Saturday, July 14, 2018

You Don't Say

It was the kind of story that statisticians and business analysts hate. The Metro (UK) website carried it with a banner headline that proclaimed “Couples who spend more on their weddings are more likely to get divorced” in bold letters above a picture of a wedding cake. The story went on to claim that the more cash spent on wedding rings, engagement rings, or the ceremony itself, the more likely the marriage would eventually crash and burn, as illustrated by pictures of celebrity couples who had managed to do just that. It’s the kind of thing that would make anyone who couldn’t afford an elaborate wedding, anyone who thinks ostentatious displays of wealth are crass, or anybody who particularly dislike weddings feel better about themselves…

Unfortunately, the original article does not give the title of the study they are citing, the name of the journal in which it appears, or where the researchers got their information. To be fair, most people who are casually reading online news stories wouldn’t care about the statistical methods employed or the degree of empirical rigor employed by the research team; most Internet readers don’t appear to consider the source at all. The Metro (UK) site isn’t exactly the BBC, but they aren’t the Daily Mail, either, so I decided to run down the original research article…

As it turns out, the paper the Metro (UK) people were talking about is called “A DIAMOND IS FOREVER” AND OTHER FAIRY TALES: THE RELATIONSHIP BETWEEN WEDDING EXPENSES AND MARRIAGE DURATION, and it appeared in the October 2015 issue of a journal called Economic Inquiry, which is published by the Western Economic Association International. It’s the work of two economics professors from Emory University, Andrew Francis-Tan and Hugo M Mialon, and as you’d probably expect, it’s not quite as sensationalist as the Metro (UK) headline, or even its own title, would have you believe…

Basically, what the professors did was ask people to fill out a Qualtrics survey that provided basic demographic information, an approximate range of what they spent on the wedding, the rings, and such, and how long they had been/were married. They then cleaned and adjusted the data to account for as many inaccuracies as possible, and ran a number of regressions and other analyses to see if any patterns appeared. If you’ve spent any time on statistical research, you already know that there are problems with self-reported data (people lie) and correlational data (correlation does not equal causation, no matter how good your math is), but the researchers in this case weren’t looking for a causal relationship in this case…

According to the report, the researchers were attempting to determine if there was any correlational relationship between elaborate weddings and/or rings and the length or success of the marriages, specifically because the companies that supply wedding services and supplies have claimed for most of the last seventy years or so that such expenditures are critical if you want to have a successful marriage. They specifically note in their literature review that these marketing claims are a recent development, and prior to World War II advertising of this type was highly unusual, and there does not appear to have been any corresponding popular belief…

Even more to the point, what the study found was that there was no such correlation. According to the data they collected, the researchers were unable to find any support for more expensive weddings or accessories leading to longer or more successful marriages. Although they did notice a number of other interesting correlations, as far as this study can determine, there is no reason to believe that spending a lot of money on your wedding will help you stay married, and no reason to believe that failing to do so will doom your relationship to divorce. If you dig down into the information, this turns out to be a moderately interesting study of changing consumer economics over the last two or three generations that debunks claims made by a specific industry about the vital importance of their products and services…

Although we should probably concede that just coming out and saying that would make it much less likely that anyone would read a news article about the findings…

Thursday, July 12, 2018

Watch Your Mouth

After all of these years you’d expect me to have gotten used to the idea of people failing to value things they don’t understand, but it still annoys me as much as anything else. Writers deal with this almost constantly, given the vast numbers of people who seem to think that writing is the same thing as typing, but you can also find examples in business, government, academia, and even in the military. One particularly vexing version, of which you can find examples in the news on almost any weekday lately, is people who believe that speech writers aren’t necessary; that any idiot with a microphone and a podium can just spin out oratory off of the top of their head…

The truth is that even something as a ranting blog post can take hours to craft, at least if you don’t want to sound like the kind of blogger who wears their underpants on their head and believes that the World Health Organization is beaming vegan pastry recipes directly into the President’s false teeth. Great orators – and there are far fewer of these than people seem to think – can make it look like the awe-inspiring speech they are giving is just something off the top of their heads, but that’s showmanship and acting, not wordplay. Even for very smart people, just saying the first thing that comes to mind can get you in trouble faster than you would believe…

