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50 Years of Growth, Innovation and Leadership



Smarter Computing For Retailers:
Meeting The Needs Of The Smarter Consumer
Through Insight And Action




                                                          A Frost & Sullivan
                                                             White Paper

                                                          Brian Cotton, PhD
                                                                 and
                                                           Robert Worden

                                                           www.frost.com
Frost & Sullivan




               Abstract .....................................................................................................   3

               The Retail Industry Environment:
               Savvy Customers And Agile Competitors ...............................................                            3

               The Business Need For Smarter Computing
               To Transform The Retail Industry...........................................................                      7

               The Business Value Of Smarter Computing
               In The Retail Industry .............................................................................. 11

               Building A Responsive And Efficient
               Retail Business Infrastructure ................................................................. 12

               References ................................................................................................. 14




                                                             CONTENTS
Smarter Computing For Retailers




ABSTRACT

Retailers today are facing more technology-savvy, demanding customers and more
sophisticated competitors, which are forcing them to transform their business
models. This transformation is being guided by three imperatives defining the retail
landscape: 1) deliver a smarter shopping experience; 2) develop smarter
merchandising and supply networks; and 3) build smarter retail operations. In
response, retailers are becoming more customer-centric, which requires them to
transform their information technology (IT) infrastructures. Forward-thinking
companies are moving quickly and strategically to embrace Smarter Computing, a
progressive approach to building IT infrastructures that return real business value.
Smarter Computing enables retailers to connect with manufacturers, suppliers and
consumers globally for better real-time decision-making. Retailers embracing
Smarter Computing are also finding that they can keep pace with their customers’
changing buying preferences and demands, while realizing increased availability and
resiliency of transaction systems, and lower operating costs.


THE RETAIL INDUSTRY ENVIRONMENT: SAVVY CUSTOMERS
AND AGILE COMPETITORS

The retail environment across the globe is challenging retailers as changes in
consumer behavior interact with an unstable global economy, rapid advances in
technology, and increased competition and regulation. In some parts of the world,
the economic recession has decreased consumers’ spending ability, but has not
stopped it completely. In June 2011, for instance, the retail sales index decreased
by 0.4 percent in the Euro Zone, but in the U.S., retail sales posted a slight gain of
0.5 percent . There are also some signs that certain segments of the retail industry,
such as apparel, are picking up. The economic mood in growth markets such as
China, India and Brazil is positive. Low unemployment and rising wages, coupled
with greater access to consumer credit, have fueled spending to the point that
growth markets are expected to account for 60 percent of world GDP by 2020 and
contribute significantly to world retail sales. This all suggests that consumers
around the world are becoming more conscious about their spending, which is
forcing retail models to adapt.

Retailers are also confronting the empowered consumer. The continued spread of
mobile communications and the rapid rise of social networking have given consumers
the power to redefine their relationship to retailers. Armed with more information
and an ability to make purchases from virtually any Internet-connected device,
consumers are better informed during the purchasing process. Whereas some retail
websites provide consumers the ability to compare products and services, pervasive
social media open up multiple forums for shoppers to post comments and make
recommendations about a retailer’s products, pricing or customer service. These
consumers are savvy and seek out the highest value for products and services, as well




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                    as demanding a consistent shopping experience across all channels. Retailers need to
                    take advantage of the opportunity to engage with their consumer on a personalized
                    basis, and provide platforms for a new vision of electronic commerce.


                       Retail Industry Drivers
                        • An unstable global economy

                        • Increased access to mobile technology

                        • Changing consumer behavior

                        • Intense retail competition

                        • Changing regulatory rules and expectations

                        • Fast changing online and mobile technologies




                    Changes in retail competition and regulatory rules are causing additional challenges
                    for retailers as many seek to expand internationally to take advantage of growth
                    opportunities outside of their home markets. Some U.S. retailers, for instance, are
                    entering into Canada and this is creating a highly competitive retail market north of
                    the border. Over the past decade, seven of the top 10 U.S. retailers have expanded
                    into Canada . Wal-Mart, for instance, operates approximately 329 stores in Canada,
                    having made the decision to enter that market several years ago. In September 2011,
                    Target Corporation announced plans to open another 84 stores in Canada, bringing
                    the total of new stores due to open in 2013 and beyond to 189 locations . In addition
                    to Target, Nordstrom’s and Kohl’s are investigating opening retail operations in
                    Canada as well . Existing Canadian retailers have responded with lower prices,
                    adjusting their merchandizing mix and examining acquisition targets.

                    Regulatory initiatives in the U.S. also have retailers concerned about rising operational
                    costs. The Patient Protection and Affordable Care Act (PPACA) employer mandate
                    provision, for example, has retailers concerned about not being able to afford
                    healthcare for employees, a situation that may lead to layoffs . A U.S. Department of
                    Transportation initiative to reduce driving time hours for freight companies could
                    impact delivery schedules by mandating drivers have two consecutive nights off. Those
                    retailers using night-time shipping would be most affected. All of this means that
                    retailers need to develop leaner, more efficient operations.

                    The drivers of today’s retail environment have shifted power to the consumer,
                    which is compressing margins and changing the retail paradigm. Retailers are
                    scrambling for the right strategic approach in this challenging environment, as
                    traditional retail models such as warehouse stores, department stores and specialty



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Smarter Computing For Retailers




retailers are reaching maturity, and online retailing is growing. Retailers need to
find ways to be more agile, and to expect that their suppliers will do the same.

The challenges of the retail environment create complexity for retailers trying to adapt
to the 21st century economy, and this is requiring them to transform their business
models, and the technology that supports them, to succeed. This transformation
process is guided by three vital retail imperatives, as shown in Figure 1.

Deliver a smarter shopping experience: enabling a shopper to engage on a
personal basis with retailers, shopping whenever and wherever they want, and match
inventory and brand experience across channels, in stores and via mobile devices.

Develop smarter merchandising and supply networks: gathering
customer information continuously at every touch point, to manage and deliver
assortments based on customer insights.

Build smarter retail operations: inserting intelligence into customer data
management and processes to understand real-time sales trends, while improving
management across production, product development, and assets to drive
operational excellence and lower costs.

