As I write this, the media is rife with news about the dire straits the Indian airline industry finds itself in. Black ink spent in discussing the predicament appears to be competing with the spreading red ink at every airline, casting a pall across an industry that sported abundant cheer not a few months ago. There is increasing clamor from the industry for government support of some form. The scene is not very different in the US or Europe, though the auto industry, for a change, has taken center stage in the former. Airlines have sought to address some fundamental problems by setting up new entitities to target specific customer segments. Thus we have JetLite as a fully owned entity, a reincarnate of the old full-service Sahara, now in the avatar of a "low-cost" airline. Kingfisher, likewise, has re-branded Deccan as Kingfisher Red. Jet even attempted to lay off several hundreds of people and had to beat a hasty retreat at the resulting political storm. The dizzying pace of change in India is matched abroad as well: British Airways, too, has now come up with a fully-owned branded carrier called OpenSkies while Delta is merging with Nortwest.
Will these work? What really ails the airline industry and do these measures address the real problems? Are the the several airlines making short-term tactical decisions, operational fixes, or working out longer-term ideas? In other words, are they pursuing a strategy or making use of a situation to bring their house in order? A singular feature of the airline industry throughout the world is its total fixation with current problems and an inability to learn from what has happened in the past to its own fortunes from specific sets of circumstances. A study of the industry is an excellent reference to understand strategy.
Strategy, Simply Put
Strategy, according to Porter, is all about creating a difference one can preserve. It lies, in his thinking, in doing the same activities differently from others or in undertaking entirely new activities. This is what has been referred to as a "positional" point of view which holds that competitive advantage arises from the ability of a firm to create a unique differentiation in the market in which it competes. The competitive advantage is sustained when a firm benefits from natural or given barriers or those it erects itself to make it difficult for other firms to replicate the unique position. These barriers include industry-specific ones that make customers captive (such as spectrum a telecom firm has bid for and won, the right to manage an important port or utility, ownership of a large coal or oilfield, etc); economies of scale and scope (cable or satellite television, undersea optic fiber cable); proprietary technology (DNA chips) or process complexity that create a unique set of activities for the advantaged firm (such as Amazon's online retailing with backend sophistication, Sabre's ownership of the travel agent's desktop, or McKesson's overwhelming presence across hundreds of US hospitals). The positional viewpoint is a product-market orientation - ie, advantage through the creation, domination, and preservation of the product market, where a "product" can be either a physical one or a service.
An alternative is the resource-based view of the firm that posits that competitive advantage comes from ownership of unique resources that include assets such as brand, distribution channels, intellectual property, corporate culture, competencies, etc. Thus, other much-touted strategy formulations such as core competence are subsumed within this viewpoint. The practical importance of whether a firm has a positional or resource advantage is possibly only academic: one may argue on both sides, for example, with respect to Southwest Airlines where its arguably unique combination of culture, staff, and systems has created a valuable competitive advantage which owes its position to the resources, but the resources themselves are unique only because of an ability and focus to deploy them in a manner that has created advantages.
The Crux of the Matter
It is easy enough, with this in mind, to see if the various airlines in India have pursued any strategic intent by seeking a competitive advantage. About four or five years ago, Captain Gopinath burst forth on the Indian skies with Air Deccan and quickly garnered market share. The so-called "low cost" airline concept took hold and was instantly - if only interminably - profitable; attracted more players, and the concept became an industry mantra. The skies soon became crowded with Air Deccan, Go, IndiGo, Spice, and Kingfisher jostling with the so-called "full service" airlines - Jet, Sahara, and Indian Airlines.
Thanks to a fast growing economy, the airline pie became larger and all the airlines grew as a result. The incumbent ones, however, saw falling market share as the new ones gained. Increasing market share of some airlines, however, only tells upon the top line, not the bottom line, and this holds important clues to the tragedy that followed. The airlines cumulatively created value that largely accrued to customers and not to the providers of such value. Today's bleeding industry is evidence of the fact that most of these players did not succeed in capturing the value they created and are now scrambling to find ways to do so.