If the public sector examples of the last two years aren’t enough for you, consider the case of “Papa” John Schnatter, founder of the Papa John’s Pizza chain. Anybody who starts with a single pizza oven located in his father’s tavern and ends up with over 5,000 retail locations and corporate earnings in the $1.7 billion range (according to Forbes) can’t exactly be a blithering idiot, but you could be excused for thinking so if you’d encountered his remarks about the NFL player protest controversy, or his more recent attempts to justify them…

You can pick up the Forbes and CNBC stories about this if you want to, or go back and check the news broadcasts for the relevant days. I’m not going to say that the issue isn’t controversial, or that Schnatter doesn’t have a right to his own opinion, but I will suggest that making unscripted remarks about an emotionally-charged topic isn’t a great idea even if you do know what you’re talking about. In this particular case, there’s something particularly tone-deaf about a wealthy and powerful white man criticizing African-American athletes for staging a respectful and non-intrusive protest against institutionalized violence aimed at their community. But as bad as that was, attempting to justify your remarks by saying that Colonel Sanders used the “N” word may be even worse…

Now, I’m not going to suggest that everyone should run all of their public remarks past their Public Relations department before speaking them; many of us don’t have a PR department, and not everyone has a spouse or a partner who can tell them when they are about to put their foot into their mouth. But, by the same token, it doesn’t take a master’s degree in Communications with a Public Relations emphasis to realize that making uninformed or casual remarks about anything as complex and emotionally charged as race relations in America is probably not something that a career in food service management would qualify you to do…

The truth is that most of us won’t ever be important enough that our remarks will be noted by millions of people, let alone result in a multi-billion dollar loss in our stock price and get our sponsorship deals with the NFL and Major League Baseball cancelled. All I’m saying is that if you are in a position where a poorly-chosen, carelessly-worded, or badly-informed remark can have a major negative impact on a company, a country, an international treaty organization, or the stakeholders whose jobs or lives may depend on those institutions, there’s nothing wrong with hiring someone who does have expertise in those areas to help you…

Wednesday, July 11, 2018

One Small Step

I was reading yesterday’s BBC story about the upcoming Israeli space mission with great interest, and not just because I’ve been a huge space geek for as long as I can remember. If their mission is successful, Israel will become only the fourth country to soft-land a probe on the Moon, following the United States, the Soviet Union, and China. Even more remarkably, the Israeli probe will then use the fuel remaining onboard to take off again, soft-land again, and make observations from a second point on the lunar surface – something that none of the other countries have managed to date. Even the Apollo missions were limited to just landing and then using a separate drive system to leave…

The second flight, or “hop,” across the Lunar surface is a requirement of the X-Prize competition that this mission hopes to win, but if the probe functions correctly it will open the way for more advanced deep space surveys using remote technology at a relatively low price. So far the Israelis have spent around $88.5 million, according to the BBC, and the addition of a Falcon 9 launch vehicle will add another $60 million or so, depending on the exact launch specifications. For reference, a single Space Shuttle launch would cost between $500 million and $1.5 billion, depending on the payload and duration, and most of the equivalent unmanned missions launched by NASA ran in the $700 million to $900 million range. But then, that’s kind of the point…

I’ve written before in this space about the need to privatize spaceflight, beyond basic programs like the X-prizes and the Virgin Galactic sight-seeing flights. Well, according to a recent article in the Smithsonian’s Air and Space magazine, that is exactly what has happened now that Space-X and United Launch Alliance (ULA) are competing to offer the best value for the price. Of the two, Space-X is considerably cheaper, offering launch vehicles for one-half to one-third as much as their rival, while ULA (a joint venture of Boeing and Lockheed-Martin) has a longer track record and over 130 consecutive successful launches. Both are a far cry from the days when only a national government – and only two of them, really – could send anything other than weapons into space…

Now, I would be the first to admit that this appears to be pushing the concept of a business blog just a bit, but it really isn’t. The commercial possibilities for space flight and space-based manufacturing have been discussed for decades now, and new ones appear every time the cost-per-pound of lifting things to orbit goes down. We’re still probably a few decades away from having large-scale habitats in space, let alone passenger service to get to them, but when even conservative companies like ULA start talking about building cities in Trans-Lunar space, it’s time to start taking them seriously…