Figure 1: Imperatives Guiding the Transformation of the Retail
Industry


     Deliver a Smarter Shopping Experience                             Develop Smarter Merchandising &
     • Customer Intelligence & Insight                                 Supply Networks
     • Online Customer Experience & Selling                            • Supplier Integration & Management
     • In-Store Point of Service                                       • Supply Chain & Inventory Optimization
     • Cross Channel Order Management                                  • Transportation & Warehousing
       & Fulfillment                                                     Management
     • Cross Channel Campaign Management                               • Supply Chain Performance
     • Social Retailing and Analytics                                    Optimization



                                                  Retail
                                                 Industry
                                              Transformation




                                     Build Smarter Retail Operations
                                     • Financial Performance Management
                                     • Financial Analytics
                                     • Energy Performance Management




                                                                        Source: Frost & Sullivan Analysis and IBM




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                    The imperatives shown in Figure 1 revolve around how a retailer can transform its
                    business model to be more attuned to the customer, make changes to the
                    organization and improve the shopping experience for the customer. The
                    transformed model equips the retailer to listen to the customer, through multiple
                    media, and learn from their choices, feedback, and behaviors. This allows them to
                    service customers flawlessly, and predict and grow customer loyalty. It enables the
                    retailer to develop a single, “truthful” view of each customer across multiple
                    shopping channels, and use this information to guide changes in merchandising and
                    marketing to make interactions more personalized and service-oriented. Finally,
                    the new retail model enables the customer to select the methods and channels of
                    interaction, while taking control of social media so that a customer’s suggestions
                    and feedback are able to build a retailer’s brand. The retailer who embraces these
                    imperatives will become a lean, informed and versatile organization capable of
                    driving operational efficiencies and growth. The key requirement of success,
                    however, is the need to adapt the retail IT infrastructure to handle the demands
                    imposed by these imperatives.


                      Key Infrastructure Requirements
                        • Scalability

                        • Performance

                        • Flexibility

                        • Reliability and Availability

                        • Standardization




                    The conundrum for smarter retailing is how to support the imperatives with an IT
                    architecture that is collaborative, scalable, secure and integrated. The
                    infrastructure must be scalable in response to increased demand, such as consumer
                    responses to promotions or seasonal shopping periods. The systems must also
                    support high-performance computing across multiple workloads to accommodate
                    large numbers of consumers shopping on a website, for instance. The infrastructure
                    also needs to be flexible to adapt to changes in demands and new applications,
                    enabling IT managers to direct resources where they are needed most, and it must
                    be reliable and robust to ensure constant uptime. Finally, it is crucial that the
                    infrastructure be standardized to close gaps in the existing architecture,
                    governance rules, and process management simultaneously across the enterprise.
                    Many retail IT infrastructures have often been implemented without these
                    necessities as top considerations and over time expanded to handle singular tasks
                    that were not part of an integrated design.




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Smarter Computing For Retailers




Retail industry leaders are beginning to seek advanced IT solutions to help them
address their rapidly changing environment. Forward-thinking CIOs are starting to
transform their IT infrastructures to respond to the imperatives driving 21st century
innovations in retail business models. Retailers need a modern IT infrastructure
powered by an efficient set of operations to successfully deliver a smarter shopping
experience backed by an agile merchandising and supply network. The architectural
design of this infrastructure must accommodate a constantly updated stream of
information from customers and the supply network, feeding into analytic platforms
that enable quicker reactions to changing customer preferences and operational
conditions. They also need to perform complex information capture and processing
efficiently, and support different types of business models to keep costs down.
Smarter Computing is an approach that can help retail industry CIOs transform their
IT infrastructures to address these imperatives.


THE BUSINESS NEED FOR SMARTER COMPUTING TO
TRANSFORM THE RETAIL INDUSTRY

Introducing Smarter Computing
Smarter Computing is a new approach to transform IT infrastructures to enable
retailers to optimize the shopping experience for today’s digitally-empowered
consumer. This approach is based on three fundamental capabilities:

 • Designed for Data means designing an IT infrastructure to harness all
   available information, including real-time streaming data, to unlock insights for
   better decision-making. It is about extending beyond traditional sources of data
   to generate insights by leveraging new forms of information, which can be
   incorporated into a retailer’s information supply chain to reduce operational
   costs, master a single version of a customer profile, simplify data security, and
   get insights from huge volumes of complex data.

 • Tuned to the Task means matching workloads to systems that are
   optimized to the workload characteristics, ranging from transaction processing
   and database management, to business intelligence and analytics, to managing
   communications across merchandising and supply networks. Optimizing the
   systems to the workloads enables greater performance and efficiency, helping
   CIOs working to enable smarter retail operations.

 • Managed in the Cloud means changing operations to support evolving
   business models and enable delivery methods that bring greater efficiencies out
   of existing IT assets, and deploy resources flexibly, dynamically and quickly to
   multiple store locations, distributors, and suppliers in a cost-effective manner.

Smarter Computing supports business transformation by creating a technology
framework to enable business operations that realize the business imperatives, and
generates business value in a competitive, cost-conscious environment. The



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                    Smarter Computing approach in the retail industry revolves around how
                    customers’, suppliers’, store, and partner data is collected, processed, analyzed,
                    saved, and shared. The IT infrastructure that supports the model’s business
                    operations delivers business value by using data to guide decisions, using optimized
                    systems to maximize efficiency, and leveraging the cloud to transcend geographic
                    borders and legacy system limitations. Figure 2 illustrates the application of the
                    Smarter Computing approach to retail industry innovation.

                    Figure 2: Smarter Computing and Retail Industry Transformation

                                                       Retail Organization Transformation
                                    Deliver a Smarter                      Develop Smarter                         Build Smarter Retail
                                    Shopping Experience                    Merchandising & Supply                  Operations
                       Business      • Customer Intelligence &             Networks                                 • Financial Performance
                      Imperatives      Insight                               • Supplier Integration &                 Management
                                     • Online Customer                         Management                           • Financial Analytics
                                       Experience & Selling                  • Supply Chain & Inventory             • Energy Performance
                                     • In-Store Point of Service               Optimization                           Management
                                     • Cross Channel Order                   • Transportation &
                                       Management & Fulfillment                Warehousing Management
                                     • Cross Channel Campaign                • Supply Chain Performance
                                       Management                              Optimization
                                     • Social Retailing and Analytics

                       Business                     SMARTER COMPUTING-BASED IT INFRASTRUCTURE
                      Operations
                                                   Process Automation                                   Business Process Management

