Friday, November 8, 2013

Strategy, the most misused business tool of them all

Recently, I have been asked to consult for a start-up airline that was about to launch operations. The company faced its usual hiccups, common for any start-up venture, and with the imminent launch, the board had decided to strengthen the start-up management team with some serious expertise in order to increase customer experience from the start. Needless to say that the board initially did not choose me! I came in only after the original consultant had run away in tears over the company's disorder (as any entrepreneur probably can tell you, you need to be an admirer of chaos when starting-up a company) and nobody else was willing to risk his reputation. Don't get me wrong, the company itself was not worse or better than any other start-up airline. The focus had been on operations - and quite rightly so, you might argue since this is the division at the forefront competing for all those critical and internet savvy passengers out there - and with the usual understaffed start-up team, a direct consequence was that the back office had not gotten the attention it surely was entitled to.

Deciding quickly that the guys could manage operations without my help and that, as a consultant, I could not directly influence finances to the extent it deserved (you either have the money to survive the initial loss making period or you don't), I started focusing on all those nice departments that lack the glitzy and shiny perception of what a passenger thinks an airline is all about. I am talking about administration, human resources, business development... the boring yet necessary fundamentals of any company. So, after I successfully struggled to finally get my personal copy of the business plan (more often than not, consultants are apparently expected to consult on business structures that they do not know the company specific and applied fundamentals about), I started reading and on page one (I always skip the executive summary since I fortunately have enough time to make strategic decisions based on more than a page or two), I encountered the following highlighted statement that immediately started ringing all kinds of bells in my head: 'It is our strategy to provide high quality customer service.' Well, that is nice, obviously, but this strategy statement is missing its inherent point: A strategy of a company should never be about one issue alone. On the contrary, it only has an actual meaning that staff can truly work with when it addresses all aspects of the venture. This statement could very well be one of many goals to provide exceptional customer services, but it never can be a competitive strategy by itself. So, this made me thinking, how many airlines - or general organizations for that matter - have their competitive strategy right? Speaking from experience (including my experience from my own companies, I am not claiming that I have done things always right), not too many, I am afraid, and I believe this is because only few actually understand what strategy is all about.

Broadly, strategy can be divided into two categories: Corporate strategy and competitive strategy. Most corporations mean the latter when they refer to their strategy since corporate strategy is basically an internal plan that specifies which industries the organization wants to invest in and which upstream logistics need to be in-house (or not).
Now, competitive strategy should be based on a number of points raised in one's - hopefully sound - due diligence. These all should encompass the ever so important 'added value' to the passenger. Don't forget that at the end of the day you only receive your salary if your passenger is a) present and b) coming back for more. So, strategy should be laid-out around the following main areas:
  • the targeted audience (not only geographical but also demographical) and its expected to be received service levels
  • the carrier's value proposition (or in other words: perception is reality as far as passengers are concerned)
  • competitive advantage. I.e. you either do it better or you do it for less. As unfortunate as it may sound, and I know that your business management professor told you otherwise, but the reality is that price is the number one factor upon which people decide to buy or to go to your competitor. If I recall correctly, an official study recently published that historically only 30% of all airline passengers have been willing to pay a premium over the lowest offering and then only if the perceived value to them (and remember: perceived is real) outweighs the price increase by far. Contrary to what the business gurus tell you: can you really afford to be different? You can when you are Concorde, you cannot when you are Kingfisher.
  • an optimized value chain (or, in other words, hire-in that expensive MBA to reflect for you on the assets of and their flows within the organization). Ideally, all the customer perceived benefits of the chain should be enhanced whilst all costs to the airline should be reduced. Yet don't make the mistake of changing individual processes without looking at the bigger picture.
So, next time when sitting with your feet on your desk and a coffee in your hand, take a few minutes to think about your organization's strategy. Does it have a clear and communicated (without which the best plans fail instantly) targeted customer base? Do your sales people know that they are required to approach those private inhabitants, not more than 100km from your base, with families with at least 1.25 kids and an annual salary of at least triple the one of the airline's CEO since your flights are actually never more than 2 hours late? Has your audience been told (and I mean in such a way that they actually are aware of it) that they are able to fly from London Heathrow to Stansted without a stop-over in Singapore? Does you audience know that you charge exactly the same price as all the other airlines but your airline does provide them with free smiley stickers for their luggage so that they can easily spot it a the bazaar of their holiday destination? And does your maintenance manager know that he is supposed to find that MRO that is actually qualified to work on your fleet type, even though he has no family working there?

I am being sarcastic, of course. Most airlines have a pretty clear picture in their minds of what their strategy should be. But believe me, communicating the strategy to stakeholders and actually living by it often seem to be forgotten business arts.

