TEACHING WITH MICROWORLDS June 2001 SGM3/4.1 WORKED TEACHING - - PowerPoint PPT Presentation

TEACHING WITH MICROWORLDS June 2001

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WORKED TEACHING EXAMPLE

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People Express

THE HEAD-HUNTERS CALL

“We were wondering if you know anyone who’d like to join a new European airline start-up.”

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YOUR BOSS’ ADVICE

“It’s a joke…” l Huge companies l Which mostly lose money

l In an over-supplied market “Your new assignment in Kazakhstan will contribute greatly to your personal growth over the next two years…”

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But the airline business is changing

JUDGING STELIOS

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What questions would need to be addressed for you to have confidence in a start-up venture like EasyJet?

HOW DO YOU CHOOSE AN AIRLINE?

(When your employer is paying) l Schedule l Airport l Punctuality l Speed l Service l Quality l Air Miles (Certainly not price)

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HOW DO YOU CHOOSE AN AIRLINE?

(When you are paying) Price! Time and route flexible Service threshold low

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CORE PROPOSITION

Segment from rivals

Cost/seat mile

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YOU

?

INCUMBENTS Unionised Premium airports/slots Stuck with add-ons And service level And bribes And fancy aircraft Capacity

WHAT KINDS OF RESOURCES DO YOU NEED TO PUT IN PLACE?

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Infrastructure Operations Distribution Marketing etc

YOUR AIRLINE

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Do it Emerging industry

• pportunity

New capabilities needed Set strategic direction But how?

WHAT CAN WE LEARN FROM PREVIOUS EXPERIENCE?

U.S de-regulation: 1979 1980’s l 200 significant new entrants

l More that 200 airlines went bankrupt 1989 - 93 U.S. airline industry lost all the money it had ever made

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But some succeeded

PEOPLE EXPRESS: STAGGERINGLY SUCCESSFUL...

Prices less than half competitors’ Full planes 10th largest airline in world l 100 planes l In just four years

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…PEOPLE EXPRESS: SPECTACULAR FAILURE

1986 bankruptcy What went wrong?

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With almost identical strategy, South West Air continued to succeed

PEOPLE EXPRESS MICROWORLD

Simplified to five decisions l Fare l Marketing spend

l Planes l Hiring l Service level Played over l 9 years l Decisions each quarter

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PEOPLE EXPRESS

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Customers

l Demand and Market Share l Perception of Service Scope and Quality l Reaction to Relative Fares l Response to Marketing

Financial

l Fares l Balance Sheet l Income Statement l Cash Flow, External Financing l Stock Price

Fleet

l Aircraft acquisition l Capacity l Passengers flown l Load factor l Fleet operating costs

Service

l Hiring l Employees, turnover l Productivity of CSMs l Quality of service l Cost of service

Competitors

l l Competitor Fares l l Competitor Service Scope l l Competitor Quality

RESOURCES: WHAT ARE THEY

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TANGIBLE / DIRECT INTANGIBLE / INDIRECT

Products Production capacity Staff Cash Customers Product quality Cost efficiency Staff skills Borrowing capacity Customer perceived quality Supplier relationships Staff morale Reputation

WHAT IS A FIRM?

Not a ‘thing’ But a network of resources l Within firm’s boundaries l And beyond them

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CRITERIA FOR COMPETITIVELY CRUCIAL RESOURCES

Hard to replicate Hard to substitute Not easily mobile Durable

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Barriers to entry, mobility or substitution enabling us to sustain a competitive advantage

COMPETITIVE SUCCESS WILL DEPEND ON DEVELOPING THE CRUCIAL RESOURCES

None of the criteria are black-and-white None of the criteria have significant meaning except in the context of time passing Hence, resources are not so much barriers as ‘hills’ to be climbed l Of varying height (how much you need) l And steepness (how quickly you can develop them over time)

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RELATIVE EASE OF ASCENT IS AFFECTED BY RESOURCE COMPLEMENTARITY

Understanding how one resource contributes to another Designing a system of mutually reinforcing resources l So that owning one resource makes it easier to

develop the next

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Conversely, failure to ensure resource complementarity leads to a fast rate of descent!

SYSTEMS THINKING

A company is a complex system of inter-relationships But we tend to focus on one or two aspects of a problem only And try to optimise those sub-systems independently It takes some time for the effect of our action to show up, so we don’t even see that we are the source of our problems This leads to crisis, confusion and domino-effects

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Unless we try to understand the whole system

WHAT DRIVES THEIR GROWTH?

New passengers

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R

Passenger base

WHAT LIMITS THEIR GROWTH?

Rivals’ reactions

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R

Service quality

B

Passenger base New passengers

B

UNLOCKING LIMITS TO GROWTH

Fleet size Service capacity Passenger base

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THE PEOPLE EXPRESS GROWTH MACHINE

Passenger miles flown

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HIRING POLICY PASSENGER BASE FLEET SIZE SERVICE CAPACITY FLEET POLICY FARE MARKETING SPEND Net new passengers Reported service quality Experienced staff Hiring and training capacity New staff Productivity Net revenues Planes bought Cash reserves SERVICE LEVEL

AND NOT YET FULLY EXPERIENCED!

5 after 3 months training 10 after interview 2 20 after psychometric tests 60 after interview 1 200 after physical tests

THE ROOKIE FACTOR

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1000 APPLICANTS

Recognition

FRAMES

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Classification Perception THE WORLD Belief Generalisation ACTION

PEOPLE EXPRESS

Historic Stock Price

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1981 $ / share 1984 1987 6 12 18 24

PEOPLE EXPRESS

Historic Revenues

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1981 $ million / year 1984 1987 500 1000 1500 2000

PEOPLE EXPRESS

Historic Capacity

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1981 Billion Seat Miles / Year 1984 1987 25

PEOPLE EXPRESS

Historic Profits

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1981 $ Million / Year 1984 1987

• 400

200

EXPERIMENTING WITH STRATEGY

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Low growth Low cost Differentiation High growth

EXPERIMENTING WITH MOBILITY

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High growth Low cost Differentiation Low growth

FRAMING THE WORLD

10 Issues to reflect on

• 1. Financial health versus strategic health: have the

right measures

• 2. Consistency versus reacting to short-term

pressures: explosive spirals

• 3. The dangers of snapshot measures in a world of lags
• 4. The role of a long-term vision of how to gain

competitive advantage

• 5. Building capabilities ahead of needs

Source: Williamson SGM3/4.41

FRAMING THE WORLD

10 Issues to reflect on (cont)

• 6. Relying on low cost alone as a source of advantage:

the importance of service

• 7. Barriers to mobility: changing perception
• 8. Co-ordinating growth
• 9. Competitor retaliation
• 10. Creating options

Source: Williamson SGM3/4.42

CO-CONSULTING WORKBOOK ASSIGNMENT

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For our businesses... For ourselves... What ‘frames’ can we infer from its decision rules, measurement systems, rewards, promotions and celebrations? How have our ‘frames’ constrained what we could accomplish

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OTHER EXAMPLES

INDIRECT USE OF MICROWORLDS

PSF Jane Sloan

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DISCUSSION

Underlying Principles Questions for Practice

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