                                       Event Processing          Customer Intelligence          Business Intelligence     Transaction Processing
                                                                        Data Storage, Sharing, & Management
                                                    Physical World Interfaces (Sensors, Systems, Devices) & Data Acquisition

                                           DESIGNED FOR                                CLOUD                                WORKLOAD
                       Business                DATA                                   ENABLED                               OPTIMIZED
                        Value


                                    Customer-Specific Offers              Scalable Operations for Seasonal          High Availability, Multi-tiered
                                    and Outreach Activities               Promotions and Events                     Transaction Processing



                                                                                                               Source: Frost & Sullivan Analysis

                    Retail company CIOs can use Smarter Computing-based IT infrastructures to carry
                    out the operations underlying the transformation imperatives. Because the various
                    business operations have different characteristics, workload-optimized systems
                    yield efficient computing infrastructure designs. The efficiencies lie in systems that
                    are flexible enough to meet peak-level workload demands, such as back-to-school
                    or holiday sales, and enable resources to be deployed elsewhere during off-peak
                    periods. Smarter Computing’s cloud capabilities facilitate the deployment and
                    implementation of new processes and models that encourage collaboration and
                    contributions from customers, retailers, and suppliers across the value chain, while
                    giving managers a unified view of the insights derived from customer and business
                    intelligence. By being able to capture all available data for advanced analysis, a
                    Smarter Computing infrastructure can help managers predict preferences and
                    behaviors and make decisions accordingly. Importantly, the approach gives CIOs




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control over capital and operational expenditures because existing                 IT
infrastructures can be transformed and need not be completely replaced.

Delivering a Smarter Shopping Experience
Delivering a smarter shopping experience requires retailers to develop a deep
insight into the needs and shopping behaviors of their customers and offer them
personalized products and services, often in real time at point of sale. This is based
on intelligence about past purchases and behavior, and incorporates social retailing
and mobile commerce patterns. Retailers use this insight to develop customized
offers and product mixes, conduct cross-channel campaigns, and fulfill orders
quickly and cost-effectively. A smarter experience also relies on communication
between a retailer and a customer across channels in whatever media the customer
chooses— store, online, or mobile—
          in                            and offering social networking to their
community to gather and interpret customer feedback.

The key to a retailer’s ability to deliver a smarter shopping experience is putting
the savvy, digitally empowered customer at the center of their operations. There
is a wealth of data, both structured and unstructured, available to retailers that can
be captured and analyzed. The resulting insight can be shared across the value
chain. By building an IT infrastructure that is designed for data, retailers can
harness large volumes of rich data and apply sophisticated analytics to it, enabling
them to redefine their relationships with their customers. By deploying systems
and components that are optimized to their IT application and operational tasks,
and hosting the applications in the cloud, retailers can quickly scale out to maintain
a personalized connection with all of their customers—     without the need to build
costly infrastructure at multiple store locations.

The Smarter Computing approach also creates business value for a smarter
shopping experience by:

 • Capitalizing on social and mobile commerce;

 • Contributing to growth by enhancing and extending the value that the retailer
   gives to their customers; and

 • Enhancing customer loyalty by supporting customer-specific offers and
   outreach activities.

Developing Smarter Merchandising and Supply Networks
Developing smarter merchandising and supply networks requires retailers to
synchronize operations across the supply chain, optimizing inventory and order
fulfillment processes to bring the smarter shopping experience to customers quickly
and efficiently. This involves not only managing vendor relationships, but also
enabling open collaboration between retailers, customers, suppliers, and shippers to




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                    ensure that the products customers want are available and can be delivered rapidly.

                    Retail industry CIOs can apply the Smarter Computing approach to build an IT
                    infrastructure that sustains smarter merchandising and supply networks by
                    integrating and managing suppliers in the process of developing customer insight to
                    deliver product assortments that customers want. Applications that enable asset
                    and inventory management and tracking would be able to run on infrastructure
                    components architected to harness and analyze customer and operational data. In
                    an online and mobile commerce model, retailers would use cloud computing to
                    enable suppliers, outlets, and customers to remotely access storefronts and
                    warehouses and input data securely. A cloud model would also enable supply chain
                    performance optimization using real-time analysis of data to dynamically allocate
                    supply chain resources and coordinate workflows across the chain.

                    Smarter Computing can help CIOs gain business value from smarter merchandising
                    and supply networks, including:

                     • Optimized supply chain performance, from product manufacturing through
                       warehousing and distribution;

                     • Efficient, robust, and resilient supply networks; and

                     • Secure and seamless transaction processing and order fulfillment.

                    Building Smarter Operations
                    Retail CIOs can apply Smarter Computing to build smarter operations to improve
                    business processes, make production more efficient, and control costs across the
                    business. The big data capabilities used to develop sophisticated customer insights can
                    also be applied to better understand the financial performance of retail operations and
                    support management decisions. An IT infrastructure that is optimized to handle a
                    retailer’s workloads can save operational costs, such as energy, and reduce
                    unnecessary infrastructure expenditures. By applying virtualization technologies,
                    retailers can deploy resources during off-peak times of demand for other projects,
                    such as application development or backup of mission-critical systems.

                    Smarter Computing can also help realize other business value from having smarter
                    operations, including:

                     • Improved business intelligence;

                     • Support for high-availability, multi-tiered transaction processing; and

                     • Cost and consumption management.




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Smarter Computing For Retailers




THE BUSINESS VALUE OF SMARTER COMPUTING IN THE
RETAIL INDUSTRY

Retail organizations are facing an unprecedented set of challenges that are forcing              “The goal was to
changes in their business models. Global economic uncertainty is making customers                ensure that our
more careful about their spending, and mobile communications and social networking               customers would
are giving them the means to demand more from retailers. Competition among                       have a great site
retailers for this business is increasing, and the successful merchants will be those that       experience relative
consistently deliver a smarter shopping experience to their customers. Commercial                to performance.
success will also depend on smarter merchandising and supply networks, and smarter               We wanted to
and more efficient operations. All of these factors are driving retailers’ IT departments        decrease our total
to transform their IT infrastructures to adapt to the imperatives of today’s retail              cost of ownership
environment. Some progressive organizations have embraced the Smarter Computing                  for the hardware
approach to direct their transformation to meet these imperatives.                               technology while
                                                                                                 increasing flexibility
Staples: Delivering a Smarter Shopping Experience
                                                                                                 and scalability
Staples is the world’s largest office products company and provides products and                 for the future.”
services in office supplies, copy & print, technology, facilities, breakroom, and
furniture. The company is a leader in eCommerce sales and considers the continual                —Rob McClellan,
improvement of the online shopping experience to be a strategic priority. As part of             Vice President of IT,
this, Staples’ marketing teams need the ability to model customer responses to                   Staples.com
various promotions before taking them to market. Staples recognized that its current
IT architecture would be unable to provide the computing platform necessary for this
transformation, and it would need substantial investments in it to achieve its
ambitious goals. Rather than taking on a huge cost burden, it partnered with IBM to
implement a Smarter Computing approach to guide the process.

