brand names that are instantly recognizable - Lay’s, Ruffles, Doritos, Tostitos, Fritos, Rold Gold, and Sun Chips (http://www.fritolay.com/fritoco.html).
Its products and services are what make Frito-Lay stand
out. With 30,000 employees nationwide, a sales force of 12,000 (routes sales
people), the largest store-door sales force in the world, and 750,000 sales
calls made weekly, it is easy to see that service is the top priority at
Frito-Lay (http://www.fritolay.com/fritoco.html).
On the manufacturing side of the business, Frito-Lay
operates 41 manufacturing plants in 26 states, including the world’s largest
snack food plant in Frankfort, IN. Together these plants produce 30,000
packages of snacks per minute. Frito
Lay uses 2.3 billion pounds of potatoes a year and 775 million pounds of corn
to create these snack foods (http://www.fritolay.com/fritoco.html).
As for PepsiCo, it still stands for the same thing it did
back before this merger: aggressive growth year in and out. In terms of finances, sales and ongoing
profit have grown on average 15 percent annually since 1965. The future of Frito-Lay looks bright with
leadership share in 39 international markets around the world. Frito-Lay continues to make advancements in
technology, service, quality and product line, while increasing market share
(http://www.fritolaythai.com/framehis.htm).
Finally, the snack food industry itself is considered to be
in a no growth stage. Frito-Lay expects
chip sales to “slow down or remain flat over the next few years (Yung,
1999).” Currently, Frito-Lay, along
with its competitors, is attempting to introduce new products to stimulate
consumer demand. The high sale of
low-fat and non-fat products in the mid-nineties is one example of this trend
(Wite-Sox, 1996). In accordance with
this trend, Frito-Lay announced in October that they are currently focusing on
non-core products for sales growth (Yung, 1999). Also, firms have had to increase advertising and promotional
expenditures, as they have had to in the past, which reduces already slim
profit margins (Horwitt, 1986).
Having reviewed Frito-Lay’s history, it is now important to
focus our attention to what they have done in terms of management information
systems.
MIS plays a key role at Frito-Lay. Frito-Lay maintains top of the line computer
information systems with constant upgrades and evaluations. For example, Frito-Lay uses EDI (Electronic
Data Interchange), which is a computer-to-computer exchange of information
between companies, using an industry standard format. They also utilize DEX (Direct Exchange), which is the electronic
exchange of information between a hand-held computer and the stores’ direct
store delivery system (http://www.fritolay.com/edi/pages/edi/wahtis_edi.html). These systems, along with others, have
helped Frito-Lay to benefit in all areas of the business.
Although Frito-Lay is happy with the success of its own
information technology department, it realizes that because information systems
are so important it may have to outsource certain portions. A good sign of this is that Frito-Lay has
recently outsourced telephone technical support for “off-the-shelf” software
applications to PC Helps Support Inc. (Collet, 1999).
At the time of the case, Frito Lay did not have the management processes, organization, or information systems in place to support the micromarketing strategy they had implemented. The problem did not lie within the strategy, but in the lack of new mind-sets, process controls, and information systems necessary to enable the success of this strategy.
Analysis/Discussion:
Since the case was written, Frito-Lay management realized that the paper-based processes were not timely or flexible enough to react to the ever-changing market conditions. In an effort to correct this problem the field sales organization teamed up with the management information systems organization to redesign the fieldwork processes with a goal of improved efficiency. The introduction of the HHC (hand held computer) in 1987 improved both the efficiency and the effectiveness of the sales operations. The rollout was very successful and well received by the sales force.
However, the benefits yielded still did not support the micromarketing strategy. Improved information was still necessary to streamline, integrate, and time synchronize operating processes. A series of IT projects, called the Pipeline Projects, were then initiated to support operating process redesign activities within and across functional units. While these projects produced the information necessary, they were also a source of frustration because there was too much information to analyze. A major realization of the 1990’s is that “implementing the technology is the least complicated part; redesigning the organization and defining the information to manage it constitutes major constraints (Applegate, McFarlan, McKenney, 1999, p. 178).”
