Enabling the Connected Customer Experience.doc.doc

ENABLING THE CONNECTED CUSTOMER EXPERIENCEA MICROSOFT ENTERPRISE & PARTNER GROUP WHITE PAPER

Bill GonzalezGeneral Manager, Worldwide Distribution & Services Sector

Enterprise & Partner GroupMicrosoft Corp.

Distribution and services companies in the retail, hospitality, food services and consumer goods industries face unprecedented challenges of these turbulent times.

One of the most significant outcomes of these times of unprecedented economic uncertainty has been a dramatic change in consumer and customer behavior. Customers everywhere demand brand, quality, service and, above all, compelling prices. Value is what keeps customers loyal to a store, a brand or a company, and value is what keeps them coming back. The value-driven consumer creates challenges and great opportunities for distribution and services companies everywhere. By leveraging observed trends from loyalty and preferences data, distribution and services companies will be better positioned to address this consumer behavioral shift with new products and services.

Additionally, faced with the need for cost-cutting and IT consolidation propelled by today’s global economic contraction, distribution and services companies will benefit from the opportunity to integrate disparate ‘silos’ and unlock value by connecting systems that drive new efficiencies and accelerate innovation across global distribution and services networks. This will enable them to better connect with employees, partners and customers worldwide through Web-based communities, for example, and to respond more flexibly to rapidly changing market conditions across the global enterprise.

Many distribution and services companies will take advantage of today’s economic climate to implement innovation initiatives to achieve competitive advantage. Innovation in distribution and services involves transforming new ideas into products and services that drive profits through a process built on the knowledge, experience and insight of people. Distribution and services companies consequently will be looking for strategic ways to create new business models and for improving their long-term competitive position in the market.

Major Trends Reshaping Today’s Distribution & Services Industry

As they revise their business models and restructure to respond to today’s global economic crisis, distribution and services companies must adjust to the major trends and drivers reshaping their industry on a worldwide basis.

Digital lifestyle and work style will continue to converge in today’s distribution and services industry. As a result, the connected customer is increasingly in control.

In recent years, for example, retail customers have begun to spend more time shopping online, researching products and even comparing retailers online before they buy. As a result,

ENABLING THE CONNECTED CUSTOMER EXPERIENCE – 2

customers know more about products, prices, stock availability and the overall marketplace than ever before.

Travelers and food services guests increasingly base their loyalty on the personalization of traveler and guest services – compelling hospitality experiences on a familiar platform that most travelers and food services guests already use at home and at work.

The consumer goods industry, meanwhile, is in the midst of fundamental change driven by macro forces that are causing companies to rethink their business models and current practices. They are searching for ways to address these challenges by creating connected consumer, customer and partner experiences with new solutions for digital marketing, connected innovation, connected supply chains and more.

The personalization of the connected shopper, traveler/ food services guest and consumer goods manufacturer experience leads to increased revenue streams by leveraging observed trends from loyalty and preferences data.

Retailers, for example, are more capable of collecting information about customers and products from the high online transaction volumes generated by their interactions on the Internet. All too often today, however, retailers and their consumer packaged goods suppliers primarily rely on point-of-sale (POS) data to sense trends.

In the future, distribution and services companies will have to consider expanding their connected customer capabilities beyond the checkout line or registration desk to encompass the full lifecycle of the customer relationship. The vast repositories of information about consumers, for example, will allow distribution and services companies to replace mass marketing with highly personalized marketing initiatives that focus on each individual customer.

Distribution and services companies will be able to expand their observations and analyses of customer behavior in both the real and the virtual world. They will increasingly be able to examine consumer moods and feelings in a specific locale and determine how these psychographics and demographics translate into a willingness to purchase. For example, they will be able to observe and model individual behaviors in stores as video monitoring technologies mature, creating new challenges and competitive opportunities.

Six Major Business Trends in Distribution & Services

Through its continuing engagement with distribution and services customers and partners worldwide, Microsoft has identified six major business trends that are having a significant impact on this industry worldwide: Changing Consumer Demands, Consumer-centricity, Globalization, Environmental & Social Sustainability, Digital Convergence, and New Business Models.

Trend #1: Changing Consumer Demands

Consumers want to make informed shopping decisions, taking into account product features, pricing, warranties, availability, environmental impact, competitive comparisons, and more, and


they will use technology to accomplish this. They seek relevant information from retailers – but also from their social networks and independent third parties.