The goal of the project was to develop a next-generation platform that would give
Staples’ customers a differentiated shopping experience, and save the company
capital and operational costs. The core of the transformation involved replacing 35
older servers with seven new servers, built specifically to support Staples’ e-
commerce initiative. The architecture design enabled Staples to apply real-time
Web analytics to a range of customer data, which was used to create targeted
marketing messages and offerings. The system is also designed to scale to handle
spikes in activity during peak load periods. During off-peak periods, it can redeploy
resources on the fly to do promotion testing alongside production, boosting the
flexibility and efficiency of the system. Staples’ system was built with future
capabilities in mind, such as leveraging its cloud capabilities to serve multiple micro
e-commerce sites. By consolidating its servers and building them to handle specific
e-commerce tasks, Staples reduced data center space requirements by 56 percent,
cut hardware maintenance requirements by 80 percent, and saved tens of
thousands of dollars in energy costs in the first year.




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                            Rocky Mountain Chocolate Factory: Automating Business Processes
                            Increases Insight and Effectiveness
        “We can run our
       business so much     Rocky Mountain Chocolate Factory, a candy maker, franchisor, and retailer with 300
         more effectively   locations in North America and the Middle East, applied Smarter Computing
      and with so much      principles to develop a smarter merchandising operation. The company maintains a
      more insight using    focus on developing and producing candy, and leaves the majority of sales operations
       the IBM system.”     to the 300 franchise stores. Each of them, in turn, maintains a separate point-of-sales
                            (POS) system and manually e-mails sales and inventory data to the company’s main
         —Key Jobson,       office. This manual approach was time- and labor-intensive, which meant that the
                  CIO,      important findings in the data reports were often out of date and not useful to the
       Rocky Mountain       company’s merchandising strategy. Trends were also difficult to identify, and
      Chocolate Factory     products were often not delivered to meet these trends. Rocky Mountain Chocolate
                            Factory’s management decided that the threat to business was substantial and
                            decided to team up with IBM to standardize the POS system, which would feed data
                            quickly into an IT system designed to manage the company’s merchandising and
                            supply network. By applying the Smarter Computing approach, the company is able
                            to identify trends more quickly, and act on them, to increase sales and profitability.


                            BUILDING A RESPONSIVE AND EFFICIENT RETAIL BUSINESS
                            INFRASTRUCTURE

                            Retail industry CIOs and IT managers are under constant pressure to ensure that
                            their IT infrastructures enable their companies to be lean and agile in their
                            intensely competitive retail environment. Value-conscious customers are
                            connected and empowered, and demand personalized service across a number of
                            channels. At the same time, retail in a globalized world is fiercely competitive as
                            companies contend for business at brick-and-mortar stores and e-commerce sites.
                            To succeed, retailers need to adapt their business models to deliver a smarter
                            shopping experience to respond to their customers, while building smarter retail
                            operations and smarter supply networks to maintain cost-efficiency. Retail CIOs
                            need a smarter way to transform IT infrastructures to capture complex customer,
                            competitor, and operational insights underlying retail business models that are
                            responsive and efficient.

                            The application and operational requirements to realize these imperatives come
                            with substantive IT workloads, and traditional IT infrastructures that were
                            designed around a one-function-one-hardware system principle cannot cope with
                            these workloads. In today’s austere economic climate and highly competitive
                            industry, retail CIOs have the additional requirement for their IT infrastructures to
                            reduce operating costs, be flexible and scalable to deploy computing resources
                            where they are needed, and to encourage collaboration across the value chain.




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Smarter Computing For Retailers




The Smarter Computing approach is a holistic solution that can guide retailers’ IT
departments along the path of establishing the IT infrastructure to support the
imperatives of a responsive, efficient, and reliable business infrastructure. A
number of retailers around the world are beginning to realize the benefits of
implementing a Smarter Computing approach. Industry CIOs may wish to
investigate using a Smarter Computing approach if they are considering:

 • Establishing a sophisticated program to capture customer intelligence and
   derive insight from a variety of data types and sources;

 • Supporting a global network of merchandise suppliers, store outlets, and virtual
   storefronts for serving customers across multiple channels;

 • Enabling the rapid development and deployment of promotions and offerings to
   take advantage of emerging product and customer trends; and

 • Creating a company-wide data management system, with shared access to
   master records.

Forward-thinking retailers, such as Staples and Rocky Mountain Chocolate Factory,
have employed a Smarter Computing approach to help them meet the needs of
demanding customers and succeed in a competitive, cost-conscious environment.




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                    REFERENCES




                     1
                         U.S. Census Bureau. “ADVANCED MONTHLY SALES FOR RETAIL AND FOOD SERVICES JULY
                         2011,” August 12, 2011.
                     2
                         “IBM Forecast: Fall Looking Bright for Apparel Retailers.” IBM Press Release, 31 August 2011.
                     3
                         The Conference Board, “Global Economic Outlook 2011.” http://www.conference-
                         board.org/data/globaloutlook.cfm
                     4
                         Colliers. “The Retail Report Canada,” Spring 2011 Edition.
                     5
                         Target Corporation. Press Release “Target Finalizes Real Estate Transaction with Selection of 84
                         Additional Zellers Leases,” September 23, 2011.
                     6
                         Reuters, “Canada a magnetic north for U.S. retailers,” September 26, 2011.
                     7
                         National Retail Federation. “NRF Testifies on Health Care Reform, Asks Congress to Eliminate
                         Employer Mandate Penalties,” February 9, 2011.


