Monday, June 26, 2017

Blade Wars

For some time now we’ve been seeing ads on television and various other media for new companies that are selling razors and shaving products over the Internet. I’ve been watching them with some interest, both because I use such products myself and also because this is a product category that has suffered from artificially inflated prices for as long as I’ve been old enough to shave. Whether this is an isolated case or if it turns out to have relevance to other product categories remains to be seen, but at the very least it would appear that the traditional strategic advantages are no longer quite as sustainable as you might think…

Fox Business is reporting that Gillette’s share of the men’s shaving market has been dropping for at least the last six years – from nearly 70% in 2010 to 54% in 2016, and possibly still dropping. To the best of my knowledge, there has never been any reason why other companies could not have challenged Gillette’s domination of the industry, any more than other companies could have challenged Frito-Lay for control of the potato chip and corn chip industry. But as in the case of salty snacks, it can be very difficult for a new competitor to break into an industry that already has an entrenched competitor with vendors, distributors, retailers, and the majority of the end users already its control. The purchase of Gillette by Proctor and Gamble in 2005 only made things that much harder for anyone else who might have thought to break into the market…

As a result, Gillette has been selling razor cartridges for as much as $6 each, and is in the middle of testing and introducing new extensions to the product line that might go even higher. It has become something of a running joke in recent years that the company keeps adding blades and jacking up the price. And while exactly how much of the price was made up of profit margin remains in dispute, it has not been much of a surprise to learn that the well-known Schick competing products run for as little as 50% of the Gillette equivalent’s price. Finding out that the cheapest Dollar Shave Club refill cartridge goes for as little as 20 cents was rather more surprising, to be sure, but what was really amazing was seeing the full-page ad in the newspapers responding to the new competition…

You can see one of the examples at Campaign Outsider if you’d like to. Gillette was already planning to answer the shave clubs delivery/convenience advantage by launching their own subscription service, but apparently the threat posed by the price advantage has caught their attention as well, and they are now publicly announcing upcoming price reductions across their product line. If the Fox Business story is correct, this should amount to an average reduction of about 12% on Gillette shaving products. Whether this will be enough to counter the 90% price advantage offered by the new online competition remains to be seen, of course…

Now, I’m not saying that the new price reductions won’t work, or that the success of the new shave clubs will bring additional competition into the market. I don’t begin to have enough data to make any such predictions, and I’m not sure anybody else does, either. For all that the situation is a classic example of a previously dominant company having to deal with an unexpected entrant crashing their market, the use of an Internet-based campaign and a direct-billed subscription model, not to mention home delivery, is almost literally unprecedented in this industry and product category. I can’t see any reason it shouldn’t work, and I’m not sure there’s anything Gillette or P&G can do about it – except compete with the newcomers on their own terms, that is…

Gillette is still entrenched in the market; their product is available in virtually every supermarket, drug store, convenience story, and general merchandise retailer in this country. They’ve got the technology and knowledge-base to create superior products, the distribution channels to get them into any customer’s hands, and the capital to run better ads and set whatever price points they can get away with. It seems possible for them to compete in this market and win, especially with the support of their corporate parent. What they can’t do is ignore the threat that these new competitors represent. The way they have been doing until now…

Wednesday, June 21, 2017

Sucker Showcase

Many years ago, the original cast of Saturday Night Live did a sketch about a game show called “Irwin Mainway’s Sucker Showcase” during which the host would tell various credulous idiots (the titular “suckers”) various obvious lies in order to get them to humiliate and/or injure themselves. It’s a variation on the old idea that people will do literally anything in order to get on television or win money; when you combine the two there’s almost nothing that is too obviously stupid to keep people from doing it. Dan Ackroyd was the MC (Irwin Mainway) and Steve Martin was the show’s “returning champion” – e.g., somebody so dim that he couldn’t figure out the show’s true nature even after enduring an episode of it. Steven Martin later included the sketch in his own T.V. special; you can find the clip here: https://youtu.be/4Hi8DIEhb_o

What seems most remarkable to me isn’t so much how prescient this sketch turns out to have been as how much more honest the format is, to the viewers if not to the contestants. Modern reality television has subjected contestants to activities at least this unpleasant, and potentially even more hazardous to life and limb, starting with shows like “Fear Factor” and “Survivor” and continuing to the current day. But where the fictional Irwin Mainway and whatever heartless production company was behind him were openly making fun of people, and inviting their audience to laugh at these suckers/contestants, the modern reality show hosts (and, one assumes, producers) go on endlessly about how exciting and competitive their contests are, and how well their contestants are dealing with the challenges involved…