One of the many dangers that the airline faces, and this is especially true for airlines that do communicate effectively, is, of course, instant imitation by its peers. With real time communications that we enjoy nowadays, challenges for managers to continuously improve their business models - and thus themselves - are greater than ever. As a direct result, micro-managing the value chain - i.e. the easy way out by discriminating stations in the value chain in one way or the other -  has become an unfortunate trend in airlines that more often than not leads to failure of (parts of) the business model. It is always easy to judge a profit centre on its bottom-line numbers. And often it would indeed be a smart and solid decision to outsource the activities of a non-performing division. Yet, as I have already said in my article on network planning, 1 plus 1 does not necessarily equal 2. And by that I mean that the individual contribution of any profit centre needs to be judged against the whole organization. It may very well be that the in-house heavy maintenance division loses money. Yet at the same time its closure and subsequent third-party provider would lead to delayed operational aircraft that in-turn would decrease the value of the airline for its customers. And as said before, perceived value is actual value.

And, as a final word of caution before I let you go back to your well deserved cup of coffee: an airline's business model is often confused with its strategy. 'Our strategy is to be a hybrid airline.' This, as nice a statement as it may be, is not a strategy. Rather, it reflects the airline's business model. A strategy tells you how to achieve your set goals. A business model tells you the operations of your strategy, i.e. how revenues are made and what the costs of these revenues are.

We all know that airlines face huge challenges from within their own industry and from outside. Oil prices sky-rocket while OEMs have not yet developed suitable propulsion alternatives. As a direct consequence, business models are continuously changing. Those that don't will ultimately be left behind and will fail the moment (financial) protection by its state falters. It is therefore necessary for any airline - even those that are currently enjoying solid growth - to have its basics right. As my old flight instructor used to tell me, 'it is better to have a prepared and well thought-of plan at your disposal and not to use it than to fly blind without a clue what is going to happen.' And he was right, of course, as could all those tell you who did not adhere to this wisdom... if they were still able to talk to us, that is.


  1. I agree. Strategy is in most companies a topic that is not very well understood. How many Strategy Managers have been employed in recent times coming from a business development background? This trend shows that even CEOs often have no real understanding of what strategy entails.

  2. You briefly skirt on Company Ethics here Alex, and I think one of the most important aspects is to set a strategy that you as a company are willing to invest in, and to adhere to.
    There is no point saying in your strategy that you will be provide "high quality service" if secretly your CFO is saying "yes, but only as long as we spend as little as possible!" Equally don't say "we will be fair and straightforward in our procurement processes" if you know that actually you will favour people that you have done business with before, or have family ties with (there is actually nothing wrong with this as an approach in many circumstances) - Be Honest!
    I also absolutely am with you with the frustration of being a consultant and not being given access to the information which would inform the opinions that we are giving - all to often I find that I am working on old incorrect or out of date information, or coming up with suggestions which have already been implemented.

  3. Mike,

    thanks for your comments. It is appreciated that you found not only the time to read my scribblings but also to think about them!

    I agree with you that a number of companies advertise one thing and do another. As always, communication - in this case internal - is to blame. And of course there is still a few 'old-time' managers around that know that it is expected that they seem to be believing in all the latest trends of the science called leadership but secretly find it only a bunch of .... after all, it has worked for them over the last number of years so why change now?

    Company culture comes into play here and consequently your addressed company ethics. As a consultant, and I gather by your post that you are one, one always is hindered by the lack of executive powers. It is the old question every consultant has asked himself thousands of times: where do I draw the line and tell the client to shape-up, thus risking the contract? I myself, probably because of my straightforward Dutch background, do not tolerate much and rather halt the project than keep working towards an outcome that cannot be the optimal one for all involved. This approach has lost me quite some money over the years but it also makes me capable of sleeping well through the night. I hope you have, or at least will find shortly, found a way that works for you as well.

    Keep in touch!

    Alex de Vos

  4. Alex,

    I work in an area of airline strategy fitting your description as often trampled upon as just a cost center: IT. There are a few examples of positive alignment (JetBlue comes to mind) but more often than not I see technology being boxed into the back closet (the "we don't want to see you" path) or being assigned to different people without a clear understadning of how to make it work (the "we don't know what to do with you, so we'll find a way not to see you" path). I wish some of those in charge could have your common sense approach.

    Please keep enlightening this uneducated brain with your knowledge!

    Kind Regards,


    P.S. Would love to connect on LinkedIn if you permit!

  5. Marin,

    thanks for your thoughts. Although you probably give me too much credit! As stated, I know that I have made numerous mistakes in my career (and certainly will make some more). It is as on the skiing slope: the ones that tell you that they have been skiing all day and never fell have just not been trying very hard to improve their skills.

    I hope you will find a suitable way to give your department the credit it certainly deserves soon!

    Alex de Vos