Thursday, November 14, 2013

Flying in the Face of History

At first glance, it looked like one of those stories that turn up from time to time railing about the fact that the US does not buy the things it needs and spends too much on things it doesn’t need. At second glance, it looked more like one of those defense industry stories about how some contractor or other is going to improve the nation’s defense against attack by weaving safety nets made out of actual dollars and then running their operations from a building made entirely out of gold and gullibility. And at third glance it looked like yet another story about how an aircraft that is older than I am is showing no signs of retiring anytime soon, provided we keep pouring money into it – which is actually a subset of the first two stories…

For those not familiar with it, the Boeing B-52 “Stratofortress” strategic bomber was originally designed and built over sixty years ago (first flight in 1952), primarily as a carrier for nuclear weapons during the Cold War. A lineal descendent of the famous “Flying Fortress” and “Superfortress” types of World War II, the B-52 combined a number of new design elements and new technologies to produce the largest, most powerful and most effective strategic weapons platform of its time. Since then, the aircraft have seen action in every major conflict the United States has fought in, slowly evolving from carrying giant thermonuclear gravity bombs to stand-off weapons, smart bombs, missiles, and anything else you could ask for. It even stepped in as a cruise missile launch platform when the B-1A was cancelled during the Carter Administration. Meanwhile, regular updates of its avionics and control systems have kept these airplanes flying decades after the intended end of their service life…

What usually gets lost in all of the shouting is that while the mission for which these aircraft was designed (e.g. dropping massive hydrogen bombs on the Soviets) has long since vanished, the utility of a large flying truck that can carry forty tons or more of assorted weapons to pretty much anywhere you might want them to be launched from has not. It’s debatable as to whether or not the B-52 could ever have accomplished its primary mission as designed (rather than simply being hacked out of the sky in droves), but as long as its systems are kept compatible with the rest of the military, and as long as you can still find things for it to carry, there’s no real need to build another huge, radar-friendly, gas-guzzling, smoke-spewing, noisy, ugly and incredibly adaptable flying machine…

The new story is really just another case of finding new things for the B-52 to carry. According to the press information on Boeing’sMedia Room page, the company has signed a small contract to develop modifications to existing launcher systems that will allow these venerable airplanes to carry the latest generation of “smart” weapons in their internal weapons bays, instead of having to carry all of them on external mounts. This will enable the aircraft to carry larger loads, or to avoid external mounts (and their attendant drag) and operate more efficiently. It won’t enable them to fly through contested airspace, ignore active threats, or do anything else they don’t already do, in fact. But if you just went off the original story headline (“Boeing to extend B-52 life span by increasing smart weapon capacity by half”) you could easily get the idea that this is a massive deal that will drive the company’s bottom line for decades to come…

Instead, we’re just looking at a $26 million upgrade to the airplane’s weapons stations – a nice project, and potentially very useful, but not particularly significant compared to the $33 billion in business that Boeing’s Defense, Space & Security division does in a year. I don’t know what the next big thing in manned strategic weapons platforms is going to be, if in fact there is every going to be one, but I can tell you with a fair amount of confidence that this isn’t it…

Sunday, November 10, 2013

The Ethics of Honesty

As most regular readers of this blog (assuming I have readers) already know, I spent a number of years as a management consultant, working with small and medium-size organizations, both for-profit and non-profit, and helping new ventures to launch and existing firms to get better at whatever they were doing. Unfortunately, most people have no idea what that actually means. Even with the best of intentions, some people can’t seem to grasp that writing is different from typing, that operational analysis involves an in-depth examination of a firm’s activities and comparison to the rest of their industry, or that what I do requires years of experience and training. As a result, a lot of people apparently believe that I can take a brief look at what they are working on and somehow just know whether their idea will work, and what efforts will be required to make that happen, without any particular effort. Although it would seem that some of them also believe that the same functions could be handled by any bum from off the street – or a particularly bright two-year-old…

It’s a peculiar situation, in which people who would never consider asking for a free ride from a taxi driver or a free cake from a baker, or even for free legal advice from a lawyer, will assume that despite the fact that they have not the slightest idea what I do, it must be easy (and require no time at all). From time to time someone will call me up and ask me to read over their plans for a new venture of some kind and tell them what I think of the project, assuring me that this will “just take a minute” and that no one else can help them with it. The question at this point isn’t so much whether or not I should do it (I really shouldn’t, but no one is going to understand that, either), as it is what do I tell them. This is especially true when the concept I’m looking at is so deeply flawed that I can see multiple ways in which it could get the idea person behind it divorced, savagely beaten, publicly ridiculed, or completed bankrupted if they even admit to originating the idea…

On the one hand, I’m not actually the world’s expert on anything. I’m a competent, capable analyst with a lot of experience both operational and consulting in a wide range of industries, but that hardly makes me the final authority on every conceivable type of new venture. If I give a valuable idea a hearty thumbs-down there’s a real chance my “client” could give up on something that could make the world a better place. On the other hand, five years with a consulting firm, two more with the Small Business Administration (through the Small Business Development Centers program) and several additional years freelance, not to mention two Master’s Degrees in Business and 20 years in Corporate America means that I’m not exactly Captain Kangaroo, either. If an idea is flawed enough that I can spot major problems with it in a cursory reading, that probably means that it needs further development before the entrepreneur proceeds with his or her business plan. The issue then becomes, what do I tell them?

An idea that someone has nurtured for years is a deeply personal thing. Frequently, it’s the one brilliant idea that they are sure will catapult them to the big time without needing any of the tedious intervening steps; their generation’s answer to Microsoft Windows, or Facebook, or sliced bread. In other cases, it’s their personal vision of a better world to come; the Utopia that could exist if only people were willing to let go of their blindness and pre-conceived notions and listen. In either case, crushing that person’s hopes and dreams seems heartless – except when we consider that aforementioned divorce, ruin, grievous bodily injury and/or public humiliation, in which case failing to point out those critical flaws would be far worse…

So you tell me: what is the ethical choice here, for me – or any other management professional in an analogous situation? Should we fulfill our obligation to the client as we would with any other customer and tell them the bald truth, even though they are friends and/or family and our answer will have difficult emotional freighting? Should we refuse to take any case with a personal connection, the way a doctor or a lawyer might, knowing that our friend/relative would never be able to afford a professional analyst of reasonable quality, and our refusal could doom the project right off the bat? Should we try to divert the client into additional research and/or development when we know their idea will never fly and there is next to no chance they can find a fix for any of its problems? Do we attempt to point them toward existing ventures that already do something of this kind – assuming such ventures exist? Or do we tell the truth, the whole truth, openly and clearly, and let the chips fall where they may?

It’s worth thinking about…

Saturday, November 9, 2013

Outrage in the Air

Looking back over my records I find that nearly 10% of all of the entries for this calendar year have involved airlines behaving badly; usually in some completely preventable way that inconveniences, endangers, monetarily damages or just outrages customers and potential customers. Some of these merely reflect momentary lapses of reason or cases of outright incompetence (such as failing to get an unescorted minor onto the correct flight), while others involve blatant criminal malfeasance (such as the employees accepting bribes to smuggle packages onto departing airliners), but nearly all of them are things so absurd that it passes understanding how a service-providing company can do them and remain in business. It’s almost enough to make you believe in collusion between the major companies in the industry – not to fix prices or to defraud the public, but simply to maintain service levels bad enough to convince the travelling public that one airline is much the same as any other…

Now, in fairness, operating a company that transports tens of thousands of people for billions of air-miles aboard complex machines that can be rendered completely inoperable in seconds by a single mistake by a single employee trying to park one of them is harder than it looks. To make matters worse, in recent years it has become increasingly difficult to differentiate one airline’s service from another, which has left many of the major carriers competing entirely on price. There was a time when it was possible to charge more for higher-quality food and drink, better services, or even (it has been done) more attractive cabin personnel, but today most carriers have to cut back on everything to remain competitive, which includes lowering expenses for recruiting, training, and especially salaries. What is less clear is how far one can lower staffing quality before the resulting lawsuits begin to eliminate any resulting savings…

Take, for example, the case of Angeline O'Grady, who was attempting to transport her late husband’s ashes to England for burial on a US Airways flight, when a TSA idiot insisted that since ashes aren’t a solid they had to go in her checked baggage. A competent airline might have tried to accommodate a customer during a difficult time, but US Airways gave away her seat reservation and forced Ms. O’Grady to pay for a business-class seat since she was delayed checking in by the aforementioned TSA idiot. That would merely be callous; however, when Ms. O’Grady landed in England she discovered that at some point during the flight, someone had opened her suitcase and stolen the urn containing her late husband’s remains…

