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Articles
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Volume 6, #5______________________________________________________________________
July, 1987
On May 19, 1987,
over 500 senior managers attended Digital’s State of the Company
Meeting in Merrimack, N.H. The theme of the day was "Digital’s
Networking Vision is More than Connectivity." The following are
summaries of the speeches.
State
Of
The Company Address by Ken Olsen, President
Digital’s
Message
by Ilene Jacobs, vice president, Treasurer
Overview
Of
Basic Industries by Jerry Witmore, vice president, Basic
Industry Marketing
Manufacturing
Problems
And Solutions by Peter Graham, manager, CIM Market
Development
Service Industry Vision by Bob Hughes, vice
president, Service Industry Marketing
Trading
Problems
And Solutions by George Chamberlain, vice president, M/E/M Finance
Digital’s
Message
And The Canadian Market By Ken Copeland, President,
Digital Canada
Educational
Services’
Message Delivery by Pat Cataldo, vice president,
Educational Services
Financial
Update
by Jim Osterhoff, vice president, Finance
Entrepreneurs play
an important role in our economy. Entrepreneurs will try many
things, and a small number will succeed. And overall, they make
important contributions to society. The computer industry in the
U.S. has gotten to where it is because we encourage
entrepreneurship.
Entrepreneurship in
a company like ours does not mean that we tolerate people running
off in all directions. Entrepreneurship in our company obviously
means that things have to fit into Ethernet and have to be
conÂsistent with our goals and our strategy. Without
entrepreneurship, we would be limited to only what we do in
centralized planning and be limited by the attention span and
interest span of a small number of people. No matter how bright
and competent those people are, they are a limiting factor.
When we were just a
$14 million company, we were in bad shape for an interÂesting
reason. We could only work op those problems which were of highest
priority. We ran the company with a committee of 20 people, and we
could only get them interested in the problems of highest
interest. We couldn’t get anybody to work on the next level of
priority. And if we were going to take care of those areas that
were not burning issues to the corporation, we had to divide the
responsibility. .
A few years ago
there was great interest in breaking the company into divisions.
And when I started studying about divisions, I found out
someÂthing interesting. One book said that when a company
divisionalizes, it stops all creativity.
People want
divisions because they want to be free of the corporate staff. But
it doesn't work that way. Divisions mean more staff.
Now, staff are all
good people, with good motivation. They are only interÂested in
the company; but just by the definition of their job, they avoid
risk and duplication and fear any failure. So any proposal coming
from a division has to go through the staff before it's brought
up. The result is that divisionalization can stifle a company.
Freedom and
entrepreneurship can be misunderstood, and that, too, creates
problems. People develop the "emperor syndrome." They measure
their power by how much they can spend without telling anybody, by
firing people without any due process, by changing plans without
telling anybody. But that's not true entrepreneurship.
If you are an
entrepreneur in a separate business, you have to lay out plans in
detail and report on them regularly in order to get initial money.
You depend on all of those people looking over your shoulder, and
you take that into account and exploit it as part of your
planning; and then you have freedom on top of it. Freedom is not
showing power without any responsiÂbility. The entrepreneur who
survives owns the budget and owns the profit and loss (P & L)
statement, and true power comes from watching that P & L every
day.
Problems arose in
the past when the staff said, "Don't get involved in budgeting.
We'll run the P & L statement." And the entrepreneurs lost all
power because the plan that put everything together was gone.
Now it is asked
today, why take good technical people and make them half- baked
business people? Keep them pure, elegant and great technicians.
And there's some validity to that. But we have to work out a
system where people who make the technical decisions also
understand enough to make business decisions.
People in a
technical area make business decisions all the time. When we
design a product, do we design it for lowest manufacturing cost,
or do we design it for a return on assets? Do we design it so
there is the least inventory risk? Do we design it so we get it
out the quickest possible way? What is the cost and profit
advantage of maintenance? So there's no such thing as being a pure
technical person.
[Later, in answer to
questions, Ken returned to this theme of entrepreÂneurship and the
role of staff.]
What's the job of staff?
I don't mean to be
negative on staff at all. Staff is absolutely critical to a
business. They just happen to have a very dangerous position,
because they can have a lot of control, if you're not careful.
A few years ago when
we had product lines, one year the staff said, "Oh, we'll do the
budget this year; it’s too much trouble for these people who are
supposed to generate products, do marketing and engineering —
we'll do the budgeting." So by algorithm they turned out the same
budget for everyÂbody. That year the product lines were absolutely
devastated.
The budgeting
process is what gave them the power, the control, the
underÂstanding of their business. Just like your home budget,
every single business wants to do more things than they have money
for. Travail is the only word I can think of for budgeting. You
have to decide what you're going to leave off, and still get the
job done. Going through that is the job of the entrepreneur. If
that's done for you, you are nothing. If you don't understand and
take part, or actually make those decisions, you do not have
control.
Staff is important.
Staff organizes all the options, makes sure everything gets
covered, that nothing gets lost. Hopefully, the staff is educated
in the areas in which the managers aren't and can say, "Here are
the different points of view that the world looks at: return on
sales, return on assets, return on this, return on that. Here's
information about your future planning, your inventory, your
inventory risks and all the other factors." They bring the data,
do the analysis and bring all the points of view to your
attention. But sometimes staff makes the mistake of making too
many decisions on the way. And if the staff makes the decisions
for you, you lose your control.
Internal competition
in Digital between groups and individuals is frequently fostered.
Could you please clarify your position on the importance of
inÂternal cooperation versus competition for survival and success
in Digital?" We have to foster internal competition. We have to
have several approaches to the same problems, and pick the best
ones. But we can’t tolerate any lack of cooperation, any political
activity which is not fostering good things.
We've had some
magnificent examples of competition that have really paid off. For
instance, two computers are being developed more or less in the
same space and for the same time frame. They represent different
approaches, and the work is being done by two excellent groups.
Some people have said, "We can’t afford both of them." And here
they are turning out two magnifiÂcent computers. Nobody else in
the world has them. And to say we can’t afford them is just
inconceivable.
Yes, the development
groups are competing. When one does better, the other ends up
doing better. I’m sure those machines are twice as fast and coming
sooner than they would be if there wasn't competition. But they
share technology, design tools and ideas. They cooperate and still
are in compeÂtition. So most of the time, the competition has been
very positive, and we’ve come out wav ahead.
Can you help me
understand the assignments of Product Business Units (PBUs)? It
seems like there are unclear boundaries/ with too much overlap^
A few years ago, we
tried to lay out business units so that they always added up to
the corporation. And each business unit would have a group of
lawyers make sure that they got their share of the orders, because
the measurement became the goal. They figured if they earned
money, then they could spend money the way they wanted. But that's
not the attitude we want. We want people to have the drive that
results in their being satisfied that they are doing a good job.
So we sliced the
company in many ways. And in one direction, the pieces have to add
up to the entire corporation. But you can break it up in many ways
and measure each part for the satisfaction and motivation of that
group; and sometimes you can have groups compete, without saying
that the pieces always, mathematically, have to add up to the
entire corporation.
When my kids were
young, we used to walk along the railroad tracks in northern Maine
and visit with the workers on the railroad tracks. The workers
seemed to spend all day sitting in this little shack drinking
coffee, complaining that they were understaffed and couldn't get
all the work done. In years past they were given a section of
track, and it was theirs and they took pride in making sure that
those tracks were in good shape. Now they got job orders, and they
had no motivation whatsoever. There's a difference between being
motivated for the job because it's yours and you're trusted, and
just being told what to do all the time.
So we have to
understand all aspects of entrepreneurship. Wherever people can be
motivated by being trusted for the job, we should give them the
opportunity.
Ken wanted you to
hear the company's message from a non-technical person, and that
certainly describes me.
I've used our
technology for years and know what a powerful set of tools we
have. I have all the information when, where and how I need it. It
stimuÂlates initiative and unifies my organizations with each
other and importantÂly with the rest of the world.
We're so used to
what we have, and how we all work together that we take it for
granted. It's completely invisible to us, and yet it frees us up
to get our work done efficiently. Delivering that message appears
to be so diffiÂcult, but why is that?
We can show others
we understand their problems and can explain to them how our
solutions work from a corporate-wide perspective; not just simple
packages, but groups of solutions that work in harmony across an
entire company, just like it works here at Digital. What we have
is really a competitive weapon: the ability to work together
sharing information easily. Communicating effortlessly allows us
to benefit from solving problems together. Not having these tools
traps people into seeing problems from too narrow a perspective.
It causes them to sometimes miss the broader organizational
inefficiencies, and the real solutions.
Perhaps we get too
close to it to explain to others what we have. To us, these
capabilities are like electricity. None of us can remember the
world without electricity. We can buy a new clock or appliance,
plug it into the wall and it will work. We don't think about how
it works. We don't think about the source of the power. We can
move from an old house to a new house and use the same appliances.
We can go on a trip, and they work; unless we travel
internationally. Suddenly we're confronted with different
electrical currents and many different plugs. In England you can
sometimes go into a hotel room and find two or three different
versions of plugs in the same room. We never face those
frustrations here at Digital.
I can travel around
the world, and sit down at a workstation or a desk in any one of
our offices and, within a few seconds, log into my electronic mail
account back in Maynard, just as if I were sitting at my own desk.
The first time I
did that, I was impressed, just
like I was the first time I used the old electronic mail
system. Now when I travel I just assume that I can read my mail
and answer it. We've grown up
with all
of these convenÂiences, with electricity, with telephones,
and, for us old timers, even electronic mail.
Sharing data,
sharing graphics, working together in teams -- no wonder we're so
spoiled. No wonder we have trouble explaining it to others. We
must realize that others are just beginning to grapple with what
we've had for years. We can’t expect them to understand it and
embrace it the way we do. We have to explain our vision of the
future to them. We have to tell them we’re using it ourselves. We
have it now. And they can easily have it too. We can tell them we
can help them create an environment where everyone can work
together sharing information around the world throughout their
company. They can work in teams that are created to solve problems
and can effortÂlessly disappear when the resolutions are found.