Now, I would be the first to admit that this isn’t a new idea. A number of television series have based episodes around the concept over the years, and there are at least three full-length movies of which I’m aware that have been released on the same themes. I will admit, however, that I have started worrying about the long-term effects of both encouraging people to be credulous idiots and encouraging other people to watch them and laugh. As the world becomes more complicated all around us it gets easier every year to make an innocent mistake that can screw up your entire life. Even ten years ago if you lost your cell phone, the worst that would happen is that you would report it as lost/stolen, have the carrier deactivate the account and give you a new one, and buy a new phone. If you’d bothered to sign up for the insurance, they’d just give you a new one. Today that same phone could allow someone to drain your bank account and max out all of your credit cards before noticed it was gone…

I point this out for a number of reasons, not least of which is I’m worried about the corrosive effect this is having on our society; however, the effects on business, and particularly on business strategy, may be even worse. Business runs on information, even more so than money, and without complete and accurate information it isn’t possible to plan your activities or make competent decisions. If you base your calculations on bad data there is no way you can possibly get the right answers (the infamous programmer’s term GIGO – garbage in, garbage out – comes into play here), and with people deliberately introducing nonsensical information into reference sources just for the fun of watching more people behave like credulous idiots it’s getting harder every day just to tell what is real and what is supposed to be humor…

Earlier this week I noticed a clickbait item trumpeting that Don Knotts had just blurted out his “real” reasons for leaving the Andy Griffith Show. Which sounds like minor celebrity gossip, at best, until you realize that Mr. Knotts has been dead for eleven years as of today’s writing, and he revealed the complete rationale for leaving the show in the early 1970s. Heaven only knows what kinds of malware or online scams you might be subjecting yourself to if you clicked on that link, but the one thing I’m fairly sure of is that if you did click on it you would not have learned anything about the late Don Knotts that everybody else didn’t know forty years ago. If you make a practice of clicking on such links you probably won’t learn anything else, either, but you’ll definitely have qualified for an appearance on the next Irwin Mainway production when it comes out…

And that’s still not even the worst of it…

Thursday, June 15, 2017

The Hits Keep Coming

Suppose for a moment that a random customer of yours has just saved your company from a disaster that would have meant the loss of an asset worth at least $100 million, plus at least a few hundred wrongful death lawsuits, each of which can easily run into the millions of dollars all by itself. Let us further suppose that the employees to whom they initially reported the impending disaster did not believe their report, and only reluctantly verified the story while being particularly rude to those customers. And while we are at it, let’s suppose that the signs of impending doom that they discovered could have been noticed by any ordinary school child, and that enough witnesses exist that trying to cover up the details of the story would be asinine. Where would you expect to find those customers when the dust clears?

Well, unless you said “Sleeping on the floor in the Baggage Claim area because no one gave them a hotel voucher” you have, again, over-estimated the customer service and public relations skills of our old friends over at United Airlines. According to a story from the New York Post a United flight was departing from Newark for Italy when two of the passengers noticed fuel leaking from the airplane’s main tanks in the wing. Not just a dribble, either; they described it as looking like the stream from a fire hose. The flight attendants reacted to the report of this information by yelling at the passengers to get back in their seats, and only reluctantly looked out the window – whereupon they immediately called the cockpit and told the flight crew…

After aborting the takeoff and returning to the gate the flight crew were nice enough to the heroes of our story, personally thanking them for saving the plane and everyone aboard from the fiery (and idiotic) death the airline had unknowingly been courting. United’s ground personnel were less effusive, however, proceeding to attempt to cover up the incident, issuing a statement downplaying the leak, and trying to get everyone on the flight rebooked and overseas before they could start talking to the press. They managed to get meal vouchers to all of the passengers, but somehow failed to supply hotel vouchers to all of the customers they had just massively inconvenienced (and nearly killed), including the couple who had noticed the leak in the first place…

Now, I don’t mean to suggest that these two people, a couple on their honeymoon, were the only thing standing between United and total disaster. We can probably assume that the flight crew would have noticed the rapidly dropping fuel levels, either on a routine check or when the flight computer’s alarms went off, and returned to the airport. I’m also not suggesting that the airline go to any special lengths to thank them, although one would imagine that customer retention concerns alone would make that worth the effort. I’m just pointing out that I’ve gotten better care than that when a flight I was supposed to be on was canceled at the last moment, and all I have ever done for that particular airline was buy a ticket…