As a result, successful retailers will collaborate with consumers and suppliers to facilitate information access and focus on delivering a consistent, positive total shopping experience across multiple channels and geographies. Consumers will reward retailers who innovatively help them make informed purchases and secure the best value.

Consumers also expect to access shopping-related information on the go. To satisfy this demand, they increasingly rely on technology to connect with useful information wherever they are.

Successful retailers also will combine communications technology, in-store technology, consumers’ personal technology and familiar Microsoft products and solutions to connect on-the-go shoppers with information they seek to make informed purchase decisions. Consumers will favor retailers who support their spontaneous, mobile shopping behavior.

The hospitality industry also is faced more than ever with the impact of mobile and digital lifestyles. Today’s traveler is part of a connected digital community, having instant access to information and using technology on the go for work, entertainment and social networking.

Sheraton and Microsoft, for example, have partnered to implement products and services at Sheraton’s signature communications hub rolling out in Sheraton lobbies. As a result of this partnership, Sheraton is rebranding its lounge areas as “The Link @ Sheraton experienced with Microsoft.” Sheraton’s Link is a virtual and physical lobby lounge space where guests can work, relax and remain connected with friends and family during their travels.

The enhanced “Link @ Sheraton experienced with Microsoft” will offer Windows-based computers providing visitors with search, maps, email and information. In addition, many Link computers will also feature webcams, allowing guests to use Windows Live Messenger to have free video-chats or email video postcards back home. This wide-ranging partnership with Sheraton is part of a comprehensive effort to differentiate the guest experience at its 408 hotels across 75 countries.

Today’s traveler is part of a connected digital community, with instant access to information and technology for work, entertainment and social networking. Microsoft and Sheraton are working together to meet the diverse needs of travelers whose business and leisure activities intersect throughout the course of their travel day. With the “Link @ Sheraton experienced with Microsoft,” Sheraton and Microsoft are helping forge the convergence of the digital lifestyle and work-style in the experiences offered to this new breed of connected guest.

Trend #2: Consumer-centricity

The new global demand chain is driven by information in the hands of people. To satisfy today’s consumer needs, retailers must become customer-centric enterprises.


Consumer expectations range from personalized attention to unassisted shopping. But regardless of the level of personal contact, consumers expect a positive, convenient shopping experience.

To meet these requirements, and as a result increase their “share of wallet,” successful retailers will capture and maintain customer and product information, and connect shoppers and store employees with it to enable successful shopping experiences. Share of wallet is the industry measure for success.

In this current economic environment, airlines and hotels also are looking for ways to reduce costs and increase revenues from new channels. Microsoft helps hospitality companies deliver a rich interactive guest experience for today’s highly connected traveler using mobile technology for work, entertainment and social networking. Blurring the lines between the physical and virtual worlds, these technologies provide new opportunities to engage with travelers and power the next-generation of media experiences incorporating video, animation, interactivity and stunning user interfaces on any Web-enabled device.

Companies also can leverage social media to enrich the entire traveler experience -- starting with initial planning and booking, through providing innovative services during the actual trip and by maintaining virtual community ties that, after they have returned from the trip, keep travelers engaged and interested in future travel opportunities.

For example, Microsoft and Travelport have teamed together to develop an integrated set of software and services to help airlines, travel suppliers and travel agencies enrich and personalize the traveler experience. Through this collaboration, Microsoft and Travelport will explore the development of services designed to improve the traveler experience and to provide airlines, travel suppliers and travel agencies, including travel management companies (TMCs) and online travel agents (OTAs), with new revenue and cost reduction opportunities, broader distribution reach, and improved customer satisfaction and loyalty.

Today’s consumers are active participants vs. passive recipients of goods and services with unprecedented access to product information. Consumers are focused not just on the functionality of products, but also on their potential as fashion statements and the overall experience they deliver, including related services.

This power shift to consumers involves the emergence of consumer communities and an increasing emphasis on “consumer experiences.” Consumer communities are increasingly influential in determining consumer choice and driving consumer demand. The new manufacturing landscape reflecting the power shift to the consumer includes the increasing influence of emerging economies, the management of consumer experiences, and the impact of consumers and consumer communities as active value chain participants.