A point that seems to have currency in recent discussions is that our low cost carriers were never that; instead they were merely low fare carriers. Where could low cost arise in the case of airlines? Listen to Herb Kelleher of Southwest Airlines: "If you take all of Southwest's compensation together - wage rates, profit sharing, the full 401(K) match, the stock options that our people have - Southwest employees are the most highly compensated people in the airline industry". So how does SWA still manage to be a low cost airline despite ostensibly having the highest visible costs? There are the usual variables that have been much discussed as characteristics of a true low cost airline: one type of aircraft that saves capex and training; direct intercity routing in place of hub-and-spoke; rapid, 20-minute, turnarounds at the gate; greater frequency; one class with no assigned seating; higher load factors; cheaper, secondary, airports; no interline baggage check; no costly booking systems; absence of costly air mile administration; vastly higher productivity of their assets, both human and material; futures contracts for fuel; and so on.
Not by Costs Alone
The cost per seat mile of such a LCA for a 500 mile flight, a Booz Allen study estimated, was about Rs.3.50, or less than half that of a full service, hub-and-spoke carrier. Their study further showed cost differences across the board between the two types of carriers: pilots, onboard services, sales and reservations, maintenance, aircraft ownership, ground handling. In general, LCAs were seen to be using all resources much more effectively and the cost difference between the two were 2-to-1 for the same stage length and aircraft after adjustments. Specifically, 65% of the cost advantage resulted from production model choices (slower pace of full service airlines owing to slack built into schedules, process complexity, and ticket distribution), 15% to labor agreements, and 12% to capital structure. Only 5% was attributable to savings from not offering amenities.
In India, none of these seem to matter. Here, a Jet flies directly from Ahmedabad to New Delhi and a Kingfisher from Mumbai to Kolkata, notwithstanding the fact that the respective bases of each are located in Mumbai and Bangalore. In effect, there is no hub to speak of, all airlines have similar capex and staff compensations, they all fly the same aircraft of like vintage for the most part, from and to the same cities, the same airports, at the same times, often enough the same passenger segments, have implemented Internet ticketing, and onward booked passengers are a small percentage of total compared to point-to-point - important because these passengers contribute about 40% lower revenue per mile than domestic passengers and are an issue with full service carriers in the US. They even have the same, long, turnarounds due to airport congestion! The differences only exist in terms of classes and on-board meals offered.
What we notice is a lack of differentiation and, therefore, an absence of competitive advantage. Differentiation comes from offering value - not to be confused with the new fangled airline industry jargon about "value carriers" - and value is simply the old fashioned difference between a customer's desire to pay for service and the cost of providing such service. With no clear benefits, or when value is replicable there is tendency to reduce price, with the benefits transferred to customers. But this works so long as there is an extractable surplus - ie, costs are within its control or controllable. In the Indian skies, as airlines have discovered, they do not have too many options with costs and simply lowering price gets them deeper into the hole.
If you thought strategy was what our airlines are practicing think again. SWA has higher staff costs and lower ticket price compared to the airlines it competes with, but still makes money because it has a competitive advantage that others find impossible to replicate.
Sunday, November 30, 2008
Saturday, November 22, 2008
The Extended Braintrust: Your Customer
C.K.Prahalad, in his intriguingly thought-provoking book "The Future of Competition", refers to two two "deeply embedded, traditional business assumptions" - that any company can create value unilaterally and that value resides exclusively in the company's products or services. There may still be exceptions, but it should be fairly obvious that the days of vendor-driven value creation that ignores the customer perspective is long gone. The feedback loop exists in myriad forms today and a firm's capacity for receptivity can become a powerful differentiating factor.