Okay, so this wasn’t really an atrocity. The worst thing that seems to have happened is that a group of passengers was moderately to severely inconvenienced (if the worst thing that ever happens to you while traveling is having to sleep in an airport, you’re an extremely fortunate traveler), and any of that could have happened on any ordinary day, even without mechanical failures and employees who appear to be thick as a brick. But it does make you wonder how many close calls a single company can survive, even leaving potential air disasters out of it for the moment. Sooner or later people are going to get fed up with the various United shenanigans and start voting with their feet. You might expect that the company would want to put off that day for as long as possible, or at least avoid any billion-dollar disasters in the meantime…

But unless this story turns out to be a hoax, you’d be wrong about that, too…

Wednesday, June 14, 2017

Museum of Failure

As I’ve mentioned a number of times on this blog, I originally went back to grad school to learn more about management failure, with an eye towards getting people to stop running perfectly good companies into the ground. This turns out to be harder than you would expect, because as one of my professors pointed out during my first year in Michigan, it’s difficult to study companies that don’t exist anymore. Even if you could find financial data, operational records or human resources information for defunct companies, and you generally can’t, the problems that killed the company could just as easily be intangibles like personality conflicts, poor stakeholder management, greedy owners, poor corporate governance, or sudden economic downturns. Usually the best you can do is study the failure of specific products or programs…

Regular readers of this blog (assuming I have readers) already know that I collect these stories; they’re a staple of my lectures at MSU as well as a major part of why the “Stupidity” tag appears on more of these posts than any other. Sometimes I do find myself having to remind people that most businesses (and business people) aren’t actually idiotic failures; it’s just that people who operate a business successfully very rarely need to hire management consultants, and they even more rarely do anything funny enough to be worth making snarky comments about in a business blog. And while anyone who aspires to run a successful company, or even work for one, absolutely should study the way successful firms have accomplished their missions, I was still practically giddy when I learned that an entrepreneur and clinical psychologist had launched a Museum of Failure in the city of Helsingborg, Sweden…

You can visit the Museum’s own site if you want more information, or pick up the Detroit News story online if you’d like to read about the operation. Some of the artifacts in their collection will probably already be familiar to the reader, such as the infamous Apple Newton PDA or the venerable Sony Betamax, while others may have slipped under your radar, like the Harley-Davidson fragrance products or the visually revolting green catsup. But while many of these items may move you to wonder what the inventors were thinking, the key point of this exhibition isn’t so much that they failed as specifically how. Because while many of these products are every bit as preposterous as they sound, some of them are quite sound in themselves…

Take, for example, the Betamax. Most people know it simply as an older format that lost out to the more common VHS tapes (before the entire product category were rendered obsolete by DVDs, Blu-rays, and eventually streaming video services). What most people today may not realize (or remember) is that the Betamax was actually a better product. By any objective standard, the Betamax had better picture quality, better sound quality, better workmanship, and was generally more reliable than even the most advanced VHS systems. What did it in wasn’t price or quality so much as a fundamental misunderstanding of the market – and the competition…

When Sony first introduced the Betamax it was a very innovative concept: bringing both the size and the cost of video tape down to the point where any private citizen could have one at home. Consequently, the company decided to keep close control of all aspects of the system, refusing to allow anyone else to use the technology. With no real competitors, they could set the price point wherever they wanted to, and take their time bringing out additional features. The extent to which their competitors reverse-engineers the Betamax design remains somewhat unclear, but in addition to the lower price it was the longer tape running time and pre-recorded tapes that made the VHS so much more successful. With a run time of less than an hour, later increase to just over two, it would be difficult to record movies from cable or broadcast television on a Beta tape, and initially it was almost impossible to find anything pre-recorded on one…

Now, I don’t mean to suggest that the failure of the Betamax, or any of the other products in the Museum, for that matter, would have been easy to predict in advance. If I could tell you with any certainty what products or features would sell in any specific market I could probably have retired on the fees from telling companies not to build the Apple III, the Google Glass, or the Pontiac Aztec. I am in full agreement with the founder of the Museum that all future innovators, and the operational leadership of companies attempting to sell new and innovative products, should study all of the products in this collection, and any others that they can get their collective hands on…

Because I can almost guarantee you that the next big exhibit in the Museum of Failure will have its initial product launch any time now…