To succeed in the digital world, consequently, consumer goods manufacturers must actively observe and serve observe and serve the consumer to drive profitable growth. They must focus on digital marketing to directly engage and interact with consumers and deploy new business


models that focus on services, including social networking and online services, that complement product delivery to deliver complete, highly personalized consumer experiences.

Trend #3: Globalization

The global economy is outpacing growth in the U.S. today, and globalization is a reality in the distribution and services industry. Consumer goods manufacturing, for example, is feeling the increasing influence of emerging economies and their consumers. As a result, “one size fits all” no longer works to meet unique local consumer needs and demands.

Key globalization trends include the growth of the middle class in Brazil, Russia, India and China, falling trade barriers, the growth of global enterprises and global retail networks, the need for global sourcing, as well as personalization and product fragmentation.

Consumer goods manufacturers consequently need global scale to compete, but must be able to execute locally. They must be agile to respond to the changing needs in widely differing markets worldwide. To succeed, they must achieve what we refer to as “profitable proximity” by developing capabilities to sense and respond to unique local needs as well as to the growing threat of low-cost local competition.

Trend #4: Environmental & Social Sustainability

The rapid growth of global demand described above is fueling rapidly rising costs in commodities and transportation in distribution and services, as well as elsewhere in the world economy. This acceleration in global demand also is having an adverse impact on the environment and quality of life. As a result, consumer goods manufacturers must use technology to reduce waste in their supply chains as well as to create, market and deliver sustainable products and services – now a necessity to compete and survive.

Consumer goods manufacturers’ sustainability efforts today are spurring a need for innovation process management (IPM) – a Microsoft-led initiative to help enterprise customers and partners to apply tested technologies and formal processes to address the challenges of innovation by focusing on the lifecycle of ideas and structuring the process of turning insights into ideas, action and improved ROI. New partnerships involving secure global collaborative networks also are required to facilitate innovation, cut costs and create efficiencies that address environmental and sustainability imperatives.

Adding to the pressure on distribution and services companies to “go green,” today’s consumers increasingly expect retailers to operate in environmentally sustainable ways. This has resulted in retailers and their suppliers’ growing interest in contributing to making the world a better place by conserving energy and protecting the environment.

To meet consumers’ demand for increased social responsibility while controlling costs, successful retailers will deploy a flexible technology platform across their enterprise that connects customers and store employees to sales-enabling information. They also must take advantage of technology – for example, for computer server virtualization -- to reduce data


center space and power consumption. And they must leverage technology to make customers aware of their sustainability efforts.

Trend #5: Digital Convergence

The power balance in the distribution and services industry is shifting from retailers to consumer communities powered by the latest Web 2.0 capabilities.

Change in distribution and services is being accelerated by the digitization of the economy, enabled by many factors, including better hardware performance and unlimited storage and memory; software breakthroughs and natural user interfaces; ubiquitous broadband; mobility; new devices; form factors and high fidelity displays.

Content delivery has become critical to success in a global market characterized by major emerging economies and consumer-driven demand. Globalization, shrinking product lifecycles, and digital convergence require distribution and services value chains and markets to become far more dynamic. Content-delivery technologies such as MP3, shared video, GPS, high definition DVD format resolution, social networking and text messaging are now familiar but still rapidly-changing and disruptive.

Meanwhile, the increasing convergence of the digital lifestyle with the digital work style is supporting seamless professional and personal productivity gains at the office, at home, and on the go. Distribution and services companies need to provide their employees with access to business information, anytime, anyplace, on any device. They also must have the ability to reach their suppliers, customers and consumers, anytime, anyplace, on any device.

This trend is evident everywhere around us. As the worlds of entertainment, computing and communications go digital, they can be combined to create exciting new products, services and business opportunities for the distribution and services industry where information can be accessed anytime, anyplace and on any device.

The focus on not just the retail product but on the overall consumer experience the product delivers becomes key to future success. Combining products and services that manage the customer experience throughout the lifecycle of the product becomes critical. These new services also drive new and recurring higher-margin revenue opportunities.

Trend #6: New Business Models

Distribution and services business models are changing at an unprecedented pace due to global and technological opportunities and challenges.