It's a whole new management style, a whole new way of working
together. It's a tool for one person, for a group, for an entire
company.
Yet, Ken wanted me
to be able to understand and explain in simple terms the essence
of how it works -— the technology that is such a powerful weapon.
Of course I had to get help from others.
The technology is
built in layers and is based on the objective that everyÂthing be
designed with integration in mind. It all must be compatible.
The first layer is
hardware. At Digital that means VAX hardware. The VAX architecture
is the basis of our unique solution. The VAX family of systems
extends from the desktop to the data center. No other architecture
has been implemented so broadly and so consistently. Our single
product family provides the maximum flexibility and is so simple
and cost effective to use because it grows as needs increase.
The next layer is
the DECnet communications architecture. This allows systems to
connect and talk to each other, totally interactively. It also has
the ability to allow other computers to tie into our networks.
The operating
system, VMS, spans our entire architecture from the smallest VAX
workstation to the largest VAX 8800. We don't produce different
operatÂing systems for workstations, for batch processing, for
timesharing. We have one, and that's VMS.
Together, these
layers — VAX, DECnet and VMS — create our expandable and
responsive network. Our network is more than connectivity. It
allows data to be shared and allows capacity to be expanded
automatically when you run out of space. The systems can be tied
together in clusters, sharing data so intimately that the users
don't even realize they're using more than one computer. But it’s
not just in clusters that make it possible to share data. We can
share it from anywhere in the network easily, totally
interactively.
The next layer is
Digital's Application Integration Architecture. VAX InÂformation
Architecture (VIA) is part of this layer which provides a way to
share data and to retrieve it again. VIA supports writing programs
to access the data or to be used in inquiring directly into the
data file. One application of VIA that I'm familiar with uses our
Employee Master File. The Employee Master File is accessed as a
data file to run the weekly payroll system, by supervisors to do
salary plans, and by all of the personnel people throughout the
United States to update the employee records of the company.
The final layer is
all of the applications written by Engineering, Software Services,
third parties and all the various user groups. All of the
appliÂcation integrations are tied together to our Application
Integration ArchiÂtecture .
These layers
comprise what Digital offers the world technologically. Of course
all these layers come together and work as one integrated whole.
With our network
everyone can share data, software, graphics and documents. People
can work in groups that evolve as needed, independent of where the
people are located. That is the basis of our real competitive
advantage. That is our vision.
Let’s not get caught
up trying to explain it in technological terms. While that can be
done simply, let's not explain our message that way. We need to
emphasize the value of sharing information, the value of
integrating work within an entire company. We need to explain how
that creates tremendous motivation and synergy within an
enterprise. The companies that are going to survive in the future
have to integrate their enterprise, allowing employees to take
part, using their creative ability. Our solutions provide
information when, where and how it's needed, regardless of where
people work. Our networks provide people with the tools they need
to work in teams towards a common set of goals. It frees people up
to focus on their real business problems. Our networks turn
information into a powerful competitive advantage.
We need to explain
this power to all the potential users in the world. We've got the
responsibility to help them understand that Digital has the
solution. The purpose of our company is not just to make a set of
products,, but rather to give companies what they need to grow and
to prosper. That is Digital’s real purpose for being. That is our
message.
My group has the
marketing responsibility for three major industries — discrete
manufacturing companies, process manufacturing companies, and
institutions. In FY87 this represented a $31 billion market for
hardware, software and services.
In discrete
manufacturing we are focusing on the aerospace, automotive and
electronics industries. Among process manufacturing companies we
are focusing on chemical, pharmaceutical, food and beverage, and
oil and gas industries. Among institutions we are focusing on
education, health care, and state and local governments.
We want to be the
preferred vendor of solution systems for manufacturing companies
in three mission-critical areas: create, build and distribute the
product. That's what Digital worries about internally, and that's
what all manufacturing companies worry about. By preferred vendor,
I mean that when customers think about a new application or a new
project, they think of Digital first.
In electronics
companies, creation of products means design, which is largely
electronic, using computer-aided engineering, computer-aided
design (CAD), simulation of design, software engineering,
computer-aided software engineering and electrical CAD. Mechanical
design is also important, but the electronic areas are viewed as
being the most mission-critical in electronics companies.
Aerospace companies
also worry about design, but they look first at the mechanical
portion of the design, mechanical CAD. They also deal with
simulation, software engineering, and electrical and electronics
design, but the mission-critical area that they focus on first is
mechanical CAD.
When automotive
companies deal with design, they worry about mechanical CAD,
electrical CAD, testing and simulation. They use other tools as
well, but again, the primary focus is on the mechanical and
electrical design.
From a process
manufacturing point of view, when you talk about creating the
product you don't use the word "design." For instance, in an oil
and gas company, they have to find the product and drill for it.
It costs them just as much to dig a dry hole as it does one that
produces oil. So, not surÂprisingly, it is mission-critical for
them to optimize where they drill. They deal with seismic
modeling, simulation, and interpretation of the data long before
they drill the hole so that they can optimize the percentages of
bringing in a profitable well.
Chemical companies
create products by synthesizing them, typically in the laboratory,
using instruments like mass spectrometers and electron
microÂscopes. They take the data from those instruments, analyze
it, and determine whether they have managed to synthesize the
product they want. They use statistical analytical programming
techniques to take the noise out of the data so they can see the
real result.
Food companies
create products not so much by synthesizing, but from brand
management marketing. They want to determine the products grocers
will stock their shelves with and customers will buy. In the
United States, grocery-shelf space is relatively flat — there's no
new shelf space. So the name of the game is to create products
that will occupy the maximum shelf space and bring the grocer and
the maker the maximum profits.
Making the product
is the next mission-critical area. In discrete manuÂfacturing
companies, that means dealing with a manufacturing plant.
Electronic companies
worry about shop floor, production control, materials planning and
quality control. Here we can tell them about the things we've done
in our own manufacturing area using these same kinds of tools and
approaches to help optimize the way we build products.
Aerospace companies
also have plants, but they are huge. Not surprising, it takes a
lot of space to build a Boeing 747. They worry about production
engineering and planning, and shop-floor data collection. Much of
the data collection is done by hand. Inventory control — getting
the right part to the right place at the right time in the
building process -- is absolutely crucial. And they think of
quality control as data management. Every step of the process has
to be documented, and the data has to follow to the next step; so
that when the airplane is finished, it has a complete database
explaining everything that occurred at each step of the process.
Automotive companies
are interested in production scheduling and monitoring. They are
concerned about shop floor control and, more importantly, quality
control. The focus in quality control is on integrating the parts
of the corporation together to look at quality.
In oil and gas,
making the product involves refineries. Building refineries
involves classic engineering-type application requirements,
including mechanical and electrical CAD tools. But that doesn't
happen very often. Running the plant is a matter of controlling
and monitoring a continuous process, optimizing it using decision
support tools, and scheduling proÂduction to get the right mix of
products.
Chemical companies
also use plants to make products. For them, running the plant is
the main consideration. They worry about process control and
monitoring, decision support systems, and production and
scheduling techÂniques .
In food companies,
the plants are not all that large. The industry worries about
controlling the process and monitoring it. But they have an
overriding concern about quality, which is absolutely crucial.
The third
mission-critical application area is product distribution --
getting it to the ultimate consumer. In an electronics company
like Digital, you get to the ultimate consumer by having a direct
sales force and calling directly on the customer, or by having
indirect channels, such as distribuÂtors, and OEMs, and other
third parties. You're concerned about getting the right order
processed in the right period of time, getting demand forecast
correct so you build the right product, managing inventory and
logistics, getting the spares and parts that you require into the
field to distribute the product and help maintain and support it.
By the way,
distribution, in the application areas I'm discussing, involves
bringing the customer and the enterprise together in an integrated
way. And that is a critical part of the next phase of application
requirements for Digital as we move into this market.
Aerospace companies
take orders directly from the government or from airÂlines and
deliver them directly. What’s important when they're delivered is
the database which has all of the job information in critical
detail. This gives the people receiving the airplane all the data
and quality-control records they need to maintain and support the
plane themselves.
Automotive companies
distribute their products through dealers.
Oil and gas
companies distribute their products through pipelines, and huge
tanks that serve as intermediate storage areas where trucks fill
up with gasoline to deliver to local service stations. Here
mission-critical questions include, how do you manage the
terminal, how do you properly stage it for the demand that you
have, and how do you process orders from your customers? Also,
when they have excesses, oil and gas companies act like
commodities traders, and move the product among themselves.
Chemical companies
also deal with storage and distribution. Order proÂcessing,
inventory management, logistics management, transportation, and
transportation routing are all critical concerns that process
manufacturers worry about.
Food companies
distribute direct, through wholesalers, and through distribuÂtors.
They tie themselves to these distribution networks in terms of
materials managment, demand forecasting, inventory control, and
order processing.
Digital is unique in
its ability to provide networks that bring together the
mission-critical areas within these companies, as well as the
suppliers and the customers. Through use of a network they can
have the information they need, the ability to change internal and
external environments, and the ability to react to what their
competitors are doing, and at the same time maintain maximum
efficiency. That is the reason Digital is in a fantastic position
to penetrate manufacturing companies.
Say the word
"chemical," and the average person usually thinks of an alien and
mysterious substance in a beaker. Actually, chemicals are an
intimate and essential part of our everyday lives.
Every piece of
fabric in this room, from the carpets on the floor to the clothes
we're all wearing, owe their color to dyes produced by the
chemical industry. Pharmaceutical companies have produced some
truly remarkable chemicals, from aspirin a hundred years ago, to
the latest drugs for heart problems and high blood pressure. These
chemicals make life possible and productive for millions of people
who wouldn’t otherwise be alive.
