Thursday, February 15, 2018

Strong Airline Profitability? Is it Really About Fees?

Source: Dallas News
For decades, the airline industry has been characterized by abysmal profits. The list of airline bankruptcies is seemingly endless. However, the Wall Street Journal reports this week that U.S. airline industry profitability is very strong at the moment - "healthier than ever" according to the headline.  The newspaper credits the litany of fees charged by airlines for the strong income numbers:  

Profit per passenger at the seven largest U.S. airlines averaged $19.65 over the past four years—record-setting profitable years for airlines. In 2017, it stood at $17.75, based on airline earnings reports. In truth, airlines now cover their costs with tickets and get their profits from baggage fees, seat fees, reservation-change fees and just about all the other nickel-and-diming that aggravates customers. You might also call those extra 12 to 15 passengers now crammed onto each flight “Andrew Jackson” for the profit they bring... U.S. airlines were on pace to take in more than $4 billion in baggage fees and $3 billion in reservation-change and cancellation penalties in 2017, according to Transportation Department data. (The full year hasn’t been tallied yet.) Most of that drops straight to the bottom line. The two categories add up to about more than half of the net profits airlines posted last year.

A couple of sentences toward the end of the article identify the airline with the highest profit margins in the industry.   Accoridng to the Wall Street Journal, Southwest tops the industry with a 16.5% net profit margin, nearly double the average margin in  the industry (9%).   Actually, the newspaper does not account for a one-time tax benefit of roughly 6%.  After adjusting for that figure, Southwest's advantage over the rest of the industry is much narrower.   Still, Southwest generated strong profits, as it has in the past.  The article does not delve into the reasons for that profitability.  Southwest Airlines does not charge baggage fees, unlike nearly all of its rivals.   Southwest also does not administer ticket change fees, unlike nearly all of its rivals.   How then does it generate strong  margins in the industry?  That's the question that the newspaper should explore.   

In weaker economic times, the other airlines may find it much more difficult to continue to generate strong consumer demand while charging so many fees.  A more sustainable competitive advantage comes from a distinctive strategy and organization, as Southwest has developed over many years.   Many scholars have studied this question over the years.  Perhaps it's old news to the Wall Street Journal, but that old news offers much more enduring lessons for managers than the story of how piling on fees has juiced profits recently for some players. 

Wednesday, February 14, 2018

Nordstrom Unlocks Its Changing Rooms

Source: NY Times
Luxury retailer Nordstrom continues to innovate in hopes of surviving and thriving in the embattled department store business. The Wall Street Journal reports today on many of the experiments that the firm is conducting. For example, Nordstrom chose to stop locking its fitting rooms recently. The WSJ reports on the change:

In November, the company unlocked the fitting rooms in its department stores. Many retailers keep them locked to discourage shoplifting, but the practice annoys customers. Although theft has increased slightly since Nordstrom made the change, executives say, the retailer is sticking with the new policy.  “Analysts don’t like it,” Jamie Nordstrom said. “But I’m thinking about the next 50 years, not the next quarter.”

I've always found these types of moves interesting.  Typically, managers conduct cost-benefit analysis when they make key decisions.  However, in certain cases, the costs can be quantified rather easily, but the benefits are not as well-defined.  Many managers would not go through with this decision because the cost-benefit analysis does not justify it.  Here, the costs of increased theft can be measured precisely.   The benefits from increased customer satisfaction may be much more difficult to evaluate and quantify.  Still, Nordstrom knows that its loyal customers do not appreciate the locks on the changing room doors.  Will this small change enhance customer loyalty?  Will people be more likely to try on multiple outfits now?  Might it increase the size of the average transaction per store visit?  Some of these things can be measured with time and some creativity.  In certain cases, though, managers simply have to side with the customer, recognizing that it may not pay immediate dividends.  In the long run, Nordstrom won't win against online competition through better assortment or lower prices.  They have to create a superior in-store experience.  This small step appears to be moving in the right direction on that front.  

Tuesday, February 13, 2018

Advisers and Uncertain Advice

Celia Gaertig and Joseph Simmons have published a paper titled, "Do People Inherently Dislike Uncertain Advice?"   The authors focus on the longstanding research finding that individuals prefer confident to uncertain advisors.   Individuals generally don't want take advice from someone who does not appear self-assured.  Gaertig and Simmons extend this research by examining the question:  Do people exhibit an aversion to uncertain advice itself?