Monday, June 12, 2017

Strategic Failure: Profit

There’s a common Internet meme that has been around for some years now in which includes three step-by-step directions, to wit: 1. Buy Products; 2. Sell Products; 3. Profit! As far as I can tell it started out as a sarcastic comment on people doing things that shouldn’t normally gain a profit, either because one or two of the steps involve criminal/unethical behavior, or because at least one of the steps involves something for which no sane person would pay money. What may not be clear, especially now that the meme has become something of a cliché, is that this faulty strategic approach is responsible for a very large number of business failures every year, especially in the case of online businesses and websites that are intended to make a profit…

With the rapid expansion of online businesses in the late 1990s and early 2000s, a lot of people with brilliant technical and programming skills but limited business experience began creating websites that they believed would be an effective license to print money. I got to work with some of these folks during my time with the Small Business Development Centers program from the SBA, and almost inevitably, the founders of the company had created an amazing product or service, but had never considered how they would get paid for their work. Most net citizens at the time would not pay for content, and selling advertising on the site was difficult unless you could prove that the advertisers would be able to generate actual sales off those specific ads…

Even today, it remains difficult to get people to pay for online content unless it serves some function they can’t get in the real world or just steal off of any of the various pirate sites. Selling advertising is still a possibility, of course, if you have millions of visitors each day, but the presence of sites like YouTube and Facebook make that harder for a small business to achieve, not easier. Most internet advertisers today will only pay on the basis of verifiable “click-throughs” – people who saw their ad on your site and clicked on it – and some won’t even pay for that traffic unless it results in a verifiable sale. This has led to some to some desperate and often far-fetched approaches…

Consider, if you will, any of the Internet businesses that will allow you to use their basic services for free, and then attempt to get you to purchase an upgraded version or add-on features for the free version (or occasionally both) – the so-called “freemium” services. Pandora is probably the best-known example, but I can list dozens of others; one could actually see any of the media sites with a “paywall” arrangement as using the same tactics (e.g. newspapers that will allow you to read 10 articles a month off their online site, after which you have to pay). Some of these have met with limited success, but even something like Pandora, which provides a service to recording artists and music holding companies as well as consumers, has struggled to stay operational, and with the appearance of the App Store it’s increasingly difficult for anyone else to sell software…

My experience is hardly universal, and even the published research isn’t entirely clear on this point, but it has always seemed to me that this particular strategic failure comes about because people immersed in the challenge of building a new product or service aren’t usually thinking about the strategic aspects of the new business that their invention will create. Even within the business community itself, the kind of long-term strategic planning that is one of the staples of the management function is not widely appreciated by our colleagues from other disciplines. After all, why would anyone want to spend their time working on a musty old business plan, articulating the strategy that will make their business a success, when they could be coding, drawing, animating, welding, soldering, polishing or shipping their products? Or, for that matter, tracking sales, balancing the books, paying the vendors, managing the other stakeholders, or investing the proceeds? But unless there is some method by which people will give us money for doing whatever it is we are doing, the whole thing is a hobby, not a business – and it won’t last any longer than our hobby budget does…

Of course, failure to create an adequate business plan is a strategic failure in its own right – but that’s a discussion for another day…

Sunday, June 11, 2017

The Ethics of Profits

I hadn’t intended to follow up on this week’s piece concerning the EpiPen scandal at Mylan because, as usual, I didn’t really think there were two sides to discuss. Anybody who would intentionally charge a 60,900% markup – or even a 600% markup – on a medication that could save someone’s life in an emergency is going beyond simple capitalism into a realm that might get their company (or occasionally their entire industry) placed under government price controls just to keep people from rioting. That is to say, there is no ethical justification for such a policy, according to any standard of which I’m aware. But while it seems obvious that allowing people and organizations to earn some profit is the basis for our entire economic system, the point at which something goes beyond a reasonable profit and into outright exploitation or usury is rather less clear. I thought we should take a closer look…

First off, it should be obvious that in a completely free market it makes no sense to price something at a level that no potential customers can afford, or even at a level that no one would be willing to pay. In fact, pricing strategy to a large extent deals with how many additional purchases we can generate for each increment by which we lower the price; the point at which we can’t increase revenue by lowering the price any further being the price point. If price is the only factor driving the transaction then we probably can allow the “Invisible Hand” professed by Adam Smith and beloved of conservative pundits to sort things out. Unfortunately, conditions in the real world are rarely that simple…

