(^ HD28 S^y .M414 t Dev>/ey dm STRATEGIES FOR ELECTRONIC INTEGRATION: FROM ORDER-ENTRY TO VALUE-ADDED PARTNERSHIPS AT BAXTER N. Venkatraman James E. Short June 1990 (Revised February 1991) CISR WPNo. 210 WP Sloan No. 3164-90 ©1990 Massachusetts Institute of Technology MASSACHUSETTS INSTITUTE OFTECHMOLOGY MAR 081995 LIBRARIES Center for Information Systems Research Sloan School of Management n '1 /- L| r) . Strategies forElectronicInteRration:From Order-Entrvto Value-Added Partnerships at Baxter Strategies for Electronic Integration: From Order-Entry to Value-Added Partnerships at Baxter Abstract The Analytical Systems Automated Purchasing (ASAP) system developed by American Hospital Supply Corporation (AHSC) in the early 1960s is one of the best- known, most often-cited strategic information systems, exemplifying v^hat we now refer to as the potential strategic role and capabilities of information technology. However, the knowledge and strategic implications of this system are scattered across varying sources, including personal anecdotes, columns in the popular press and pedagogical cases. This paper offers a more systematic analysis of the interrelationships among the organizational, marketplace, and competitive characteristics of the system from its early inception to current status. Specifically, it argues that this evolution can be best viewed in terms of two eras, and the first era consisted of three phases: localized experimentation; organizational assimilation; and competitive jockeying. The second era ~ distinguished by a redefined relationship between Baxter and its customers, as well as a fundamental shift in technology away from dedicated, customer-supplier, electronic order entry, and towards a multivendor electronic infrastructure ~ is now emerging. This raises significant challenges from a business perspective in how to leverage information technology to redefine the fundamental roles and relationships among players in the business network. Key Words: Interorganizational systems; information technology; strategic advantage; business strategy; electronic integration; ASAP system; ValueLink. Acknowledgements: The research was funded by the Center for Information Systems Research (CISR), and Management in the 1990s Research Program, MIT. Special appreciation is extended to Robert Andersen, Michael Heschel, Tom Main, Judith Quillard, Jack Rockart, Sue Scott, Carl Steiner, and Ergin Uskup for their valuable insights and comments. The views expressed are solely those of the authors. SlrafeRJes forElectronic Intei^ration:FromOrder-EntrytoValue-Added Partnershipsat Baxter 3 Introduction Information technology (IT)i is emerging as a key force in shaping the basis of competition in many markets. Information systems (IS) have long been considered central for effective management, but recent interest in IT is based on its potential to influence the drivers of competition. The subject of IT and its potential role for strategic advantage has been largely dominated by conceptual frameworks (e.g., McFarlan, 1984; Porter and Millar, 1985; Barrett and Konsynski, 1982; Cash and Konsynski, 1984; Johnston and Vitale, 1988; Wiseman, 1985). There is also a growing set of popular examples and applications such as: McKesson's Economost system, American Airlines' SABRE reservation system, Baxter's (previously American Hospital Supply Corporation, AHSC) ASAP system, Merrill Lynch's Cash Management Account, and Otis Elevators' Otisline. Since systematic theory development is just beginning in this area, we argue here that a careful delineation of the relationships among the structure of firm-to- firm competition, the characteristics of major players competing in the marketplace, the nature of the products and services delivered, and the role of interorganizational information systems (lOS) is necessary to better understand the strategic role of IT. Towards this ^nd, three strands of research are promising: (a) theoretical articulation of the centrality of IT in competitive terms (see for instance, Bakos, 1987; Malone, Yates, and Benjamin, 1987; Rotemberg and Saloner, 1989); (b) empirical assessments of the impact of IT on the nature of business relationships (see for instance, Venkatraman and Zaheer, 1990; Zaheer and Venkatraman, 1990); and (c) detailed cases which describe and analyze the role of IT in the larger context of organizational and marketplace characteristics (see for instance, Copeland and McKenney, 1988; demons and Row, 1988; demons and Weber, 1989; demons, 1989; Harris and Katz, 1988). This paper falls within the third category and seeks to provide a more detailed analysis of the role of ASAP in supporting and shaping Baxter's business strategy as well as its impact on the competitive characteristics of the hospital services marketplace. Although this particular system is widely discussed, much of what is available is either anecdotal (see for instance. Business Week, 1986; Petre, 1985) or written for pedagogical purposes (Harvard Business School, 1985; 1988). Following Bonoma (1985), we distinguish between cases for pedagogical purposes and cases for research purposes. Strategies forElectronic Integration:From Order-Entryto Value-Added Partnershipsat Baxter 4 Background and Approach Baxter International Inc. entered the 1990s with a $7.4 billion worldwide sales base, up 7.8% from the company's 1988 sales of $6.9 billion. Baxter's core businesses operate within four industry segments: Hospital Products and Services, Medical Services and Specialities, Alternate Site Products and Services, and Industrial Products.2 The hospital supply division is the largest business within Baxter, representing 52% of sales, up 5.7% to $3.8 billion in 1989. The alternate site business is the fastest growing, up 19% to $1.5 billion in 1989, representing roughly 20% of total sales. Medical systems and specialties account for 22% of total sales, and industrial products 6.0%.3 Baxter International was formed in the 1985 merger of American Hospital Supply Corporation with Baxter Travenol Laboratories. The merger positioned Baxter as the largest single source of healthcare products in the industry. Baxter develops, manufactures, or distributes more than 120,000 products for use in hospitals, laboratories, blood and dialysis centers, nursing homes, and at home. For a typical hospital customer, Baxter can provide over 70% of the hospital's supply needs. For blood and/or dialysis centers, Baxter can supply essentially 100% of their needs. Analytic Systems Automatic Purchasing (ASAP) — a computerized system for ordering, tracking and managing supplies, traces back to 1957. At that time, the American Hospital Supply Corporation (AHSC) began to automate its internal order entry and billing procedures by installing IBM 632 tab-card billing machines in its distribution centers."* What began then as an internal move to automate the company's distribution function expanded in the 1960s and 1970s to become one of the first, and one of the most successful, supplier-to-customer electronic linkages in the industry. Below we describe and classify the development and evolution of the ASAP system into two distinct eras. Our review and case analysis has involved numerous interviews with Baxter and former AHSC persormel over the last two years, archival studies of corporate reports and other secondary sources, and interviews with hospital customer and other healthcare suppliers. Appendix 1 provides a brief description of our methodology.