The scholars studied advice evaluation in a series of studies focused on issues such as sports predictions, finance, and weather.  Their findings proved remarkably consistent.   Indeed, people evaluate confident advisers more favorably than those who appear uncertain and hesitant.  However, people do not necessarily dislike uncertain advice.   Here is an excerpt from their paper: 

In eleven studies, we found that people do not inherently dislike uncertain advice. We observed this in studies of sports, weather, and stocks. We observed this in studies that operationalized uncertain advice as imprecision, as statements of numerical probability, and as statements of non-numerical uncertainty. And we observed this in studies in which people directly evaluated the advice and in studies that asked people to choose between an advisor who provided certain advice versus one who provided uncertain advice.  

This paper gives me comfort.  It shows that people are quite capable of sifting through advice, and recognizing the merits of advice couched in the form of probabilities.  We do not expect complete certainty.  That's a good thing, as I believe we should be skeptical of advice and predictions that seem to express absolute certainty.    We just might be more rational than some people think!  

Monday, February 12, 2018

Communicate Goals, Then Test for Understanding & Learn from Your Audience

Leaders often assume that people at all levels understand the organization's goals and objectives.   Is that presumption correct?  In too many cases, it is not.  What happens?   First, leaders do not recognize that they must communicate those goals repeatedly - in different ways, through different channels, and using different media.   It is not sufficient to address goals once or twice at the outset of the year. You have to beat that drum reepeatedly.  However, you also must make a compelling case for why front-line employees should care about those goals and objectives.  Ask yourself: So what?  How can you answer that question for the workers at all levels.  Why should they care?   

Even more importantly, though, leaders have to test for understanding.  A leader has to put his or her finger on the pulse of the organization, so as to determine whether people heard and comprehended the message.   How do you put your finger on the pulse of your firm?  Certainly, managing by walking around helps.  Meeting people informally, perhaps in small group lunches in the cafeteria, can be useful as well.   Finding ways to solicit and address employee questions is crucial.   Asking them to play back what they have heard from their managers is a useful technique.  Listen carefullyas they speak to you.  Don't put words in their mouths.   Ask them to be as specific as possible about the sources of their confusion.  

If they didn't understand the goals or misintrepreted them, don't blame the audience!  It's not their fault for misunderstanding your message.  You have to learn from them, and you must clarify and modify the communication accordingly.   Ask for their help!  Often, the audience can help you craft a more compelling and easy-to-understand message.  

TEDx Bryant 2018

I enjoyed speaking at the inaugural TEDx Bryant event on Saturday, February 10th.  I look forward to sharing the video via YouTube as soon as it is posted.  My talk addressed the topic, "Does the Devil's Advocate Kill Creativity?"  

Saturday, February 10, 2018

L.L. Bean Alters Its Unlimited Returns Policy

L.L. Bean announced a major change in its famous product return policy yesterday.   The Maine-based retailer always used to allow customers to return goods years after purchase with no questions asked.  Their lifetime guaruantee stood out as one of the distinctive elements of the firm's value proposition and brand positioning. Now, though, the company has put a one-year limit on product returns. Here is what the company told the Wall Street Journal: “For over 100 years, our guarantee has worked just fine, but in the past five years in particular, our guarantee has been misinterpreted as a lifetime product replacement program and we have seen a large influx of returns that have nothing to do with product quality or satisfaction." reported on the rampant customer abuse of the L.L. Bean's longstanding policy, leading to this change in company policy:

Over the past five years, the company has lost $250 million on returned items that are classified by the company as ‘‘destroy quality,’’ said L.L. Bean spokeswoman Carolyn Beem. ‘‘Destroy quality’’ items are destined for the landfill. First-quality products are returned to store shelves and ‘‘seconds’’ are sold at outlets or donated to charity. It’s not uncommon to hear stories of people clearing out basements of used or unwanted L.L. Bean products, sometimes decades after their purchase. Some customers replace the same items year after year to get the latest outdoor gear. Some even head to thrift stores, yard sales or junkyards to retrieve L.L. Bean items that they then return.

Sadly, a small minority of customers have spoiled it for the rest of the company's loyal fans.  For L.L. Bean, the policy change is not without risk.   However, the fact that competitors, including REI, had already made similar changes in recent years lessens the risk.   Moreover, the company does leave itself the ability to address customer concerns on a case-by-case basis.   The new policy on the L.L. Bean website states "If you are not 100% satisfied with one of our products, you may return it within one year of purchase for a refund. After one year, we will consider any items for return that are defective due to materials or craftsmanship."   In other words, if you are a loyal customer and have a return after one year, the company retains the ability to address your concerns.  They simply do not want to have to provide a blanket, open-ended return policy for all.   

