Diametrically Going Nowhere

In the Daily Universe editorials page, there was a political cartoon which showed a stage coach being pulled one direction by an elephant and the opposite direction by a donkey. The passengers were looking towards the person reading the comic with dumbfounded looks. This comic immediately made me think of the 7S analysis we performed on HP.

The US is a beautiful country with so many grand ideals that went into its formations. One of the major changes from colonial rule was a true implementation of checks and balances. Having an executive branch, legislative branch, and judicial branch keep all power from residing in a defacto monarch/tyrant. The downfall is that there is no one way to set a strategy for the country. Part of the way the country has attempted to work around this limit was to render the country to a 2 part system where there is a chance that you can have people who all lean one direction to be in power at the same time and allow the coach to be pulled in one direction.

The upside with HP, was that they are able to have a defacto tyrant (still responsible to the board/shareholders, but given alot of free reign). Despite the size, there is no check or balance to day to day execution of strategy, what the CEO says should occur (within constraint of the corporate regulations and laws of the land). I have seen Obama going head to head with the Republican leaders in the house and a stalemate occuring, there should not be such an occassion at HP, yet we saw Fiorina in such a position with her board when it came to the merger with Compaq. Despite the aforementioned, Fiorina had the capability to get everyone moving in the same direction through reorganization, new hires and a specific corporate vision. Unfortunately, as with certain presidents in the past, the assumed power of their position doesn't excuse them from actually ensuring that what they say actually makes it to the execution.

The US government will probably never be truly aligned, but there shouldn't be a lack of effort from the executive branch to at least try to move in one direction. In the case of a CEO there is no excuse for not trying to get all 7 S's aligned. You are hired and given a mandate, align the business with that mandate and you won't have to fight the board. If you succeed in not contravening your board, you won't have a situation where you are so musy pulling in one direction that you fail to stop another authority from pulling in the opposite direction.

Best is better than great

I was reading about a proposed takeover of a Dutch-based shipping company on Yahoo! Business. I was thinking that this is a simple way of looking at over coming competition by taking them over, but that would be too simple. Instead, I was thinking about the Hedgehog concept in Good to Great: you see, I believe UPS and TNT Express both realize what they are good at. Unfortunately for TNT, they are not able to be as profitable as they like doing what they do best.

On the otherhand, we look at UPS who is very good at keeping low marginal costs and have an efficient system. They are not good at breaking into existing markets. To counter, they are willing to spend money to buy a company in an existing market and make them profitable. We see everyday that they have a passion for shipping: even their employees move quickly to get things done as well as possible. This is a company that is fully capable of helping TNT Express profitable for their shareholders.

In the end, we look at the three circles of the hedgehog: UPS is the best at delivery, UPS has passion for delivery, and UPS makes money in delivery. TNT lacked the latter and that is why it makes sense for TNT Express to at least entertain UPS as a courter.

Profit Pool or kiddie pool with a leak?

Discussion in class today turned to profit pools again. This discussion turned me, once more, to looking at when I was a manager with McDonald's in Canada. McDonald's likes to experiment with things and the Canadian extension did it alot while I worked there.

One of the experiments seems the ultimate profit pool example.Someone made a decision to spend around 40K in remodels on most existing stores so that we could sell deli sandwiches. I believe this was in an attempt to compete with Subway and Tim Hortons who both were eating into the QSR market with their fresh sandwich offerings. How does this relate to profit pools? McDonald's was losing money by having parents come into the restaurant and ordering only Kid's meals which are low margin when you include the toy, but go across the street or next door to get their Tim Horton's or Subway sandwiches.

Giving the adults the opportunity to have a non-burger would allow them to spend more money at McDonald's and skip a trip to the competitors. But having parents by the smaller margin kids meal and small margin deli sandwich adds up to a small profit pool. Given that you are spending a fair amount of money to keep the station running (cooler and conveyer toaster) and you need a lot of volume to fill the pool. How do you fill the pool faster when people just aren't eating this delicious offerings? Increase margins on the kids meal, that's how.

I remember, a year into the deli sandwich era, working out that it would take 14 years for the sandwiches to pay for their own existence. How much did this experiment teach McDonald's about profit pools? There are no profit pools playing low margin items off against each other. In other words: there are no deli sandwiches at McDonald's in the US and there will not be in the near future.

Less is more

A few months ago, AT&T and Verizon were trying to convince us that fewer cell phone providers was better for the consumer. Fewer competitors-in their words-means that they can focus on improving their service and less on competing. I guess I should be really mad that the money I pay every month for cell service doesn't get me the kind of service I need. I should pay more to receive the same service, only believe it is better because I am paying more. Now the airline industry is making similar waves.

I read a report on Yahoo! Finance indicating that Delta, fresh off a merger with NorthWest Airlines is looking to add American Airlines to their portfolio. I can appreciate their motivation: reduce consumer buyer power! With fewer options, the buyers (consumers) will have to pay more. We do know, through examples such as JetBlue, that there is still a threat of new entrants to keep the prices from sky-rocketing, but this will not keep mega-carriers such as Delta from easing up the prices.

As far as we have come since airline regulation, the prices are still very reasonable, but we are seeing other profit centers for airlines to allow profit pools that will keep them in the black, even if competition forces them to keep prices down. I just don't picture an industry with 3 major carriers maintaining a war that hits their margins. Instead will see them apathetically watching their competitors raising prices and then finding that they are better off raising their own prices. Another merger in this industry will be good for the airlines and bad for the consumers.