The Subversive Strategist

Why Baggage Fees Are Likely Helping Airlines Lose Money

2010-05-16T09:06:00.001-04:00

So, I was boarding a flight recently and realized the real effect of baggage fees beyond customer dissatisfaction and general proof point of airline industry desperation to make any money.

As I was boarding the flight, everyone had a carry-on and a small bag. Everyone's observation is that passengers are now incentivized to carry on as much as possible to avoid the fees. What was interesting is how much it slows down the boarding process when almost everyone has a carry-on. For this one particular flight, the plane was delayed in taking off for two reasons: a) the gate agent had to wait for them to tell her if there was anymore room on the plane for additional carry-ons and b) carry-on bags that didn't fit were gate-checked (at no charge to the passenger).

It'd be interesting to see how much the airline loses for every minute they stay on the ground because if it's a relatively large amount, say $100, then staying on the ground for an extra 10 minutes would cost the airline $1,000. I suppose as long as they're making more than that in baggage fees, it's worth it. We know from Southwest's business model that their planes are on the ground for fewer minutes than any other airline, a source of competitive advantage.

My guess is the baggage fees might outweigh the flight delay costs by a little, but if you add in the customer ill will caused by this policy, I would contend it's a losing proposition.

Posted via email from T from the D

YAPRC: Yet Another Post Regarding Consolidation

2010-04-23T19:08:00.001-04:00

Ad Age usually provides news and interesting points of view. Not today. Someone has gone and repeated that the online advertising value chain is extremely crowded and is ripe for consolidation. Usually, comments to posts are usually folks arguing over arcane points, but in this scenario, the sole commenter (at least when I read the post) calls him to the carpet:

When everyone decides to take their bat and ball home with them, these middlemen are going to be left with aging IP that does not generate revenue. No one, at least in 2010, is ready to make a big bet on technology. It ages too fast.

Eh. I'm all for being a contrarian, in fact, I should make it my middle name, but like all views that sit on the polar opposites, what's most likely to happen is somewhere in the middle. In some parts of the value chain, it makes absolute sense for some companies to consider horizontally or vertically integration, either backward or forward. The real issue with online advertising, unlike many other industries, is that you can become very good at say, being a DSP, but if you sit idly while you're #1, six months later, you are no longer. We're not Dunder Mifflin making paper. The learning curve is extraordinarily steep for every step of the value chain. Therefore, I think it'd be foolish to think large pools of these companies post-consolidation would be able to move at the right speed.

Then you look at industries that decoupled their value chain, like the car industry. For them, it was mainly a good idea (except Ford and GM never truly cut the umbilical cord with Visteon and Delphi, respectively). In others, it ended with disastrous consequences like Boeing's attempt to outsource most of the Dreamliner's construction.

Someone point me to a thoughtful notion of what this market may really end up looking like with some solid reasoning. I want to read something profound.

Posted via email from .com deconstructed

Brillance from My Options and Futures Professor

2010-04-07T19:54:00.000-04:00

As a prelude to this post, I've already graduated, so I have no reason to butter up my finance professor for a good grade :)

Professor Seyhun taught me something very valuable about the value of money (ha!): Cash, itself, is a derivative. Everything is until you get to the underlying good or service. So, how convoluted is the world of credit default swaps, mortgage-backed securities, etc?

Congress is currently in the process of trying to create an exchange as a way to regulate credit default swaps. This idea would be great if it were commodities that were being traded, but credit default swaps are extremely complex contracts between two entities with very specific risk mitigation needs. In a world where these swaps are like snowflakes where no two are the same, how is an exchange going to work? Exchanges only work when they're efficient and the only way to make them efficient is to make to make what's being bought and sold a commodity. In turn, that commodity is a fairly liquid asset. These derivatives fit none of these criteria.

Professor Seyhun has suggested in this article that there's an easy way to do it. The principle of Occam's Razor holds to this problem and solution set. The last thing we need is to make an already complex finance world even more complex.