So far, things seem to be limited to Space-X’s low-cost strategy versus ULA’s differentiated strategy – cost versus quality, or a brash start-up company that has suffered a number of setbacks in recent years versus the more established firm that hasn’t had a rocket blow up on them in over a decade, depending on your point of view. But there is reason to believe that the Russian space agency, which has been the prime contractor for human-rated space launches since the end of the Shuttle program, and the European Space Agency, which never liked having to beg NASA for seats on the Shuttle in the first place, may start offering their own commercial services. And while they haven’t done it yet, I can’t see anything that would prevent the Chinese, the Japanese, or the Koreans from developing their own commercial-grade launch systems…

Let me again call the reader’s attention (assuming I have readers) to the early days of aviation, only 115 years ago. As long as airplanes were limited to Wilbur and Orville in the bike shop, or even a bunch of wood-and-canvas military biplanes, there wasn’t really a lot of commercial potential in the technology. It was only after the First World War, when companies like Boeing and Douglas started building the first airliners, when things really started to take off. I’m not sure we can compare the Falcon-9, or the new ULA launch vehicles due out in 2022, to the DC-1 or the Ford Trimotor. But unless my understanding of business, history, and aerospace are all completely out to lunch, we all just got one small step closer…

Tuesday, July 10, 2018

Another Try for an Old Idea

I can’t exactly say that I was disappointed when I saw a news item about a “flying car” on one of the news aggregation sites. Flying cars have become a meme over the last decade or so, and there will be at least one mention of something that might be one, or a snarky reference to some flashy (but ultimately pointless) piece of technology that ends with the question “Where’s my flying car?” in the news each month. Most of these turn out to be vague rumors about something that might happen in ten or fifteen years if a currently unproven technology turns out to have legs, or something that has already failed to catch on multiple times before. Although this week’s story may ultimately turn out to be both…

We should probably note that flying cars, or “roadable” airplanes, have been around for at least seventy years at this point, and if you actually care I could show you both contemporary accounts and advertising pieces about models actually offered for sale at various points. Most of these projects ultimately fail, either because the vehicle in question is too expensive to afford, because it is too hard to operate, or because it is too hard to get permission to operate from the applicable Federal, state, or local laws. A flying car that you can’t use without first obtaining a (very expensive) private pilot’s license, or that you can’t fly from where you live or to anywhere that you’d want to go, isn’t going to be much of a draw as a consumer product…

In this particular case, the new entry into the field isn’t a new technology or even a new concept. Fans of James Bond movies are already familiar with it, and so is anyone who has ever studied the history of experimental aircraft in or out of the movies. The PAL-V Liberty, made by a Dutch company of the same name, is actually a gyroplane, or auto gyro. If you’re not familiar with the term, imagine a small propeller-driven airplane with an unpowered rotor instead of a conventional airfoil. It can take off and land on much shorter airstrips than a conventional airplane, and a skilled pilot can actually land one like a helicopter, although the leadership at PAL-V describes it as being more like landing a parachute or paraglider…

Now, I’m not saying that the Liberty and similar craft don’t have potential, because they absolutely do. The gyroplane was a competing technology to both fixed-wing aircraft and helicopters in the early 20th Century, and its lack of acceptance had more to do with lower top speeds and problems with its public image than with its safety or V/STOL capabilities. Advocates of the type claim, with some justification, that it is safer to operate than comparable fixed-wing aircraft, and more efficient than comparable helicopters. But anyone who wants to keep one in the garage and just fly to work is going to be disappointed to learn that gyroplanes and their pilots are regulated, certified and licensed by the FAA just like any other light airplane…

The unfortunate fact is that flying cars, or at least the kind that anybody can get into and fly around any time or place they like, are a terrible idea. The next time you’re out on the road and you see someone driving like an idiot (and you will) imagine them travelling two or three times faster and crashing into the side of somebody’s house if they take their eyes off of what they are doing – and who’s even mentioned flying while texting or flying while under the influence yet?

