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

TEACHING WITH MICROWORLDS June 2001 SGM3/4.1

WORKED TEACHING EXAMPLE People Express SGM3/4.2

THE HEAD-HUNTERS CALL “We were wondering if you know anyone who’d like to join a new European airline start- up.” SGM3/4.3

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…” But the airline business is changing SGM3/4.4

JUDGING STELIOS What questions would need to be addressed for you to have confidence in a start-up venture like EasyJet? SGM3/4.5

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) SGM3/4.6

HOW DO YOU CHOOSE AN AIRLINE? (When you are paying) Price! Time and route flexible Service threshold low SGM3/4.7

CORE PROPOSITION Segment from rivals INCUMBENTS Cost/seat mile Unionised Premium airports/slots Stuck with add-ons And service level YOU And bribes ? And fancy aircraft Capacity SGM3/4.8

WHAT KINDS OF RESOURCES DO YOU NEED TO PUT IN PLACE? Infrastructure Operations Distribution Marketing etc SGM3/4.9

YOUR AIRLINE Emerging industry New capabilities opportunity needed Set strategic direction Do it But how? SGM3/4.10

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 But some succeeded SGM3/4.11

PEOPLE EXPRESS: STAGGERINGLY SUCCESSFUL... Prices less than half competitors’ Full planes 10th largest airline in world l 100 planes l In just four years SGM3/4.12

…PEOPLE EXPRESS: SPECTACULAR FAILURE 1986 bankruptcy What went wrong? With almost identical strategy, South West Air continued to succeed SGM3/4.13

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 SGM3/4.14

PEOPLE EXPRESS Competitors Customers l l Competitor Fares l Demand and Market Share l l Competitor Service Scope l Perception of Service Scope l l Competitor Quality 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 Service l Aircraft acquisition l Hiring l Capacity l Employees, turnover l Passengers flown l Productivity of CSMs l Load factor l Quality of service l Fleet operating costs l Cost of service SGM3/4.15

RESOURCES: WHAT ARE THEY Products Production capacity TANGIBLE / DIRECT Staff Cash Customers Product quality Cost efficiency Staff skills Borrowing capacity Customer perceived quality Supplier relationships INTANGIBLE / INDIRECT Staff morale Reputation SGM3/4.20

WHAT IS A FIRM? Not a ‘thing’ But a network of resources l Within firm’s boundaries l And beyond them SGM3/4.21

CRITERIA FOR COMPETITIVELY CRUCIAL RESOURCES Hard to replicate Hard to substitute Not easily mobile Durable Barriers to entry, mobility or substitution enabling us to sustain a competitive advantage SGM3/4.22

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) SGM3/4.23

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 Conversely, failure to ensure resource complementarity leads to a fast rate of descent! SGM3/4.24

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 Unless we try to understand the whole system SGM3/4.25

WHAT DRIVES THEIR GROWTH? New passengers R Passenger base SGM3/4.26

WHAT LIMITS THEIR GROWTH? Rivals’ reactions B New passengers R Passenger base B Service quality SGM3/4.27

UNLOCKING LIMITS TO GROWTH Fleet size Service capacity Passenger base SGM3/4.28

THE PEOPLE EXPRESS GROWTH MACHINE FLEET Passenger miles SIZE PASSENGER flown BASE Planes Net bought revenues Reported Cash MARKETING service quality reserves SPEND Net new FLEET passengers POLICY SERVICE Productivity FARE CAPACITY SERVICE LEVEL HIRING POLICY Experienced New staff staff Hiring and training capacity SGM3/4.29

THE ROOKIE FACTOR 1000 APPLICANTS 200 after physical tests 60 after interview 1 20 after psychometric tests 10 after interview 2 5 after 3 months training AND NOT YET FULLY EXPERIENCED! SGM3/4.30

FRAMES ACTION Belief Generalisation Classification Recognition Perception THE WORLD SGM3/4.31

PEOPLE EXPRESS Historic Stock Price 24 18 $ / share 12 6 0 1981 1984 1987 SGM3/4.35

PEOPLE EXPRESS Historic Revenues 2000 1500 $ million / year 1000 500 0 1981 1984 1987 SGM3/4.36

PEOPLE EXPRESS Historic Capacity 25 Billion Seat Miles / Year 0 1981 1984 1987 SGM3/4.37

PEOPLE EXPRESS Historic Profits 200 0 $ Million / Year -400 1981 1984 1987 SGM3/4.38

EXPERIMENTING WITH STRATEGY High growth Low growth Low cost Differentiation SGM3/4.39

EXPERIMENTING WITH MOBILITY High growth Low growth Low cost Differentiation SGM3/4.40

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 For our businesses... For ourselves... What ‘frames’ can we infer from its How have our ‘frames’ constrained decision rules, measurement systems, what we could accomplish rewards, promotions and celebrations? SGM3/4.45

OTHER EXAMPLES SGM3/4.46

INDIRECT USE OF MICROWORLDS PSF Jane Sloan SGM3/4.46

DISCUSSION Underlying Principles Questions for Practice SGM3/4.46