From a vendor perspective, the path to customer acquisition, satisfaction, and retention does not actually center around its products or services - a mistake often committed by both marketing and sales. Instead, it focuses on the customer. That is a notion that is difficult to grasp at most organizations where staff is ill-equipped in defining and articulating the value of its products and services in a context that the customer can appreciate. In an ongoing, consulting engagement with one organization that provides healthcare services, I have been working with sales in understanding the challenges they have been experiencing and their inability to translate interest among potential clients to actual revenues. Their market has been heavily commoditized, one that reveals itself in plain vanilla functionality and indiscriminate price discounting by a large number of players attempting to increase or hold on to market share. In probing their contact with potential corporate customers a refrain was hard to miss: that it was difficult to get through to the HR head (HR in most cases had ownership for employee benefits); that when a face-to-face meeting did transpire, they heard but did not listen; and the list of services appeared to get lost in an executive chain of evaluation and approvals. Simply - apply, apply, no reply. Has the vendor attempted to understand what is of value to the customer? What shapes them? Who is the real decision making authority and how they could be involved in designing a package of services that works?
This is a company looking to sign corporate contracts which are inherently more difficult than approaching the individual, end-customer. The difficulties here pertain to requirements for vendor evaluation and empanelment; a constant battle to hold the price in the face of competitive pressures that are used by the customer to play one vendor against another; non-exclusivity of most agreements; choice and optional use of services by its employees among the several vendors empaneled for benefits services; and fulfillment that elicits customer response and matches expectations. By contrast, snagging the non-corporate customer should be a cakewalk!
Defining, articulating, and delivering value is one thing. Retaining touch with the customer is quite another. Most telcos today face this problem where the customer understands the kind of value they expect. Some companies do a better job than others in developing products or packages around these values. The real trouble, that we all see in the world of telecom, begins after one has signed up either as prepaid or post-paid customers. "There's many a slip between the cup and the lip" goes an old expression and that is proved to a fault at most companies when reality bears a different testimony: in other words, when the cheery words from the ad agencies promising instant nirvana comes face-to-face with delivery and fulfillment. That's when customers willing to give the benefit of the doubt turn into hardcore cynics. Such a customer is ripe for desertion and almost nothing the company does can reverse weeks and months of indifference and callous disregard. Unfortunately, in hyper-growth industries - as telecom has been for some time now - where net customer acquisitions are positive by far, companies pay scant regard to deserting customers. Hindsight is 20/20 but the tide has already begun to turn when management wakes up to reality and the problem is not peculiar to telecom alone.
Customers can become deserters when there are competitive products in the product. To some extent, the network effect may restrain or delay a decision, but decide they will when the cost of continuing with an indifferent provider proves too compelling. Telecom, satellite television, banking, brokerage, courier services are all fair game in the customer's evaluation. Most of these are services and the reason is not unusual. Services have to scale capacity in the form of human resources in line with demand and when this falters - eg, when a company wishes to reduce or to have the same number of customer call center agents - quality suffers immediately. Services also require staff to be well trained and versed in the company's products or services even if they scale well and this could be a sore point with customers who wish to speak with someone who appreciates their problem and wants solutions. Finally, the real disconnect happens because most companies continue to exist in silos of departments, functions, and responsibilities. Hence, a customer seeking information about an order s/he has placed is transferred endlessly to people who have no visibility into the order or its fulfillment. We are beginning to see this happen with DTH players experiencing exponential growth. These companies, facing high capital costs and a challenging and competitive market, have resorted to endless variations in packages on offer - a theme that has been raised to an art of great and inexplicable complexity by the telcos. You may be a subscriber undertaking periodic recharge, but neither you nor the provider at the other end can tell you what exactly you are getting and how they are priced. Such is the nature of nonsensical differentiation that is foisted on the customer.