Lighting Oneself on Fire (Foolishly)

2010-04-05T19:35:00.001-04:00

Reading Ars Technica today, I stumbled over this post about how Microsoft is going to end-of-life their support for the Itanium processor. This brought me back to a valuable lesson I learned in business school, a somewhat sad lesson: Being right isn't as sweet as winning.

A friend of mine and I entered a case competition last September that asked the simple question: "What adjacent markets should Intel enter into next?" For three days, we slaved over this question, taking industry trends from different sources, looking at market trends, performing competitive analysis, etc.

What we came up with wasn't art. It was pure science. We made a recommendation , based on market demand and overlap in their product offerings, that they needed to stop investing in the Itanium processor and take those dollars to invest in the rapidly growing mobile market, in which they were virtually absent.

We lost. Let me elaborate. We didn't even make it to the second round. One year later, Microsoft doesn't see the demand for the Itanium either and decides to pull the plug on it. I wouldn't be shocked of HP announces they're ditching it too.

The lesson: Write to your audience. Or at the very least, if you're going to go down in flames, at least know why you're lighting yourself on fire (and do it for a valid reason). The case competition was clearly about creativity and presentation. We definitely lacked creativity. I suppose it was my mistake for leaving up creativity to poets and politicians.

In case you missed the link above, here's our case competition presentation.

Applying MBA Logic to Politics

2009-07-09T10:03:00.010-04:00

The simple fact that there's a debate about the effects of campaign contributions on politicians' votes completely eludes me. NPR did a story this morning about it, but every well-known news agency has done this story in one flavor or another multiple times.

Here's the broken logic that Congress is applying against all rational explanation: When the financial system collapsed, we sought out the root cause for the entire debacle. I wouldn't trust Congress to do a good job with root cause analysis, but besides blaming business graduate schools for turning good Americans into money-grubbing hedonists, the other big reason being thrown out there are poorly designed incentive systems that don't take into account for the riskiness of the business decisions.

What if we apply the same logic Congress? What are Congress' incentive systems? I think it's safe to generalize even more and think about a politicians' incentive systems. Politicians want to stay elected. To stay elected, you need votes. To get votes, you need a platform that will allow you to speak to voters. These traditional platforms have been TV advertisements, town halls, etc. These platforms tend to be really expensive, so these politicians need money. Unfortunately, going around with a tin cup isn't a particularly efficient way of raising money, so Political Action Committees (PAC) aka lobbyists for corporations, set up lavish fundraisers and invite all of their rich friends who work in these corporations.

Some argue that corporations represent people because people work at these corporations. I dismiss this argument simply because at any given time, not all of us are working (especially in this economy), so therefore corporations do not represent the US in a collectively exhaustive manner. Furthermore, assuming that corporations can represent an employee's interests is tantamount to saying that you should trust your dentist to do the job of your cardiologist. Corporations do not represent the totality of our lives in the US, therefore they cannot represent us.

All in all, I think we could all take a big step back and look to massively overhaul most incentive systems. In the several incentive systems I have observed in corporate America, most are broken in one way or another. Some inhibit long-term planning and reward short-term gains. Others are so poorly designed that they cause blatant inhibitions of successful behaviors. I have seen incentive programs that, at the very least, cause suboptimal resource utilization (generally caused by too closely tying transfer pricing to incentive plans). On the extreme end, I have seen anti-teaming, siloing, obfuscation, and misleading reporting.

So, is it really a big surprise that we catch politicians falling off the public interest wagon every so often? If anything, it's surprising to me they don't fall off more often.

What IT really needs - managers, the real kind

2009-06-16T16:26:00.010-04:00

In a recent HBR blog post by Susan Cramm, I found this one line particularly interesting:

This lack of competence and confidence means that you are letting technology manage you rather than the other way around.