As I have noted in earlier posts, a failure in operational security this severe has a very real chance of destroying the entire airline (as well as any aircraft that somebody manages to sneak a bomb onto because no one was paying attention). Here again, a competent airline might have considered apologizing for the theft, launching a serious investigation, calling on law enforcement agencies on both sides of the Atlantic to help them find out what happened, firing everyone who had access to the relevant baggage facilities during the time when the urn was stolen, or having all of the employees who could have stolen the urn arrested and letting the police/FBI/Scotland Yard figure things out from there. I’m not sure I have an adjective appropriate to describing an airline refusing to so much as explain what they think happened, and claiming they have no responsibility for the theft and did nothing wrong; calling this “stupid” would be an insult to stupid people. And that doesn’t even consider stonewalling the customer and attempting to tie up the case in court once the customer finally got a lawyer…

Here in one story we’ve got criminal negligence (leaving the baggage vulnerable to theft), criminal malfeasance (assuming it was a company employee who committed the theft), incompetent customer service (charging a bereaved widow for a more expensive ticket? Really?), incompetent public relations (saying things like “we’ve done nothing wrong” after losing someone’s mortal remains), incompetent operational management (letting things escalate to the point we found out about it) and incompetent senior management (not just quietly settling the case and moving on). And the company isn’t done yet; a few weeks ago attorneys representing US Airways filed a motion to move the case to Federal court, since this outrage took place on an International flight. That will hold up proceedings, make the whole case harder and more expensive to try, and might cause Ms. O’Grady to give up, but is almost certainly going to make a bad situation even worse for the airline…

To quote the late Frank Zappa: “It’s not getting any smarter out there, folks…” Keep watching the skies, everybody, because there’s no telling what kind of shenanigans will be going on up there next…

Tuesday, November 5, 2013

What Could Possibly Go Wrong?

Every so often you will run across a news story that makes you assume that either the reporter who wrote it has gone barking bad or you have; something so surreal that you find yourself looking for signs of Photoshop even when you know there won’t be any. Or, at least, that was my reaction when I saw the story headlined “Giant yellow duck explodes in Taiwan” at the head of an AP story featured on an Australian news site…

It turns out that the duck is the work of a Dutch artist named Florentijn Hofmann, and it’s a larger version of a 2007 piece (the original was 16.5 meters tall; the current duck is 18 meters tall) that made the news a few years ago when it got loose from its moorings and became stuck up against a large bridge in Europe, effectively blocking boat traffic along a river/canal system for several hours before it could be towed out of the way. Since then, the ducks have toured 13 cities around the world without significant incident, until a powerful earthquake in Taiwan knocked out the air pump filling the current duck, causing it to partially deflate. When power was restored and the exhibiters began re-filling the duck a combination of poor handling and unfortunate winds caused the duck’s rear to blow out and flatten the entire structure…

I have often heard people claim that all strategists are inherently pessimists, because of the time we spend trying to anticipate all of the things that could go wrong with any project we’re working on, and the effort involved in working out contingency plans for those events. People who have actually spent time developing or implementing strategy will tell you that they are realists, concerning themselves with what to do in the event that specific outcomes occur, rather than just assuming that something bad (or good) will happen because it can. We should probably admit that this does lend itself to spending a lot of time determining all of the things that can go wrong and working out responses to them, since it generally isn’t necessary to make contingency plans for coping with success. However, this doesn’t make the process any less important…

If we are working with any structure or installation that requires electrical power in order to function, including the electric air pumps needed to keep a giant duck construct inflated, then it isn’t unreasonable to take some time and consider what you should do in the event that the local electrical power grid goes down. This is especially important if the local grid is rendered less than 100% reliable because of faulty generating plants, government malfeasance, operational incompetence, or regular natural disasters (such as earthquakes) that interfere with power generation or power transmission. By the same token, we should probably consider what we will do if the water currents or prevailing winds are stronger than expected (or are going in an unexpected direction), what we will do in the event that the duck gets loose from its moorings, what we will do if the duck becomes stuck against a bridge or overpass, and how we will deal with the negative news stories, civil lawsuits, and public backlash against us and/or our duck…

Because the truth is that an 18-meter (60 foot) tall rubber duck construct is a wonderful and whimsical thing, and we should not permit minor challenges in operations or safety to interfere with the viewing public’s enjoyment of our duck. And while it isn’t strictly true that everything that possibly can go wrong does – sometimes there are multiple bad outcomes that are mutually exclusive, for example – it’s still our job to identify and plan for as many of those contingencies as possible...

Because if anything is certain in this world, it’s that there are more potential failures lurking behind the scenes than we have planned for so far…

Monday, November 4, 2013

The Doughnut of National Preference

One of the ideas I try to get across to my students in my Business Policy and Strategy class is that different people in different markets and segments want different things, and pretending that they don’t – pretending that everyone in the world wants exactly the same things – is just as absurd as pretending there is anything wrong with that. I’ve often pointed out that people are people wherever you go, and that when it comes to the really big things (survival, security, acceptance, community, acknowledgements) we all DO want the same things, but when we get down to issues like consumer preference we’re no longer talking about what it means to be human; we’re talking about things like how much sugar is produced within a given consumer’s home country. I often make that point using a short story about doughnuts…

When I was a graduate student (both times, actually) I was part of a study group that met every week to go over some of the more impossible aspects of our course of study, and we all took turns bringing snack foods to the meeting. When it was my turn I would usually bring doughnuts, because they are filling, taste good, and can be economically obtained in large quantities. However, I rapidly noticed that different members of the group had different ideas about what constituted a good pastry. My friends from China, for example, told me that American people put too much sugar on everything – which makes perfect sense when you realize that neither sugar beets nor sugar cane are native to China. Accordingly, there is no local equivalent to the gooey pastry beloved of Americans and some European nations. From then on I made a point of buying plain cake doughnuts, without frosting or filling, and our Chinese friends loved them; they said it was the best snack food we had in America…

Our Korean students loved the doughnuts with the thick white icing and colorful sprinkles; even some of the women who had never been known to eat junk food (or much of anything else, actually) could be counted on to have one or two of these. Some of the Northern Europeans like icing and frosting more than anybody else, and I made sure to have some for them, while the Eastern European nations go in more for light and flaky pastry and fruit fillings – powdered sugar doughnuts, lightly glazed doughnuts or occasionally jelly doughnuts or apple fritters went over big here. And, of course, my fellow Americans love anything frosted with sugar, chocolate, glaze, icing, filling, cream, maple syrup, or all of the above at once, which made it relatively easy to round out my order…

Over the years I’ve come to refer to this as Belin’s Doughnut of National Preference – which is a reference to Porter’s Diamond of National Advantage; a well-known construct developed by Dr. Michael Porter at Harvard to account for why some nations are more successful in international trade competition than others. Unlike the better known Diamond construct, I can’t back my Doughnut up with anything more concrete than many years of personal observation, but there was an article this past week that does seem to support my thesis. The Viral Nova website published at list of foreign snack foods, complete with pictures, and I call your attention to #5 – the Dry Pork and Seaweed Doughnut offered by Dunkin Doughnuts in China – and to #12, the Wasabi Cheese and Seaweed Cheese Doughnuts offered by Dunkin in Singapore. While certainly not conclusive, this information does appear to support my contention that different people have different ideas about what constitutes a good doughnut…

Now, I don’t mean to suggest that this observation is particularly deep or especially profound; in fact, it’s about as simple an explanation of National product preferences as you could ask for. But then, that’s the point: finding out what your customers in a specific country, state or city prefer is a painstaking activity that will require considerable research; recognizing that they have unique preferences, and that these may very well NOT be the same as your own preferences, is as simple as sharing doughnuts with your colleagues on a rainy afternoon and watching what each of them likes to eat…