The microchips that
provide the intelligence for our computers are based on chemical
products. Tapes and disks we use in our storage systems are all
chemically based. And all the cabinets for all our systems, from
the VAXmate up to the VAX 8000 series, are coated with special
protective paint that’s produced by the chemical industry.
The annual output of
the chemical industry in the U.S. is about $200 bilÂlion, which
represents 5% of the country's gross national product. In America
alone, chemical companies employ more than one million people.
Worldwide, the
chemical industry amounts to over $700 billion in sales each year.
Europe has been a major player in the industry since the turn of
the century. More recently, Japan has established a very strong
position. Each of the major participants competes in all the
regions of the world.
The chemical
industry is multi-national by nature. Raw materials are available
in only a few areas in the world, and customers are spread out
geographically; the manufacturing plants and research facilities
must be located strategically.
Competition has
increased dramatically in the last decade. The increase in the
price of oil has tilted the economic balance toward those
countries which are oil producers. In addition, the increase in
the value of the dollar, which peaked early in 1985, presents U.S.
chemical companies with an increasingly difficult competitive
environment.
However, the U.S.
chemical industry is fighting back with a variety of strategic and
tactical measures designed to cut costs, increase market share,
and protect assets and profitability against an uncertain future.
Since most chemical
companies are made up of several divisions, their first step is to
redefine their business. There has been a lot of shuffling of
portfolios, divestitures of unprofitable or peripheral
subsidiaries, acÂquisition of better positioned divisions, and
mergers between firms with synergistic products, resources, and
markets.
Their next step is
to look at the product mix. There has been a general move away
from commodity chemicals, where growth has been flat, into
specialty chemicals formulated on a custom basis for individual
customers.
With specialty
products, chemical companies can charge for the added value of
their research and development effort. Companies have also stepped
up their efforts to find new products, particularly in the area of
consumer products. Perhaps the most promising consumer market is
health care, a traditional, high-profit segment which offers
significant growth potential as we pay greater attention to curing
major diseases and improving the quality of our own lives.
To maximize the
competitive advantage of new products, companies must get them
into the marketplace quickly. A new pharmaceutical product may
cost $100 million to develop and take six or seven years to
introduce, with such hurdles as government approvals. Anything a
company can do to speed product introduction, even by a few
months, whether by more creative research, or more efficient
tooling up of production, means a longer period of excluÂsivity
for that product, and that translates directly into profits.
Meanwhile, chemical
companies are making tactical moves, attempting to better satisfy
the needs of their customers by improving the quality of their
existing products. Consistent product quality, lot after lot, is
essential.
As in many other
industries, chemical companies are placing heavy emphasis on
reducing manufacturing costs, both through technological and
organizaÂtional innovations. This restructuring, which has
eliminated entire layers of management, is aimed not just at
reducing costs. It brings management closer to the customer and
the decision-making action.
The U.S. chemical
industry is now in a very strong position. They have focused on
long-term winning strategies. The major decline in the dollar over
the last two years is beginning to show a positive impact. And the
stock market has reacted very favorably for the chemical segment
over the last year.
It is in helping
these companies bring new, high-quality products to market more
rapidly and at lower cost that Digital will achieve its goal of
becomÂing the preferred computing supplier to the entire industry.
In the area of
research, molecular modeling applications are critical to
developing new products and meeting time-to-market goals. Digital
has a clear leadership in this market. All the major software
packages run on VAX systems. With Digital's networking,
researchers in the U.S. can work with scientists in other parts of
the world, accelerating the development of new products. This
gives our customers an edge over their competition, and it can
also have a tremendous profit impact. For a product that will
bring in $100 million a year, trimming the research schedule by
one day can mean an additional profit of a quarter million
dollars.
In the area of
manufacturing, we offer several cost-cutting and qualityÂenhancing
solutions. Our computer-aided design applications can help
engineers design or redesign a plant more rapidly and at less
cost. With the help of partners, Digital can offer the process
control devices needed to insure consistent product quality. Our
industrial VAX and real-time VAX systems add new important facets
to our total computing solution. We also can help customers reduce
cost with manufacturing scheduling and resource planning packages
running on our larger VAX systems.
Digital's solutions
are less well developed in the areas of distribution, purchasing,
sales and marketing. However, several companies are using such
All-in-1 functions as electronic mail effectively in these areas.
However, the biggest
challenge facing the chemical industry, and the biggest area of
opportunity for Digital, is not in any of these individual
departÂments. Instead, it involves a vision for the whole
industry. The chemical companies that survive and prosper will be
those that manage to link all the functional departments into a
single, integrated enterprise, which meets the needs of today, and
yet is flexible enough to meet the changes of tomorrow. This
integration is the ultimate competitive edge, the way to fully
maximize all the resources of a worldwide organization. And that's
good news for us, because Digital is the vendor best positioned to
bring true functional integration to the industry.
Right now, Digital's
solutions can effectively integrate key activities between the
research and manufacturing environments. Our Laboratory
InforÂmation Management System (LIMS) enables researchers to
monitor large numbers of samples which are collected from
manufacturing processes for quality control. We are now developing
a Computer Integrated Research (CIR) stratÂegy, which will allow
decision makers to integrate the research and manuÂfacturing
operations. An important link is also being created between
distribution and manufacturing by increasing our efforts on
Computer InteÂgrated Logistics (CIL), which is part of the broader
based Computer InteÂgrated Manufacturing (CIM) strategy. With this
integration, we help chemical companies use electronic order
processing to reach backwards to their suppliers and forwards to
their customers, providing just-in-time delivery and reducing
inventories at both ends.
Placing terminals in
the hands of a customer's customer has even greater implications,
however. By making ordering easy, an electronic ordering service
can make the vendor that provides it the de facto supplier of
choice. Potentially, it also lets the company collect feedback
from its customers to help direct its research and development
efforts. Finally, linking our customers to their customers creates
an added benefit to Digital by introducing the advantages of our
style of computing to an expanding network of industries and
companies.
But we must always
remember that senior management in the chemical industry is
concerned not with the issues of computing, or even functional
integraÂtion. Their focus is on insuring a long-term profitability
for their customers and enhancing stockholder value. In the future
that we're helping to create, chemical companies will use their
distributed computing and networking to pull all these activities
together into income statements and balance sheets. These
financial applications will bring the benefits of enterprise-wide
integration to the final forum of decision making, the corporate
board room.
As long as we keep
our customers' business issues foremost in our minds, we can
achieve our goal of becoming the preferred supplier to the
industry.
The automotive
industry is typically front-page news -- with its myriad of
problems, its performance levels, economic impact and production
output. It is a volatile industry that evokes many emotions
related to the U.S. posiÂtion as a manufacturing nation in a world
economy.
The U.S. automotive
industry market is comprised of domestic manufacturers like GM,
Ford, and Chrysler; foreign-based domestic manufacturers like
Honda Motor Corporation of America in Marysville, Ohio or Nissan
Motors in Smyrna, Tennessee; and foreign imports and suppliers of
goods to the autoÂmotive industry.
These major players
in the automotive industry represent a huge market, with revenues
from U.S. manufacturers alone of $200 billion in 1986. A look at
U.S. auto sales show the lion's share of the business going to
U.S. manuÂfacturers .
General Motors (GM),
the world's largest company with a 42% market share -- $103
billion in revenue —- employs 561,000. Ford has about half the
market share of GM, with almost twice the profit. Chrysler has a
10% market share. This total market share of over 70% for U.S.
manufacturers is a bit misleading, however. The foreign market
share gain in recent years is exerting pressure on domestic
manufacturers for a change in the industry.
Almost 16% of the
GNP in the U.S. is either part of or closely linked to the
automotive industry. Manufacturing cars is the nation's largest
industry, drawing its machinery, raw materials, parts stock and
accessories from every corner of the country. Consequently,
whatever is good economically for GM, Ford and Chrysler, is by
extension good for a very sizable portion of the U.S. population.
Unfortunately, the
automotive industry exhibits a far more pronounced impact on the
U.S. economy than on Digital's business — a situation we're
working to change.
The automotive
industry is in a state of turmoil that started with the prosperity
and record profits the industry enjoyed between 1983 and 1986. The
industry is characterized by the over-capacity (an estimated 30+
vendors are expected to be competing for a flat market) that is
likely to be a key factor in shaping the automotive marketplace
through the early to mid-1990s.
Opportunities exist
for those who are prepared to face increased competition and real
problems for those who are not. Automotive suppliers are looking
for increased revenue through market share growth. They need
vendors as partners who can respond to their needs for engineering
and manufacturing innovation.
Today, people are
demanding and getting new levels of quality in American cars. It
is design, quality, and innovation that make the difference. The
world is shrinking, with increased competition for automotive
manufacturers worldwide. A key issue facing the domestic
automotive industry is how to remain profitable in the U.S. market
and survive the market share battle that is in its early phases.
We have witnessed
some far-reaching market shifts in automotive buying criteria from
price to quality and innovation; from mass markets to a more
segmented or fragmented market; from a high degree of brand
loyalty to little brand loyalty; to customers rather than vendors
defining the product; and from a growing market to a flat market.
Digital already has
a strong presence in the market from both an account (GM and
Ford), and an applications (engineering, manufacturing, and
office) perspective. The U.S. is faced with increasing competition
and the need to reduce the cost per vehicle enjoyed by the
Japanese. Digital's strengths in engineering, computer integrated
manufacturing, office applications and communications networks are
a real answer to automotive industry problems.
Employee
productivity and changing skill requirements will require careful
planning and organization in the automotive industry. Decreasing
time to market with improved cross-functional, cross-geographic
communications is a necessity to answer this problem. And Digital
is addressing these challenges today.