She makes this pronouncement shortly after citing survey statistics that basically demonstrate that business users either don't know how and don't fully use their IT resources. While this may surprise some, it doesn't surprise me in the least. I can't count the number of times I've seen application deployments go this way: IT deploys a huge time-saving, money-saving application that automates a number of business processes. Business doesn't adopt out of fear or misunderstanding. IT doesn't understand out of fear or misunderstanding and voices this to the business. Business thinks IT is trying to ramrod processes it didn't create down its throat. IT thinks business is being petulant and misguided.

(On a side note: These situations have created an entire cottage industry in consulting around benefits realization, change management, and release management.)

I agree with Susan that it's a management problem, but it's not the technology managing you, it's a lack of management on the part of IT. Maybe a better way to state it would be to say that there is IT management and regular management. Some IT organizations do a wonderful job on the IT management, but very few actually manage.

What do I mean by this? A dearth of professional managers exist in IT leadership positions. Many of these folks have grown up as developers and architects and then graduated into positions that require dealing with customers and subordinates. What ends up happening is the classic Peter Principle where IT folks are promoted to the level of their least competence and in many of those cases, it's when they take on subordinates or deal with clients/customers. Some pull up their bootstraps and become good people managers. Others do not. While this occurs in the business side of the business as well, metrics for success are much better defined through balanced scorecards and profit and loss statements. In IT, the incompetence of a manager is obfuscated by lack of good success measurement. So, what happens is that these people continue to rise through the ranks, despite their managerial inadequacies. These inadequacies are the ones that create change management, adoption, and risk. Thinking about it another way: You never hear a brand manager complain that it's his customer's fault that his adoption rate is too low. Why? Because it's the brand manager's fault, not the customers. However, you will commonly hear this complaint echoed in IT.

Remember, I am not speaking about IT prowess. It is important for the Director of Business Intelligence to have knowledge regarding enterprise data warehouses, reporting tools, etc., but even more importantly, this person needs to be a professional manager. At this position, they are more or less managing their own line of business. I would ask you to consider this: Take some of these IT leaders and think of whether or not you would consider putting them into line management positions. If you've exhausted your IT leadership roster and the answer was "no" most of the time, then Houston, we have a problem.

So, what's the solution? I have two suggestions.

1. Develop measurements that are directly correlated with IT's ability to satisfy the needs of the business. Period. I have seen too many IT "scorecards" that take into account all of these other factors that dilute the true success criteria. Another way to look at it would be to take the IT metrics and align them with your business metrics. You've decided they're good for the business, why not make IT use the same ones? It might not be a one-to-one match, but the concepts and principles can be copied over to IT.

What will this fix? A whole host of common problems such as IT doing their own thing, IT delivering nonvalue-add, IT blaming the business (this will still happen but less frequently), and IT management getting promoted into stratospheric heights who have no business being there.

2. Before allowing any IT person to assume a managerial role, make them take a customer-facing role where there is no option but to satisfy the customer. This will teach two things: what it's like in the real world where you have to fight for every single customer's business by getting them what they need and how to play nice in the corporate sandbox because they'll finally realize there are people of whom they have no control, but desperately need assistance.

We all hate swarmy salespeople, but let's face it. If they don't sell, they don't eat. We have forgotten this in IT land. When our customers don't buy (or adopt), we keep eating what doesn't belong to us.

MBAs don't create greed, people create greed

2009-03-31T23:50:00.009-04:00

The debate on "how to fix business schools" that rages on at the Harvard Business School's blog is just plain disturbing. As someone who is on the edge of graduating from Ross at the University of Michigan, I take personal offense to the fact that a subset of people actually believe that people go into MBA programs as perfectly righteous human beings and come out cold-blooded economists.

The logic behind the argument on how MBA programs need "fixing" is beyond me, but I suppose I do understand its origins. History has shown us that when something really bad happens, we must find someone to blame. When kids acted out in the 1980's, some fanatical parents blamed dirty lyrics in rap lyrics from the Beastie Boys. So, what did they do? They "forced" the music industry to put big fat labels on their albums that said "Explicit Lyrics". Any good marketer (with an MBA) can tell you what that did: It created demand for products labeled as such because they were taboo. I know from personal experience because I was a kid who bought one of the Beastie Boys albums labeled that way.