Sunday, November 3, 2013

The Ethics of Spite

In yesterday’s post I noted that it appears McDonald’s has allowed its collective animosity for rival company Burger King goad it into severing ties with a supplier with whom it has done business for over four decades – Heinz company, which once supplied McDonald’s locations with ketchup. It isn’t clear from the news stories, or from the other information about this action that are available online, whether there is some larger strategic move in play, whether McDonald’s strategic planning staff had already identified opportunities available in changing ketchup suppliers before the new CEO of Heinz was appointed, or if this really is just a spiteful reaction right out of a schoolyard squabble. What matters from our standpoint is whether an ethical company could countenance such a decision in the first place. I thought we should take a closer look…

We should begin by noting that procurement decisions like this one are usually made on the basis of complex calculations dealing not only with current conditions, but also with projected conditions in the future and assumptions regarding the most profitable choices available. If the decision to drop Heinz in favor of other suppliers turns out to be incorrect that is a matter for the usual mechanisms of corporate governance to handle, and if the decision turns out to be a truly incompetent move that creates actual financial damage to the stockholders there are a variety of legal remedies already in place. We should also note that if such a move were to be made for nefarious reasons there are already laws in place under which the perpetrators could and probably would be charged. For our purposes, we can assume that the decision we are discussing isn’t being driven by incompetence or malfeasance; what we must ask is what motives are actually driving it…

If, for example, members of the management team have reason to believe that their supplier’s new CEO is incompetent, irresponsible, negligent, or otherwise likely to commit acts that will threaten their own operations, then refusing to do business with that supplier would be entirely in keeping with their responsibility to their own shareholders. In the case of an executive who has for some years served as the CEO of a rival firm, the suspicion that such an individual would retain feelings of animosity from his previous position and thus not deal honestly or equitably with the company is probably baroque, but certainly understandable. If previous direct dealings with that executive, either as the CEO of the rival company or in some other capacity, have led management to have doubts about that individual, that concern would also be appropriate. Nor can we completely discount the possibility of animosity based on personality conflicts, interpersonal relationships or social interactions between this new CEO and members of the management team; however unfortunate this might be…

The truth is that however much we might prefer to believe that companies are run on a scientific basis by professionals trained in the finer points of both management science and also in the finer points of their specific industries, companies are still run by human beings, with all of the intellectual and emotional frailty that implies. It is quite possible that business dealings with someone with whom our company has been directly competing for an extended period will carry additional risks, either because that person does in fact harbor animosity towards us, or because we may be unable to suppress such feelings on our side. But absent some concrete evidence of that risk, can we reasonably act on that possibility, knowing that if we do so we run the risk of depriving our shareholders of the best return on their investment, costing employees of our existing supplier their jobs, and potentially damaging the economy of the states or countries where those companies do business?

Or, to put it another way, can we accept the possibility of causing all of this harm in order to protect ourselves from a threat that may or may not even exist? Alternately, can we accept the consequences of failing to take precautions if the threat does exist? How do we determine the course of action that will do the most good for the most people over the longest time while maintaining our primary mission of running our own company to the benefit of the shareholders who own it?

It’s worth thinking about…

Saturday, November 2, 2013

Spite and Ketchup

Every once in a while you will run across a business story that reminds you of small children squabbling on a schoolyard, and you will reluctantly have to acknowledge that no matter how hard we try to be adults, professionals, and leaders of commerce, people don’t always change that much between the ages of five and fifty. This may take the form of business people sabotaging deals that would have earned them billions of dollars because a hated rival would have made millions on the same transaction, or of people refusing to work together because of something one of them said about the other decades before, and this past week it took the form of the world’s largest quick-serve restaurant chain severing ties with a valuable supplier because that supplier’s new CEO used to run a rival company…

If you missed the story on Reuters by way of Yahoo Business you can pick it up on the link, but the story is simple enough. McDonald’s announced this week that they are ending a relationship with the H.J. Heinz company, and will no longer purchase their ketchup, because the new CEO of Heinz is the former CEO of Burger King. Why exactly this would be a bad thing from McDonald’s point of view is not clear; certainly it doesn’t suggest that the executive in question is inexperienced in large-scale food service operations or that he wouldn’t understand how important condiments are to a quick-serve hamburger restaurant. It’s possible that the leadership at McDonald’s is reacting to some of the more outrageous (and stupid) management blunders Burger King has made over the past decade (the advertising debacles come to mind, as does Burger King’s insistence on treating its franchise-holders like crap); it is also possible that the leadership knows the new CEO of Heinz from industry functions and just doesn’t like him…

It’s also possible that someone associated with the McDonald’s organization has, or would like to have, a relationship with the Heinz company’s primary rival in the ketchup field, Hunt’s, which is owned by ConAgra Foods. Or, alternately, that someone at McDonald’s is concerned about Warren Buffet’s Berkshire Hathaway group purchasing Heinz, and wants to keep at arm’s length from the operation. These considerations may not seem all that important in the short run, but once we start considering corporate acquisitions in the $28 billion range it becomes much harder to dismiss these concerns as mere spite or simple defensive posturing...

In any event, the move should have minimal impact on your enjoyment of McDonald’s products within the United States, as only two domestic markets (Pittsburgh and Minneapolis) actually feature Heinz products as of this week. For some years now McDonald’s locations across the US have given out condiment packets marked, simply, “fancy ketchup,” and most of the in-store dispensers make no mention of brand names either. It’s possible that the leadership at McDonald’s has obtained a supplier contract that will lower their ketchup-related expenses outside of the US (which the company has been using Heinz products) enough to make up for any losses associated with dropping the name-brand product; it is even possible that the mention of possible rivalry and/or animosity toward the new CEO of Heinz is nothing more than a ruse to misdirect anyone who might be looking away from the details of that new deal…

And, of course, it’s also possible that the people running a multi-billion dollar company have just make a major purchasing decision on the same basis that you might have used in picking players for a dodge-ball team when you were nine years old. We should probably keep an eye on this one…

Monday, October 28, 2013

I’d Buy That for a Penny, Too!

It was one of those headlines that catches your eye from the corner of the page: “Carrier Sells for a Penny!” Obviously, this is one of those outrageous cases of governmental waste in action! We must leap to arms, write to our Congresspersons, demand action, and speak loudly in public – or at least put our caps lock key on and leave it there! Unfortunately, once you actually call up the story and read it most of the fanfare drains away relatively quickly; the carrier in question is the former U.S.S. Forrestal (CV-59), commissioned in 1955 and decommissioned thirty-eight years later in 1993. For the past twenty years she’s been more of a political and ecological football than anything you could call a ship, and it’s actually past time somebody did something with her hulk.

From a historical standpoint, Forrestal was a significant development; the largest carrier constructed by that point in history and the first ship to include innovations such as an angled flight deck, a steam-powered launch catapult, or an optical landing control system during her construction. Like the later and somewhat larger nuclear-powered super carriers, Forrestal served both as a symbol of American military power and as an instrument of force projection all over the world. With the end of the Cold War and the gradual drawdown in Navy requirements, however, the need for the older carriers began to decline following the first Gulf War, and several of these ships were decommissioned and offered for use as monuments or museums, much like the U.S.S. Midway (museum ship in San Diego, California) or the U.S.S. Intrepid (museum ship in New York City). In the event, however, Forrestal became a more difficult issue…

It should come as no surprise to anyone that it is an expensive proposition to maintain an 81,000-ton ship in readiness to sail and fight; what continues to surprise many people is that it is also expensive to maintain one as a floating museum. Of course, anything made of metal that is floating in salt water is going to have to deal with corrosion, and a museum (of any kind) also has to deal with maintaining displays and exhibits and with keeping the interiors clean and safe enough so that the tourists won’t accidentally hurt themselves. This isn’t necessarily easy to do inside the hull of a warship, which (in fairness) was never designed for small children, idiots, or members of Congress. And even assuming you can raise the money to acquire and convert the hull, tow it to its final resting place, and maintain both the hull and its contents, there’s still the issue of where to put the museum…

In the end, Forrestal was on the donation list for over a decade while various groups tried to raise the money to buy her, but ultimately those efforts fell short. There are, after all, only so many carrier enthusiasts, and only so many ports that can both house and afford a museum ship of that size. There was a second effort in the early 2000s to use the ship as an artificial reef; a number of former American warships have been utilized in this fashion, but these efforts fell through as well. All that was left at that point was to sell the ship for reclamation, to be broken apart and scrapped. Oddly enough, this also proved difficult…