I’m glad to see the humble gyroplane getting a new lease on life, and I’ll be looking forward to seeing more of them in use over the next few years, at least if PAL-V is as successful as they’re hoping to be. But anybody who is looking for the mythical flying car had best keep on walking…

Sunday, July 8, 2018

Get Out the List

I can’t really say that finding yet another situation in which American business interests have been running amok during this administration really came as a shock to me, although I have to admit that this one is even more despicable than usual. We’ve already seen companies getting the government to let them start dumping mine tailings (poison) into rivers and lakes, pushing to repeal even common-sense regulations on air pollution, trying to gain increasing support for failing industries like coal mining (which even our former coal customers don’t want anymore), and advocating for additional import tariffs that are now threatening several previously solid manufacturing sectors. But allowing the US-led infant formula lobby to interfere with U.N. World Health Assembly’s efforts to promote breast feeding is still a new low…

You can pick up the New York Times article here, if you really want to see things hit their worst, but don’t say I didn’t warn you. All the assembly was trying to do was pass a resolution saying that “mother’s milk is healthiest for children and countries should strive to limit the inaccurate or misleading marketing of breast milk substitutes.” This isn’t exactly a controversial statement; there are quite literally decades of evidence, from hundreds of studies, which support this position. On the other hand, it’s easy to see how the $70 billion formula industry, led by Abbot Labs here in the US, would consider such a resolution to be against their interests…

It’s hard to imagine how, exactly, the industry leadership would justify promoting their business interests over the health and welfare of millions of infants, and the HHS statement that this move was to prevent “stigmatizing” women who want/need to use formula isn’t particularly convincing. It’s even less convincing when you consider that American representatives at this same Assembly meeting were also threatening to withdraw international aide and military support from various small nations if they chose to support the resolution – starting with Ecuador, which was originally going to propose it. American delegates apparently also threatened to slash US funding for the World Health Organization…

Now, I wouldn’t want you to place all of the blame for the United States delegation behaving more like organized criminals than advocates for public health on the shoulders of a single, albeit gigantic, industry. During these same meetings, the Americans were also noted as advocating to limit the ability of countries with rising rates of obesity and diabetes to put warnings labels on sugary beverages, and opposing changes to patent laws that would make it easier for poor countries to gain access to potentially life-saving medications. It might be possible to argue that intellectual property rights and free trade without regulatory interference are good for business in every country, and therefore these other efforts are still slightly into the grey area, but those claims don’t hold up well when accompanied by threats of extortion…

There are times when it really does seem as though the people who are running this place have a checklist of completely disgusting things they want to accomplish, just to make sure that they don’t miss anything. I feel constrained to point out, however, that even if these mainly political moves made sense in a purely business-friendly context – and they really don’t – the degree of international resentment this kind of behavior is generating has potential long-term consequences that dwarf whatever immediate gratification these companies may be receiving. When things get to the point where the Russians have to step in and propose the resolution in support of breast-feeding because the Americans have been threatening everybody else you really know that the regular order of things has been upended…

In the simplest possible terms, we’re still going to have to live on this planet, and do business here, once the current administration finishes lining their own pockets and leaves office. That’s going to be really difficult to do if all of the residual goodwill we might still have had with the rest of the world gets flushed in order to sell more infant formual…

Saturday, July 7, 2018

Back to Basics

Back in 2013 I brought you the story about United Airlines reconfiguring its CRJ regional aircraft to include more – but lighter and smaller – seats. At the time, I commented that travel on a CRJ is already a miserably cramped experience, and I couldn’t imagine that trying to cram more people on to one was going to help. Since then, all of the airlines have been experimenting with new seating arrangements and equipment, ranging from things that look like a saddle to a kind of standing-room-only system that provides just enough support to keep the FAA from shutting it down. It’s enough to make you wonder if anyone running an airline is even thinking about passenger comfort anymore…

Well, apparently they aren’t. Some recent interviews with the leadership at United and arch-rival American Airlines reveal that they have been working on smaller and lighter seats, and planning to fit extra rows – and possibly even an extra seat per row – onto every type of airliner currently in service. This will enable the airlines to increase their revenue per flight considerably, as I noted in the 2013 post, but it completely ignores passenger comfort and potentially safety (in the case where you’re trying to get more people off of a more cramped airplane during an emergency). Push-back from some consumer advocate groups has helped prevent the worst of these plans from going through, although we should note that the public relations and customer service staff at some of the major carriers have also complained about the concept…

