Tuesday, September 27, 2005

Why Delta is Going Bankrupt

No doubt you’ve been reading that Delta Airlines is facing bankruptcy. Today I finally figured out why. I used to think the reasons involved an archaic hub-and-spoke business model, an anachronistic labor-management relationship, and severe pension liabilities—all exacerbated by recent spikes in fuel prices. I’m sure those are important contributing factors, but they’re not sufficient to explain Delta's plight. I now have the missing piece to the puzzle, and it’s a small mundane banal seed that has sprouted into a vast deadly weed. That deadly weed has created a hideous fissure in Delta’s corporate foundation. Confused? Read on.

I hold a Gold Card status with Delta, which means that I have accumulated a lot of frequent flyer miles with the company. A couple months ago I decided to cash in some of those miles to fly my in-laws to our home for Thanksgiving. I expected a simple transaction. Wrong. I was able to book the reservation, but to confirm it the folks at Delta needed to know my PIN number.

PIN number?? I responded. I didn’t even know I had a PIN number.

Well, yes you do, they responded. You must have designated one a few years ago.

Okay, I said. I don’t remember it. What is it?

We can’t tell you, they said. We can mail it to you.

Mail it?? When I forget a password with 21st century companies, I can get my password or designate a new one via e-mail within minutes—even after responding to security questions.

So my wife and I agreed to wait for a letter with the PIN number. (10 business days, they said. What century am I living in???) We waited for six weeks. Three times my wife called (itself a grueling on-hold-hell process) to complain, and three times we were politely told that the PIN number had been mailed to us even though we never got it, three times we were assured that the letter would be remailed, three times we never received it, and three times we were reminded and that if we didn’t have the PIN number we’d forfeit my in-laws’ reservation.

This afternoon, while at the airport on a business trip, I went to the Delta desk and demanded the tickets, which I finally received. But after telling the agent my hard luck story, she confessed that she didn’t understand it either. So she called an in-house number for a definitive expert response while I waited in front of her. Eventually, the agent insisted that the expert talk to me directly because she (the Delta agent) couldn’t understand what the expert was telling her (that’s a bad sign).

The lady on the line told me that it wasn’t even Delta who was sending me the PIN number. It was a partner company independent of Delta, and the letter looked enough like junk mail so that we might have tossed it into the trash by mistake. Okay, I said, what’s the name of the company, so we can be on alert for it? She didn’t know. And she didn’t know anybody who does know. Well, I asked, what’s the rationale for having another company do the PIN work for you in the first place? She couldn’t say.

So what in the hell do I do now? I asked. Well, she suggested, if I wanted to create a new PIN, I would have to write a formal snail-mail letter to Delta with documented proof of my address, and then Delta would send me a letter with a PIN number!!

I’ll stop now, because I still don’t know whether to laugh or cry. But do you get the idea here? What we have here is a glacially slow, cost- inefficient, time-consuming, unexplainably opaque, employee-confusing, customer-alienating system. Systems like these do not occur in isolation. Undoubtedly there are a zillion other similar ones across Delta—in procurement, logistics, reservations, supply chain management, maintenance, personnel, you name it—and that’s what’s strangling the company. I just tapped into one of those insane systems. Multiply this sort of stuff exponentially across the entire company and you will see why Delta is going bankrupt.

It’s not the people. Throughout the entire process every Delta person we spoke to was unfailingly polite, courteous and sympathetic. That’s not enough. It’s the system and the thousand subsystems around it that’s the killer. While successful companies like Dell, Progressive Insurance, Amazon, and Zara obsess on speed, transparency, agility, and friction-free customer care—deeply troubled companies like Delta force their employees and frequent flyer customers to jump through the most onerous, irrational, hyper-bureaucratic hoops imaginable. Small wonder Delta’s heading for bankruptcy. Meanwhile, I still don’t have a damn PIN number!

Tuesday, September 20, 2005

Harsh Medicine for David Pottruck

The latest issue of Fast Company features David Pottruck, the ex-CEO of Charles Schwab who was fired on July 19, 2004. It’s a very sympathetic cover story. Though it acknowledges that it’s hard to feel too much compassion for someone who’s worth half a billion dollars, the article is markedly compassionate, focusing on his post-firing feelings of shock, hurt, self-doubt, embarrassment, denial, anger, and his path towards personal growth.

Pottruck comes across as a decent human being, and I appreciate the fact that he doesn’t deny his responsibilities for his company’s downward spiral the way so many CEO’s do these days. Yet is this acknowledgment sufficient for us to gloss over some very real and disastrous decisions that he made while co-CEO and CEO?

Well, you be the judge. Once a pioneering dominator in the world of discount brokerage, Schwab in the 1990’s saw its services being imitated by competitors as diverse as Morgan Stanley Dean Witter, Merrill Lynch, Citigroup and others.