Despite the desire to view an aircraft carrier – or any other large vessel – as just an ocean-going collection of metal, such a ship is actually better described as a floating waste dump, containing forty years worth of petroleum waste, battery acid, asbestos, heavy metals, lead-based paints and other toxic chemicals. Cleaning one up enough to use it as an artificial reef is a massive undertaking, and highly expensive; breaking one up for parts is even harder, and requires more OSHA and EPA clearances than the average person would believe. It is still possible to make money on such a salvage operation, given enough time and the right facilities, but it isn’t easy and it’s almost always something that our government would be better advised to outsource than try to do in-house. So if you were thinking about trying to by one of the other decommissioned pre-nuclear super carriers for a penny, I’d have to advise against it. It’s more fun to blog about anyway…

Sunday, October 27, 2013

The Ethics of Profit

We were discussing the subject of for-profit colleges the other day when the question came up about whether these enterprises have any functional utility. We’ve all seen the stories about crooked for-profit schools taking advantage of students by charging outrageous tuition fees, encouraging students to take out student loans they have no hope of ever paying back, or even accepting large cohorts of students, collecting non-refundable fees, and then flunking out the entire class for academic deficiency before the end of their first semester. But clearly not all of the companies in this industry are corrupt or fraudulent; many of them operate honestly enough, taking on students who are unable or unwilling to find suitable education in conventional channels and providing useful instruction at a reasonable price. The real question would appear to be not so much why the fraudulent organizations are tolerated, but under what conditions a useful for-profit college can be operated…

What sets for-profit schools apart is that, unlike most other companies, these organizations are attempting to serve the public interest as well as generate revenue for the owners. Much like a for-profit hospital or a for-profit insurance company, these schools are still trying to generate a positive bottom line, but also like these institutions they are serving the need for educational opportunities (on the part of the citizens) and the need for a better-educated workforce (on the part of society). Or, to look at it another way, if a for-profit school is not providing anything of value for its customers (let alone defrauding them or leaving them in debt) it is cheating not only its “students” but all of the rest of us who live in the community where it is allowed to exist. Clearly, then, the ethics of running such an institution are more complicated than those of a company that sells filtered tap water for $40 a bottle or fermented grape juice for $500 a bottle; but what are those ethics specifically?

First, it seems reasonable that any for-profit course of study that enables its graduates to obtain gainful employment – or to upgrade their career prospects, if they are already employed – has some concrete value. Whether it’s a cost-effective method of obtaining that value is up to the student/consumer to decide; a school which costs as much as an Ivy League degree but offers only a $1-per-hour increase in salary probably isn’t worthwhile, though it’s clearly not useless. This suggests than many vocational and technical training programs should be ethically acceptable, and some of the STEM disciplines might be, but most of the Humanities and Liberal Arts subjects should probably be left to traditional institutions…

Second, there’s the issue of predatory lending. For our purposes, lending someone money they can never repay for a useless degree is even more egregious than lending them money they can never repay for a real estate purchase, considering that student loan debts can never be discharged through bankruptcy the way a conventional loan can. Schools obtaining tuition this way are clearly crossing the line. Likewise any school which is deliberately misrepresenting the value of its training programs – advertising the salaries of famous chefs, for example, when all their graduates can look forward to is $14 per hour as a line cook – should be prosecuted under the truth-in-advertising laws and driven out of business. But in both cases, if the costs and benefits are clearly explained up front, and the risks of pursuing such a course are make apparent to the applicants, it’s difficult to say that the companies involved would be committing any crime by accepting payment and providing the classes…

All of which brings me to the real ethical question underlying this issue: how safe a proposition does a given course of study have to be – and how much absolute value does it have to off the student – before we consider it ethically acceptable for a company to offer it to students at a profit to itself? Any number of students will graduate from public and non-profit private schools every year with crushing student loan debt and degrees for which no employment opportunities exist (the so-called “Do you want fries with that?” majors), yet these programs do not generate accusations of fraud or calls for closer regulation. Such events may seem more reprehensible when someone is using those graduates to obtain profit, but there is no appreciable difference in the effect those debts and degrees will have on the lives of the students. So how do we decide what is simply a cost-ineffective educational opportunity and what is a dastardly fraud used to separate would-be students from their money? And who gets to make that decision?

It’s worth thinking about…

Friday, October 25, 2013

Decisions, Decisions

One of the cases I discuss with my students is about Southwest Airlines, and since this is a strategy class what we mostly discuss, both in class and in their written assignments, is changes the company could make in its strategy in light of the changing conditions within their industry. I get students from all of the various majors in the business school in my class, so I try to select cases that can be looked at from a variety of different angles and from the perspective of different disciplines. For example, the Southwest case was written just as the company had acquired Air Tran, and our Finance majors can analyze the deal and discuss the implications for the company’s future equity and capitalization, while the Human Resources students can talk about the difficulty in merging the two (very) different corporate cultures. It isn’t easy coming up with assignments that are interesting and fun (or at least, not boring) for this many different interests, and I’m sure I don’t always succeed. But the Southwest case is popular, and discussions of the anti-bag-fees policy are almost always spirited…

If you don’t fly commercial, you may not be aware that some years ago all of the major airlines started charging an extra fee for every piece of checked baggage, starting at around $25 and escalating rapidly from there. Some carriers have kept the fee structure basic, some have jacked the price up to see how high it can go, and others have tied it into other promotions, offering free bags for their frequent flier customers, people who sign up for their branded credit cards, or whatever. Only Southwest, out of the major carriers, has persisted in allowing customers to check two bags per person without charging extra – despite the fact that the airline industry as a whole is making roughly $3.5 billion on bag fees each year, according to an article this week in the Wall Street Journal. Many of my undergraduates have suggested that Southwest consider adding such a fee, given that these charges are now the industry standard and appear to be gradually gaining acceptance. But it’s never the Marketing majors who make that suggestion…

In the same article, the CEO of Southwest is quoted as saying that adding bag fees could end up costing the company in excess of $1 billion per year in lost revenue, as customers abandon Southwest in reaction to the change. On the face of it this seems alarmist – the company still has a number of other strategic advantages, such as lower fares and convenience of travel, not to mention overall customer satisfaction in most other areas of its operations. But there is no denying that the “Bags Fly Free” slogan is an important part of Southwest’s brand image, both in terms of the actual savings (at $35 or $50 per bag it doesn’t take long before we’re talking a significant expense) and also in terms of the company’s image as different from all of the other large airlines; a maverick organization that takes care of its loyal customers. And therein lies the question of strategy…

Southwest has spent most of its corporate existence working on a low-cost strategy – minimizing all possible costs in order to offer the lowest price to the customer while still earning a greater profit on each ticket than any competitor. But to continue on as they have, both of those things must remain true. If they depart from that strategy they may lose customers, as they will almost certainly lose their price advantage over the other airlines. But if they continue to pass up a major revenue stream like the checked baggage fees they run the risk of becoming less profitable than the other airlines, becoming a less attractive investment than other airlines, and losing the support of investors, which will impact their stock price and eventually their cost of capital. Not to mention earning less money in absolute terms…

Sooner or later, Southwest is going to have to decide if they believe they can make more money flying more people (and more people per flight, as well) without baggage fees than they could make by implementing them. Their traditional strategy has served them well so far, but can they continue with it if the add-on fees the competition is charging become the industry standard? Stay tuned, folks…

Thursday, October 24, 2013

Floating Pork?