                    This report was developed by Frost & Sullivan with IBM assistance and funding. This
                    report may utilize information, including publicly available data, provided by various
                    companies and sources, including IBM. The opinions are those of the report’s
                    author and do not necessarily represent IBM’s position.




                                                                                                      XBL03015-USEN-00




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Smarter Computing For Retailers: Meeting The Needs Of The Smarter Consumer Through Insight And Action

  • 1. 50 Years of Growth, Innovation and Leadership Smarter Computing For Retailers: Meeting The Needs Of The Smarter Consumer Through Insight And Action A Frost & Sullivan White Paper Brian Cotton, PhD and Robert Worden www.frost.com
  • 2. Frost & Sullivan Abstract ..................................................................................................... 3 The Retail Industry Environment: Savvy Customers And Agile Competitors ............................................... 3 The Business Need For Smarter Computing To Transform The Retail Industry........................................................... 7 The Business Value Of Smarter Computing In The Retail Industry .............................................................................. 11 Building A Responsive And Efficient Retail Business Infrastructure ................................................................. 12 References ................................................................................................. 14 CONTENTS
  • 3. Smarter Computing For Retailers ABSTRACT Retailers today are facing more technology-savvy, demanding customers and more sophisticated competitors, which are forcing them to transform their business models. This transformation is being guided by three imperatives defining the retail landscape: 1) deliver a smarter shopping experience; 2) develop smarter merchandising and supply networks; and 3) build smarter retail operations. In response, retailers are becoming more customer-centric, which requires them to transform their information technology (IT) infrastructures. Forward-thinking companies are moving quickly and strategically to embrace Smarter Computing, a progressive approach to building IT infrastructures that return real business value. Smarter Computing enables retailers to connect with manufacturers, suppliers and consumers globally for better real-time decision-making. Retailers embracing Smarter Computing are also finding that they can keep pace with their customers’ changing buying preferences and demands, while realizing increased availability and resiliency of transaction systems, and lower operating costs. THE RETAIL INDUSTRY ENVIRONMENT: SAVVY CUSTOMERS AND AGILE COMPETITORS The retail environment across the globe is challenging retailers as changes in consumer behavior interact with an unstable global economy, rapid advances in technology, and increased competition and regulation. In some parts of the world, the economic recession has decreased consumers’ spending ability, but has not stopped it completely. In June 2011, for instance, the retail sales index decreased by 0.4 percent in the Euro Zone, but in the U.S., retail sales posted a slight gain of 0.5 percent . There are also some signs that certain segments of the retail industry, such as apparel, are picking up. The economic mood in growth markets such as China, India and Brazil is positive. Low unemployment and rising wages, coupled with greater access to consumer credit, have fueled spending to the point that growth markets are expected to account for 60 percent of world GDP by 2020 and contribute significantly to world retail sales. This all suggests that consumers around the world are becoming more conscious about their spending, which is forcing retail models to adapt. Retailers are also confronting the empowered consumer. The continued spread of mobile communications and the rapid rise of social networking have given consumers the power to redefine their relationship to retailers. Armed with more information and an ability to make purchases from virtually any Internet-connected device, consumers are better informed during the purchasing process. Whereas some retail websites provide consumers the ability to compare products and services, pervasive social media open up multiple forums for shoppers to post comments and make recommendations about a retailer’s products, pricing or customer service. These consumers are savvy and seek out the highest value for products and services, as well frost.com 3
  • 4. Frost & Sullivan as demanding a consistent shopping experience across all channels. Retailers need to take advantage of the opportunity to engage with their consumer on a personalized basis, and provide platforms for a new vision of electronic commerce. Retail Industry Drivers • An unstable global economy • Increased access to mobile technology • Changing consumer behavior • Intense retail competition • Changing regulatory rules and expectations • Fast changing online and mobile technologies Changes in retail competition and regulatory rules are causing additional challenges for retailers as many seek to expand internationally to take advantage of growth opportunities outside of their home markets. Some U.S. retailers, for instance, are entering into Canada and this is creating a highly competitive retail market north of the border. Over the past decade, seven of the top 10 U.S. retailers have expanded into Canada . Wal-Mart, for instance, operates approximately 329 stores in Canada, having made the decision to enter that market several years ago. In September 2011, Target Corporation announced plans to open another 84 stores in Canada, bringing the total of new stores due to open in 2013 and beyond to 189 locations . In addition to Target, Nordstrom’s and Kohl’s are investigating opening retail operations in Canada as well . Existing Canadian retailers have responded with lower prices, adjusting their merchandizing mix and examining acquisition targets. Regulatory initiatives in the U.S. also have retailers concerned about rising operational costs. The Patient Protection and Affordable Care Act (PPACA) employer mandate provision, for example, has retailers concerned about not being able to afford healthcare for employees, a situation that may lead to layoffs . A U.S. Department of Transportation initiative to reduce driving time hours for freight companies could impact delivery schedules by mandating drivers have two consecutive nights off. Those retailers using night-time shipping would be most affected. All of this means that retailers need to develop leaner, more efficient operations. The drivers of today’s retail environment have shifted power to the consumer, which is compressing margins and changing the retail paradigm. Retailers are scrambling for the right strategic approach in this challenging environment, as traditional retail models such as warehouse stores, department stores and specialty 4 frost.com