These are not new issues and have been discussed threadbare by academics and practitioners alike. Yet, the fact remains that few companies do a good job. How can organizations ensure that customers do not fall through the cracks? Three ideas come to mind:
First, dispense with the traditional "customer complaints" function and instead use the opportunity to integrate customer experience within the larger framework of product or process innovation. This is not as easy as it sounds: the organization has to have a sense and an overwhelming desire to innovate. So this would well work only with companies where senior management is serious about a culture of constant innovation and continuous, incremental, implementations. Many companies spend time and energy attempting to get employees to give feedback and ideas. Why not involve the customers as well, given that customers are the ones likely to spot or experience less-than-satisfactory performance? This pathway could well be routed through the employees in some manner and have them incented, thereby catching two birds with one stone - attendance to customer grievance and also having employees involved in sifting through them to cull the most appealing ideas that could be put up for evaluation, brainstorming, and implementation.
Second, provide a valid channel for customer access. Such an access has to be both physical - ie, clearly identified person(s) at each location together with phone, fax, and address where they may be reached - as also virtual in some form such as email or live chat. Contrary to fears, not all customers attempt to reach out to management, but providing such access both reassures and enables a mechanism for "release of steam". The benefits of this are immense: it allows an organization to retain the customer and even use the opportunity to upsell its products and services.
Third, keeping the customer engaged. Much of the problem lies in the fact that a customer perceives an organization that s/he deals with as a black hole where queries or complaints simply disappear into. This can be resolved in two stages, one automatic, the other manual. The automatic approach is to have an immediate stock response (by email, SMS, etc) promising that a representative would attend to their issues in short order. Such a promise has then to be followed up by a manual process by employees who are able to access information and are empowered to take decisions.
None of the above ideas are unique. But it behooves organizations with a real interest in customer focus to utilize them in a manner that does not result in customer flight while also benefiting from their complaints. Not all organizations would be able to implement these ideas even if they wanted to and that may be because of their position in the market that may run contrary to the greater resources - and, therefore, the cost - of getting more involved with the customer. That is a topic for discussion in itself. But, for those who do, integrating the customer (especially those with less-than-satisfactory experience) in the innovation process has important implications for product differentiation and leadership.
From a vendor perspective, the path to customer acquisition, satisfaction, and retention does not actually center around its products or services - a mistake often committed by both marketing and sales. Instead, it focuses on the customer. That is a notion that is difficult to grasp at most organizations where staff is ill-equipped in defining and articulating the value of its products and services in a context that the customer can appreciate. In an ongoing, consulting engagement with one organization that provides healthcare services, I have been working with sales in understanding the challenges they have been experiencing and their inability to translate interest among potential clients to actual revenues. Their market has been heavily commoditized, one that reveals itself in plain vanilla functionality and indiscriminate price discounting by a large number of players attempting to increase or hold on to market share. In probing their contact with potential corporate customers a refrain was hard to miss: that it was difficult to get through to the HR head (HR in most cases had ownership for employee benefits); that when a face-to-face meeting did transpire, they heard but did not listen; and the list of services appeared to get lost in an executive chain of evaluation and approvals. Simply - apply, apply, no reply. Has the vendor attempted to understand what is of value to the customer? What shapes them? Who is the real decision making authority and how they could be involved in designing a package of services that works?
This is a company looking to sign corporate contracts which are inherently more difficult than approaching the individual, end-customer. The difficulties here pertain to requirements for vendor evaluation and empanelment; a constant battle to hold the price in the face of competitive pressures that are used by the customer to play one vendor against another; non-exclusivity of most agreements; choice and optional use of services by its employees among the several vendors empaneled for benefits services; and fulfillment that elicits customer response and matches expectations. By contrast, snagging the non-corporate customer should be a cakewalk!
Defining, articulating, and delivering value is one thing. Retaining touch with the customer is quite another. Most telcos today face this problem where the customer understands the kind of value they expect. Some companies do a better job than others in developing products or packages around these values. The real trouble, that we all see in the world of telecom, begins after one has signed up either as prepaid or post-paid customers. "There's many a slip between the cup and the lip" goes an old expression and that is proved to a fault at most companies when reality bears a different testimony: in other words, when the cheery words from the ad agencies promising instant nirvana comes face-to-face with delivery and fulfillment. That's when customers willing to give the benefit of the doubt turn into hardcore cynics. Such a customer is ripe for desertion and almost nothing the company does can reverse weeks and months of indifference and callous disregard. Unfortunately, in hyper-growth industries - as telecom has been for some time now - where net customer acquisitions are positive by far, companies pay scant regard to deserting customers. Hindsight is 20/20 but the tide has already begun to turn when management wakes up to reality and the problem is not peculiar to telecom alone.
