Change management, Strategy management, Culture, Communication & Organizational Behavior are all one and all different at the same time. How? Why?
The South American Southwest
10 February 2011
The clever airline
Founded in 2000 and based in São Paulo, Gol Linhas Aereas Inteligentes (NYSE:GOL) is Brazil’s second largest carrier, sporting 39.5% market share.
You could think of it as the Southwest Airlines of Latin America. The company operates passenger and cargo air transportation under five brands – GOL, Varig, Gollog, VoeFácil, and Smiles (the frequent flyer program) – and also provides charter airplane services.
With a fleet of more than 110 Boeing 737 Next Generation aircrafts, Gol offers 900+ daily flights to 52 destinations, connecting all the important cities in Brazil and 13 major destinations in South America and the Caribbean. From the outside it may seem strange (and limiting) to own of fleet of more than 100 identical planes – but it’s actually very smart business.
By having only one type of plane in its fleet, management cuts down on repair and re-routing costs. Airport hubs need only supply a single model’s maintenance and replacement parts; mechanics need only to learn to repair and maintain one model; and pilots can easily be switched to new planes when travel delays leave empty planes in airports while they wait for a crew on incoming flights that are stranded due to weather conditions. (That’s something travelers in the United States have experienced in spades so far this winter!) You can start to see why the company’s name is Portuguese for “Gol Intelligent Airlines…”
An Amazing Growth Story
On January 17, 2011, the company completed 10 years of operation, over which time it carried more than 160.5 million passengers. That’s one amazing growth story, considering the company started with a fleet of only six planes.
Between 2001 and 2009, the company generated average revenue growth of 59.12% – and its revenue and net income are still growing. In 3Q/2010, Gol reported increases of 88.8% in operating income and 41.2% in net income over 3Q/2009. Once again, the high load factor is key…As of 3Q/2010, the company boasted a 71.3% load factor, representing a 5.6% increase over 3Q/2009 and also topping Brazil’s 2010 overall airline industry load factor of 68.8%.
Brazil
Let's take a look at Gol's home: Brazil is a competitive and sophisticated country blessed with abundant natural resources, plus increasingly strong export ties to China and other South American economies. When the numbers are posted, Brazil’s economy will probably put in 7.5% for 2010. Despite signs of overheating, it is still expected to average 5.9% a year through 2014, according to the country’s finance ministry.
That makes it one of the fastest-growing economies on the globe and – with concentrations in agricultural, mining, and resources – puts it on track to be one of the single biggest concentrations of rising wages and purchasing power at the same time. Rising purchasing power means rising wages. And when you work back through the system, rising wages are driven by business expenditures – as is travel, which is itself a reflection of expanding purchasing power and business growth.Case in point: According to Ana (the country’s civil viation regulator), Brazil’s airline industry “load factor” jumped to 68.8% in 2010, up from 65.8% in 2009. (Load factor, by the way, is the average occupied percentage of available seats per flight.)
And it’s not just domestic flights that are boosting Brazilian air travel. Demand for international flights operated by Brazilian airlines climbed 20.4% in 2010, improving the load factor to 76.4%. Brazil is host to the FIFA World Cup in 2014 and the Olympics in 2016, and it’s no wonder President Dilma Rousseff’s administration has pledged massive investments to enlarge airport capacity. A lot has been said so far in 2011 about the U.S. pulling itself up off the mat after a financial smackdown of epic proportions. Private sector jobs are rising again, manufacturing is on the mend, and even consumer spending is coming back. But if you head to many of the so-called “developing” countries – China, India, Taiwan, South Korea, or Indonesia – well, it’s like the financial crisis never even happened. There, economic growth averages 8.11% a year. Compare that to the United States and the European Union, which are struggling to maintain growth rates of 2.9% and 1.7%, even after trillions in stimulus spending and unprecedented central bank meddling. We can see where growth is... In a world of growth hype the West itself can't escape its own metrics and growth logic for long without losing momentum.
Agency theory's perimeters - Corporate governance
31 January 2011 Kovacs Attila Mate
1. Definition of CG
Corporate Governance should cover the policies, procedures and rules governing the relationships between the shareholders, (stakeholders), directors and management of a company, as defined by the applicable laws, the corporate charter, the company's bylaws, and formal policies. Primarily it should deal with managing top management, building in checks and balances to ensure that the senior executives pursue strategies that are in accordance with the corporate mission.
It consists of a set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance governs the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
2. Governments & CG
Despite the efforts of national governments and international organizations to improve corporate governance in emerging markets, the response of the companies themselves has been underwhelming.
Many companies ignore initiatives—which primarily involve reform of boards of directors—or just pay lip service to them. Little attention is paid to the directors' qualifications, even when reforms are mandated, as they are in South Korea, where 25 to 50 percent of a company's directors (depending on its size and sector) must now come from the outside. Could the problem be that the would-be reformers are focusing on the wrong reforms?