How did the company—led by Pottruck and Charles Schwab himself--respond to these competitive challenges? Hint: not by sharpening, innovating and extending the company’s performance in discount brokerage so as to perpetuate its dominance. Instead, in the early 2000’s Pottruck and Schwab engineered a series of acquisitions like U.S. Trust (high-end wealth management), Soundview Technologies (research and analysis), and CyberTrader (digital trading). At that point, Schwab the company declared itself a “full-services” financial supermarket.

Sounds wonderful, but now the company had a diffuse strategy, a highly complex organizational structure, and—as it turns out-- an inability to fully integrate the cultures and missions of the acquired firms into one cohesive direction. Accordingly, Schwab couldn’t dominate in any sector. It got battered on the low end by the Ameritrade’s, on the high end by the Fidelity’s, and on the middle end by the Merrill Lynch’s. It was not only no longer dominant, it was no longer even distinct. How was it different from Morgan Stanley or Citi or Merrill or Fidelity? Who knew? Its brand and reputation suffered, its skill sets were overwhelmed, and even its top line remained flat from 2000-2003. Unsurprisingly, its stock price plunged even as the market rebounded from its 2000 low. Things went from bleak to bleaker during Pottruck's reign as CEO on his own. In explaining the mess, a Motley Fool investment website commentary was right on target:

“There is a certain truism about basic competitive strategy: There should be only one. It is nearly a sure sign of failure when a company that has spent its entire existence as a low-cost provider suddenly tries to become that and a provider of differentiated products. Schwab was essentially trying to service two different kinds of customers at various pricing tiers (three, if you count the company's hundred-billion-dollar mutual fund business).”

I agree. So let’s be frank. Pottruck failed. Completely. As a result, lots of people got hurt and an entire company was seriously weakened. Nobody is asking Pottruck to commit seppuku. Nobody is asking him to go down with his ship while saluting. He can keep his millions and enjoy his new ventures. I wish him well. But please, in the wake of catastrophes in New Orleans and the rest of the world, let’s not bleed too much sympathy for his wounded feelings and need for redemption.

Tuesday, September 13, 2005

Simple David vs. Complex Goliath

Since I’m a 1K flier on United Airlines, I fly United a lot more than I do Jet Blue. I must be in the minority, because Jet Blue is thriving while much bigger and older United is trying desperately to avoid drowning. How can that be?

At a projected $1.7 billion dollars in 2005, Jet Blue is no small shakes, but it is miniscule when compared to the $16.4 billion United Airlines behemoth. But consider that over the past few years, while Jet Blue was growing in leaps and bounds without acquisition, United’s sizable debt, cost-inefficiencies, and mismanagement threw the company into bankruptcy, a fate that, according to regular newspaper headlines, periodically looms before just about every single major airline in the U.S. other than Jet Blue and Southwest Airlines.

Compare United’s sad status of multi-billion dollar annual losses with the fact that in second quarter 2005, Jet Blue achieved a 9.1% operating margin representing 18 consecutive quarters of profitability. What is remarkable is that JetBlue was profitable while growing available seat miles (the industry measure for capacity) by 33% while the other majors contracted or stood still.

Here’s the deal: while United and the other majors fly a large number of multiple types of aircraft, with multiple, complex, horrifically costly labor-management contracts and liabilities, with multiple hubs and spokes, and attempt to reach as many towns, villages and cities as possible (3,400 daily flights to 200 locations around the world)—Jet Blue focuses with a much simpler, more coherent, more limited, careful growth business model.

Simpler is better. It should be no surprise that people in the airline business have concluded that Jet Blue’s business model is the wave of the future: very selective routes with profit potential (only 33 locations served), straightforward point-to-point travel (no hub-and-spoke complexities to manage), non unionized multi-job employees, compensation built on lower wages with stock ownership, a genuinely collaborative labor-management culture, new planes only (low maintenance), one type of Airbus A320 plane only (high standardization, low maintenance, low training costs), more coast-to-coast red eyes to keep more planes in air, hands-on leadership (executives work on the planes to stay in touch), amazing productivity (all hands helping get a 50% faster turnarounds at gate, 70% of tickets through website, tech-armed agents working at home, no paper tickets, no commissions to travel agents).

And on top of everything else, Jet Blue has the reputation buzz. It’s not just the fast queues in airports (an employee told me it’s because the new technology requires only a couple strokes on the keyboard to take care of each person in line , as opposed to the endless tapping that rival agents—have you ever wondered what they’re writing?—are forced to do). It’s not just the cheerful, informal banter of the staff with passengers, or the personal service (I regularly see flight attendants help passengers put luggage up in the bins). It’s not just the 36 channel DirecTV on every leather seat. It’s not just the Conde Naste Readers’ Choice Award for Best Domestic Airline. It’s all that combined for something more intangible. As stated in the Motley Fool investment website, “By offering customers an exceptional experience, JetBlue has fostered brand loyalty in what had become a commodity industry.”