To meet the
time-to-market problem, the major functions to addresss are
engineering and manufacturing. We already have a presence in
engineering — in such areas as computer-aided design and finite
element analysis -- although not to the degree that we could. In
manufacturing — for shop floor control, cell control, production
scheduling and monitoring — we do, in fact, sell a significant
number of point solutions which we either provide directly, or in
conjunction with third parties. But these specific solutions are
not really our competitive edge.
Central to our
competitive edge is our interactive, flexible, networking
capability that allows automotive companies to address the revenue
side of the profit equation (Profit = Revenue - Cost).
Why is this
significant? The U.S. auto industry has focused more on the cost
side of the equation in response to Japanese competition in recent
years. They have spent billions on programs aimed at reducing
production costs. Improved design and innovation is increasingly
important. The market now favors well-designed, innovative cars —
even at a premium price.
The auto industry is
beginning to place more emphasis on the revenue side of the
equation in response to the demands of a changing market. Lower
cost for U.S. cars has not made the expected impact in market
share. Quality may be even more important than design, emerging as
a determining factor in the buyer's decision. Buyers are
increasingly discriminating. Fords's success in the introduction
of the Taurus/Sable line indicates that people are buying
innovation and design.
This shift
represents a tremendous opportunity for Digital. Automotive
manufacturing functions, and departments which impact revenue —-
engineerÂing, manufacturing, and research — are where Digital is a
significant player right now.
The factors that
contribute the most to revenue -- especially design, quality and
time to market -- require a high degree of integration and are
communication-intensive. Auto manufacturers really would like to
recapture the kind of physical integration they had when they were
small. Design teams were co-located and could meet in a conference
room. More discussion took place. More decisions were made at the
knowledge worker level because of cross-functional physical
integration. It is this model of physical integration that needs
to be emulated in the automotive industry to meet current
challenges.
As companies grew
larger, there was a natural migration to the cost side of the
equation to take advantage of the economies of scale and other
effiÂciencies, and because maintaining the small company
environment became more difficult. Today's challenge for the
industry is how to reap some of the benefits they experienced when
they were smaller, benefits such as entreÂpreneurial spirit,
innovation, design, and time-to-market without having to back away
from successful programs that address cost reduction and quality.
Our solution
supports cross-functional and cross-geographic integration. It
enables companies to operate in a way that contributes to
creativity, innoÂvation, quality and reduced time to market. This
peer-to-peer communication is equal in importance to information
management. Conceptually, this creates an environment like what
they enjoyed when they were smaller and could physically
integrate. It is the link between a customer's point problems and
solutions, and is the overall corporate business problem. It is
this kind of communication that contributes to innovations, that
is the glue which links all the necessary players throughout an
organization for the best combination of functions and
geographies.
Our unique
networking capability can provide the linkage between the
deÂpartmental solution and the corporate business problems. This
is at the heart of Digital's unique solutions capability.
I'm here to tell you
about Digital's manufacturing solutions, and how these solutions
can enable companies to solve today's problems in new ways.
In the years
following World War II, many companies ceased to perceive
manufacturing as a critical corporate function. In the old
environment, markets were national, not global. U.S. companies
made shoes, textiles, televisions, etc., for the U.S. market. The
major competitors were known and familiar; they were similar
companies with similar products and similar management practices.
Nobody "rocked the boat," and nearly everybody progressed at the
same rate. This meant that product life cycles were relatively
long, and corporate performance was measured in a specific
competitive advantage in the areas of marketing, sales or finance
leaderÂship, but not manufacturing. Computers were expected to
automate limited tasks, in which the benefit could be measured in
labor or material dollars saved, and Digital excelled in providing
point solutions for these needs. Computer-integrated manufacturing
(CIM) was a buzz word, a vision, but not a reality.
In the new world,
markets for most basic goods are global. Competitors have a
different mix of management attitudes, values, and cost factors
that they bring to the game. In addition, the application of
technology to product development has increased dramatically in
the past few years. Consider the changes resulting from
technological developments in areas such as informaÂtion
processing, telecommunications, or materials. These factors have
led to shorter product life cycles, and more competition. The new
environment requires a totally new approach from manufacturing
companies. Flexible manufacturing systems were an option in the
old world; they are a requireÂment in the new world. Manufacturing
companies need to adjust their product mix, and their production
volumes, quickly and easily. To enhance productiÂvity, they must
be able to share information and decentralize control of the
production process. In the old world, automation was a
productivity tool. In the new world, survival will be based on CIM
-- the integration of automation and information management across
the entire manufacturing enterprise.
CIM goes beyond
intra-company communication to allow a manufacturing company to
deal more directly with its customers and suppliers. Today, when
we buy a car, the dealer can order the vehicle on-line at the
dealership, using the car maker's production scheduling system to
quote a build date.
CIM is a management
approach through which a company can address its critiÂcal success
factors — product cost, time to market, asset management, and
customer satisfaction. Within the manufacturing department, CIM
specifically addresses:
o the need for
local, high-performance production, management and control — how
you make things cheaper, better, and faster;
o the need for
information sharing; and
o the need for
complete solutions.
According to a
recent survey, the single greatest barrier to the impleÂmentation
of automation is technical planning difficulty. These needs for
planning, customization, service, delivery and support, are key
elements of CIM, and must be included in any solution which
Digital provides.
In the old
environment, purchases were made based on price, performance and
operating system software. In the new environment, CIM solutions
do not necessarily begin with the purchase of a computer. Rather,
they usually begin with simplification of the organization, the
manufacturing process, and the way information is used. This
distilled structure can then be automated and integrated.
Automation and integration require comprehensive networking for
sharing of data, and they require the ability to collect and
disseminate information among people, and to all kinds of devices
that acÂtually perform the production tasks. Finally, a full range
of services and support complete today's CIM solution.
Through various
cooperative marketing programs, we are today developing the
broadest and deepest portfolio of software for manufacturing
applications available from any vendor. Over the past two years,
the business leveraged through all of the partners in the
manufacturing market has grown at a rate in excess of 75% per
year. In addition to expanding the application portÂfolio, our
plans include integration of these applications. For example, a
bar-code reader on the shop floor will be able to collect and send
informaÂtion to the inventory management application in the plant
manager's office.
Several recent
market-research studies indicate that manufacturing companies
increasingly are making decisions which limit the number of
computer archiÂtectures they will use. Digital's VAX VMS
architecture, and DECnet Ethernet networking, are simply the best
products for the implementation of CIM. Our base products in
networking are the building blocks for CIM solutions. The recent
introduction of the industrial VAX family extends this
base-product strength to the production environment. The
industrial VAX systems are uniquely designed to withstand the
harsh conditions, such as dust and temperature, which exist in
many factories.
CIM also requires
sharing information in the multi-vendor environment that is
typical in manufacturing departments. Multi-vendor solutions need
to address two very different problems, at two very different
levels. A higher-level problem is integrated networking, which can
tie together all functions of the enterprise, including
communications, down to the superÂvisory or cell-control computer.
Planning for factory automation should start with the enterprise
network. The fullest benefits of CIM can be realized only if you
have a single networking approach. We need to highlight the proven
performance, the reliability, and the simplicity of our integrated
networking solutions for manufacturing.
On the other hand,
the lower-level problem is interconnection of the superÂvisory
computer, or cell controller, to the hundreds of devices that
perform production. These devices include meters, motors, robots
and controllers. Digital has a family of products, like BASEWAY,
which allow device interÂconnect today. We also support the
development of industry standards, which will make this problem of
interconnect easier to solve in the future.
Some of our
customers are starting with the lower-level problem. We must
advocate a broader vision, which clearly illustrates the benefits
of beginÂning with networking.
The last component
of the CIM solution -- service -- starts with the ongoing
expansion and refinement of our service offerings, in Educational
Services, Field Service, and Software Services. In addition,
several new service offerings will be of particular significance
in this market. For example, the Manufacturing Systems Integration
Service (MSIS) positions Digital as a provider of complete
solutions, such as integration of Digital products with
third-party applications and customer software. In addition,
Manufacturing Resource Centers (MRCs) are opening that are focused
speciÂfically on CIM solutions and staffed by people with years of
hands-on experience implementing CIM. They are located today in
Detroit, Enfield, and Santa Clara, and will be expanding to other
areas over the next 12 months. Today, MRCs address the needs of
more than 60 manufacturing customers, and we expect this number to
grow rapidly over the next few years.
Taken together,
these new service offerings represent significant new directions
for Digital, offerings which are very much in tune with the needs
of the manufacturing market.
To summarize, many
of our manufacturing customers assume that the answers to their
problems lie in their traditional ways of thinking. It is our job
to expand our customers' approaches to problem solving, to show
them how simplicity, elegance, and completeness of our CIM
solutions can empower them to move beyond current limits, and to
achieve their manufacturing objectives in totally new ways.
Many people in large
companies view the engineering department as a black box. You feed
it a set of requirements; you fund it to the projected level; and
you expect to receive products, after a certain time. In some
companies, the black box may be more like a black hole into which
you continue to pour money, and eventually you might get a product
out.
The most common or
first problem of any engineering manager is the late- schedule
nightmare. One of the major goals of any project is achieving the
best time to market -- the time from initial concept to the start
of shipÂping. A late schedule will limit the total market
opportunity, and signiÂficantly reduce the total potential
revenue. For "Fortune 100" companies, a single product slip can
mean tens of millions of dollars of lost business per day.
Why do product
design efforts often miss the mark by a wide margin? In
engineering, the typical causes include: poor team productivity,
inability to manage the new technology incorporated into the
product, poor management, lack of sufficient computing resources
to completely simulate the design and poor communication across
the engineering team. A poorly documented product can cause
manufacturing delays, even in the start up.
How can Digital
help? VAX workstations can increase greatly the productiÂvity of
engineers. For mechanical and electrical design, we have the most
complete set of leading-edge computer-aided design (CAD) systems
in the industry, plus complete simulation and project management
tools. VAXclusters are an excellent offering for any size project
that cannot anticipate its growing computing requirements, because
new capacity can be added as required.
