Sunday, February 16, 2014

Focus and Leverage Part 307

In one of my last Focus and Leverage postings (Number 306) I sort of "beat-up on" Delta Airlines for their lack of focus on the customer (Me) during my trip to and from Pittsburgh this week.  In this posting I want to stay on the airline industry in general and try to understand their current strategy for making money.  I want to do this through the writings of H. William Dettmer in his fantastic book, Strategic Navagation - A Systems Approach to Business Strategy.  Specifically, I want to relate Appendix E of his book with the Appendix  appropriately entitled Strategic Conflicts (Examples).  Just so you know, Bill Dettmer is my favorite author and although I too am an author, Bill writes on a level so much higher than me, that I read in awe every time I read something he has written.
Bill tells us that there is ample evidence that the airlines were already self-destructing before the 9/11 terrorist attacks took place.  And we all know what's happened to airline travel since then, don't we?  Bill explains that beyond the issues related to security (baggage and passenger screening), convenience is particularly important.  One reason that many passengers have cited for not flying is the inconvenience of it all with too many changes of planes, missed connections, and missed baggage transfers from flight to flight.  He's right as I experienced this week.  Bill further explains that one of the principal culprits behind the "connection" problem is the hub-and-spoke system that all of the major airlines use.  The hub-and-spoke concept is the idea that many flights are routed through a few key airports, called "hubs" with the routes flown serving as the spokes that radiate from the hubs.  So even if you, the passenger, wants to fly directly to a major city, many times there are no direct flights.
Bill tells us that airlines used to fly point-to-point, and asks why they now choose to fly hub-and-spoke now?  Bill explains that the short answer to this question is cost reduction.  That is, the airlines made a conscious decision to "inconvenience" the customer in favor of reduced cost.  The net impact of this decision is that passengers are deciding that it's not worth the hassle, so many passengers have decided to significantly cut discretionary spending on flying.  Since the airlines all want to increase revenue, it is Bill's contention (and mine) that returning to point-to-point would go a long way toward reaching their goal of more revenue.  That is, in order to increase revenue, the airlines should restore their point-to-point flights.  Because the airlines don't make any substantive changes, they find themselves in a conflict situation that looks like the following Conflict Cloud.
For those of you not familiar with the conflict cloud, it is a Theory of Constraints Thinking Process logic tool used to identify and surface conflicts and then resolve them.  Without going into a detailed explanation of this tool, which by the way is also known as an Evaporating Cloud, Conflict Resolution Diagram and other terms, let me explain some of the basics of this tool.  As can be seen in the above figure, the Conflict Cloud consists of a common Objective, two Requirements needed to satisfy the Objective and two Prerequsites necessary to satisfy each of the two Requirements.  The Conflict Cloud uses necessity based logic and is read as, In order to have Requirements 1 and 2, I must have Prerequisites 1 and 2 because....  The because statement are the assumptions behind the linkages of the Objectives, Requirements and Prerequisites.  In the figure above, the conflict has been identified as Flying Direct (point-to-point) versus flying through hubs (Hub-and-Spoke).
The way in which the Conflict Cloud works is that some of the assumptions are not valid and if we can break the invalid assumptions, we can usually break the conflict.  We break the assumptions by developing what are referred to as Injections or new ideas.  I encourage everyone to search the net for a more detailed explanation of this tool because it has helped me out of many difficult times.
The figure below is Bill Dettmer's completed Conflict Cloud the with the Assumptions listed within it.

To improve profitability (their common objective), they must both increase revenues and control costs (both nonnegotiable necessary conditions).  In order to increase revenues, they should fly point-to-point (one prerequisite).  But to keep costs under control, they should fly through hub-and-spokes (the conflicting prerequisite). Both require opposite actions and are therefore the conflict that exists.  The assumptions (or the because statements) are listed in the figure above for both sides of the conflict.  Remember, not all of these assumptions are valid and these invalid assumptions are what prevent us from resolving this conflict.  So if we can determine which assumptions are invalid, then we can hopefully resolve our conflict.  We do this by inserting ideas (injections) as seen in the figure below.
In this figure, 3 injections have been added.  Injection 1 is really a compromise of sorts as both sides get part of what they want.  The primary end point of this tool is to develop win-win solutions.  Injections 2 and 3 really go together and they permit the complete replacement of Prerequisite 2, fly through hubs and spokes.  The question then becomes, is this really practical?  Bill offers for our consideration, Southwest Airlines, which not only flies point-to-point exclusively, but also does so at lower fares that the other airlines don't seem to be able to match easily and is the most profitable airline in America in doing so.  Why is Southwest able to do this, and the other airlines don't think they can?  As Bill rightfully points out, It's because the other airlines are operating under erroneous assumptions that they haven't yet identified!  Identifying these assumptions is the first stage to a breakthrough solution to their profitability problem.  I will add one other differentiator for Southwest Airlines.....they are also able to be profitable without charging excessive "bag fees" on top of their ticket prices, which are lower than the other airline.
If you really want a great read, check out any of Bill Dettmer's books....they're all destined to be classics!!
Bob Sproull 

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