Today, Frito-Lay is on the leading edge of information technology. Ten thousand salespeople are still using the hand-held computers introduced 13 years ago. These notebook size computers monitor every move of the 4.5 billion packages of snacks sold each year through 41 manufacturing facilities, 1900 warehouses, 200 distribution centers, and 400,000 stores across the nation. It integrates operational data from manufacturing, helps in purchasing decision making, and tracks the logistical movements from raw materials to final delivery. A salesperson can both key in orders on the spot and print sales receipts with tax, discounts, and promotions, free of errors (http://www.smeal.psu.edu).
Transaction Processing System (TPS) saves 30-50 thousand man-hours of paperwork every week. This vast database is updated daily funneling up-to-the-minute sales figures into comprehensive financial, historical, and competitive data. Robert Beebe, past CEO of Frito-Lay stated, “What we have here is incredible access to almost real-time information on every aspect of our business.” He adds, “take any market; we know more about what is going on in the snack category there than the regional competitor who only operates in that market. We know how much shelf space he has, his share of displays, his share of the market, his actual pricing—and we know it for his competitors too.” According to Beebe, that is a “mighty powerful competitive tool (http://www.smeal.psu.edu).”
Frito-Lay management continues to be very efficient at identifying opportunities for competitive advantage through the use of information technology. At the same time, Frito-Lay also realizes that these “high-tech” investments mean nothing unless their managers know how to blend them into their daily activities in the most efficient ways (Wheeler, 1999). Management Reporting System (MRS) has permitted Frito-Lay to consolidate four hundred sales routes. Even with a leaner sales force, sales volume has increased dramatically. Delivery scheduling has improved, almost eliminating “stales” (which in turn contributes to improved product quality and less waste). Telemarketing has been implemented to target thousands of new account prospects, which are too small to justify a sales visit. In the store, salespeople use the system to provide retailers with its Profit-Vision program. Profit-Vision helps to convince store management of the profit advantage in providing Frito-Lay more shelf space to displays. The Chief Information Officer for Frito-Lay claims the real benefit of information systems is the energy it brings across the entire company. “When your database allows you to respond so quickly to changes in the environment, it becomes not just a management tool but a requirement for survival in the 90’s (http://www.smeal.psu.edu).”
Further examples of management information system tools used by Frito-Lay include Executive Support System (ESS), Decision Support System (DSS), and Packaging Application Expert (PAX). ESS helps to locate potential problems in maintaining sales levels and market share. It was noticed that sales of Tortilla Chips were slipping in the southwestern market. Drill down capabilities of ESS, coupled with cash register data from Profit Vision Software, led to the discovery that a competitive product was flavored and packaged to appeal to regional tastes. Frito-Lay used that information to create a new product line, which gained back its market share and generated new sales nationally. DSS aids in reducing the costs of raw materials and supplies. This system helps purchasing track, for instance, the prices of corn. Keep in mind Frito-Lay purchases 775 million pounds of corn annually! When low prices are forecasted, potential markets are identified which might be able to gain market share through aggressive product pricing. Frito-Lay should bear in mind that a study on DSS revealed that benefits might arise from having inventory systems on different levels (Sobotka, 1998). PAX is used to automate production and logistical processes. This system allows planning to schedule 7 days out, helping workers deal with variations and insuring timely delivery (http://www.smeal.psu.edu).
