Tag: Business Models

April 15, 2019

The “Just Plane Smart” Strategy & Activity Alignment

A key breakthrough I really grokked during one of my many silent strategy meditation retreats is that strategy is all about alignment – especially once you fully wrap your head around your goal, your resources, and the competitive landscape. Alignment is what gives systems that 1 + 1 = 3 result and misalignment can bring systems to their knees.

A strategy is a set of well-aligned activities with the aim of occupying a valuable position within a competitive landscape.

For example, synchronous rowing has been proven to be 8% faster than non-synchronous rowing. Further, when oars tangle – which can only happen during asynchronous rowing – someone is usually going for a swim. So if your goal is to win a race, then you should row synchronously.

Southwest Airlines

The classic corporate example of great strategic alignment is Southwest Airlines. Growing up in Dallas, Southwest’s headquarters and home-base, I had a front row seat to the company’s incredible growth into its current position as the largest domestic air carrier in the US (by passengers boarded). Over the past 5 decades, Southwest has delivered tens of billions in value to customers, employees, and shareholders. Remarkably, the company has been profitable for 46 consecutive years – which is completely unheard of in the airline industry.

BTW, even if you don’t care for Southwest as a customer, the lessons from this company – especially around alignment – are quintessential for developing your own strategies.

What’s the Goal?

Before digging into the alignment between Southwest’s activities, we need to know their objective. Southwest’s vision is “to become the world’s most loved, most flown, and most profitable airline.” I’m assuming that they have clear internal definitions and KPIs for most loved and most flown.

Southwest Airlines’ Activity Map

Now we can dig into their specific activities. This is obviously an incomplete list fo their activities, but it’s a starting place to illustrate the importance of alignment.

As you can see visually, most of their activities reinforce one or several other activities, resulting in very high alignment.

Alignment Isn’t Risk-Free

Southwest’s strategy is not, however, without its risks. For example, Boeing is Southwest’s sole supplier for aircraft and many parts. The March 10 crash of a 737 MAX 8 in Ethiopia (the second crash in 6 months of that model) and the subsequent grounding of the entire MAX 8 fleet worldwide is clear evidence of the risks of overly-tight alignment. Neither crash was a Southwest flight.

(Source: CNN)

Fortunately, Southwest only owned 31 MAX 8s as of Jan 1, 2019 (of a total fleet of 750). But grounding 4% of your fleet is a big deal and Southwest is due to buy or acquire another 37 MAX 8s in 2019 and over 200 MAX 8s over the next 8 years. I’m confident that Southwest will survive the 737 MAX 8 issue relatively unscathed, but the unfortunate events are a clear reminder that even brilliant strategies like Southwest’s are neither permanent nor invincible.

Key Take-Aways

A good strategy is inherently well-aligned. Good alignment is the best way to deliver disproportionate value and results (1 + 1 = 3). Poor alignment usually means that some parts of a system are destroying value that was created elsewhere.
Tradeoffs are inevitable, but should be deliberate. For example, Southwest chooses to invest heavily in its employees and in ways to reduce fuel costs. A myopic focus on cutting costs would be a huge mistake long-term.
While there may be many ways to win, just choose one. Southwest ignores the high-end travel market and focuses on a low cost strategy. The company knows exactly what it is and what it isn’t. And, just as important, they’re disciplined about it. Focus and consistency have the additional benefit of carving out a clear brand in customer’s minds over time.
Cut activities that don’t fit (49 services Google has killed, some of which they acquired at great cost) and double down on activities that do fit. YouTube, Android, Google Home, Maps, and Chrome may feel like expensive & unprofitable distractions on the surface, but they actually fit very tightly with Google’s/Alphabet’s core strengths: organizing the world’s data, powerful search, and monetizing intent via advertising.
Remember: you have to be crystal clear on your objective before you even begin to worry about what activities to perform or not.

Herb Kelleher, Southwest’s Heart

This short podcast with Herb Kelleher, the co-founder and former CEO of Southwest, is a must-listen. Herb was a living legend until he passed away early this year. I was deeply saddened by Herb’s passing but I promise you’ll laugh out loud if you check it out.