For many of our
targeted accounts, a large project involves managing engiÂneering
and manufacturing resources around the world. At Digital we have
found that our interactive, flexible, worldwide network and mail
system is equally as valuable as any CAD tool, because it provides
the timely, needed level of communication. We also have integrated
excellent documentation facilities in our key CAD tools. All of
these solutions have enabled the Digital engineering community to
introduce new products at an ever-increasÂing rate.
The second nightmare
that bothers engineering managers is the "we cannot ramp"
syndrome. Sometimes the team does a great job and meets the time-
to-market objective. However, they don't meet the time-to-volume
objective, because the product could not be built to the expected
volumes. The effects of these are lost opportunities in the total
revenue stream. For example, when Union Carbide introduced
artificially manufactured diamonds in the 1950s, it took them five
years longer than planned to get a high-volume process. This delay
cost them hundreds of millions of dollars in lost opportunities.
Some of the leading
causes for not being able to ramp up include: a poorly designed
manufacturing process (the responsibility for which is owned by
engineering in a fast-moving industry), and continuing to confront
manuÂfacturing with many engineering change orders (ECOs). Even if
the ECOs are small, each one causes manufacturing to stall for a
period of time. The specification of a component may be inaccurate
or incomplete. Engineering may do a poor job of preparing the
whole manufacturing and service popuÂlation, due to poor
communications, training, or integration for data exchange.
What can Digital do
to help avoid this set of problems? Once again, we can provide CAD
tools, VAXclusters, interactive networks and mail, and
documenÂtation tools. For electronics customers, simulation and
automatic test generation could help the specification problem. In
the discrete manufacÂturing industries, Digital is committed to a
large and ever-growing number of standards, all of which can help
in integrating applications and manufacturing.
Another class of
engineering problems I call "the big hiccup nightmare." Things are
looking great — time-to-market schedule is right on time, and
market acceptance and manufacturing ramp-up are right on the
best-case target. Then because of some unexpected problem, you
cannot ship any product for a significant period of time. The
necessary design changes cause a big delay and loss of
opportunity. Immediately, your biggest winning product becomes
second-rate, or even a loser in profits.
The most common
cause of this nightmare is an engineering fix that takes a long
time to introduce into high volume. Another cause is the loss of a
process formula. Suddenly, you cannot control the manufacturing
process, because you’ve failed to understand it completely in the
beginning. The solutions to the big hiccup problem are good CAD
tools, a thorough design methodology, and very complete
simulation, to discover potential design and process problems
before beginning to build product.
Basically, we have
the best base of product capabilities and services, and literally
hundreds of applications to avoid these and other engineering
nightmares. We have VAX computers on the desktop, with the tools
to make the designers more productive. We have VAXcluster systems,
which today are the preferred solution for engineering
departmental computing needs. The same engineering application
that runs on the desktop also runs in the large computer center.
Nobody else can do that. Our networking and mail are the best in
the industry, and our worldwide service offerings are second to
none.
More than half the
market for computers and supplies and peripherals, exclusive of
telecommunications costs, is in what we call "service
indusÂtries." But in FY85, when we started our industry marketing
activity, we were losing market share in this fastest-growing
segment of the computer world. In FY86, we kept pace with market
growth. And in FY87, we're gaining market share.
Part of our success
comes from efforts to organize and focus our marketing and sales
force. When you dedicate sales people to an account, you get
results. But much of the success comes from better understanding
where our customers are headed and what they want to hear -- our
message and our vision.
Many companies in
service industries deal directly with you, the ultimate consumer.
Telecommunications and utilities companies have wires running
right into your house. Others have subscription services that go
right to your door. Others have credit-card information on you.
Others offer profesÂsional services, like accountants and lawyers.
Based on what they
know about you, these companies want to offer you more
information-based services, first from their corporate offices,
and ultimÂately out on the user premises. For example, by 2007,
your children will be able to apply for a mortgage at home and
have the mortgage approved without ever having to see a banker.
One important trend
in service industries relates to market redefinition and the
consumption function. I'll use the airline industry as an example
to explain this concept, but it applies to many industries.
Four years ago, the
large database in your typical airline was organized by ticket
number, and about all the airline could tell you was the number of
seats that were filled on a given flight. About two and a half
years ago, they began throwing more computers at the problem and
building larger databases so they could organize databases by
individual traveler. At this point, they could tell you the number
of flights you took on their airline, and where you went. About a
year and a half ago, they added database cuts by "consumption
function" or "affinity grouping." An "affinity group" is a list of
products and services a targeted consumer is likely to buy. People
who fly usually rent cars, stay in hotels, eat out, etc.
In another example,
the L.L. Bean catalog now comes in six editions, inÂcluding the
old standard catalog, a hunters' edition, a children's edition and
a yuppies' edition. The one you get is a function of how they
classify you.
The insurance
industry does likewise. Your first policy triggers other affinity
groupings. Is that policy for your child as well? Does your child
need a car seat? Do you need car financing? The airline industry
targets you for mail about frequent-flier programs, hotels, cars
and travel, based on affinity groupings.
All service
industries are beginning to organize around consumption
funcÂtions. Fortunately, we have organized our marketing the same
way. We call our groups "Financial Services," not banking; "Travel
Services," not airÂlines; "Media Services," not books. From the
customer's point of view, this is a subtle but very important
point. In IBM, the banking manager and the insurance manager and
the investments manager all work for different manaÂgers. The
customer tells us, "They don’t understand these affinity
groupÂings. It’s hard to get things done with them." And we'll
probably reorganÂize our group as the industry reorganizes around
these groupings.
Another important
concept and trend is client-based delivery of services. Each of
these corporations deals through an intermediary, as a way of
delivering its services. Over the next 20 years, they want to
reduce their dependence on intermediaries, if not do away with
them.
For example, in the
airline business, there are vendor and non-vendor airlines. Vendor
airlines are those that sell their reservations database to travel
agents. Sometimes these travel agents have inexperienced help and
don't provide the best route or the least expensive travel option.
Companies are waking up to the fact that this approach is not
efficient. So a new breed of intermediary is popping up. Within
the last four months, two new data-services companies have started
offering customer-oriented services — access to the most
convenient route, at the least cost. They're buying all these
services from the vendor airlines and car rental companies,
putting them together in a database and selling them to companies
like Digital. Leaders in that service area will be large
conglomerates like American Express Travel-Related Services.
Eventually, companies that are big enough to afford their own
travel-related services operation will get into that business and
cut out that intermediary. First, they'll offer those kinds of
services through the headquarters location. Ultimately, you'll be
able to access them from your personal computer at home. You will
be able to go from vendor to personal use, without the
intermediary.
Moreover, service
industry companies are worried that they can't make a profit
delivering all these services to the user. So they are setting up
new data-services organizations, such as GTE Data Services,
American Airlines Data Services and Banker's Trust Services. They
are taking the service industry equivalent of manufacturing and
distribution, under the MIS manaÂger, and setting up a profit
center. That trend is extremely important to Digital's success.
When they (MIS executives) start thinking in terms of profit and
loss, they are open to change, and ready to talk to us.
There's also a move
to get away from "brick and mortar" retail banking, because it's
unprofitable. Bank buildings are usually old and inconveniently
located, and hard to staff and maintain. They are looking for a
more efficient distribution model. We have some products today,
and some under development, that will help them do that. Today,
the most common approach is the automatic teller machine (ATM). In
the future, they’ll be moving toward "smart cards."
Insurance is going
through a major change. It wasn't too long ago that you received
one insurance policy a year. Now it seems that every time you turn
around your agent's calling you up: new this, new that, combine
this, do
that. It's very
confusing for you and for insurance agents. Right now, they have
PCs and their only connection with the region and from there to
headquarters is by "sneakernet."
Well, we could put
it all on one electronic mail system. Then as soon as you sell a
$5 million policy to John Doe on the West Coast, you can put a
message on the mail system telling your fellow sales reps the
objections, how you overcame them and how you closed the order.
Recently Prudential
Insurance bought Century 21. That’s an interesting affinity
grouping. They want to capitalize on all the people applying for
mortgages. Savings and loan companies are also getting into real
estate.
There are
experiments going on right now to develop consumer-based products
that will allow you to download the file of houses, and all the
data on those houses, to your lap; and, using graphics techniques
that don’t exist today, allow you to shop at your convenience. If
you want to see seacoast homes, you get on the value-added network
for seacoast homes, download it while you sit on your couch at
home, and go up and down the Maine coast. If you see a town you
like, you move into that town. If you see a house that's up for
sale, you move into that house. You can take a tour of that house,
either on the value-added network or downloaded. You can apply for
credit, apply for the mortgage, and buy the house, if you choose.
In the loan
business, there are 150 subscribers to the 1-800-LOAN, USA Loan
system, where you never have to go to a credit store and you never
have to go to a bank, and you get your loan approved today.
There are already
10,000 people in the U.S. today doing 24-hour stock trading, using
their personal computers, bypassing the dealers. They pay more
than the standard commission charge just for the convenience and
the ability to get more data.
Probably no greater
area for change exists than in the retail trade and consumer
banking market. Today we're all familiar with credit cards. You
carry them around in your wallet today. When you buy something,
you have a certain amount of float, caused by the amount of time
it takes to debit and credit your account. There are experiments
going on today with debit cards which allow you to go into the gas
station, put your debit card into the pump, pump the gas, and
immediately your account is debited and the gas station's account
is credited. "Smart cards" are about the thickness of a small
calculators. They're now being used primarily in the Far East.
They have on them every piece of data you ever need to know about
yourself: your life history, your family's life history, what you
like to eat, your bank balance, how much you get paid, insurance
policies — every critical number you ever wanted.
