Thursday, December 01, 2005

“Purpose Brands” ?

Tuesday’s Wall Street Journal featured a piece in the second section’s “Manager’s Journal” that can only be described as remedial marketing.

The piece, entitled, “It’s the Purpose Brand, Stupid,” advances the apparently-novel notion that products (and services) should be focused on customer needs.

Really? Do tell!

What struck me as I glanced at this piece is how low the Journal’s staff must be aiming to waste space on this type of pablum. And, thus, how uneducated the staff must feel their average reading audience is.

But there’s more shocking news. The piece is an exerpt of the authors’ upcoming article in the Harvard Business Review. One of the co-authors is a member of that college’s business school faculty.

The notion of developing products to satisfy customer needs is literally as old as marketing itself, and covered in an introductory marketing course at the undergraduate level. Why this would need to be re-stated as a special topic in the world’s leading business daily makes a sad statement about the state of mediocrity among business executives in general.

Perhaps this is because the MBA as an educational program is insufficient to impart the necessary knowledge in depth to lead and manage businesses effectively. With less than 24 months duration, and the last 6 of those typically wasted on job search, the educational program may be too short to really imbue its students with effective managerial tools. In my opinion, it seems to have become more of a financial- and other functional tradecraft certification, and much less of a management degree.

If this were not true, would an article such as the one mentioned in the beginning of this post be appearing in the leading business daily paper, as well as a well-known business monthly magazine?

Southwest Airlines: A Case for “Right Sized” Airlines ?

This weeks’ Wall Street Journal article about Southwest Airlines’ move into a new hub in Denver brought me back to some insights about the airline sector from a few years ago.

There seems to be an irreconcilable conflict in many sectors between a company’s growth objectives, its profitability, and the real constraints to satisfying both of these. It is especially obvious with airlines.

As a business with large fixed capital assets and varying customer demand levels, both in unit volumes and revenues, airlines have always been management challenges. Factoring in the relevant economic attributes of the typical airline- low barriers to entry, relatively high capital requirements, unionized labor, lack of control over the system in which it operates, tendency towards costly evolution to multiple plane types, underlying derived demand for travel- suggests that there are probably very real limits to profitable growth.

In Southwest Air’s case, when I read about the airline changing its operating model to accommodate growth, I expect financial doom to be in the offing. The stock is down over the last five years as it is, and even under-performs the S&P500 during that period.

Similar to the “wheel of retailing,” about which I have written in an earlier post, budget airlines beg for trouble when they depart from their original low-cost, no-frills, or limited-geographical service model. It does seem that historically financially successful airlines were regional carriers who had identified a fairly self-contained segment of fliers whom they could serve at lower costs than larger airlines could do so. So long as such airlines expanded within a region that provided high load factors while the airline grew service points and passenger volume, there was no problem.

What seems to sound the death knell for these regional carriers is their eventual desire for passenger and revenue growth which requires them to outgrow their original, self-contained market segment of travelers. Just because an airline wishes to profitably continue its growth does not mean it should, or will, happen. Thus, Southwest’s dilemma.

It is pushing for growth while its total returns over the last five years are already penalizing its shareholders.

Hard as it may be to accept, many companies simply run out of profitable market segments in which to grow, and then their days of consistently superior returns are over. Airline total return performances seem to reinforce this conclusion with stunning regularity. So much for learning by example, or even from their own mistakes.

Sunday, November 27, 2005

US Financial Super-Utilities

Both Chase and Citibank have become massive, mediocre financial super-utilities in the past decade. But neither one has out-performed the S&P500 over the past 5 years. Chase’s last merger, with the combined Midwest banking conglomerate, FirstChicago-BancOne, hasn’t and won’t change that.

Ironically, my old boss, and SVP of Corporate Planning and Development of the “old” Chase Manhattan, Gerry Weiss, predicted back in 1986 that eventually the major money center banks of Manhattan would merge into one or two giant mediocre financial services companies. He was eerily prescient.

What Gerry saw from his unique vantage point was how difficult it was to effectively manage such a wide range of types of businesses at these banks, in conjunction with the lack of adequate managerial talent. Financial services has never attracted good managers.

Traders, deal-makers, and financial products innovators, yes. Consistently-effective managers, no.

My original research at Oliver Wyman & Company, now Mercer’s financial services consulting unit, confirmed this. Money center banks and large investment bank/brokerages never enjoyed consistent superiority in their shareholder wealth creation. They were out-peformed by single-line firms in credit card lending, mortgage banking, private banking, asset mgt, etc.

Empirical research of over a decade of company performances confirmed my old friend and boss’ hunch, and added a new finding. Not only were and are these financial leviathans simply too complex for the executives that are typically drawn up through their ranks to successfully manage. By being so broadly diversified, and large, they are sure to experience every major financial calamity which befalls the sector- be it real estate lending, sub-prime credit, risky proprietary trading, or, as in the Enron case, over-zealous complex financial products marketing which apparently crossed the line from finance to abetting financial fraud. The result is that consistent total returns prove to be an elusive goal, as these huge financial behemoths are beset with every market excess which occurs in the industry.

That is no doubt why these companies are rarely, if ever selected by my portfolio strategy. Revisiting my original sector research, and Chase’s and Citigroup’s recent performances, is a comforting reminder that my strategy’s bias in favor consistently superior performance is based on sound empirical research. Size for its own sake is of no value when you want to out-perform the market, despite what analysts may believe.

Chase: Remembering “Vision Quest”

A reference this weekend to an American Indian “vision quest” brought to mind a long-ago corporate monstrosity, Chase Manhattan Bank’s own “vision quest” project of the early ‘90s. The effort was, I believe, ascribed to then-CEO Tom Labreque. I recall that a friend told me, after I had moved on to other work, that the bank actually inscribed the resultant values from the “vision quest” project onto a panel on the wall of the bank’s then-headquarters downtown at Chase Plaza.

I suppose an indication of how useless the resulting “vision” was is that Chase was acquired by Chemical bank within just a few years of the company-wide project’s conclusion. As I recall, it was that, or have Michael Price, then a hot mutual fund manager, force the bank’s senior management to dismember the firm in order to wring more value from it. Either way, Labreque's hand was forced, and he lost control of the bank he had labored so hard to finally "lead."

Today, Chase is a combination of Manufacturers Hanover, Chemical, and JP Morgan with Chase. The only significant US banks on the island of Manhattan that didn’t merge into it were Bankers Trust, which was snapped up by Deutsche bank after its ill-fated derivatives moves later in the decade, and Citibank.

Maybe the lesson here is that clueless white senior managers shouldn’t try “vision quest” –ing on their own, or with conventional management consultants.

Perhaps if Chase had actually retained an American Indian consulting group, complete with hallucinogenic substances, their efforts would have met with more success. It's arguable that the results of such a "vision quest" could have led to any worse results than those which followed from the erstatz process the bank actually employed.