I refer back to my original question. I guess I answered it. Bigger isn’t necessarily better.

Friday, September 09, 2005

Choose Your Battles

“Uh-oh”, I thought, “this is not good.”

I was getting my first peek at the “Strategic Plan” of a company whose financials had been flat for the past four years, and I didn’t like what I was seeing. According to the plan, the company intended to enter just about every conceivable market and niche imaginable. Business after business, industry after industry, region after region, demographic after demographic—all were targeted, all were covered with specific business goals, action plans, and marketing initiatives. On paper, it looked terribly impressive, but I knew that in reality, this plan would not only aggravate the company’s problems, but would most likely worsen them.

In my last book, I quoted Colin Powell as saying “Choose your battles very selectively, then go in with overwhelming force.” Leaders of successful organizations—whether military or corporate—know that a key step of achieving optimal impact and victory is to narrow their scope of activities, attention, and “main event” priorities to the point that they can achieve domination.

Nowadays, fragmented markets and lower barriers to entry yield an environment where numerous competitors provide customers numerous choices that look alike and are “good enough”. Add to that the technological advances that give customers the power to freely compare and contrast the offerings of vendors worldwide. In this environment, you can’t do it all and it’s a fool’s gambit to even try. In my upcoming book, I argue that the way to sustain competitive advantage is to choose your battles (your markets, your products, your customers) very selectively, then go in with overwhelming force with the goal of dominating. In other words, figure out what you can and will dominate, and exit everything else. Do this, and everything else –like profit margins and customer loyalty--follows. Don’t do it, and you’re like Sisphyus forever trying to get the boulder to the top of the hill.

Remember how in the 1990’s Nokia burned past Motorola in the digital phone sector?. Many people believe that Nokia was a startup that found it easy to jump into digital because it had no legacies to protect like Motorola did. Hardly. Nokia was a mid-sized diversified conglomerate making products like cables, rubber boots, toilet paper, and televisions. When it made the decision to dominate the digital cellphone space, it dumped everything else. Motorola stayed in everything, trying to do analog and digital. It didn’t work. Never does.

Tuesday, September 06, 2005

Drug Companies Want Profit? How Awful!

Writing my August 30 blog on the $253 Merck/Vioxx verdict got me thinking. Isn’t it interesting that drug companies are such convenient whipping boys for the public when that same public expects and demands instant drugs to cure every ailment imaginable? The jurors and plaintiff’s lawyers who felt so self-righteous about sticking it to Merck because it’s got deep pockets —and the simultaneous piling on of thousands of other lawsuits by plaintiffs with the same pot-of-gold dream—all emanate from a gut-level belief: Evil drug companies are interested in profits, not people’s health.

I know logic won’t do much to dent ideology, but let me try anyway. First of all, here’s how free market economics works: if sick people aren’t helped by a drug, there are no profits for the drug company. Second, have you ever considered the tens of millions of invested dollars and thousands of dead-end tries necessary before one promising drug emerges? And then the millions of dollars to fully test the drug and get approval by the FDA? If there’s no profit, where is the incentive for a company to plow money and manpower (a.k.a. employees and jobs) into these ventures? Indeed, without profit, where are the funds to do this at all? And without some significant profits, where is the incentive to come up with any new drug that has patent protection for only seven years before it becomes available as a generic product copied by any rival? I’m always intrigued by certain political advocates who seem to think that pharmaceuticals and their shareholders should do business at a loss, or as a charity, for the good of mankind.

Last week while channel surfing, I spent a few minutes watching an infomercial by a guy named Kevin Trudeau who was peddling his book “Natural Cures”. I’m actually a big proponent of alternative approaches to health, but I was taken aback by Trudeau’s monotonous diatribes about how awful drug companies are because they seek—gasp!—profits! I went online to get some information on Trudeau and found that readers’ reviews of his $29 book on Amazon were at best mixed, but what intrigued me was that some negative reviews referred to the fact that to get complete information, apparently one must go to Trudeau’s website and pay a fee. Meanwhile, even though Trudeau has no background in either healthcare or science, he’s sold 3 million copies of his book over the past year through heavy marketing and sales efforts that would do a drug company proud. Sounds to me that with his book, website, commercials and infomercials, old Kevin is very interested in making—hold on to your hat—a profit!

Pharmaceuticals have made a lot of stupid, profit-reducing business decisions over the past couple decades, from self-defeating mega-mergers to myopic operational budgeting. But seeking profit is not a stupid decision. Nor is it immoral, whether you’re a book hustler or a drug company.