  • 5. Smarter Computing For Retailers retailers are reaching maturity, and online retailing is growing. Retailers need to find ways to be more agile, and to expect that their suppliers will do the same. The challenges of the retail environment create complexity for retailers trying to adapt to the 21st century economy, and this is requiring them to transform their business models, and the technology that supports them, to succeed. This transformation process is guided by three vital retail imperatives, as shown in Figure 1. Deliver a smarter shopping experience: enabling a shopper to engage on a personal basis with retailers, shopping whenever and wherever they want, and match inventory and brand experience across channels, in stores and via mobile devices. Develop smarter merchandising and supply networks: gathering customer information continuously at every touch point, to manage and deliver assortments based on customer insights. Build smarter retail operations: inserting intelligence into customer data management and processes to understand real-time sales trends, while improving management across production, product development, and assets to drive operational excellence and lower costs. Figure 1: Imperatives Guiding the Transformation of the Retail Industry Deliver a Smarter Shopping Experience Develop Smarter Merchandising & • Customer Intelligence & Insight Supply Networks • Online Customer Experience & Selling • Supplier Integration & Management • In-Store Point of Service • Supply Chain & Inventory Optimization • Cross Channel Order Management • Transportation & Warehousing & Fulfillment Management • Cross Channel Campaign Management • Supply Chain Performance • Social Retailing and Analytics Optimization Retail Industry Transformation Build Smarter Retail Operations • Financial Performance Management • Financial Analytics • Energy Performance Management Source: Frost & Sullivan Analysis and IBM frost.com 5
  • 6. Frost & Sullivan The imperatives shown in Figure 1 revolve around how a retailer can transform its business model to be more attuned to the customer, make changes to the organization and improve the shopping experience for the customer. The transformed model equips the retailer to listen to the customer, through multiple media, and learn from their choices, feedback, and behaviors. This allows them to service customers flawlessly, and predict and grow customer loyalty. It enables the retailer to develop a single, “truthful” view of each customer across multiple shopping channels, and use this information to guide changes in merchandising and marketing to make interactions more personalized and service-oriented. Finally, the new retail model enables the customer to select the methods and channels of interaction, while taking control of social media so that a customer’s suggestions and feedback are able to build a retailer’s brand. The retailer who embraces these imperatives will become a lean, informed and versatile organization capable of driving operational efficiencies and growth. The key requirement of success, however, is the need to adapt the retail IT infrastructure to handle the demands imposed by these imperatives. Key Infrastructure Requirements • Scalability • Performance • Flexibility • Reliability and Availability • Standardization The conundrum for smarter retailing is how to support the imperatives with an IT architecture that is collaborative, scalable, secure and integrated. The infrastructure must be scalable in response to increased demand, such as consumer responses to promotions or seasonal shopping periods. The systems must also support high-performance computing across multiple workloads to accommodate large numbers of consumers shopping on a website, for instance. The infrastructure also needs to be flexible to adapt to changes in demands and new applications, enabling IT managers to direct resources where they are needed most, and it must be reliable and robust to ensure constant uptime. Finally, it is crucial that the infrastructure be standardized to close gaps in the existing architecture, governance rules, and process management simultaneously across the enterprise. Many retail IT infrastructures have often been implemented without these necessities as top considerations and over time expanded to handle singular tasks that were not part of an integrated design. 6 frost.com
  • 7. Smarter Computing For Retailers Retail industry leaders are beginning to seek advanced IT solutions to help them address their rapidly changing environment. Forward-thinking CIOs are starting to transform their IT infrastructures to respond to the imperatives driving 21st century innovations in retail business models. Retailers need a modern IT infrastructure powered by an efficient set of operations to successfully deliver a smarter shopping experience backed by an agile merchandising and supply network. The architectural design of this infrastructure must accommodate a constantly updated stream of information from customers and the supply network, feeding into analytic platforms that enable quicker reactions to changing customer preferences and operational conditions. They also need to perform complex information capture and processing efficiently, and support different types of business models to keep costs down. Smarter Computing is an approach that can help retail industry CIOs transform their IT infrastructures to address these imperatives. THE BUSINESS NEED FOR SMARTER COMPUTING TO TRANSFORM THE RETAIL INDUSTRY Introducing Smarter Computing Smarter Computing is a new approach to transform IT infrastructures to enable retailers to optimize the shopping experience for today’s digitally-empowered consumer. This approach is based on three fundamental capabilities: • Designed for Data means designing an IT infrastructure to harness all available information, including real-time streaming data, to unlock insights for better decision-making. It is about extending beyond traditional sources of data to generate insights by leveraging new forms of information, which can be incorporated into a retailer’s information supply chain to reduce operational costs, master a single version of a customer profile, simplify data security, and get insights from huge volumes of complex data. • Tuned to the Task means matching workloads to systems that are optimized to the workload characteristics, ranging from transaction processing and database management, to business intelligence and analytics, to managing communications across merchandising and supply networks. Optimizing the systems to the workloads enables greater performance and efficiency, helping CIOs working to enable smarter retail operations. • Managed in the Cloud means changing operations to support evolving business models and enable delivery methods that bring greater efficiencies out of existing IT assets, and deploy resources flexibly, dynamically and quickly to multiple store locations, distributors, and suppliers in a cost-effective manner. Smarter Computing supports business transformation by creating a technology framework to enable business operations that realize the business imperatives, and generates business value in a competitive, cost-conscious environment. The frost.com 7
  • 8. Frost & Sullivan Smarter Computing approach in the retail industry revolves around how customers’, suppliers’, store, and partner data is collected, processed, analyzed, saved, and shared. The IT infrastructure that supports the model’s business operations delivers business value by using data to guide decisions, using optimized systems to maximize efficiency, and leveraging the cloud to transcend geographic borders and legacy system limitations. Figure 2 illustrates the application of the Smarter Computing approach to retail industry innovation. Figure 2: Smarter Computing and Retail Industry Transformation Retail Organization Transformation Deliver a Smarter Develop Smarter Build Smarter Retail Shopping Experience Merchandising & Supply Operations Business • Customer Intelligence & Networks • Financial Performance Imperatives Insight • Supplier Integration & Management • Online Customer Management • Financial Analytics Experience & Selling • Supply Chain & Inventory • Energy Performance • In-Store Point of Service Optimization Management • Cross Channel Order • Transportation & Management & Fulfillment Warehousing Management • Cross Channel Campaign • Supply Chain Performance Management Optimization • Social Retailing and Analytics Business SMARTER COMPUTING-BASED IT INFRASTRUCTURE Operations Process Automation Business Process Management Event Processing Customer Intelligence Business Intelligence Transaction Processing Data Storage, Sharing, & Management Physical World Interfaces (Sensors, Systems, Devices) & Data Acquisition DESIGNED FOR CLOUD WORKLOAD Business DATA ENABLED OPTIMIZED Value Customer-Specific Offers Scalable Operations for Seasonal High Availability, Multi-tiered and Outreach Activities Promotions and Events Transaction Processing Source: Frost & Sullivan Analysis Retail company CIOs can use Smarter Computing-based IT infrastructures to carry out the operations underlying the transformation imperatives. Because the various business operations have different characteristics, workload-optimized systems yield efficient computing infrastructure designs. The efficiencies lie in systems that are flexible enough to meet peak-level workload demands, such as back-to-school or holiday sales, and enable resources to be deployed elsewhere during off-peak periods. Smarter Computing’s cloud capabilities facilitate the deployment and implementation of new processes and models that encourage collaboration and contributions from customers, retailers, and suppliers across the value chain, while giving managers a unified view of the insights derived from customer and business intelligence. By being able to capture all available data for advanced analysis, a Smarter Computing infrastructure can help managers predict preferences and behaviors and make decisions accordingly. Importantly, the approach gives CIOs 8 frost.com