Competing in the digital world demands new skills, technologies and strategies from retailers and product companies. To effectively compete, retailers and consumer goods companies must focus on six key areas:


1. Creating customer trust and preserving reputations

2. Involving customers to co-create trust and value

3. Competing on responsiveness

4. Competing on design

5. Competing on brand

6. Strategically and proactively using information to define demand

Brand effectiveness is the distribution and services industry’s measure for success.

Consumers – informed, technology savvy and demanding – increasingly drive the demand chain. To the extent that a distribution and services company’s brand does not deliver a compelling shopping or guest experience, consumers will make buying decisions based on price or migrate to other retail or hospitality/food services brands.

Successful distribution and services companies will use technology to digitally connect with customers and suppliers and deliver a differentiated, value-added, multi-channel shopping or guest experience that enhances their brand value and encourages customer loyalty.

Growing Interest in Business Insight

Retail today is an increasingly competitive low-margin, high-volume business. Driven by commodity pricing, retailers must enhance the shopping experience as their primary differentiator. In addition, compelled by the current financial crisis and the sharp drop in consumer spending, Retailers can better compete and succeed in today’s global marketplace by meeting the demand for a highly personalized and connected shopper experience.

As a result, the demand chain is now leading the retail enterprise, replacing the supply chain as the main driver and putting consumers in control.

Today’s customers know more about products, prices, stock availability and the overall marketplace than ever before. At the same time, retailers are more capable of collecting information about customers and products from the high online transaction volumes generated by the interaction.

Retailers must track and manage this massive amount of information to derive insights that help deliver the most engaging shopping experience across all channels.

In the case of high-service retailers such as department stores, for example, the organization needs to know as much as possible about their customer’s demographic and psychographic data, products, employees, and historical trends. Organizations must process massive amounts of data from a variety of sources and quickly convert that raw data into information to meet customer information needs. Sales people and cashiers, store managers and corporate leaders


need to be able to use all of this information to make business decisions supported by actual information quickly.

Those retailers that can make the best use of customer interaction information to refine their strategy have a competitive edge over retailers who use more traditional approaches. The challenge is to determine where real-time information needs are most critical – providing the most up-to-date information to the information savvy customer and enabling the real-time decisions required to help increase customer satisfaction, and ultimately revenue.

Gaining business insight provides comprehensive knowledge of all of the factors that affect the retail business such as customers, competitors, business partners, economic environment, and internal operations and enables effective business decisions.

Consumers have become increasingly information savvy as a result of spending more time shopping online. Often an online retailer "knows" more about the customer than does a sales person in a physical store. If brick and mortar retailers can arm their sales people with that same level of information, customer intimacy could be elevated to a whole new level. To meet these challenges, a retailer’s ability to analyze data and make decisions in as close to real-time as possible is critical.

Retailers are faced with a myriad of challenges every day. Sales people, cashiers, store managers and corporate personnel continually strive to find more innovative ways to improve customer satisfaction and ultimately increased revenue. When dealing with customer interactions, it is important to make decisions regarding products, staffing mixes, inventory and stock-out decisions as quickly as possible. Understanding latency and the differing needs of operational and analytical data can help an organization identify ways to reduce delays and make decisions as close to real time as possible, similar to the online interactions customers have become accustomed to.

Retail Business Insight in a Global Economic Crisis

As described above, in times of great economic uncertainty, customer loyalty is critical to survival and success. Microsoft and its partners provide retail industry customers with the software and services needed for rapid and seamless systems integration to ensure that valued consumer relationships are not sacrificed to pricing pressures and cost controls. Microsoft’s Business Intelligence platform, for example, makes use of real-time analytics to increase consumer insight and satisfaction by analyzing the volumes of data associated with operations to streamline key performance indicators for faster, more informed decision making and better customer service. By leveraging observed trends from loyalty and preferences data, distribution and services companies can accelerate the pace of innovation to meet rapidly shifting consumer demand with new products and services.

Microsoft provides a broad product set that can decrease data latency in all its forms across the entire organization.

All retail organizations should strive to automate decision making processes where possible to improve customer interactions and allow sales people to focus on selling and providing good


customer service. Microsoft and its global network of partners can help all organizations achieve those goals.