When someone thought kids were too violent, they blamed Bugs Bunny cartoons because Wiley Coyote trying to drop an anvil on the Road Runner was just too violent and we wouldn't want kids trying to mimic that behavior now would we? For the record, I grew up watching those cartoons and I never tried dropping an anvil on anyone. And, what have we replaced with Bugs? I was unfortunate enough to not be able to sleep in on a Saturday and watched about five minutes of a Pokemon cartoon. I could actually feel my brain turn into a gelatinious goo. It had so many flashes of light and scene changes, I felt like I had just ridden a roller coaster without any safety restraints.

There are hundreds of more examples, but let's look at it logically: Is the following statement true? The people running the companies that caused the economic downturn all had MBAs. Therefore, people who have MBAs will cause market downturns.

Anyone who has taken a logic class can tell you that this is a false causal relationship. This is like saying: When it rains, it is wet outside. It is wet outside, therefore it must be raining. What if I just poured a big bucket of water out on my porch? Other things cause it to be wet outside, right?

This whole MBA debate is no different. No amount of schooling is going to turn me into an unscrupulous, evil money grubber. It's a more likely argument to say that if I were unscrupulous, I was that way before I started my MBA program. One can also turn this into a circular argument. I bet if you looked at many of the backgrounds of those who helped cause this mess, you'd find out many of them went to private high schools. Maybe private education is to blame?

I'm not a psychologist, so I'm not going to provide any hard data on this one, but I've heard many say that your personality is pretty much set in stone after your tween years. If this is the case, then the likely culprit are the people who raised these kids to believe that making money in spite of who you had to step on to get there is a way to cultivate success: their parents.

Now just ask yourself who their parents are, and then maybe we can finally track down the real people to blame.

Why the auto execs can learn from Willy Wonka and Knight Rider

2009-03-24T12:00:00.000-04:00

I never saw the creepy remake of Willy Wonka and the Chocolate Factory because I was told by several friends that Johnny Depp's depiction of Willy Wonka was so demented that it made Gene Wilder's depiction seem banal in comparison. I don't need the nightmares.

However, if you do remember the story, the long term lack of success with the automotive industry reminds me of the scene where Charlie asks Willy about the Everlasting Gobstopper. Here is a piece of candy that, no matter how long you suck on it, never gets smaller or loses any flavor. I find this concept to be completely disgusting, but let's assume for a moment that this is a feature that some kid would actually want. If you pay ten cents for a normal piece of candy, wouldn't you be willing to pay much more for the Everlasting Gobstopper?

There's also the episode of Knight Rider where some tire executives hire villains to stop a company that's invented a tire that impervious to nails. How much would you pay for tires that lasted the life of your car?

I compare that to the quality of automobiles. Back in 1946, cars didn't last as long, at least not with their original parts. They also didn't have airbags, traction control, anti-lock brakes, six-speaker stereo systems, bucket seats, seat belts, and countless other improvements. In 1946, the Buick Roadmaster Sedan cost $1,822. Adjusted for inflation, that's $19,156. Using Edmunds.com, I priced a 2008 Mazda 6 with a 6-CD in-dash stereo, compass/autodim mirror with HomeLink, door edge guards, floor mats, and wheel locks. It came in at $16,271. There are a lot of legitimate arguments for why cars cost more back in 1946. The two main arguments would be that that cars are less costly to manufacture now with welding robots, supply chain optimization, etc. and global competition. Buick didn't have to contend with Honda, Toyota, Nissan, etc. We'll come back to the role of competition and what it means when the industry as a whole did a poor job of capturing more consumer surplus for themselves.