After my post about the C-27J Spartan project, and its attendant squandering of funds by a Federal government that can’t seem to afford to keep its own lights on, I wasn’t expecting to find anything significantly worse any time soon. After all, it’s hard to picture anything more wasteful than spending hundreds of millions of dollars on aircraft that we’re going to put straight into mothballs as soon as they arrive from the foreign company that is making them. Granted that the C-27 is a perfectly useful airplane, and a few squadrons of them might come in handy at some point, the whole point of buying them was to keep an airbase open in Ohio, which seems silly if all of them are in storage in Arizona. To top that we’d have to imagine a project that spent hundreds of millions of dollars on a single prototype that ends up not working at all, with a design concept so absurd it’s hard to imagine anyone taking it seriously…

Then the story surfaced in the Los Angeles Times about the U.S. Army's Long Endurance Multi-Intelligence Vehicle program being cancelled, and the single $297 million prototype being sold back to the British company that built it for $300,000. That’s right; in this case we paid nearly $300 million for an aircraft we’re not even going to keep and stick in the desert for possible future use. But the numbers don’t really tell the whole story here. Consider in addition that the Long Endurance Multi-Intelligence Vehicle is an unmanned blimp, 300 feet long and 85 feet tall, and was expected to operate at about 20,000 feet over the battlefield for up to three weeks at a time. We should probably also add that the vehicle only ever made one test flight, during which it was determined that the 12,000 pounds of overweight it had packed on during its development had left it unable to lift the sensors and communications gear it had originally been intended to carry…

Now, to be fair, the Long Endurance Multi-Intelligence Vehicle is hardly the most spectacular waste of money and resources to come out of the US Military/Industrial complex. Certainly it has nothing on the $6.97 billion dollars (in 1981 dollars, no less) originally awarded for the M247 Sergeant York air defense system, which was eventually cancelled after repeatedly failing to shoot down a stationary balloon. Lighter-than-air craft have a long history as military observation platforms, and it isn’t too far-fetched to imagine that a drone version of one might be as useful as its heavier-than-air drone cousins. What is truly amazing about the Long Endurance Multi-Intelligence Vehicle project is the amount of money spent on absolutely nothing of substance – and the fact that such programs are still being funded after the failure of the M247, the A-12 attack aircraft, and so many others that have not only failed but also left their supporters open to mockery over the decades…

Back in the 1940s and 1950s anything having to do with atomic weapons was in vogue; projects that could even vaguely offer additional nuclear capability were funded despite a complete lack of reason or sanity, such as the Davey Crockett rifle, otherwise known as the “Atomic Bazooka” – a weapon with a range of a mile or so and a blast radius of almost three-quarters of a mile. In the 1960s anything that could possibly help us beat the Soviets into space was going to get funded, and during the 1980s anything that could help keep them from overrunning Western Europe had top priority, however implausible it might be. So it’s hardly surprising that in this time, when unmanned combat vehicles are the in thing, that an unmanned platform that could remain on station for weeks at a time would find acceptance despite being the stupidest-looking idea to come along in fifty years…

I’m hoping that this will remain the worst example of government excess for a while, or at least the worst example of our government spending hundreds of millions of dollars it doesn’t have on crackpot aerospace development programs that a small child could have told them were silly ideas for a while. But I am very much afraid that it won’t be. Keep watching the skies, folks…

Wednesday, October 23, 2013

Getting More Complicated

If you tell people that the world in general, and the world of business in particular, are becoming more complicated all the time it’s unlikely that anyone will argue with you. Just in our lifetimes – and I’m not really all that old – we’ve seen things like the fall of Soviet Communism, the rise of e-commerce, and the development of a truly global economy, just to name three examples from the last twenty years. There was a time when all an American company needed to do in order to be considered a success was to develop a product (or reverse-engineer an existing one) and then sell it for a better price or with better features and quality for the same price than the competition. Today we have to contend with such diverse problems as the socio-political impact of our success or failure, whether our business is culturally, ethnically, ethically or ecologically sensitive, whether there is any way that our business could be considered a security risk by either Homeland Security or the NSA, and whether the Chinese government has decided to pick on our pricing decisions…

In case you missed it, you can find the original story on the Wall Street Journal site here; they have some good commentary and support information. Apparently, China’s state-run broadcasting network has started airing a 20-minute program attacking Starbucks for allegedly charging higher prices and gaining higher profits in China than they do in other parts of the world. Starbucks has replied that its pricing is based on a variety of factors, such as labor, real estate, and infrastructure in the country in which they are operating. The article doesn’t mention it, but given the company’s usual strategy involves moving large amounts of product from Seattle to wherever their store is, and requires a number of local commodities (notably water) that can be difficult or expensive to obtain in other parts of the world, they may even be telling the truth. What is unusual about the situation is that it’s a national government doing the criticizing, as opposed to the citizens voting with their feet…

Most places in the world that have free-market economies also have limitations on what price you can charge for goods and services – occasionally governmental regulations, but mostly just what customers are willing to pay for that product. You couldn’t get away with charging $500 a cup for coffee in the US – not because that’s illegal, but because no one would pay that. As I’ve observed in earlier posts, there are a few places in the US where you can find specialty coffees going for as much as $10 or $12 a cup, but that’s rare, with $2 to $3 being more common. Some people refuse to pay even that much, considering that they can make their own coffee at home for as little as a few cents a cup. But that’s because in the United States coffee is a staple food item that most people take for granted as part of their regular diet; in China things are a bit different…

Several of my colleagues from China have told me over the years that in their country, Starbucks is a luxury product, and indeed a status symbol. If you are drinking Starbucks in China you are clearly a person of sophistication and taste, not to mention wealthy and powerful enough to be able to afford a cup of coffee that costs as much as some people make in a whole day! The equivalent in our terms might be people spending $200 on a bottle of champagne – it’s an example of conspicuous consumption, if not outright wretched excess, but ultimately no better or worse than squandering your paycheck on any other high-status but non-essential purchase. If people in China are willing to pay those prices for the product then it is difficult to fault the company for charging them, and if people in China were not willing to pay such prices the company would have to lower them until a new price point appeared…

In a free-market economy, the idea of not charging more for a product in a place where people will pay that higher price literally makes no sense – this is why cups of beer that cost less than a quarter are sold for $7 at sporting venues, for example. If Starbucks was offering sub-standard products, or ones that were actively hazardous to their customers then the government would certainly have a point. But unless I’m missing something in the article, all the company is doing here is selling customers a product that they wish to purchase at a price that they are willing to pay. And yet, a national government is still taking them to task over it…

No doubt about it; the world is getting more complicated again…

Wednesday, October 16, 2013

A Fish Tale

It was one of those stories that's supposed to just make you feel better about things in your own country, sort of the way going to the county fair can make you feel better about the people in your own family. With the deadlock in Washington reaching new levels of idiocy this week, and the debt ceiling deadline looming on Thursday, business and community leaders from around the world have been calling for an end to the shutdown and a resolution to the debt ceiling before the US political crisis touches off a world-wide economic disaster. This has led to incredulous comments from community leaders in several foreign countries, asking if anyone else in the world could possibly be as outlandish as the Americans are being at the present time. So if there was ever a time to run a news story saying "At least we don't have any giant brass monuments shaped like a puffer fish in the United States," now was probably that time...

You can pick up the original story from the New York Times (complete with some really amazing pictures) here if you want to, but it’s pretty straightforward: in Jiangsu Province in eastern China the city of Yangzhong has constructed a 2,300-ton brass monument in the shape of one of the beloved river puffer fish native to the Yangtze River. The fish tower is 15 stories tall, 295 feet long, and features an elevator to take visitors to the top of the structure in order to view the local sights. It’s certainly a remarkable promotional tool for the local gardening expo, and unique enough (and whimsical enough) to draw news headlines as far away as New York City. It’s unfortunate that it would appear in the International news at the same time that the Chinese government has been committing itself to new austerity measures…

Now, I don’t mean to suggest that there is anything wrong with a city or local community developing tourist attractions in order to bring more visitors and more money into their economy. For that matter, a project like this has to have created (or at least sustained) a huge number of jobs in the construction, transportation and metal-working industries in order to create and assemble the Fish, all of which would have far-reaching positive effects on the regional or national economy. Even more to the point, perhaps, it takes time to design and build a 2,300-ton bronze monument, which means that this project had been going on for a number of years before anyone got around to announcing the new austerity measures. The timing could undoubtedly be better, but when you get past the apparent absurdity of the story you realize that while the giant fish may be gaudy there is actually a strong argument to be made in favor of the project…

What seems to be getting lost in all of the shouting these days is that the present situation in the US has also been building for a number of years, and is also much more complex than meets the eye. The polarization of the political process in America did not begin two weeks ago, with the end of the funding agreement; it didn’t start last spring during the fight over sequestration and it didn’t begin with the passage of the Affordable Care Act. The storm currently breaking over Washington has been brewing for decades, and a large part of it has to do with people on the far Right (who seem to believe that we are living in the End of Days, and it’s every man or woman for him/her self) and people on the far Left (who seem to believe that everyone can have everything they want and no one should ever have to pay for it). What’s ironic is that the people who build giant brass fish during an austerity program think the people who are fighting over access to affordable health care are silly, while the people who are destroying their own government, international reputation, economic stability and way of life think the people who build giant brass fish during difficult economic times are funny…

It amazes me sometimes that there’s still a planet here to live on. And I worry about how much longer that will be the case with shenanigans like these becoming commonplace…

Tuesday, October 15, 2013

How Does This Relate?