The corporate-governance model usually prescribed is the one that prevails in the United States and the United Kingdom. Its emphasis on shareholder value reflects the environment in those two countries, where a very large, dispersed class of investors, with no prior connection to the companies listed on the public exchanges, insists on boards that are similarly independent. These investors also demand a high level of financial and business disclosure.
3. Company & board reflexes, anchors & radical change
As companies have grappled with uncertainty of a magnitude that few have experienced before, boards and management have and should begin by questioning fundamental strategic assumptions:
Is our view of the market realistic? Does our financing strategy take into account the new conditions? Should we reset the incentive scheme or abandon any approach based on share prices? Can we exploit the current glut of talent? How can we take advantage of the pain our competitors are experiencing?
Unfortunately, most corporate directors are likely to assume that radical change is unnecessary and that “normal service” will soon resume. Their experiences during less severe crises—such as those in 1990, 1997, or 2001—will lull them into a false sense of complacency; few will adjust their strategies and policies sufficiently. This behavior is the result of a clinically observed human trait of being overly influenced by past experiences and judgments. Experts on decision-making call it anchoring. The problem is made worse by the natural rhythms that characterize how many boards are used to working—rhythms that tend to reinforce rather than challenge anchored thinking. Therefore board chairmen may need to play a special role in the coming months by challenging their boards to think things through afresh.
However, board procedures are anchored too. Meetings, agendas, and timetables typically follow a preset annual pattern. Advisers are scheduled to appear before audit and compensation committees. Attempts to make changes are often resisted—in part because of habit and in part because those involved have busy calendars. Even if there is energy for fresh, substantive work, the diary may defeat the best intentions. Granted, most boards have an annual offsite day when members talk strategy, but there is an understanding that major change is not expected. New ideas generated from the offsite are viewed as creative input rather than part of a fundamental review of strategy.
Mobilizing even a board to tackle a crisis requires a fundamental overhaul of how its members interact. The only solution is to force change. The gravity and urgency of the situation needs to be underlined by summoning boards to extraordinary meetings, “survival” meetings, “does our plan still make sense” meetings, and “how can we turn this pain into an opportunity” meetings. Without disrupting the rhythm, anchored thinking will continue to dominate.
The style of interaction can be another obstacle. Boards tend to establish patterns of behavior; for example, seating can become regularized, and some members may be expected to say little. Moreover, most boards have a default operating mode. Some place a premium on running smoothly—no disagreements, no late papers, no fluffed presentations, and no late finishes. Some are preoccupied with the formal aspects of governance: process dominates and content gets less attention. Some are financially oriented, with board members peering at their responsibilities through the numbers. But amidst all this heterogeneity lies, in our experience, one simple theme—there tends to be relatively little scope for genuine free thinking or for any fundamental reexamination of the premise of the company.
The solution is to explicitly change the way boards interact. The chairman should insist that members articulate what they have thought but have not had the confidence to express. These conversations will often be more conceptual, and participants will have to take the risk of “saying something stupid.” Chairmen will need to muster up the courage to drive relentlessly the discussions that will take most boards into deep and frightening waters. Long-cherished assumptions, existing plans, or defined ambitions may go down the drain.
The subconscious mind drives many of our decisions
November 2010 Kovacs Attila Mate
Think of a large business decision your company made recently: a major acquisition, a large capital expenditure, a key technological choice, or a new-product launch. Three things went into it. The decision almost certainly involved some fact gathering and analysis. It relied on the insights and judgement of a number of executives (a number sometimes as small as one). And it was reached after a process—sometimes very formal, sometimes completely informal—turned the data and judgment into a decision.
Contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions. The third ingredient—the process—is also crucial.
Any seasoned executive will of course recognize some biases and take them into account. That is what we do when we apply a discount factor to a plan from a direct report (correcting for that person’s overoptimism). That is also what we do when we fear that one person’s recommendation may be colored by self-interest and ask a neutral third party for an independent opinion.
If, as you read these lines, you have already thought of three reasons these techniques won’t work in your own company’s culture, you are probably right. The question is which ones will. Adopting behavioral strategy means not only embracing the broad principles set forth above but also selecting and tailoring specific debiasing practices to turn the principles into action.
Think of a large business decision your company made recently: a major acquisition, a large capital expenditure, a key technological choice, or a new-product launch. Three things went into it. The decision almost certainly involved some fact gathering and analysis. It relied on the insights and judgement of a number of executives (a number sometimes as small as one). And it was reached after a process—sometimes very formal, sometimes completely informal—turned the data and judgment into a decision.
Contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions. The third ingredient—the process—is also crucial.
Any seasoned executive will of course recognize some biases and take them into account. That is what we do when we apply a discount factor to a plan from a direct report (correcting for that person’s overoptimism). That is also what we do when we fear that one person’s recommendation may be colored by self-interest and ask a neutral third party for an independent opinion.
If, as you read these lines, you have already thought of three reasons these techniques won’t work in your own company’s culture, you are probably right. The question is which ones will. Adopting behavioral strategy means not only embracing the broad principles set forth above but also selecting and tailoring specific debiasing practices to turn the principles into action.