These information system developments allow for the centralizing of data, in turn allowing managers of regional operations access to this vast database. Further, Frito-Lay provides the software to use these technologies in a way that is effective in a distributed processing environment. Management policy now focuses on directed decentralization. Hundreds of middle managers have freedom and database knowledge to make tactical decisions on local market initiatives. Headquarters retains the necessary controls, but are free to focus on strategic direction, such as new product lines and territory expansion. As has been discussed, to accomplish both centralization and decentralization benefits Frito-Lay has had to change its business culture, organization, and infrastructure (Feld, 1990). Frito-Lay understands that continued success can only come if people are willing to change the way they act and think (Applegate, McFarlan, McKenney, 1999, p. 62).
Frito-Lay has outlined a growth strategy benefiting employees, customers, and shareholders focused on four key elements. The first, “captivating the customer,” discusses knowing who your customer is and exactly what they want. Second, being the “best supplier,” refers to providing services through the retail channel through innovative changes such as EDI and UPC scanners. The third and fourth elements for Frito-Lay are having world-class operations and achieving results the right way. All of these elements have been successfully completed through management information systems at Frito-Lay.
One theme that Frito-Lay has stayed focused on is “do not wait.” “Although companies do not want to invest too heavily into new technology,” says Steve Cole of Forrester Research Inc., at the same time “if even 20 percent of what you spend on new technologies is useful you will have been successful in lowering your company’s learning curve and preparing yourself for the future (Schwartz, 1999).”
Currently, Frito-Lay brands account for 60 percent of the U.S. salty snack industry. Borden and P&G are the only national competitors that Frito-Lay has, with each holding only 4% of sales. Frito-Lay is still forced to compete on a regional basis to gain market share. Marketing and management personnel creatively look for new markets and ways to gain market share. They have implemented a strategy of forward integration, which means they have used their earnings to gain ownership or control over distributors and retailers setting competitive barriers for these smaller companies.
As for PepsiCo, a test market of joint vending machines offering both chips and soda is a unique way for them to feature two of its product lines. Frito-Lay chips are packaged in aluminum cans with a pull off tab promoted in the very same way as a cold soda. Snacks in a can have been on the test market for two years with plans of adding 4,200 more joint vending machines. As for other plans in the future, PepsiCo has decided to diversify to gain market share. A strategic decision was made to enter into the sweet snack category, which a joint venture with Sara Lee Corporation has accomplished.
Frito-Lay has done an exceptional job of interrelating information technology with its strategy to create a competitive advantage. “The complexity of the information technology management challenge increases considerably when information technology penetrates to the heart of a firm’s strategy. To facilitate planning, general managers need a comprehensive framework that views the use of IT from a strategic rather than a tactical perspective (Applegate, McFarlan, McKenney, 1999, p.62).” Frito-Lay has created a strategic advantage through its use of information technology. Their introduction of the hand held computer was just the beginning of their strategic journey using information technology.
In 1996, Frito-Lay had an estimated 60 percent of the $12 billion dollar snack food market. According to John Peters, of PepsiCo, parent company of Frito-Lay, Frito-Lay has used information technology to create an advantage over the competition. Although Frito-Lay has few true national competitors, the majority of its competitors exist on a regional level (Peters, 1999). As a result of their use of information technology, they have created barriers for other competitors to enter the snack food market.
Frito-Lay has been effective in integrating their information technologies with their customers, making it difficult for customers to switch to other brands. “Ideally, an information technology system should be simple for the customer to adopt at the outset, but then, through a series of increasingly complex-yet very valuable-enhancements, the IT system becomes tightly intertwined with the customer’s daily routine (Applegate, McFarlan, McKenney, 1999, p.67).” As has been discussed, Frito-Lay’s salespeople can use their system to show customers how reallocating shelf space, for example, can produce larger profits. Additionally, as has been discussed, retailers are provided with its Profit-Vision Program, which allows the retailer to analyze all their sales activity and to benchmark against the market’s performance. At the same time, Frito-Lay endures benefits from the program because it helps convince retailers to allocate more shelf space for its products.