Imagine for a moment that you are the owner of a successful business, and you want to expand your operations. There are a number of ways to go about this directly, such as opening new markets, moving into new customer demographics, or trying to take business away from your competition. Alternately, you could move into closely related products or services – if your company currently makes hammers, for example, you could move into screwdrivers or files, or other products that are made from similar ingredients (tool-steel) and marketed to similar customers (hand-tool users). This will increase your potential revenue, and will also provide some protection against disturbances in the market – if the market for hammers drops off, the market for screwdrivers may not. This type of strategy is referred to as related diversification; it’s distinct from unrelated diversification, which would be expansion into completely unrelated industries. For example, if we own a company that makes hammers and we decide to open a flower shop. Or, perhaps, if we own a company that makes and sells men’s clothing and we decide to open a restaurant…

Whether you consider unrelated diversification a valid strategy or not is a matter of personal preference, but you may want to watch how Brooks Brothers does with their steakhouse before you make your final decision on that point. A story in last week’s New York Post claims that the famous retailer is planning to repurpose a large retail space around the corner from its New York flagship store into an upscale steakhouse sometime during the 2014 calendar year. There are no details yet, but New York City is already home to a number of premium steak restaurants, and it seems obvious that anyone attempting to break into that market will require more than name recognition and a clever stunt to get the public’s attention. If the company can somehow come up with an absolutely top-grade steakhouse operation they might be able to compete on either cost or value or both, and if they can use their name recognition to get people to come in and try the place, they might have a chance…

How likely any of that is remains to be seen. Clearly the company has a well-established brand image that goes back to 1818 and conveys the impression of superior quality and workmanship, if not the most competitive price. And this is hardly the first attempt to use an unrelated brand and/or reputation to develop a food service operation. In recent years we have seen a number of companies not normally associated with food open (or license someone else to open) branded restaurants using their name and logo, notably including cable television network ESPN and motorcycle manufacturer Harley Davidson. And while the company does not appear to have any significant experience in food service, they are very well known for both superior customer service and world-wide product distribution. With over 300 retail locations in place and a number of possible ways to cross-promote products, this idea may not be so odd after all…

I can’t help wondering how many other companies might be contemplating similar moves – or would if they saw Brooks Brothers pull this off. Would we next encounter McDonald’s sportswear? Apple coffee houses? Starbuck’s health and beauty products? The one constant I have noticed in my years as a business teacher and a management consultant is that no idea is too outlandish that someone somewhere hasn’t considered turning it into a consumer business – and if bacon-flavored salt, vodka and personal lubricant can all be winners, what’s wrong with a super-premium retailer branching out into a super-premium restaurant?

This isn’t to suggest that the new venture will be easy, if it isn’t just a publicity stunt in the first place. I’m just noting that it won’t be the strangest thing we’ve seen this week, let alone this decade…

Monday, October 14, 2013

I’d Buy That For – Actually, No, I Wouldn’t…

There’s a new product coming out this winter from GM that has great potential, both in bringing the company into new product categories and selling a lot of units, but about which I find that I’m dubious. All hype aside, it’s basically a Cadillac version of the highly controversial Chevy Volt hybrid – with all of the elaborate body-styling, leather interior and other optional extras that implies. But the guts of the vehicle are virtually identical to those of the Volt, including the troublesome (and occasionally incendiary) battery pack, performance should be similar in all categories, and without the Volt’s hatchback the design may look better, but is significantly less practical – all of which is a problem given that the Cadillac version is priced at over twice the MSRP of its Chevy progenitor…

You can read the Wired online story about it if you want to, but they’re not that positive about the car either. For one thing, the $75,000 GM is asking for the Cadillac ELR is high enough that you could purchase a number of highly-regarded competitors for the same money, including the Tesla Model S, the Mercedes-Benz E-Class Hybrid, the BMW 5-Series Hybrid, the Acura NSX and the Porsche Cayenne Hybrid instead. For another, the ELR has a number of optional features that remain unreliable, even apart from the power plant, like the CUE entertainment system. But mainly what they are questioning is whether adding the Cadillac nameplate and logo will be enough to double the price people are willing to pay for the vehicle – and there is historical justification for questioning that…

Some of our older readers (assuming I have readers) may remember a product called the Cadillac Cimarron from the 1980s’ – it was the compact car in the Cadillac line at that time, and the company had difficulty selling them because the Cimarron looked almost exactly like the Chevy Cavalier of the same period, only with some chrome bolted on and double the purchase price. This was, of course, because that’s exactly what the Cimarron was; the majority of the car’s parts were interchangeable with the Chevy and Pontiac versions (the Sunbird, in the later case), only at twice the price or higher. The ELR has all of the same problems, including the legacy of cars like the Cimarron to muddy the waters, but from where I’m sitting it has at least one problem that is even worse…

Consider the traditional customer demographic for the Cadillac line. Developed by GM specifically to create an up-market product for people who had grown too successful to drive Pontiacs or Buicks, the Cadillac has always appealed primarily to older customers from higher income categories, both as a demonstration of wealth and because they can afford the extra comfort of the car’s optional amenities. In recent years the brand has met with increasing popularity in several other segments, notably including the rap music community, because in addition to the established prestige associated with Cadillac, the vehicles can be easily customized to conform to the owner’s vision of status, showmanship and visibility. What I question is whether either of these groups will be interested in a small, cramped, under-powered and very expensive vehicle whose primary selling points are high gas mileage and low environmental impact…

There are environmentalists in both of these communities, of course. And we can easily imagine that at least some Cadillac buyers might find the idea of lowering their gas bill by as much as 75% to be intriguing. But such individuals have had access to other hybrid models for nearly a decade now, including the highly successful and relatively prestigious Toyota Prius; it’s difficult to imagine that anyone who is motivated by either lower emissions or higher gas mileage wouldn’t already have migrated into the hybrid market. If the ELR proves to be the equal of the Tesla, Mercedes or BMW offerings from a mechanical and efficiency standpoint it might be able to complete on value, but the company as a whole has been having difficulty competing for the luxury sedan market for some years now, and the questions about whether the bugs have been worked out of its systems will not help. Unless Cadillac can reach a new customer demographic with this product, or somehow convince their existing customers to start accepting the ELR’s strong points as being worth switching to, it’s difficult to imagine this ending well for GM…

Sunday, October 13, 2013

The Ethics of Overbooking

Yesterday’s post was about the changes in how consumers are viewing the common airline tactic of overbooking a flight, and I mentioned at the time that the ethics of the situation were a bit more complicated that you’d probably think. On the face of it, overbooking a flight appears to border on outright fraud: the company is selling product that they don’t have, on the assumption that at least some of those being defrauded either won’t notice or will have screw-ups of their own which will be sufficient to keep them from using their tickets. But a closer look raises the questions of what else can you expect them to do, and can you accept the consequences if they don’t?

First of all, consider that it the airline does not charge people for changing their flight reservations it can almost certainly expect that people will blow off their original flight times at the drop of a hat, and still expect to be accommodated whenever they eventually make it to the airport. I say that because people already behave this way, and many of them will then become incensed upon being told that there will be a charge for re-routing them. I can’t think of any other type of business in which customers routinely order a product or service, then decide not to use it, and then demand to receive either a replacement or a refund, despite the fact that the vendor provided exactly what they ordered and had it ready at the agreed-upon time and place. No retailer or craftsman would tolerate such behavior, and if you did that at a restaurant you might succeed in getting your money refunded, but you’d probably be banned from the establishment afterwards…

At the same time, as noted yesterday, any airline which takes concrete steps to prevent this type of abuse – by only offering non-refundable tickets, charging large fees for rebooking passengers or the like – will quickly begin losing customers to other carriers that have less draconian rules. And if the company raises fares in general to cover the cost of operating flights with empty seats they are unlikely to retain any passengers, at least in any of their lower fare categories. But while customers will not tolerate higher fares, higher fees, or not being able to refund/rebook tickets whenever they like, they generally will accept a (relatively) low chance of being the unlucky souls bumped off an oversold flight – provided that it remains a relatively low probability…

If we accept that these conditions are relatively fixed – or, at least, that they are beyond the power of the airlines to change – then we must ask what alternative these companies have in regards to overbooking their flights. Losing all of their customers to the competition and going under is not an acceptable option; neither is spending more running half-empty airplanes than you can make on the airfares and simply going bankrupt. And having these companies go under isn’t good for the rest of us, either. Quite apart from the damage it would do to our economy if all of their employees are left without jobs, all of their vendors lose their business, and all of the people who work for those companies are left destitute, the more companies the go under the fewer options that will be left on each flight route, and the less pressure there will be on the few surviving airlines not to abuse their customers still further…

Which brings me to the question: if overbooking flights is the only way for an airline to stay in business, and if the failure of their company will do harm to their stockholders, their employees, their vendors and their stockholders, and eventually even to the customers of competing carriers, does all of that harm outweigh the consequences of people occasionally being bumped off of flights? No one is saying that people who have paid for transportation at a specific time and place aren’t being materially damaged by not receiving that service, or that there couldn’t eventually be some serious consequence of someone being denied the passage they need. But given this choice of disasters, is the inherent iniquity of being temporarily deprived of a service for which you have paid actually bad enough to require the consequences? Or, to put it another way, does the airline’s ethical responsibility to get its passengers to their destinations as quickly and safely as possible outweigh their ethical responsibility to their other stakeholders to provide jobs, drive the economy, and provide modest return on investment?

