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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

Caution: Fragile

I was reading a story off on the AP by way of the Seattle paper about one of Tesla Motor’s cars catching on fire and burning into slag when one of the later paragraphs caught my eye and it occurred to me just how fragile a new business really is. There’s no indication yet that anything was wrong with the vehicle; the crash investigators on the scene said something about debris from a crash getting into the battery pack and starting a fire, but there’s no indication that the driver or the design had anything to do with it. Cars do, after all, crash sometimes, and gasoline-powered cars catch on fire and burn down to their chassis every day in America. No one was hurt in the incident, the car didn’t explode, there were no toxic spills mentioned or innocent bystanders placed in jeopardy. No, what makes the story so surprising is that Tesla’s stock price dropped by 6% almost immediately after the story broke…

You can pick up the story from the Seattle PI web page here if you want to, but the basic story is a fairly routine traffic incident. If the car involved had been any conventionally-powered model, or even one of the newer “clean diesel” or E85 “Flex Fuel” types, this wouldn’t have rated more than a few lines in the traffic news section on page 47 of the paper. But because the Tesla Motors products are so new, and so expensive, and so exotic – and because the company has gone to such lengths to tout its products as exceptionally safe and reliable – this story was everywhere in a matter of hours, and the investors who were already uneasy about a new and unconventional company in a troubled industry began to edge away toward the exits while trying to look innocent…

This is hardly the first time this sort of bias against an unorthodox company has appeared in the media, and it certainly won’t be the last. The reading public – online even more so than in the real world – loves some schadenfreude, and all of the people who didn’t pay $120,000 for a car, let alone one that has huge batteries made out of toxic chemicals we don’t know how to dispose of safely and apparently sometimes catches on fire, can get a warm feeling of being smarter than those rich, trendy, early-adopter types who have. What struck me as remarkable about this – and the reason I’m wasting your time calling it to your attention today – is that this isolated incident, which so far does not appear to involve anything wrong with the product or the company that produced it, has immediately resulted in people who should know better bailing out on the company…

Now, it’s possible that all of the investors in this story have other reasons for going sour on Tesla Motors, and this incident and its attendant bad publicity is just what pushed them past the tipping point. It’s also possible that the negative publicity really will lower public acceptance of the company’s products, or just lower sales, enough to damage their business prospects and make the company less attractive as a long-term investment. But none of that changes the fact that all of the decisions are being made, at least in part, because of a single traffic event in Washington State that, as far as I can tell, has had no significant consequences for anyone except whatever insurance carrier was covering the driver…

It’s enough to make you wonder how any start-up company offering any innovative or unorthodox product manages to stay in business long enough to achieve mainstream acceptance. And while I can’t say for sure that this is a fundamental cause of the decline in the American manufacturing sector over the past few decades, it certainly goes a long way towards explaining why no one has successfully launched a new car company in the last 50 years…

Suspension Failure

Most people are familiar with the concept of suspension of disbelief in film, television and drama – which is to say, we all know that we’re not really looking through a magic archway into someone’s living room when a sitcom comes on, for example. And while not everyone cares enough about these media to know what a suspension failure (it’s sometimes called a “rupture”) is, just about all of us have felt one. It’s that moment when something about the work, either in the plot, the dialog, the setting, the performance, or some other factor is so wrong that it breaks through our ability to suspend our disbelief; it takes us out of thinking in terms of the story (“Wow, this guy is a jerk!”) and into thinking in terms of a work of art we are watching (“Wow, the author didn’t explain anything about why this guy would suddenly start acting like such a jerk. And the actor clearly isn’t familiar with the source material!”). Most often these occur when something so outrageous that even the internal logic of the setting cannot account for it appears on the screen; something so preposterous that you just can’t suspend your disbelief enough to stay with the story…

Consider for a moment if I started telling you the story of a major multinational oil company that was drilling for petroleum deposits in the Gulf of Mexico, and just to make them look like a collection of clowns I told you that they had complied a 600-page manual of procedures to follow in the event of a deep-water well blow-out, but only 1 page of it actually had anything to do with stopping the massive spillage of crude oil into the ocean. You probably wouldn’t believe me, but you might go along with it. Now suppose I added that the one page about stopping the horrible effects of the oil spewing out of the broken well just said “hire somebody who knows how to stop it.” You’d assume that I was not only making this up, but exaggerating for humorous effect. But if I told you that the whole 600-page travesty had not only been read by the relevant Federal authorities, but had been approved, you tell me this was nonsense and admonish me to stop making up such wild tales…

Unfortunately, if today’s testimony from the ongoing trialconcerning the BP disaster in 2010 is correct, I’m not making any of this up. The various oil companies drilling in the oceans off our coastlines have been fighting tooth and nail for fifty years to avoid any regulation, let alone safety and environmental protection regulations, that would impact their profits in the slightest – and they’ve spent huge sums of money electing representatives to Congress who would prevent such laws from being enacted, or at least make those measures impossible to enforce. At the same time, they have denounced anyone who would support such laws as anti-business, anti-American, environmental extremists, or any other epithet they could imagine. And they have succeeded so well that these standards a small child would call laughable weren’t even illegal – and nothing was done to prevent the inevitable disaster…

So let me be very clear about this: I’m not anti-business; I’m anti-idiot. I don’t blame the oil companies from taking advantage of laughable excuses for environmental protection laws in order to maximize prices; that’s their job. And I don’t really blame them for lobbying to get those laws onto the books; if such activities are legal and permissible then the companies haven’t done anything wrong there either. But if we want to have a country that is governed for the benefit of us, the people, and not by and for the oil industry for its own enrichment, then we need to start demanding accountability from the people in Washington who are supposed to be passing such laws and regulating such operations but apparently don’t because the current system works for them almost as well as it works for the oil companies themselves…

And if we don’t, I can almost guarantee you that this won’t be the last news story to come out of that industry that will defy your wildest imaginations…