Customers can become deserters when there are competitive products in the product. To some extent, the network effect may restrain or delay a decision, but decide they will when the cost of continuing with an indifferent provider proves too compelling. Telecom, satellite television, banking, brokerage, courier services are all fair game in the customer's evaluation. Most of these are services and the reason is not unusual. Services have to scale capacity in the form of human resources in line with demand and when this falters - eg, when a company wishes to reduce or to have the same number of customer call center agents - quality suffers immediately. Services also require staff to be well trained and versed in the company's products or services even if they scale well and this could be a sore point with customers who wish to speak with someone who appreciates their problem and wants solutions. Finally, the real disconnect happens because most companies continue to exist in silos of departments, functions, and responsibilities. Hence, a customer seeking information about an order s/he has placed is transferred endlessly to people who have no visibility into the order or its fulfillment. We are beginning to see this happen with DTH players experiencing exponential growth. These companies, facing high capital costs and a challenging and competitive market, have resorted to endless variations in packages on offer - a theme that has been raised to an art of great and inexplicable complexity by the telcos. You may be a subscriber undertaking periodic recharge, but neither you nor the provider at the other end can tell you what exactly you are getting and how they are priced. Such is the nature of nonsensical differentiation that is foisted on the customer.
These are not new issues and have been discussed threadbare by academics and practitioners alike. Yet, the fact remains that few companies do a good job. How can organizations ensure that customers do not fall through the cracks? Three ideas come to mind:
First, dispense with the traditional "customer complaints" function and instead use the opportunity to integrate customer experience within the larger framework of product or process innovation. This is not as easy as it sounds: the organization has to have a sense and an overwhelming desire to innovate. So this would well work only with companies where senior management is serious about a culture of constant innovation and continuous, incremental, implementations. Many companies spend time and energy attempting to get employees to give feedback and ideas. Why not involve the customers as well, given that customers are the ones likely to spot or experience less-than-satisfactory performance? This pathway could well be routed through the employees in some manner and have them incented, thereby catching two birds with one stone - attendance to customer grievance and also having employees involved in sifting through them to cull the most appealing ideas that could be put up for evaluation, brainstorming, and implementation.
Second, provide a valid channel for customer access. Such an access has to be both physical - ie, clearly identified person(s) at each location together with phone, fax, and address where they may be reached - as also virtual in some form such as email or live chat. Contrary to fears, not all customers attempt to reach out to management, but providing such access both reassures and enables a mechanism for "release of steam". The benefits of this are immense: it allows an organization to retain the customer and even use the opportunity to upsell its products and services.
Third, keeping the customer engaged. Much of the problem lies in the fact that a customer perceives an organization that s/he deals with as a black hole where queries or complaints simply disappear into. This can be resolved in two stages, one automatic, the other manual. The automatic approach is to have an immediate stock response (by email, SMS, etc) promising that a representative would attend to their issues in short order. Such a promise has then to be followed up by a manual process by employees who are able to access information and are empowered to take decisions.
None of the above ideas are unique. But it behooves organizations with a real interest in customer focus to utilize them in a manner that does not result in customer flight while also benefiting from their complaints. Not all organizations would be able to implement these ideas even if they wanted to and that may be because of their position in the market that may run contrary to the greater resources - and, therefore, the cost - of getting more involved with the customer. That is a topic for discussion in itself. But, for those who do, integrating the customer (especially those with less-than-satisfactory experience) in the innovation process has important implications for product differentiation and leadership.
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