It’s worth thinking about…

Saturday, October 12, 2013

Collision Course

I was reading a story the other day about passengers in Canada being bumped off a commercial flight and reflecting that things people seem to be taking a different view of these events from years past. For as long as I can remember – about forty-five years at this writing – getting bumped off of a flight was a regular part of air travel. Airlines don’t like to discuss such things, but every airline ticket includes a bunch of boilerplate about conditions under which they don’t have to transport you anywhere OR give back your money, and what they are required to do if any of those conditions occur. I’ve had flights cancelled because of weather, equipment failure, and because there were only a few of us ticketed on the flight and the company figured it would be cheaper to pay for our hotels for the night than to lose that much money flying an almost-empty plane. I’ve also seen people get bumped – denied passage on the flight for which they purchased tickets – because the airline had over-sold the flight, although that happens less in recent years since the airlines have started offering people free tickets and other travel rewards to voluntarily give up their seats. But I’ve rarely seen anyone start demanding that their national government take action about such an event…

You can pick up the original Yahoo story here, but the basic idea is a couple was flying home from a vacation when they were bumped off their flight because Air Canada had sold more tickets on that flight than their airplane had seats, resulting in their not being able to get home in time to pick up their small children from the sitters who were watching the kids. In the end, the parents were most of day late in getting home, after the airline finally bumped someone else to make room for them on a later flight. As atrocities go it’s not very impressive; I have no reason to believe that the children were ever in danger, for example, and there is no indication that being delayed had any significant long-term effect on the passengers – although I doubt they will take any chances with their timing in the future. What struck me about the story was the outrage it seems to have generated, and the complete lack of understanding regarding why this practice will almost certainly continue…

I’m not going to argue the ethics of overbooking an airplane knowing that for a non-zero percentage of your flights that will mean that some people fail to make their destination; that’s a post for another day. But why does anyone use this practice in the first place? It seems as though a business that is essentially a commodity – most passengers don’t really care which airline they fly on, provided it gets them where they want to go on time – would want to make every attempt to maintain good customer relations and a positive public image. What the passengers don’t realize is that they are the cause of overbooking, and that it occurs because they demand it…

If an airplane takes off with empty seats it is losing money; the fuel savings (because of the lower weight onboard) do not approach the revenue lost on those empty seats. But not all passengers will be able to be on time for every flight, so the airline sells more than 100% of the seats, hoping that enough people will fail to show up to make good the overage. The airline could cover those costs in other ways, of course – through the use of expensive fees for cancellation or rebooking of a flight, or by raising the overall ticket price to cover the cost of people dropping out at the last minute. But passengers will not tolerate either of these things, and will gravitate towards airline with lower prices and fees, even if their chance of being bumped off a flight is much greater. It’s still a chance, you see, whereas the higher fares and fees are a certainty…

Time was, being bumped off of a flight was an unpleasant event, but it didn’t happen all that much, and most people just accepted it as a possible consequence of flying. Today, more and more people are missing their flights, or simply blowing them off, but still demanding low fares and minimal rebooking charges – and when they don’t get their own way, they’re complaining to their national governments or bringing civil lawsuits or both. But the costs of that litigation and government action increase the cost of doing business for the airline, and all of the prices they charge the customer have to be raised to keep pace. If we’re really in a feedback loop, and if nothing is done to stop it, eventually the current airline business model will become completely unsustainable and the industry as we know it will collapse…

Not exactly the end of civilization, I admit. But I still hope I’m wrong about this…

Tuesday, October 8, 2013

Flying Pork?

I could do an entire blog about government waste, assuming anyone wanted to read one and assuming there aren’t enough blogs on that topic already, but mostly I stay off the subject because my credentials are in management. But business strategy and policy (the subject I am currently teaching) considers all aspects of the business environment, and it is difficult to argue that the squandering of tax dollars and the lavishing those dollars on projects that won’t do a bit of good for anyone except the shareholders of the companies that make them (and the politicians standing for reelection in the districts where those projects take place) is part of that environment. So let’s consider the case of a government “pork barrel” project so absurd that the products being produced are going into mothballs the moment they arrive…

According to the story off the Fox News site, the Air Force has been sending its newly-delivered C-27J “Spartan” light transport aircraft directly to the “boneyard” long-term storage facility at Davis-Monthan Air Force Base in Tucson. So far 16 airplanes of the 21 included in the $567 million contract have been delivered, and the five remaining units are expected to follow within the year or so – whereupon they will probably join the others in Arizona. The Air Force can’t cancel the rest of the order because the airplanes are almost completed and it’s past the cancellation deadline in their contract. But following the drawdown in defense spending as a result of sequestration last spring, the government can’t afford to operate the C-27s, or to assign personnel to keep them ready…

The Fox article, in a rather inflammatory headline, claims that the government is still ordering these aircraft, even though it is sending the delivered units into long-term storage; the text makes clear that they are only fulfilling the terms of a previously-signed contract. It’s actually the later part of the story – which details how these aircraft were demanded by the Senators from the state of Ohio because the C-27 squadrons were going to be based in that state – that really provokes a sense of outrage. Well, that and the fact that the contract was originally going to be for over 40 of these things, costing over $2 billion, during a time when our government can’t even seem to agree on paying for basic health services…

Even worse, in the pork-barrel project sense, is that these aircraft aren’t even being built by an American company. They’re produced by Alenia Aermacchi, an Italian firm based in Rome. Thus, we’re not even getting the multiplier effect from the $567 million; the only possible benefit to our domestic economy would have been the jobs provided by the squadrons operating out of Ohio. I fully agree with keeping our bases open, assuming that we can afford to do so, and I certainly understand how much the local economy in Ohio would have benefitted from this one. I don’t even object to spending $567 million dollars on light transport aircraft that we may or may not actually need; I object to paying $567 million dollars for military aircraft we’re not going to use. Which is to say, paying hundreds of millions of dollars we haven’t got for absolutely nothing…

From a business standpoint, I have to ask if it wouldn’t have been better to just spend a smaller amount of money keeping the relevant airbase open in case we need it later. We could probably find some use for it in the meantime. After all, the C-27J Spartan project isn’t the only barrel of pork whizzing around in the air – and sooner or later they all are going to need somewhere to land…

Monday, October 7, 2013

Are you Kidding Me?