Also, Southwest Magazine did a nice job with an extended article about Herb’s life. The opening story is classic Herb.

Concept: Hidden Competition

One last thing.. writing this piece made me think about a cool concept: Hidden Competition.

When Southwest first started flying in 1971, they weren’t really competing with the major interstate airlines, whose customers were mostly businessmen with expense accounts. Southwest’s quick flights between Dallas, Houston, and San Antonio were actually competing with Greyhound and other surface travel options. For Greyhound, Southwest represented hidden competition and was a key reason Greyhound is only a fraction of its former self and filed for bankruptcy in 1990.

June 14, 2018

Capitalizing on Changing Beauty Norms

It’s one thing to be obsessed with our looks, our beauty…

As the demands of beauty rise, not only do we have to do more all the time, but their nature also changes. Beauty becomes more important. It has begun to function as an ethical ideal. Beauty is often what we — rightly or wrongly — value most. It is what we think about, talk about and what we spend our time and hard-earned cash on. If we are good at beauty, we feel we are good, virtuous; if we are bad, we feel we are no good, almost no matter what else we do. We judge others too on how they look. We make assumptions about what people are like and how successful they are. We read character traits directly from looks, and we start doing this as young as four years old.

…but it’s another thing to confuse beauty practices for health practices.

Consumers are allowing themselves to be manipulated by obvious marketing tactics and the beauty industry is capitalizing on the opportunity. These marketing and advertising tactics remind me of the diamond industry, which I’ve written extensively about.

Let’s take hair for instance. “Shaving, plucking, waxing and lasering” have become so normalized that hair removal is no longer a “beauty practice” but has been “redefined as a hygiene practice, as part of so-called “routine” maintenance.” And these redefined social norms aren’t just for celebrities – they’re for everyone.

Hair removal becomes something we have to do, a requirement. It is not an option to refuse — like teeth-cleaning, but without any of the health benefits. Beauty practices are indulgent and optional; hygiene practices are necessary and required. You don’t have to do a beauty practice; you do have to do something that is required to meet minimum standards, just to be normal. Once the shift to routine is complete, the fact that this is a demanding beauty practice becomes invisible.

The Beauty Market

The Economist reported in 2003 (Real Men Get Waxed) that the US male grooming market was $8 billion. 15 years later, that number has nearly tripled and is on pace to grow by 12% annually.

(source)

Bottom Line: Societal norms and their changes drive huge shifts in spending – especially when there’s strong emotional connection or potential for embarrassment. What shifting & emotionally-charged norms can you capitalize on?

June 13, 2018

Building a Business from Hate

Bianca del Rio didn’t set out to be “the nastiest bitch on the planet,” but she kind of is–and it’s really working for her career.

Del Rio, formerly Roy Haylock, is the crowned queen of the 6th season of RuPaul’s Drag Race. One key to her success has been simply embracing who she is and not copying what everyone else in her industry is doing.

The queens on RuPaul’s Drag Race were all competing as queens. Bianca Del Rio realized that she needed to stand out, to do things differently. Her management recommended that she record an album. Her reply: “I’m not going to do an album. There’s enough horrible drag queens singing.”

And Del Rio’s intuition is spot on. When everyone else is zigging, zag.

What Del Rio is doing is quite expansive. Since RuPaul’s Drag Race, Bianca has headlined and sold out standup comedy tours worldwide, starred in two feature films, released a satirical self-help book, and created a line of no. 1-selling makeup removers.

“It kind of snowballed. I didn’t plan to be a comedian. I didn’t plan to be a drag queen. It just kind of evolved,” says Del Rio, who was a professional costume designer before doing drag full-time.

As a host for drag shows Del Rio got a lot of stage time, dealing with back-stage delays, hecklers, and impatient patrons. She seized the opportunity and integrated insult comedy into her hosting routine.

Since then, Bianca Del Rio has bloomed and business has boomed.