Now, as I noted five years ago, the management team of any company has a responsibility to its shareholders, and to a lesser extent, all of the other stakeholders, to maximize revenue. In the case of airlines, getting more paying customers aboard every airplane is one of the only ways to do that, but the problem with doing so is that you are also making the experience less and less enjoyable, which lowers the value you are providing to the customer. Carry this process too far and you will reduce the perceived value of the service you are providing to the point where no one will be willing to buy it…

This is a perennial problem for any company utilizing a low-cost strategy. If a given product’s perceived value drops below a certain level no one is going to purchase the product, no matter how cheap it becomes. The example I use in class is the 1980s-era imported car known as a Yugo, which cost about one-quarter of most basic cars, but was so poorly regarded that no one wanted one. If you care, I can name any number of other companies that have failed for the same reason, but given that there are only three kinds of business strategy (cost leadership, differentiation, and focus), and every business school in the world teaches its graduates to watch out for a lack of parity of quality when using the cost leadership strategy, it’s hard to understand how anybody could get to be CEO of a major airline without learning this lesson…

Even worse, in some ways, it the fact that several of the same senior managers have openly admitted that the only thing driving their decisions is how much additional revenue they can create, regardless of passenger comfort, and the only thing that has prevented some of the bone-headed ideas from going into service was that the personnel who have to care for the passengers (and deal with customer complaints) kicked up a fuss. It’s enough to make you wonder if any of these CEOs were paying attention in Strategy and Policy class…

Wednesday, July 4, 2018

Can’t Win for Losing

It sounds like one of those riddles you hear from professors who aren’t quite as funny as they think they are: “When is a $700 million savings really a $2.3 billion loss?” Usually it’s the set-up for a problem in sunk costs, hidden costs, or multi-year depreciation that the accountants in your class love – and that remind the rest of us just how critical a good accountant is to any successful business venture. Yes, non-profits too. For a strategist, though, it’s usually an indication that there has been an unexpected consequence of what appeared to be a straightforward action. In the case of a publicly-traded company, it might not even have anything to do with the action itself, or even with anything your company did…

Consider, if you will, the case of Walgreens, CVS, Rite-Aid, Wal-Mart, Amazon, and an on-line pharmacy company called Pill Pack. If you’re not familiar with it, and I wasn’t until I read the CNBC story about this situation, Pill Pack is licensed to sell prescription drugs in 49 of the States, and booked about $100 million in sales last year. Wal-Mart has been in negotiations to buy Pill Pack for several months, but negotiations broke down when Wal-Mart balked at going over $700 million, at which point Amazon stepped in and offered $1 billion. Wal-Mart probably could have matched the offer, but they didn’t want to get into a bidding war with one of the only retailers their own size, and they didn’t believe Pill Pack was worth that much anyway…

This would probably be a non-story – Amazon has bought a lot of smaller companies, some of which panned out and some of which didn’t – if it hadn’t been for the stock market fallout. Within 24 hours after the transaction was announced Wal-Mart’s stock price dropped by $1.03, which doesn’t sound like much, until you realize that the company has almost 3 billion outstanding shares of stock, each of which is now worth a dollar less than the day before…

Not making the purchase saved Wal-Mart $700 million, but it ended up costing them $3.04 billion in market value, or a net loss of $2.3 billion. That might not seem fair, but consider what also happened to the three big drugstore chains mentioned above. According to a second CNBC story, Walgreens lost 9.9% of their stock price, Rite-Aid lost 11.1 % of theirs, and CVS lost 6.1%, for a combined loss of around $11 billion on the same day (June 28, 2018). Meanwhile, Amazon’s stock gained 2.5% on the same news, resulting in a gain of just under $20 billion…

Now, I’m not saying that we should blame the drugstore chains, or their leadership teams, for the losses in question – although I will be very surprised if at least some of their stockholders don’t start asking a few rather pointed questions at the company’s next General Meeting. I’ve got nothing to suggest that any of these companies, or even all three of them together, could expect to out-bid Amazon without bankrupting themselves, or that they would be able to recover the $1 billion if they did. I can’t even tell you for sure if Wal-Mart could do that and live. What I am saying is that the leadership of every company needs to be watching the competition, and potential competitors as well, exactly so they don’t get surprised by something like this…

Because, to paraphrase a very old joke, a few billion here, and a few hundred million there, and eventually it adds up to real money. And while I imagine Wal-Mart will survive this mistake without much difficulty, there is a limit to how many more times they can ignore the consequences of their actions…