There are times when you run across a news story and just have to wonder if the author, or the company on which he or she is reporting, perhaps, are having a small practical joke on their readership. As I noted in our discussion of April Food’s jokes perpetuated by businesses, this sort of thing isn’t actually common, at least in the United States. Everyone like a good joke – almost everyone, at least – but very few people enjoy being made fun of by people who are also asking them for money in the form of consumer purchases, and even if they do it’s difficult to imagine anyone who would like this sort of practical joke enough to increase their consumption of the company’s product. But some people do insist on trying advertising of this type, and thus I had to look twice when I saw the story online about United Airlines putting smaller seats onto some of its aircraft…

You can pick up the original story off the Chicago Tribunewebsite if you want to, but basically what United is doing is re-configuring the seating on its CRJ regional aircraft to include an extra row of economy-class seats – in effect, adding 4 passengers to the capacity of each flight, or just over 6% more. They are doing that in part by introducing thinner seats – specifically, seat units with thinner backs and bottoms, although as far as I can tell, not any narrower than the existing seats on the CRJ models. The company insists that all of the seats (including the new ones) will have just as much legroom as ever; that the space savings in the thinner seats frees up enough room for an extra row of them, and further, that the new seats are light enough to make up for the weight of four extra passengers as well…

Now, if the company is telling the truth about the seat sizes – and there’s no reason they should try to make the seats any narrower, since there would still be no way they could fit an extra seat into each row – there shouldn’t be much effect on your personal experience in flying on one of their “upgraded” CRJ units. Flying on a CRJ is already a miserable experience if you are over 5’10” or weigh more than 200 pounds, but unless the new seats are less comfortable to sit in (which would be a real challenge in itself) I’m not sure why the average flyer would care. Unless you are actually sitting in the new last row of seats there shouldn’t even be much impact on how long it takes to board or deplane the aircraft. And it is possible that this is the move that all of the airlines have been looking for…

Consider that United is going to put this modification onto about 500 aircraft; if each airplane averages just two flights per day (allowing for maintenance and down time between flights) that’s 1,000 flights, or about 4,000 additional passengers – about 1.5 million additional customers per year. If each of those passengers is paying $100 for their tickets, that’s $150 million per year in additional revenue, supposedly without any increase in costs relating to salaries, advertising, aircraft depreciation or maintenance, or even fuel. The airline will literally be drawing more profit from each of its airplanes on each of its flights, rather than attempting to squeeze more money out of customers with an additional round of preposterous add-ons and infuriating service fees…

It remains to be seen if this new strategy will work, largely because it remains to be seen if the new seats are actually as comfortable to sit in, if the legroom and personal space are really unchanged, and if people react well to learning that their new seats are “thinner” than they were previously. But compared to slapping on new fees for breathing, sleeping or sneezing while on board, this concept looks like it might just work. Even if, on the face of it, the headline is enough to make you wonder if they’re kidding…

Sunday, October 6, 2013

The Ethics of Pink

There was an article this week in the Guardian online site regarding the use of October as Breast Cancer Awareness Month and the proliferation of pink products – or things temporarily give a pink package with the promise of donations made to various anti-cancer groups. One of the author’s points was that while the donations are all very well and good, most of the companies offering a temporary pink label are also using their participation in such programs as a marketing tool – the idea being that you will be more likely to purchase additional cartons of yoghurt, for example, if you think some of the proceeds are going to a good cause. The author – and a number of other Survivors I have known – would really prefer that you buy as much yoghurt (or whatever) as you were going to purchase anyway, and then donate the extra funds directly for anti-cancer research and treatment. I thought we should take a closer look at the question…

On the one hand, there is no doubt that some donations to anti-cancer groups are better than no funds, and any activity which helps lead to a cure – or even wider prevention and treatment – of this horrible disease is a good thing in my book. By the same token, it’s difficult to argue with additional awareness efforts. All charities and causes tend to get lost in the clutter of the hundreds (or thousands) of other agencies trying to raise funds for their particular issue, and having brightly-colored packages placed in public to remind people of your cause is certainly a good thing. If seeing a pink carton of dairy products reminds someone that people in their community needs help, and part of the sale price of those products is being donated to that cause, it’s difficult to see how the company taking part is doing anything wrong…

By the same token, however, it’s also difficult to argue that buying one carton of yoghurt to generate a 30-cent donation and then donating $3 directly is going to have more impact than buying two cartons and generating a 60-cent donation would. And if the company is donating 10% of their profits, not 10% of the purchase price, the actual impact of the product-purchase donation is going to be even smaller (12 cents versus $3.06 in the example given above). More to the point, perhaps, unless the company is donating more money than what they will be getting from the extra sales they can reasonably expect to make as part of the promotion, this whole exercise becomes a revenue-enhancement for the company, to say nothing of whatever future sales increases they may experience once consumers get used to using double portions of their product…

No reasonable person is going to expect a for-profit company not to pursue profits; as previously noted in this space, that is why companies exist in the first place, and their success can be demonstrated to have a positive effect on the quality of life experienced by their employees, their stockholders, and ultimately everyone else connected with them. But if one of these awareness month promotions involves spending $1,000 on an un-needed consumer product (the author’s example is a pair of pink shoes) to get a $50 donation, as opposed to buying a $200 pair of shoes and donating another $200 to anti-cancer research (and banking the rest for more important uses), then it’s hard to say if this is more to the benefit of the charity or the shoe company. Which leads me to the question:

Assuming that a for-profit company wants to contribute to anti-cancer research, treatment and awareness, do they have any ethical responsibility to ensure that any resulting uptick in sales does not benefit them more than it does the charities they support? Can they reasonably assume that a customer’s extra disposable income would have be donated to charity if it wasn’t spent on their product? If their pink promotion does result in higher donations to cancer-related charities than those same agencies would have had without the promotion, does it really matter if the company does well for itself out of the deal? Does our answer change if the company’s success allows them to offer better wages and better health coverage, allowing more of their employees to get appropriate screenings and treatment for cancer themselves? And in any case, where do we draw that line?

It’s worth thinking about…

Saturday, October 5, 2013

Adventures in Supervision

One of the questions we can discuss endlessly – but never actually solve – is the issue of how closely employees should be supervised while on the job, and whether the resulting layers of management are really worth the cost. On the one hand, span of control research is reasonably conclusive that the largest number of subordinates (or subordinate units, when you get to higher levels) any given manager can handle is 5. Or, at least, it’s as conclusive as you can get in a soft science. On the other hand, there’s good evidence that over-supervision, or micro-management, is just as harmful to the company’s successful operations as too little. Personally, I believe that a universal rule isn’t possible, and that the exact amount and degree of supervision will vary enough from one team to another, or even one shift to another, that the only reasonable approach is to hire good managers, train them well, and let them decide case-by-case from then on. But however you do it, there’s a wealth of evidence that supports the contention that someone needs to be watching…

Take, for example, a story that popped up on the DetroitFree Press website this week, about a Muslim customer who is claiming that servers at a TGI Friday’s in Garland, Texas, tricked her into eating bacon. The story goes that the customer requested the bacon be left off of a Cobb salad, and this for some reason offended the wait staff. So one of them decided to stuff a plastic drinking straw full of bacon and serve it to this customer in a glass of tea. When presented with this lapse in judgment, the restaurant’s manager refused to believe the customer, which could only have made matters worse. The company is declining to comment, pending an internal investigation, while the story goes viral and millions of scruffy bloggers repeat it around the world, embellishing just a bit in each telling…

Neither of us were present when these events took place – unless someone who works in that TGIF location is reading this post, in which case please leave me your perspective on the story in the comments. Based on what I’ve heard so far, however, there are only two possibilities in this case: either the customer is telling the truth, or she is not. If not, we should probably ask the obvious questions of how she managed to obtain one of the company’s drinking straws, fill it with bacon, and smuggle it into the restaurant undetected – and what she expects to gain by doing so. Feeding pork to a Muslim is a vicious cultural insult, but no actual physical harm seems to have come to the customer as a result of this “prank,” and I’m dubious about her chances of suing successfully over this, especially in Texas. On the other hand, if she’s telling the truth we have to ask why the TGIF employees thought they would get away with such an insult, or if they are really stupid enough to risk their jobs and a possible lawsuit over a minor practical joke. In either case, however, we need to ask where the line supervisors were when all of this was going on…

Now, I don’t mean to suggest that it would be desirable to observe every member of a busy restaurant’s serving team every minute of every shift, even if that was possible. But a properly-trained, properly-managed employee would know better than to do any such thing, and much more to the point, any good employee would not want to risk damaging his or her own company for a joke. If TGI Friday’s is employing wait staff who are so poorly trained, limited in experience, devoid of people skills, or hostile to the company and desirous of its destruction that they would actually do something like this, both their Human Resources personnel and whoever was supposed to be supervising the staff at this particular store need to be reprimanded, and quite possibly moved to less sensitive duties. And if the manager and/or supervisors of this location are too over-worked or too oblivious to look out for scammers (at least those dedicated enough to bother stuffing drinking straws with bacon) then the company needs to send them more help, as soon as possible…

Because unless the person or persons responsible are identified and dealt with appropriately, I can almost guarantee that the company will have to deal with similar human resources failures and/or scams just like this one again in the very near future…