In the Far East,
retailers and bankers are experimenting with using that smart card
to distribute pay. In Europe, they are experimenting with
"hypermarkets" with 178 checkout counters. You walk up to the item
you want and stick your smart card in. The system picks the item
and packs it and and deducts the amount of that item from your
smart card. When you walk out, you have your purchase bagged and
give them your card to verify the purchase; or you can do your own
checkout.
Already today, 20%
of all the retail sales in the U.S. is done through the home.
About 80% of that 20% is done through affinity-group catalogs, and
the other 20% is done through home shopping networks. People are
working on exÂperiments to make home shopping more efficient and
effective. In the home shopping network, you've got to listen to
the sales pitch that goes along with the fuzzy picture of the item
you don't want to buy. And when you read the catalog, you can't
see a demonstration of the product. GTE and others are working on
full-motion videos and value-added networks that will allow you to
see a demo of the product in a window, while you read the text on
the screen.
This is going to
change retailing from the way you and I know it. You'll see
clusters of durable-goods companies, like the Auto Mile on Route
One outside Boston, where every major automobile company has show
rooms. They'll be supplemented by the finance block, the insurance
store, and the accessories department.
By 1995,
travel-related services will become the second-largest industry in
the world. Here again, you can see the vendor airlines playing a
dominant role in the sale of their database, dealing with the
agents that distribute the product to you. Eventually, you will be
able to sit on your couch, call up the planned tour, and see a
full-motion video of the hotel or the seaÂcoast, the airplane, the
routes, and buy your tickets.
Today, phone
companies and utilities have a wire going into your house. They're
all searching for ways to keep that wire busy. The longer the
wire's busy, the more money they make. The wire used to be busy
with voice. Now they want to make that a digital network and put
value-added services on that network. 1-800 is a value-added
network service. If someone isn't home when you call, a
value-added network service allows you to digitize that call so
the system can call them back later and deliver your message.
In the area of media
services, did you know that Business Week today comes in six
different flavors? There's a traditional Business Week, a videotex
version without ads, a videotex version with ads, a floppy-disk
version, a Braille version, and a CDROM version. There are 50,000
subscribers, via PCs, to videotex Business Week with ads.
It’s not at all
unreal to think about a MicroVAX computer in every city in the
United States, tied to a cable system, and each week, the
providers of information download their edition to each MicroVAX
system and the inforÂmation is accessible to you, from your home,
page by page as you want it, in high-quality form. These
information services will replace local bookstores for the
majority of your reading requirements by 2007.
Today, the data
services organizations in these companies are experimenting with
"participa-stories" -- novels, using artificial-intelligence
concepts, that allow you to follow any path through the story that
you choose as a reader. It's the grown-up version of "Dungeons and
Dragons." You buy War and Peace; and if you're a warmonger, you go
down the war route.
To execute all these
visions of the future, information officers today are saying that
they need a single hardware architecture, a single operating
system, a single networking scheme. The reasons vary bv the
industry, but it's extremely difficult to execute a global 24-hour
trading system when you go from PCs to System 36s to 4300s to VAX
computers to Prime machines, to DG machines to 3090s. A trade- is
supposed to be quick, immediate, global. And you shouldn't have to
spend all your time going through layers of software to do it.
Information officers immediately recognize the value of what we
have to say. They even have a picture in their mind of the
information center of the future. It's a menu-driven device that
you can use on your couch, that has flat 35-millimeter
print-quality images of the person you're talking to, a window
into the public network that gets you into value-added networks,
and access to the range of services you need in the home.
By 1995, almost
every one of these visionaries of service industries sees the
world divided into three parts. There will be information
providers, like McGraw-Hill; information distributors, like Sprint
and AT&T; and inforÂmation systems managers, like Digital and
IBM.
Where's the profit?
We don’t know. Is it in the transmission line? Is it in the
database? Is it in the computing system? Is it in all three? How
do you protect yourself when you're building a company and a
vision out over 20 years, so you don't miss out?
Executives in these
industries, having seen that we understand where the industry's
going, say, "Yes, it's clear to me what you're doing. You want to
get a VAX system at every switch for every information distributor
(like the phone companies), and you want to get a VAX system at
every database, for every information provider. So no matter what
value-added network I choose to implement in the future, no matter
what company I choose to buy, no matter what service I intend to
implement, I've got a common architecture. That makes sense, I
like it. You're on the right path. But only do it for
mission-critical applications in these industries."
What are
mission-critical applications, and how do you identify them? There
are thousands of applications in each one of these industries, but
only a handful of them make the CEO stop whistling during meetings
and listen to what you have to say. Those are the ones for which
the customer pays money. If the press stops running, if you can’t
connect the phone call, if the bill can't be collected, if the
transaction can't be concluded, if the customer request goes
unsatisfied, you have failed in your mission-critical appliÂcation
.
I put electronic
publishing at the top of the list because almost all of the
visions for the future that I just laid out for you are the
problems faced by today's media executives: the collection,
manipulation, display and distribution of electronic picture
books. While they’re often thought of as experiments today, it is
the road to the future; it’s what they're trying to implement.
They're also trying to meet deadlines, and collect page-usage
rates. And the systems are multi-department systems, involving
many disciÂplines, usually within a function.
As you go about your
daily business, think about the role Digital might play 5, 10 and
15 years from now in the aggressive pursuit of value-added
netÂworks, supplying the hardware, the operating system, the
software, the network, the network management, perhaps even the
database management, for a variety of service industries. Think
about our role as the tax collector or the toll collector,
negotiating with the utilities companies for line usage rather
than the way it is today, where they collect the money. Think
about how we'd manage the company in that kind of environment.
Banks, insurance,
investment managers and brokers are changing. Technology, formerly
used for operations and accounting, is now driving the sharp end
of the business -- revenues. The role of technology in the
financial industry was to support traditional products: deposits
and loans in a bank, policies and claims in an insurance company,
stocks and bonds in an investment firm. Systems were organized
around production functions that handled the debits, credits,
record-keeping and statement production of those traditional
functions. They weren't really marketing organizations because
they sold what they made. The more they could make of it, the
better profits they could make, because of the efficiencies of
scale. So they operated in high volume and centralized computing
to reduce costs and improve productivity.
But these companies
want a new focus on individual customers and on corporÂate
clients. They are shifting their attention away from their
traditional products and functions and are looking at new channels
of distribution; making professionals more effective; moving
products and services closer to the customer at the point of sale
and service; and ultimately integrating the customer into this
process.
In fact, in the
financial services industry, information is the product;
information is money. These organizations are playing the role of
interÂmediaries between information users and information
providers. And they want to do so in a way that enables clients to
have what they want, the way they want it.
To meet these needs,
the financial industry is investing heavily in "mission critical"
systems -- technology that creates and delivers products and
services at the point of sale and consumption. The traditional
functions of technology were in the back office, organized around
the products or the functions performed by the organization, to
improve efficiency and to process high volumes of transactions.
Now technology is moving out of the back office and into the front
office, as it increasingly is used to support professionals — loan
officers, insurance underwriters, financial advisors and
stockbrokers -- who create and deliver financial services to
different markets. Eventually technology will move into the
client's place of business and into the home itself.
Let's look at the
business model for a bank. It consists of a large central
headquarters, where professionals — account officers and loan
officers -- are located. There are branch offices where customers
access financial services. And there is some consumption going on
in the home, primarily balancing of checkbooks and a little home
banking.
That business model
is changing, and technology is changing with it. Technology
centralized in the headquarters and the back office is moving out
to the branch offices with automatic teller machines (ATMs), and
teller terminals are linked to platform systems across a network
to deliver serÂvices. Already, corporate customers are linked to
these systems for cash and portfolio management. Tommorrow, the
promise of in-home financial services will be a reality.
Digital is already
successful in financial services applications that are
compute-intensive and that have to do with supporting
professionals — for example, funds transfer in corporate banking
markets, trading in capital markets, and portfolio management and
trust applications. We have been successful in the more valuable
transactions, the more information-intensive applications. We are
supporting a financial professional who needs access to computing.
So what's the market
opportunity for Digital that is emerging? The tradiÂtional
business was organized around products and protected by geography
and regulation. There was a lot of inertia. Customer
relationships, particularly corporate relationships, lasted for
decades. The technology was transaction-based. It was batch, and
centralized in one place, primarily for efficiency because highly
trained people had to take care of this expensive gear, and
because there were efficiencies of scale, from centralizing these
very large processors.
IBM is the
traditional provider to this industry in the operations and
back-office type of functions. Interestingly, as we move out to
support professionals at the point of sale and the point of
service, we see Digital well-positioned for increased rates of
growth. It's estimated that the traditional types of back-office
computing will only grow about 20% between • now and 1990. But the
mission-critical applications that we are targeting are growing at
a rate of 60%. That's why Financial Services Industry revenues are
growing at twice the average for the company.
We
are selling the products we have today, based on the strength we
have in these markets, now. Investment in the future means we are
creating new solutions by integrating Digital platforms,
third-party and customer appliÂcations in three mission critical
systems: branch delivery, professional
worksystems for
traders and relationship managers.
The marketplace is
responding to the networking, the VAX/VMS architecture, and
strategic solutions from Digital and third-parties. Over time, we
can help these companies change the way they do computing, to
distribute those applications and data to where they're most
needed for business success. This industry is ready for Digital
today, and we plan to increase investÂments in people, products,
partners and programs to leverage this success.
The trading market
consists of a large number of major institutions that operate
around the world — companies like Citibank, Morgan Bank, Banker's
Trust and Merrill Lynch.
A decreasing share
of the income of these institutions comes from loan revenue, and
an increasing share comes from trading profits. During the first
quarter of 1987, eight out of the nine largest U.S. banks made
more than 10% of their profits from foreign-exchange trading. For
Morgan, Citibank and Banker's Trust, that amounted to in excess of
$80 million each. These institutions trade a wide variety of
instruments, all of which are connected to one another. So when a
factor changes, like the prime interest rate or the Federal
Reserve's discount rate, something happens to the market value of
all of these instruments. And it’s that kind of change that
creates opportunity for trading profits.