  • 9. Smarter Computing For Retailers control over capital and operational expenditures because existing IT infrastructures can be transformed and need not be completely replaced. Delivering a Smarter Shopping Experience Delivering a smarter shopping experience requires retailers to develop a deep insight into the needs and shopping behaviors of their customers and offer them personalized products and services, often in real time at point of sale. This is based on intelligence about past purchases and behavior, and incorporates social retailing and mobile commerce patterns. Retailers use this insight to develop customized offers and product mixes, conduct cross-channel campaigns, and fulfill orders quickly and cost-effectively. A smarter experience also relies on communication between a retailer and a customer across channels in whatever media the customer chooses— store, online, or mobile— in and offering social networking to their community to gather and interpret customer feedback. The key to a retailer’s ability to deliver a smarter shopping experience is putting the savvy, digitally empowered customer at the center of their operations. There is a wealth of data, both structured and unstructured, available to retailers that can be captured and analyzed. The resulting insight can be shared across the value chain. By building an IT infrastructure that is designed for data, retailers can harness large volumes of rich data and apply sophisticated analytics to it, enabling them to redefine their relationships with their customers. By deploying systems and components that are optimized to their IT application and operational tasks, and hosting the applications in the cloud, retailers can quickly scale out to maintain a personalized connection with all of their customers— without the need to build costly infrastructure at multiple store locations. The Smarter Computing approach also creates business value for a smarter shopping experience by: • Capitalizing on social and mobile commerce; • Contributing to growth by enhancing and extending the value that the retailer gives to their customers; and • Enhancing customer loyalty by supporting customer-specific offers and outreach activities. Developing Smarter Merchandising and Supply Networks Developing smarter merchandising and supply networks requires retailers to synchronize operations across the supply chain, optimizing inventory and order fulfillment processes to bring the smarter shopping experience to customers quickly and efficiently. This involves not only managing vendor relationships, but also enabling open collaboration between retailers, customers, suppliers, and shippers to frost.com 9
  • 10. Frost & Sullivan ensure that the products customers want are available and can be delivered rapidly. Retail industry CIOs can apply the Smarter Computing approach to build an IT infrastructure that sustains smarter merchandising and supply networks by integrating and managing suppliers in the process of developing customer insight to deliver product assortments that customers want. Applications that enable asset and inventory management and tracking would be able to run on infrastructure components architected to harness and analyze customer and operational data. In an online and mobile commerce model, retailers would use cloud computing to enable suppliers, outlets, and customers to remotely access storefronts and warehouses and input data securely. A cloud model would also enable supply chain performance optimization using real-time analysis of data to dynamically allocate supply chain resources and coordinate workflows across the chain. Smarter Computing can help CIOs gain business value from smarter merchandising and supply networks, including: • Optimized supply chain performance, from product manufacturing through warehousing and distribution; • Efficient, robust, and resilient supply networks; and • Secure and seamless transaction processing and order fulfillment. Building Smarter Operations Retail CIOs can apply Smarter Computing to build smarter operations to improve business processes, make production more efficient, and control costs across the business. The big data capabilities used to develop sophisticated customer insights can also be applied to better understand the financial performance of retail operations and support management decisions. An IT infrastructure that is optimized to handle a retailer’s workloads can save operational costs, such as energy, and reduce unnecessary infrastructure expenditures. By applying virtualization technologies, retailers can deploy resources during off-peak times of demand for other projects, such as application development or backup of mission-critical systems. Smarter Computing can also help realize other business value from having smarter operations, including: • Improved business intelligence; • Support for high-availability, multi-tiered transaction processing; and • Cost and consumption management. 10 frost.com
  • 11. Smarter Computing For Retailers THE BUSINESS VALUE OF SMARTER COMPUTING IN THE RETAIL INDUSTRY Retail organizations are facing an unprecedented set of challenges that are forcing “The goal was to changes in their business models. Global economic uncertainty is making customers ensure that our more careful about their spending, and mobile communications and social networking customers would are giving them the means to demand more from retailers. Competition among have a great site retailers for this business is increasing, and the successful merchants will be those that experience relative consistently deliver a smarter shopping experience to their customers. Commercial to performance. success will also depend on smarter merchandising and supply networks, and smarter We wanted to and more efficient operations. All of these factors are driving retailers’ IT departments decrease our total to transform their IT infrastructures to adapt to the imperatives of today’s retail cost of ownership environment. Some progressive organizations have embraced the Smarter Computing for the hardware approach to direct their transformation to meet these imperatives. technology while increasing flexibility Staples: Delivering a Smarter Shopping Experience and scalability Staples is the world’s largest office products company and provides products and for the future.” services in office supplies, copy & print, technology, facilities, breakroom, and furniture. The company is a leader in eCommerce sales and considers the continual —Rob McClellan, improvement of the online shopping experience to be a strategic priority. As part of Vice President of IT, this, Staples’ marketing teams need the ability to model customer responses to Staples.com various promotions before taking them to market. Staples recognized that its current IT architecture would be unable to provide the computing platform necessary for this transformation, and it would need substantial investments in it to achieve its ambitious goals. Rather than taking on a huge cost burden, it