There is one looming argument beyond all others why the willingness to pay for a car should be higher now than it was back in 1946: The Interstate Highway System was established by the passing of the Federal-Aid Highway Act in 1956. Prior to the establishment of the interstate highways, cars had a relatively short range. The highways serve as a complement to a car. It'd be like buying an iPod with no iTunes or a CD player with Michael Jackson's Thriller glued inside.

There's more proof of this. In Europe, where there exist several substitutes for traveling by car and where gasoline is much more expensive, Europeans are willing to pay more for their cars. A Ford Focus in the UK starts at $19,600 (using 1.47 USD = 1 GBP). Based on the competitive landscape for transportation needs in Europe from expensive gas and trains, planes, subways, and buses, you'd think Europeans would be less willing to pay big bucks for a car, yet they pay more. So, what's going on here?

So, I've kicked around that cars are worth more than we've paid for them. Competition is what has driven vehicle makers toward covering less and less of their fixed costs (e.g. building the factory) on a per vehicle basis. In any industry with extremely high fixed costs where a unit sold captures very little of that fixed cost, the only real solution is volume to achieve minimum efficient scale and capture as much economies of scale as possible. The problem is that demand for new cars is plummeting and companies like Toyota are even having problems with achieving profitability. What's this mean overall? It means the car industry is just way too overloaded with capacity, and unfortunately for GM and Chrysler, now is not a great time to be seeking salvage value on factories that only make cars since the last thing someone wants to do right now is make more cars.

Being from Michigan, I would love to see GM and Chrysler stay around and prosper, but it's a foregone conclusion that the industry needs to shrink. I don't foresee Toyota and Honda going anywhere given their market leadership. That leaves GM and Chrysler in a precarious situation, but it doesn't seem we're going to let them fail. The only car companies left to fail are going to be the small brands: Hummer, Saab, Volvo, and maybe even a Nissan.

Even after all of that bloodshed, I still think there will be overcapacity. It may drive one of the big dogs out of business, regardless of government intervention. It's like watching American Idol, except we're talking about the real world, with real jobs, in an industry that began in the United States. Maybe that's OK though. We lost the electronics manufacturing industry a while back and we weathered that pretty well. Perhaps the effect of downsizing of the US auto industry seems much worse than it actually will be, but who knows? If I knew this, I'd be a highly-paid automotive consultant who gets quoted in the Wall Street Journal.

It's a new beginning

2009-03-24T00:01:00.000-04:00

Hi there. I never considered myself a blogger, but I decided to do it for two reasons: 1) (the good reason) it will force me to keep my critical strategic skills alive by continually analyzing different situations I deem interesting and 2) (the not-so-good reason) maybe someone may find some value in it and even think: “Wow! This guy is pretty bright! We should contact him and pay him lots of money!”

Don’t worry. I’m not holding my breath on the second reason.

Just a little background: I started my IT career more than 13 years ago. Since that time, I’ve run systems, run networks, developed software, run collaboration tools, installed firewalls, run my own IT consultancy, started up a IT solutions practice in a mid-sized firm, created frameworks and methodologies for deploying offshore IT, run an IT department, managed several budgets, led large IT programs, and work with lots of really smart people.

In that time, I’ve learned as much from education as I have through experience. I’ve seen a lot of technology go right and plenty more go wrong. I have observed countless mistakes and made countless mistakes myself. I have also been a student of ITIL, PMI, COBIT, Agile, and a whole bunch of other acronyms and catch phrases and discovered one thing: There is no silver bullet.

I’m also a student of business strategy, although unlike IT where I’ve been fortunate enough to get paid to do something I enjoy, no one has paid me for my business strategy skills because they are mainly untested. I am currently an MBA student at the Ross School of Business at the University of Michigan with a focus on corporate strategy and finance. I suppose this blog can also serve as a test to the school’s action-based learning approach. If my approaches to a variety of problems seem too theoretical or wrong, it’s either that I didn’t understand the frameworks I was taught or another case study on how MBAs are taught “pie in the sky” frameworks that aren’t applicable to the real world.

Only time will tell.