In general, I think L.L. Bean appears to be handling this issue well.  They clearly did their homework vis a vis loyal customers and their competitors before making this change.  However, I do wonder why they didn't choose to simultaneously announce some other measures to demonstrate their commitment to their most dedicated fans.   An olive branch to the hard-core fans, offered in conjunction with this policy change announcement, might have provided a more upbeat message and offset some of the negative reaction they surely will receive.   

Friday, February 09, 2018

Overconfidence in Founder-Led Firms

Bradley Hendricks and Mark Lang, and Kenneth J. Merkley evaluated 11,285 10-Ks reports filed by firms that went public between January 1, 1997 and December 31, 2013.  They have published a paper about a key distinction between the filings of founder-led firms and companies led by non-founders. The paper is titled, “Through the Eyes of the Founder: CEO Characteristics and Firms’ Regulatory Filings.”

Hendricks, Lang, and Merkley find a significant degree of overconfidence on the part of the founder-led firms.  They report, "Consistent with firms’ financial reports reflecting the founder’s optimism, we find that the 10-Ks for founder-led firms tend to be characterized by both more positive text and less negative text relative to 10-Ks for other firms."  

Prior research suggests that a positive tone in the 10K filing leads to a higher stock price.  However, the authors questioned how investors would react to the optimism conveyed by founder-led companies.  Perhaps investors would be attuned to the fact that entrepreneurs can exude overconfidence, and thus they would discount the optimistic statements made by founder-led firms.  What did they actually find?   Share prices rise in a similar fashion in the immediate aftermath of the 10K filing for both founder-led firms and those led by non-founders.  The authors state, "We find that investors do not appear to recognize founders’ tendency toward overoptimism and, instead, interpret tone for founder-led firms similarly to non-founder-led firms."  

What happens later on though?  For the full year after the 10K filing, the scholars found a negative relationship between the tone of the 10K and stock price performance for the founder-led firms.  No such negative relationship exists for the firms led by non-founders.   That finding supports the notion that investors mistakenly accept the overly optimistic pronouncements of founders initially, and the correction only takes place over time as they realize that the actual performance will not meet lofty expectations.   

What's the lesson here?  We need to analyze company pronouncements not simply in terms of the content, but in terms of the messenger as well.  Who is the company leader, and what is his or her background?  If he or she is an entrepreneur/founder, we might want to be a bit more careful about accepting their positive statements and projections.  

Thursday, February 08, 2018

How Status Disruptions Affect Teams

Marissa King and Ingrid Nembhard have conducted research on teams using a new set of methods and techniques. They used wearable sensors to collect real-time data about team member interactions and conversations.   King and Nembhard studied 66 teams in 13 healthcare centers.  They focused on the impact of assigning a nurse as a care coordinator for patients.  They expected this role to improve patient care outcomes, given that prior studies have shown that coordination failures in healthcare lead to poorer quality care and higher medical costs.   Surprisingly, the results did not work out as expected.   King explains: 

Everything was contrary to what we anticipated. We set up the experiment really to try to improve care through this care coordination intervention. We quickly realized that the intervention wasn’t nearly as successful as we anticipated going in. In fact, the elevation of the nurse’s position within a network actually induced status conflict. Increasing the nurse’s status within her team increased interruptions within the team; it decreased the amount of time that doctors and physicians and nurses were spending listening to each other. The interaction dynamics that ensued from elevating the nurse, rather than being better, actually got much worse...Everybody, I think, finds comfort in knowing where they sit. So when you change that, everybody is disrupted.

The study has some interesting implicaitons for teams in many industries.   People become accustomed to a certain pecking order and specific status dynamics within a team or organization.  Changing that dynamic certainly can be unsettling, in my experience.  I've seen it with faculty members elevated to leadership and administration roles, for instance.   I certainly have witnessed this type of unsettling disruption in the businesses with whom I have worked over the years.  However, I think some people are much more equipped than others to handle this dynamic.  When elevated to a coordination or management role, they recognize that the transition can be tricky for other team members.  They handle the situation with care, and they help people overcome the discomfort that comes with the disruption to the status hierarchy.   Others jump right into their new work, oblivious to the way that others will feel during this transition.  Empathy, in my view, is critical in this type of situation.  I would argue that the more empathetic individuals are able to move into a new management or coordination role more effectively.