Frito-Lay has clearly evaluated their value chain and continues to do so in order to gain efficiencies in the snack food market. “An effective way to search for potential information technology opportunities is through a systematic analysis of a company’s value chain – the series of interdependent activities that bring a product or service to the customer (Applegate, McFarlan, McKenney, 1999, p.71).” According to a Frito-Lay case study, Frito-Lay tracks the logistical movement of products throughout the supply chain, from “acquiring the raw materials to their final delivery system using Frito-Lay’s 848 tractors, 2,251 trailers, and a fleet of thousands of local computer-equipped delivery vehicles (http://www.smeal.psu.edu).” As these examples show, Frito-Lay has incorporated information technologies throughout its organization’s value chain. “Among the most important advantages of Frito-Lay’s information systems is the centralizing of data that still allows managers of regional operations access to this vast database and software to use it effectively in a distributed processing environment” (http://www.smeal.psu.edu).
Information systems can pose many risks as well as opportunities. Frito-Lay fortunately has been successful at avoiding the risks. For example, a company who does not continually enhance their information technologies may be unable to sustain their competitive advantage. Frito-Lay has done a great job of expanding their information technologies and continually incorporating it into their marketing strategy. “In the category of things that work too well for their own good are systems that, after achieving their initial objectives, continue to grow in size and effectiveness and eventually give rise to claims of unfair competition and cries for government regulation (Applegate, McFarlan, McKenney, 1999, p.79).” Frito-Lay has been fortunate that this has not been the circumstance here.
It should be mentioned that Frito-Lay is currently under investigation for its use of shelf-space allowance. Investigators are looking into how much Frito-Lay is paying for shelf-space, fearing that they are paying too high to force competitors out of business (Greenwald, 1996).
Steve Schuckenbrock, the new CIO of Frito-Lay, has announced that he will be leading the effort to combine the information systems of PepsiCo and Frito-Lay for, among other things, economy of scales. Schuckenbrock said that the joint systems would allow for further developments in areas such as efficient consumer response (Hoffman, King, 1998).
After extensive research, it seems obvious to us that Frito-Lay has stayed on the cutting edge of technology. While this has given Frito-Lay many new competitive advantages, it is necessary for them to continue to develop new information technologies in order to maintain these advantages and develop new ones. Not only are new ideas on technologies rising, new ideas on how to use these technologies are also apparent. One example is using customizability to better enhance your competitive performance (allowing for better market responsiveness and product cost efficiency). It is important for Frito-Lay to keep in touch with these discussions as well (Knotts, Nidumolu, 1998). One area in particular where we feel an upgrade may be necessary is with the DEX system.
Also, despite all our research, we could not find any training programs or corporate modifications that Frito-Lay used to help implement all their new information technology systems. The case indicates that a lot of information (data) was created, but not analyzed well. The organization and process controls were not structured adequately to handle all the new information. Management processes and employee mind-sets were not altered either. Because Frito-Lay is so successful with information technology today, it is obvious that their culture and infrastructure did accept the new IT changes at some time. However, we recommend that Frito-Lay develop and implement-training programs, including shared purpose, shared incentive, and top-to-bottom implementation programs. Too many companies today think that once they gather data their problems are over. This is not the case. The critical part of data collection is companies teaching employees data resource management (DRM) in order to utilize the information gathered (Jain, Ramamurthy, Ryu, Yasai-Ardekani, 1998). These programs will make future IT implementations less stressful for employees and more efficient and effective for Frito-Lay. With strategic IT changes, Frito-Lay must apply the view that all parts of the company “must be redesigned in concert (Applegate, McFarlan, McKenney, 1999, p. 184).” Frito-Lay needs to implement new processes and mind-sets in the whole company – not just individual parts. Finally, Frito-Lay must recognize that implementing new programs often leads to better service at first; however, service levels often wander back down after a year or so. Frito-Lay must recognize that keeping these service qualities up is an ongoing commitment, and therefore be willing to measure them quite often to make sure they are not dropping (Kavan, Pitt, Watson, 1998).
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