partnered with IBM to implement a Smarter Computing approach to guide the process. The goal of the project was to develop a next-generation platform that would give Staples’ customers a differentiated shopping experience, and save the company capital and operational costs. The core of the transformation involved replacing 35 older servers with seven new servers, built specifically to support Staples’ e- commerce initiative. The architecture design enabled Staples to apply real-time Web analytics to a range of customer data, which was used to create targeted marketing messages and offerings. The system is also designed to scale to handle spikes in activity during peak load periods. During off-peak periods, it can redeploy resources on the fly to do promotion testing alongside production, boosting the flexibility and efficiency of the system. Staples’ system was built with future capabilities in mind, such as leveraging its cloud capabilities to serve multiple micro e-commerce sites. By consolidating its servers and building them to handle specific e-commerce tasks, Staples reduced data center space requirements by 56 percent, cut hardware maintenance requirements by 80 percent, and saved tens of thousands of dollars in energy costs in the first year. frost.com 11
  • 12. Frost & Sullivan Rocky Mountain Chocolate Factory: Automating Business Processes Increases Insight and Effectiveness “We can run our business so much Rocky Mountain Chocolate Factory, a candy maker, franchisor, and retailer with 300 more effectively locations in North America and the Middle East, applied Smarter Computing and with so much principles to develop a smarter merchandising operation. The company maintains a more insight using focus on developing and producing candy, and leaves the majority of sales operations the IBM system.” to the 300 franchise stores. Each of them, in turn, maintains a separate point-of-sales (POS) system and manually e-mails sales and inventory data to the company’s main —Key Jobson, office. This manual approach was time- and labor-intensive, which meant that the CIO, important findings in the data reports were often out of date and not useful to the Rocky Mountain company’s merchandising strategy. Trends were also difficult to identify, and Chocolate Factory products were often not delivered to meet these trends. Rocky Mountain Chocolate Factory’s management decided that the threat to business was substantial and decided to team up with IBM to standardize the POS system, which would feed data quickly into an IT system designed to manage the company’s merchandising and supply network. By applying the Smarter Computing approach, the company is able to identify trends more quickly, and act on them, to increase sales and profitability. BUILDING A RESPONSIVE AND EFFICIENT RETAIL BUSINESS INFRASTRUCTURE Retail industry CIOs and IT managers are under constant pressure to ensure that their IT infrastructures enable their companies to be lean and agile in their intensely competitive retail environment. Value-conscious customers are connected and empowered, and demand personalized service across a number of channels. At the same time, retail in a globalized world is fiercely competitive as companies contend for business at brick-and-mortar stores and e-commerce sites. To succeed, retailers need to adapt their business models to deliver a smarter shopping experience to respond to their customers, while building smarter retail operations and smarter supply networks to maintain cost-efficiency. Retail CIOs need a smarter way to transform IT infrastructures to capture complex customer, competitor, and operational insights underlying retail business models that are responsive and efficient. The application and operational requirements to realize these imperatives come with substantive IT workloads, and traditional IT infrastructures that were designed around a one-function-one-hardware system principle cannot cope with these workloads. In today’s austere economic climate and highly competitive industry, retail CIOs have the additional requirement for their IT infrastructures to reduce operating costs, be flexible and scalable to deploy computing resources where they are needed, and to encourage collaboration across the value chain. 12 frost.com
  • 13. Smarter Computing For Retailers The Smarter Computing approach is a holistic solution that can guide retailers’ IT departments along the path of establishing the IT infrastructure to support the imperatives of a responsive, efficient, and reliable business infrastructure. A number of retailers around the world are beginning to realize the benefits of implementing a Smarter Computing approach. Industry CIOs may wish to investigate using a Smarter Computing approach if they are considering: • Establishing a sophisticated program to capture customer intelligence and derive insight from a variety of data types and sources; • Supporting a global network of merchandise suppliers, store outlets, and virtual storefronts for serving customers across multiple channels; • Enabling the rapid development and deployment of promotions and offerings to take advantage of emerging product and customer trends; and • Creating a company-wide data management system, with shared access to master records. Forward-thinking retailers, such as Staples and Rocky Mountain Chocolate Factory, have employed a Smarter Computing approach to help them meet the needs of demanding customers and succeed in a competitive, cost-conscious environment. frost.com 13
  • 14. Frost & Sullivan REFERENCES 1 U.S. Census Bureau. “ADVANCED MONTHLY SALES FOR RETAIL AND FOOD SERVICES JULY 2011,” August 12, 2011. 2 “IBM Forecast: Fall Looking Bright for Apparel Retailers.” IBM Press Release, 31 August 2011. 3 The Conference Board, “Global Economic Outlook 2011.” http://www.conference- board.org/data/globaloutlook.cfm 4 Colliers. “The Retail Report Canada,” Spring 2011 Edition. 5 Target Corporation. Press Release “Target Finalizes Real Estate Transaction with Selection of 84 Additional Zellers Leases,” September 23, 2011. 6 Reuters, “Canada a magnetic north for U.S. retailers,” September 26, 2011. 7 National Retail Federation. “NRF Testifies on Health Care Reform, Asks Congress to Eliminate Employer Mandate Penalties,” February 9, 2011. This report was developed by Frost & Sullivan with IBM assistance and funding. This report may utilize information, including publicly available data, provided by various companies and sources, including IBM. The opinions are those of the report’s author and do not necessarily represent IBM’s position. XBL03015-USEN-00 14 frost.com
  • 15. Silicon Valley San Antonio London 331 E. Evelyn Ave. Suite 100 7550 West Interstate 10, 4, Grosvenor Gardens, Mountain View, CA 94041 Suite 400, London SWIW ODH,UK Tel 650.475.4500 San Antonio, Texas 78229-5616 Tel 44(0)20 7730 3438 Fax 650.475.1570 Tel 210.348.1000 Fax 44(0)20 7730 3343 Fax 210.348.1003 877.GoFrost • myfrost@frost.com http://www.frost.com ABOUT FROST & SULLIVAN Frost & Sullivan, the Growth Partnership Company, partners with clients to accelerate their growth. The company's TEAM Research, Growth Consulting, and Growth Team Membership™empower clients to create a growth- focused culture that generates, evaluates, and implements effective growth strategies. Frost & Sullivan employs over 50 years of experience in partnering with Global 1000 companies, emerging businesses, and the investment community from more than 40 offices on six continents. For more information about Frost & Sullivan’s Growth Partnership Services, visit http://www.frost.com. For information regarding permission, write: Frost & Sullivan 331 E. Evelyn Ave. Suite 100 Mountain View, CA 94041 Auckland Dubai Mumbai Sophia Antipolis Bangkok Frankfurt Manhattan Sydney Beijing Hong Kong Oxford Taipei Bengaluru Istanbul Paris Tel Aviv Bogotá Jakarta Rockville Centre Tokyo Buenos Aires Kolkata San Antonio Toronto Cape Town Kuala Lumpur São Paulo Warsaw Chennai London Seoul Washington, DC Colombo Mexico City Shanghai Delhi / NCR Milan Silicon Valley Dhaka Moscow Singapore