In any situation where the purchase decision is more complex than simply buying the product or not having one additional levels of complexity come into play. One can choose not to pay for a luxury item, but one cannot chose not to pay for food, clothing, shelter, or medical care, just to take the obvious examples. In any situation where different customers have different resources available the situation becomes more complex again, as in cases where some people can afford to purchase food, or pay for medical care, while others in the same society can’t. And when we introduce issues like social stratification, racial discrimination, gender discrimination, transportation, logistics, government regulation, crime, spoilage, and cultural importance of specific goods and services (just to name a few) the entire situation can become baffling complex…

At the same time, we should probably acknowledge that none of the large-scale experiments with command economies, whether partly or fully socialist, appear to have ended up as anything other than complete (and usually repressive) failures. The post-scarcity economies so beloved of utopian philosophers might conceivably be different, but for the moment no such system appears to be technically possible, and thus far in history no system that requires people to sell products or services for what the government says they must (as opposed to what people are willing to pay) appears to have worked. So long as people remain motivated more by personal gain than they are by the greater good, it does not appear than any of these conditions are going to change…

As business people, we know that we would like to make as much profit as possible while at the same time creating the best possible society in which to live and the healthiest world in which to live – not because business people make any claim to being saints or angels (we’re not) but because healthy, prosperous, long-lived customers have more money to spend and more years in which to spend it. And as much as we might like to make a 60,000% profit we don’t want to do so in such a way that we get sued, regulated, mocked by thousands of scruffy bloggers, used as evidence in favor of nationalizing our industry, or that involves having our factory burned to the ground around us. So I have to ask the question:

At what point does our responsibility to our society, our nation or our world supersede our responsibility to our employees, vendors, creditors, customers, and stockholders to earn the highest possible profit on a given transaction?

It’s worth thinking about…

Thursday, June 8, 2017

Consider the odds

If anyone out there is surprised at hearing about new and different examples of airline personnel screwing up by the numbers no one has mentioned it to me. It’s possible that this is the result of all of us getting desensitized to these stories because of how often they come up, or perhaps the increasing deluge of horrible and horrifying news is making all of us jaded. For the record, I don’t believe that the world is actually getting worse; I think it’s far more likely that as the world becomes increasingly interconnected we’re getting more information of all kinds, good and bad. I do consider the most recent story, which is being brought to you by United Airlines (the people behind the Dave Carroll episode!) is particularly inept, but I think it speaks as much to the size of the problem as it does to any specific airline or airport…

If you missed the original story you can pick it up off the Washington Post site. It’s another one of those cases of a United supervisor trying to have their own way instead of thinking, in this case continuing to insist that a musician travelling on a United flight had to check her 17th Century violin despite Federal law that explicitly gives musicians the right to carry their instruments aboard. In this specific case, the musician had informed the airline at the time she booked her ticket that this carry-on arrangement would be necessary, and told the gate agents that she would leave and take a different airline if they wouldn’t let her carry her violin with her. For the supervisor to have continued to insist on checking the instrument at that point is absurd, as well as illegal, but when the supervisor made a sudden lunge and tried to rip the violin case out of the passenger’s hands it crossed the line into a level of stupid that we rarely see even in Airline stories…

Fortunately for the airline their passenger was not permanently injured during the ensuing wrestling match; even more fortunately, she has apparently decided that she has better things to do than suing the airline. Why, exactly, someone in a supervisory position was either unaware of the laws regarding this situation or too pig-headed to obey them (or both) is beyond me, but I think it points up just how complex the customer service function is in this industry. Consider, if you will, that the last time I checked the US airline industry moves somewhere over 2.2 million people a day – on the order of 820 million people per year. That means that even if screw-ups like this one are literally one in a million, there will be a couple of them every day, and over 800 in a year. It also means that the various airlines could get everything perfectly right 819,999,948 time each year and we would still have an atrocity like this one going on somewhere every week on the average. Or, if you like, every company in the industry could get every one of its people certified to Six Sigma standards and there would still be around 2,780 failures per year (about 53 per week), although admittedly not all of them would be this idiotic…

It should come as no surprise to regular readers of this blog (assuming I have readers) that even in the Airline industry, where customer service failures can result in million-dollar fines, billion-dollar lawsuits, and potentially even deaths, customer service is apparently still being regarded as an expensive function that does not generate any income. I don’t know how much longer the industry can go on this way, and I don’t know how many additional companies can go bankrupt before people stop blaming rising fuel prices, uncooperative unions, or fickle customers, and figure out that what is really killing these companies is management incompetence and inadequate customer service…

Or that, at least in this case, those two factors are one and the same…