Six deadly sins in management and crisis (excerpt)
I. Kick-off questions
A number of questions can be asked to see if the direction a company takes is harmful or destroys value.
These critical questions include:
1. Does management concentrate on financial and other indicators which portray the company in a favourable light, and ignore others which are unflattering?
2. Is the corporate standard of living visibly and luxuriously high?
3. Does the company test its performance against the best competitors in its industry and outside: and against its own previous best results?
4. Are managers held responsible for both their own unit's performance and that of the total business?
5. Are targets expressed in soft verbal form or in hard numbers or requirements which directly affect corporate performance?
6. Is there a mechanism that can rub insiders' noses in the truth of outsiders' perceptions?
If the first two answers are ‘yes', and the others ‘no', the company is probably already in deep trouble. The first seeds of disaster, and even the first crop, appear long before crisis shows in the figures. The difficulty runs very deep. Where all ‘Six Deadly Defects' exist, and smugness is running riot, their very existence makes correction very difficult.
II. Control, complacency & inertia
Any consultant will agree that the best companies make the best clients. This isn't just because mismanaged companies are unlikely to have the required breadth and depth of high-quality management. A deeper reason is that excellent companies are prepared to confront the deficiencies in good time. Lesser, smugger managements tend to wait until crisis - manufactured by their mismanagement - forces their hands.
The allied sickness of executive inertia may also be mentioned, when managers know what to do, and how to do it, but fail to act on their knowledge. In a company that's blind to its failings, however, management may be energetic enough - but its energies will be misdirected. IBM, for example, poured tremendous effort into trying to maintain its proprietary dominance, based on mainframes and once brilliantly successful: but the company smugly missed the seismic shift to open systems and microprocessor-based technology. The trouble was partly that, inside IBM, almost everybody believed that they were working for the best of all possible companies, executing the best of all possible strategies in the best of all possible ways.
... (read on in Docs)
How can we approach airline networks, models, optimization and all its context? (excerpt)
1. Profitability
As a start, we may admit, that there is a clear hard-core business logic in closing any theoretical number of destinations, until you only have the 0+ profit ones.
By the way, this is the opposite of what happenned in the US a few decades earlier.
2. Definitions
Point-to-Point
This model is based on flights that are provided to and from a city. Unit costs are lower in this model as aircrafts are utilized more often because they do not have to wait for connecting flights, thus reducing fixed costs, which accounts for a large percentage of operating costs. Costs are spread out over many hours of flying, thereby driving down the unit cost. Low fare airlines like Southwest and Jetblue are examples of airlines following the point to point system.
Hub and spoke
This model is used by most of the major airlines including American, United, US Airways, Delta, Continental, and Northwest. The Hub and Spoke system allows the airlines to maximize passenger enplanements on each flight by offering connections to both domestic and international destinations. This more complicated route system provides customers with a much larger number of route option, which in turn maximizes revenue opportunities. The downside to this is the increase in aircraft wait time and lower aircraft utilization time, which increases the airlines' unit cost.
3. Shifts in airline network models and influencing factors
So what happenned in the early 80s (or late 70s) in the US and later in EU?
At that time, deregulation there had a strong affect on airlines’ network configuration. Many carriers have rapidly reorganized their network structures from point-to-point (PTP) systems into hub-and-spoke (HS) systems.
In the EU, the deregulation process produced similar results, although its effect on the market was not so radical. European carriers had already concentrated intercontinental flights into an HS structure, while they developed a mixed HS and PTP network for shorter distances (national and international flights).
... (read on in Docs)
Changing company culture (excerpt)
Transforming an organization may be vital to improving performance. This cannot be accomplished without changing its culture - the values and attitudes shared by its members. To do this, you establish key company values, change the behaviour of individuals, and abolish bureaucracy in favour of a creative, enterprising climate of "best practice ".
Establishing a new culture
For Jack Welch, reality, candour and integrity are not ideals but essential weapons in the battle for competitive success and profitable growth. They are fundamental to the culture he established at GE. Do you face reality, tell the truth to everybody (including yourself), and display honesty in all your dealings? If this is not the case, you will not cope well with business needs or earn the trust on which performance ultimately depends.
The role of a values statement
Welch spent years and involved 5,000 people in producing a values statement for GE that made it clear what attitudes and behaviour he expected from employees. As more and more of his staff tried to live by these values, they changed the culture of GE. Today every GE manager has a card that reminds them of the values. It states that GE leaders ("always with unyielding integrity"):
* have a passion for excellence and hate bureaucracy
* are open to ideas from anywhere
* live quality and drive cost and speed for competitive advantage
* have the self-confidence to involve everyone and behave in a boundary-less fashion
* create a clear, simple, reality-based vision and communicate it to all constituencies
* have enormous energy and the ability to energize others
* stretch... set aggressive goals... reward progress... yet understand accountability and commitment
* see change as opportunity... not threat
* have global brains... and build diverse and global teams
... (read on in Docs)