Beyond SaaS: Cloud Computing… and More

We define “cloud computing” to mean the use of Internet technologies to access services that are hosted in the data centers, running on an infrastructure that employs virtualization technologies to provide the illusion of nearly infinite scalability. Consumers of cloud services need little to no knowledge of the information technology (IT) infrastructure details behind the cloud services they consume. A handful of companies, including Microsoft, are building out massive data center capabilities around the world. These data centers are designed to be energy efficient in order to provide the lowest cost per unit of processing power and storage capacity. In addition, cloud resources allow customers to very easily add processing power when required, a concept often referred to as “scale on demand.” By centrally managing a common IT infrastructure, cloud computing also to makes it easier for customers to manage the services they access through the cloud.

The cost of energy also is increasingly driving the move to cloud computing. A large consumer goods manufacturer, for example, might need to double the amount of capacity of a local data center but the local power grid might not even be capable of supporting it, and, even if it is physically possible, there might be significant penalties in terms of taxes designed to offset carbon-footprint. This manufacturer simply cannot add capacity as quickly and efficiently as one of the massive cloud providers that has already invested in energy-efficient capacity, available on demand.

Microsoft is well placed to help distribution and services enterprises take advantage of new IT architectures and opportunities with its broad infrastructure offerings spanning devices, servers and the cloud and with its familiar tools and productivity solutions used across all levels of the enterprise. Microsoft’s Software+Services platform and solutions are designed to embrace cloud computing, provide virtually unlimited computing power and storage capacity and incorporate technologies such as Web 2.0, Software as a Service (SaaS) and Service-Oriented Architecture (SOA), while extending and leveraging investments in on-premise enterprise software and applications. The platform provides choice and flexibility in how applications are delivered, deployed and managed, and provides a Web-based platform and services of immense scale that will serve to transform business processes and business models as innovative companies take advantage of these new capabilities.

Microsoft’s broad Software+Services platform is the foundation required by distribution and services enterprises today to build flexible global performance networks that link and extend business-critical applications such as enterprise resource planning (ERP) and customer relationship management (CRM).

Microsoft’s investments in the search and advertising capabilities of the Software+Services platform, together with its consumer Web properties and digital advertising solutions, provide


distribution and services companies with a direct consumer engagement model enabling them to sense consumer behavior and preferences and deliver personalized products and experiences on a global basis. These capabilities extend enterprise CRM investments to incorporate Web 2.0 technologies such as blogs and social networks, rich Internet applications and Web-based analytics to dramatically improve sales, marketing and service performance.

The immense scale, reach and capacity of the Software+Services platform enables all of an enterprise’s far-flung value chain participants to be rapidly and economically integrated no matter where they are located or their level of IT sophistication. The resulting multi-enterprise value chain networks provide visibility to inventories, operating performance and delivery schedules, while facilitating corporate compliance and governance at highly cost-effective levels not possible otherwise.

While creating a new and transformative paradigm for IT and business through its Software+Services platform, Microsoft is working closely with its developer and partner communities to enable distribution and services companies to quickly evolve to take advantage of the new paradigm and the possibilities it creates. No other company brings together the breadth of consumer and enterprise cloud capabilities in conjunction with a familiar technology and productivity platform and a broad developer ecosystem to provide distribution and services enterprises with the IT flexibility and choice they need to run their businesses and compete in today’s global economy.

Microsoft’s Commitment to Distribution & Services in Turbulent Times

While technology is not a cure-all for the current financial crisis and the sharp drop in consumer spending, Microsoft and its partners continue to help distribution and services companies succeed in today’s competitive global marketplace by meeting the demand for a highly personalized and connected shopper, traveler and food services guest experience.

For example, Microsoft helps retailers deliver a consistent shopping experience through seamless multi-channel integration and via innovative technologies and mobile and new social networking channels.

Microsoft helps consumer goods manufacturers to connect with retailers and become an important part of the shopper experience by empowering them to more effectively innovate and deliver products that meet consumer demands and deliver the connected consumer experience.

Microsoft and partner solutions also provide compelling hospitality experiences on a familiar platform that most travelers and food services guests already use at home and work.

Distribution and services is a strategic sector for Microsoft which continues to make substantial investments in people, products and partners. Microsoft continues to build its Worldwide Distribution and Services team with experienced people hired from the Industry, while continuing to invest, for example, in products for managing customer relationships, for enterprise resource planning (ERP) for small to medium-sized retailers and for store


operations. Microsoft also is augmenting its own product offerings by investing to grow its partner base to offer more localized solutions to retailers.

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