The trader's job is
to make money by "buying low and selling high." For example,
sometimes in a single day, prices of a particular currency can
fluctuate widely, creating opportunities for those who know when
to get in and when to get out. But that's not an easy task.
Information is arriving all the time — market data, prices,
analysis. The trader has to put it all together and make
decisions, and keep in touch with the back office for
record-keeping.
Increasingly, these
organizations look to technology for a competitive adÂvantage. And
they are willing to spend in the range of $150,000 per trader
station, because of the profit potential they see.
Real-time
information is very important to a trader — on stock markets,
international financial markets, etc. There are about 150
different on-line information services that a trader might wish to
use, and obviously there’s a limit to how much of this information
a trader can absorb.
Recently, I was on
the floor of a foreign-exchange trading operation. It was early in
the morning, and things were quiet. The traders were waiting for
word to come across the wire on what the German central bank was
going to do about interest rates. It turned out that the bank was
not going to change its interest rate. This caused significant,
immediate activity. People were on the telephone modifying the
positions they had taken, because some of them had been
anticipating that the rate was going to change, and therefore they
felt they were exposed. The ability to collect that information
and to react to it quickly is what interests them.
The second major
category of activity a trader engages is analyzing the data.
Today, the most widely used set of analytical tools are a
calculator, a pencil, and a piece of paper. Traders, in action,
are often furiously calculating things to determine whether or not
some particular rate makes sense, and whether any activity is
justified. Many traders will retain these pieces of paper, so that
at the end of the day, they can reconstruct what has happened.
In addition, the
back office must be kept informed of trading activity. Today, the
connection between the trader and the back office is by paper.
Every time the trader engages in a transaction, he or she has to
fill out a trading ticket, which records the amount of the
transaction, the name of the other party, and other relevant
information. That paper is then sent to the back office, either by
messenger or by facsimile machine. This procedure can lead to
significant delays -- up to 45 minutes in some cases -- which
means that the trader cannot retain on-line information on the
position. When trading becomes fast and furious, traders have to
go back to pencil and paper to keep track of what is going on.
Trading also has to
operate around the clock. Just as a New York operation may be
closing, Hong Kong may be opening up. So these organizations have
to be able to protect or enhance their trading position, as the
activity moves around the world.
What solutions does
Digital offer for this market? To meet the need for real-time
information, we are working with media companies and third-party
software houses to digitize the market information that is fed to
traders. To help traders make better decisions, and be able to
respond more rapidly, we want to introduce a set of VAX-based
decision tools, such as expert systems, so that the incoming
market data can be combined with historical information and trend
information. That way traders would no longer be dependent on
their own individual memories or handwritten logs, and they would
be able to integrate what they have seen on the screen. These
capaÂbilities are important because competitive advantage in this
business comes from the ability to spot anomalies in the market
more quickly than the next trader, and to be able to respond more
rapidly.
It's conceivable
that all of this historical data will reside on a VAX- cluster
system and be available to other traders in the same institution
over a local area network.
To enable traders to
trade more and manage their positions more effectively, we're
introducing the concept of the trader’s workstation. This might
consist of a large screen with multiple windows or, conceivably,
multiple screens. It's also important to provide the ability to
combine the output from analytical tools, using multiple colors,
or flashing, or some other means of signaling which trends are
taking place, or when action is reÂquired .
We’re considering
the possibility of an electronic transaction ticket. This means
that real-time information on the transactions can be recorded on
the workstation to keep the trader informed of what the position
is, and also be communicated to the back office. This will enable
both the workstation and the back office to know simultaneously
what is going on, and update posiÂtions immediately.
In addition, use of
a wide-area network will make it possible to manage trading
globally. It's possible for complete information on the position
to be available to all traders, no matter where they are in the
world, from New York to Hong Kong to London. As one office closes
and another in another part of the world takes charge, everybody
knows everything that's occurred, in terms of positions,
transactions. There is no important information left on a slip of
paper or a desk in New York.
By capitalizing on
Digital's strengths, such as a common architecture and networking,
we are able to offer to our customers an integrated solution that
can provide competitive advantage.
I represent 3,000
Digital people in Canada, who know the importance of sharing
ideas, directions, and strategies, in an international
corporation.
Canadians in
general, including our government officials, are very aware, and
immensely proud, of Digital's presence in Canada. We incorporated
in 1963 — Digital's first subsidiary. Our 3,000 employees are in
40 sales and service sites, plus our Kanata, Ontario,
manufacturing and distribution plant. In Kanata, Digital
manufactures backplanes, PDP-lls, and VAX 8250 and 8350 systems
for export.
Speaking of exports,
25% of Canada's gross national product is exported. Canada is the
largest trading partner of the U.S. In fact, U.S. imports from the
province of Ontario alone are greater than those from Japan.
Canada presents
interesting opportunities for Digital. The size of the geography
and the nature of the economy, lend themselves to our strengths in
networking and distributive computing.
We segment our
markets by geography. Starting from the West Coast, in British
Columbia, we have mining, pulp, and paper; in Calgary — oil and
gas; in Ontario — manufacturing; in Quebec — basic manufacturing,
pulp and paper. Within Ontario, two cities are particularly
important: Ottawa, the seat of our federal government, and
Toronto, the commercial and financial center of the country.
Next to the federal,
state and local government sector, finance is the largest sector
of data processing expenditures in Canada, and represents
approximately $1 billion in hardware and software expenditures.
IBM has over 50% of that market; and up until recently, Digital
had very little penetration there. It's an industry in a state of
flux and a major growth opportunity for us.
Recognizing the
opportunity, two years ago we decided to invest heavily in this
market. We moved 120 field management and support jobs, including
nine members of the ten-person country management team, from rural
Kanata to downtown Toronto, the heart of the financial area. In
this new location, we have a finance industry group and an entire
new finance sales and services district, which includes both
Toronto and national targets. We also estabÂlished an applications
center for technology (ACT) on the ground floor of our new
location and very visible to the passing public, to highlight the
Digital style of computing.
Part of our ACT is
an executive briefing center, where we demonstrate customer
solutions. And adjacent to it we have 15,000 square feet of
training space, including a very profitable bookstore.
As part of the
all-channels industry marketing strategy, we encourage both OEMs
and CMPs to use our ACT to joint-sell to our prospects.
Our finance
investment plan is working. At the Bank of Montreal (with 1,600
branches and 3,000 data-processing employees, all IBM-trained), we
sold the first implementation of a commercial banking application
using All-In-1. At Financial Trust and Council Trust, we sold an
OEM's retail banking appliÂcation. At London Life, we are in the
midst of installing a 200 MicroVAX network, to assist sales people
in marketing financial products. The Toronto Stock Exchange uses
VAX systems to assist communications with their trading floor.
Even with these
wins, we still see significant challenges ahead of us if we’re
going to succeed in challenging the competition in this
marketplace. The mission-critical applications that Bob Hughes and
Jerry Witmore disÂcussed, in such areas as office systems,
corporate banking, international banking, and trader work systems,
will be part of our continued success.
Educational Services
provides a worldwide network of training, education, and
communication services. We do this for both employees and
customers.
Retraining is now
imperative in the workplace, as jobs continue to change and worker
skills become obsolete. And, important innovations in
communiÂcations and in learning technology are changing the ways
we deliver our training.
We work
collaboratively with engineering, product business units,
marketing, and the field organization on products, markets,
applications, and strategic information that go into the course
materials and documentation we supply. Our added value is
designing, developing, delivering, and measuring these programs.
Our goal is to provide training and communications solutions that
are timely, high-quality, locally available and cost-effective.
The size of our
training organization has been compared to that of a univerÂsity
with a population of over 25,000 full-time students. Every Monday
morning, from San Francisco, California, to Sydney, Australia;
from Reading, England, to Rio de Janeiro, Brazil, we start over
5400 students in classes. This year, we'll teach over 500
different courses, in 17 different languaÂges, in over 100
training centers around the world. This will result in us
delivering over 10 million hours of education to over 250,000
students.
We have the
potential not only to deliver training, but to deliver our message
to Digital's end users — to deliver information about our ability
to make our customers more competitive.
Educational Services
provides a full range of communications services, from slides and
scripts to closed-circuit TV, videotapes, and manuals. We also
oroduce technical books and publish under the name of Digital
Press.
Information-age
education is no longer just an instructor in the classroom. It's a
richer, more exciting, more flexible environment for students to
learn, not only about computers, but how to use computers
integrated into their job. It extends beyond the format of
lecture-lab training, to indiviÂdual, self-paced, instructional
courses; to videotape programs; to audio cassettes, for
reinforcement of the learning; to computer-based,
computerÂmanaged, and highly interactive programs, with laser
videodisk; and even to programs being broadcast over private
satellite communication networks.
Here are a few
examples of what Educational Services is doing to solve the
training problems of Digital and its customers.
When Field Service
needed to train a large, decentralized population of its engineers
on disk and tape products, we solved this problem by simulating
the instructor in the classroom with interactive video courseware.
At the same time, we created the concept of an individualized
learning center, where an administrator was available to help
students with this self-paced material.
When the Sales
organization found that the average sales rep received over 700
pages of information a week, and didn't read them all, and spent
an average of six to eight hours a week commuting, we responded
with a sales training audio cassette learning program, to
reinforce the important prodÂuct, market, and selling messages.
Finally, when the
Field asked us to train 8,000 people, simultaneously at 80 sites,
on the new Digital Business Architecture that we introduced this
past March, we used our own private satellite communication
network, DVN, to deliver the training, at a cost of only $62 per
student.
We're working on a
systems approach to learning, to lead our customers to achieve a
more comprehensive and competitive advantage, in their
marketÂplace.
We're not only
designing, developing, delivering, and measuring these programs,
we're also being called upon by our customers to actually manage
this life-long learning process. And this will require the
development of customized curricula for each student, designed to
meet individual training needs.