“Everything is offensive, so I’m enjoying the fact that I’m anti-kind. You’ve got to go out and just speak your mind. It needs to be heard,” Del Rio says. “There was a young boy who was 13-years-old who was in drag with his grandmother that came to see me [during a comedy show] and I was nervous because he was like, ‘me and my grandma love Drag Raceand we watch the show together!’ And I looked at [the grandma] and I said, ‘you do know my show’s going to be a little racy?’ She goes, ‘well, what the fuck do you think I came for?’ So I’m bringing families together–through hate.”

Find your niche – no matter how offensive or off the beaten path.

[Photo: Daisy Korpics for Fast Company]

May 31, 2018

Profit and Competition – Stephan Kinsella

Profit and competition are inherently intertwined.

Profit is always being pushed down by competition. So profit is an unnatural thing. So you always have to to think: how can I make a profit? and once I make it how am I going to keep making a profit knowing that I’m going to attract competitors? — Stephan Kinsella, “Your Welcome” with Michael Malice 001 – Intellectual Property with Stephan Kinsella

The above concept is at the very core of profit-driven business strategy.

I wanted to dig deeper into what Kinsella meant by profits being “unnatural” so I pinged him on the twitters. Here was his reply:

Profit is in a sense unnatural–it tends to be driven down to the natural rate of interest as the market tends to equilibrium. Profit is hard to maintain in the face of competition. This is fairly standard Austrian economics AFAIK, though my argument doesnt depend on this insight — Stephan Kinsella

By the way: What he means by the “natural rate of interest” is the interest rate of borrowing money if we only consider the time-value of money and ignore the risk (and therefore increase in interest rates) associated with the borrower defaulting on their loan. Don’t worry if the natural interest rate part isn’t clear – I needed him to explain it to me as well and it’s not the point anyway.

Profit and Competition

Increasing Hooters Utilization

WeWork has new competition in Tokyo – Hooters. It’s all about utilization.

Hooters in Tokyo’s Ginza neighborhood has teamed up with Spacee – a space-matching service – to rent out work areas during the restaurant’s downtime.

Hooters has over 400 locations worldwide and they, like all brick and mortar businesses, have a utilization problem. After lunchtime traffic at the Hooters in Ginza dies down, 20 seats open up for rent via Spacee until the dinner rush begins.

While WeWork may not be worried about the competition yet, it’s going to be hard to beat the Hooters price. Spacee members pay only 50 yen, or about 48 cents, for a 30-minute work block, and that includes a discount on some beverages and an atmosphere that some will undoubtedly find truly inspiring.

(Oddly enough, students don’t have to pay the 50 yen fee. But if they’re under 18, then they have to be accompanied by a parent or guardian. Glad someone’s thinking about the children..)

Utilization

From an entrepreneurial theory perspective, one enormous path for adding value is to reduce inefficiencies. Low utilization – especially for capital intensive goods – is a huge contributor to inefficiency. And over the past 10 years, a new wave of utilization-focused start-ups have flourished on the shoulders of both the internet and mobile phones.

AirBnB increases the utilization of your spare bedroom or couch. Getaround increases the utilization of your car. Lyft and Uber increase the utilization of your time (and your car).

What’s interesting is that these companies are all marketplace plays. The business is in connecting parties with spare capacity with parties who need capacity. Bring together both parties in a trusted forum and you’ve got yourself an interesting business.

Look around you: What inefficiencies do you see? Where is utilization low? Is the value being squandered worth recovering? Can you create a trusted marketplace? Can you acquire customers at a reasonable price?

PS: In other WeWork news, the company is continuing to expand very rapidly. You may have seen some misleading headlines about $18 billion in leases, but that number is the sum of many years of leases, $13.2 billion of which is for 2023 and beyond. Their 2018 and 2019 lease payments are for $706 million and $984 million respectively. Bloomberg covers the story here and here.

PPS: Hooters and strategy. Strategy and Hooters. Are you not entertained?

(Photo Credit)