Customers like
DuPont not only have asked us to develop these plans, but also
have asked us to manage Digital training at their site. We've
responded by establishing and staffing a Digital learning center,
to help them train their employees on their Digital systems. We've
also provided on-site customized training and support to the Hong
Kong Jockey Club.
We're meeting the
training needs of aerospace companies, such as McDonnell- Douglas,
which need to train their engineers to design products with
comÂputer-aided engineering and computer-aided design
workstations. We solved their training problem with interactive
courseware, on laser videodisk, and we're using this same
methodology for other customers.
Our customers today
are looking for an educational partner, who can work with them to
train their people on today's problems, and prepare them for
tomorrow's solutions. We're listening and responding.
We tell our
customers that we want to be business partners. To sell Digital in
that role requires that we sell them on more than our products --
that we sell them on our company. And an important part of this is
our financial message.
Early this year,
Moody's moved our debt rating up two notches, to the highest level
they award: AAA. You might be inclined to dismiss this rating as
not very important in a broad business context. But in fact, such
ratings are based on a complete evaluation of a company's business
-- product strength, position in the market, management depth,
etc. Debt ratings recognize that without excellence in all
critical areas of operations, a business cannot show consistent
excellence in its financial statements. They are a measure of the
overall quality of a company.
The Moody's AAA
signifies a level of excellence matched by only 11 other U.S.
industrial corporations, of which four are pharmaceutical
companies, and two are oil companies. There's one other computer
company, plus Eastman Kodak, General Electric, Procter &
Gamble, and 3M. In addition to our strong capital structure and
financial self-sufficiency, Moody's attributed our recent
upgrading to the size and strength of the company and our product
leadership.
In the "Fortune 500"
ranking of U.S. industrial corporations, we have an unbroken
record of progression, achieved entirely by growth from within.
Our first year on the "Fortune 500" list was 1973. And in only 14
years, we have reached the top 50, the top 10% of the "Fortune
500." Based on revenues of $7.6 billion in calendar year 1976,
Digital ranked 44th among all U.S. industrial companies.
In addition, a
recent sharp recovery in operating results has made a strong
statement to the investment community, and Wall Street has
responded with a tripling of our stock price in less than two
years. Like the debt rating, this part of our message can come
across as cold and empty, if it's not understood in its proper
context. We need to recognize the distinction between financial
results and operating results. The investment community responds
to operating results -- not what hte numbers are but, rather, what
they indicate is happening in the operations of the company.
As a result of our
stock appreciation, Digital now ranks as one of the 10 most
valuable companies in America. S. investor is a voter. Based on
share prices on March 20, in a report published by Business Week,
Digital had a market value of $22 billion and was the eighth most
valuable company. The fact that we ranked eighth in value and 44th
in size is a clear indication that size doesn't necessarily create
value.
When presenting
Digital to customers, we don’t have to compare ourselves with IBM.
It's almost immaterial that IBM is six times our size. Compare
Digital with the top companies in the country, as represented by
debt rating, by size, or by value. We are among the very best, in
any category you choose. It's a position to which every company
aspires, and, as we like to say, "Digital has it now."
Those three elements
constitute the message we want the outside world to hear. Now
let's look at how we evaluate ourselves internally.
In terms of profit
margins, our performance over the past couple of years has been
nothing short of outstanding. From a low point of 7% in FY85, our
profit margin has improved to 17% in less than two years. An
excellent job has been done in reducing costs, helped
substantially by new products, but also reflecting important
contributions by working smarter, in virtually every area of the
company. Our profit recovery has occurred because cost growth was
held to only 8% in FY86, when revenue grew by 14%. Through nine
months of the present fiscal year, we held cost growth to 14%,
while revenue went up by 24%.
Cost trends,
obviously, have an important effect on margin performance, and
they have to be watched very carefully. In the latest cycle, the
deceleraÂtion of cost growth was begun early in FY85, but it was a
full year later, Q2 of FY86, before we saw an improvement in
profit margins. Each quarter since then our margins have shown a
year-over-year improvement. For the better part of two years, our
cost growth was in the 10% range. Recently, we have been
increasing our investments to take advantage of a strong
competitive product position. As a result, our rate of cost growth
has been increasing.
The consequences of
this cost growth are not clear, without the revenue piece of the
puzzle. But certainly, the higher this growth rate becomes, and
the faster it occurs, the more vulnerable we make our
profitability to a shortfall to our volume plans.
Another significant
change is taking place in the composition of our cost structure.
Since the late 1970s and early 1980s, about nine percentage points
of our cost have transferred from cost of goods sold, which is
essentially variable, to research and engineering, and selling and
general administrative expense, which are more fixed in nature.
This shift toward a greater fixed-cost component is good for our
profit margins when volume growth is accelerating. But when volume
growth slows, it increases our vulnerability to a margin decline.
So our present investment strategy, while aimed at faster growth,
also contains increased risks.
Now let's look at
asset performance. Traditionally, this was an area of low
productivity for Digital, in comparison with other computer
companies. Both profit margin and asset performance have improved
sharply over the last two years. The difference is that while
profit margins have returned to historiÂcal levels, the
improvement in assets has taken us to performance levels never
before achieved by Digital, and among the best of any company in
our industry.
The usual
performance measure here is asset turns, which is the amount of
revenue generated for each dollar of assets. Historically our
asset turn rate has been relatively constant, at about 1.15. Last
year we improved to 1.27. And through nine months of this year
we're running at 1.39.
These asset turn
numbers are quite small, and changes, for example from 1.15 to
1.39, don't appear very impressive, but they make a significant
differÂence on our balance sheet.
At a constant cash
level of 10% of revenue, if our turn rate were still at the
historical 1.15, we would require $1.4 billion more capital than
we presently employ. If we had raised that capital in the form of
debt, our earnings per share would be reduced by $.70 a share. If
we had raised all of it in the form of equity, earnings would be
reduced by about $1 a share, because of more shares outstanding.
So asset improvements have a direct and very significant effect on
earnings, and probably an even greater effect on the price of our
stock.
The star of the show
in assets has been inventories. For several years, our actual
inventory turn rate was very close to 2.0. We made small
improvements in 1983 and 1984 , and over the last three years we
have made major breakthroughs in inventory management. These
efforts have paid off handÂsomely. Our present inventory level is
$1.3 billion, and the turn rate is 3.5. If we had stayed on the
trend line of two turns per year, our invenÂtories today would be
$2.2 billion dollars. Inventory improvements over the last three
years have reduced our capital requirements by nearly $1 billion,
which accounts for two-thirds of our asset improvement.
Another element of
the asset picture is receivables. The amount of capital we have
invested in receivables used to be less than what we had invested
in inventories. But today we have $2.2 billion in receivables,
compared with $1.3 billion in inventories. Receivables now
represent our largest user of capital, even exceeding our net
investment in property, plant, and equipÂment. Despite good
progress in the U.S., and more recently overseas, our performance
in managing receivables, when viewed on a company-wide basis, over
a longer period of time, is less impressive.
We measure
receivables in days sales outstanding (DSO). Our receivables today
average about 80 days, which is 48 days over our standard terms.
Those 48 days represent $1.3 billion of our $2.2 billion in
receivables. In addition to this dollar impact, the
customer-satisfaction implications of this are very important. If
you accept DSO trends as an indication of how well we service our
customers at the time of sale, our performance here over the years
should raise a question of whether our progress in improving
customer satisfaction is all that it should be. Survey results
tell us that customer satisfaction is improving every year, but in
the factors reflected in receivables, it would appear that more
consistent improvement is needed.
I would summarize
our internal financial message this way: Our profit margin
improvement over the past seven quarters has been spectacular, but
our present absolute level of profitability is about on a par with
longer-term historical levels. Our cost growth is accelerating and
bears careful attention. The shift in our cost structure from
variable to fixed makes us more vulnerable to margin declines, in
the event that we fall short of achieving our volume plans.
Overall asset performance is the best in our history, and among
the best in our industry. An outstanding job has been done in
reducing inventories, and we need to do more about improving
reÂceivables, for both investment and customer-satisfaction
reasons.
On balance, the
financial message doesn't sound quite the same to us inÂternally
as it does to the outside world. I believe the explanation for
this can be found in our stock price.
At the end of fiscal
year FY85, our stock was selling at $47 a share, and we had a book
value of $36 a share. The $11 difference can be viewed as the
premium that investors were willing to pay above our book value
for anticiÂpated future earnings. Investors valued Digital at 1.3
times its book value, based on expectations of future added value
of $11. Our present book value is $47 a share, and the market
price is about $160. Compared with two years ago, the value of
future earnings, as assessed by the marketplace, has grown from
$11 to $114. Investors presently value Digital at 3.4 times our
book value.
Our book value can
be thought of as the solid underpinnings of the value of the
company, reflective of our cumulative historical accomplishments
over the past 30 years. Everything above book value reflects
expectations for the future. In large measure, then, most of the
rise in the value of our company over the past two years, to one
of the 10 most valued companies in America, is not reflected in
our financial statements. Over the last two years, our value has
risen by $114 a share. Of that, only $11 is in the bank, so to
speak. The other $103 represents investors' extrapolation of our
recent performance into the future. This large increment of our
value is quite volatile; it can increase further, or it can
decline, depending on what our performance indicates should be
expected of us in the future. There is a difference in our
financial message, between the way we say it, and the way the
outside world hears it, and the difference is future expectations.
The outside world assumes that we will deliver their future
expectations.
For our customers
and our customers-to-be, we have a strong, simple finanÂcial
message: We are a AAA company, one of only 12 such U.S. industrial
corporations. We are in the top 10% of the "Fortune 500," and we
are one of the 10 most valuable companies in America. And we can
keep our external message strong and simple, as long as we,
internally, understand that it's not a reality until we make it
happen.