I was on KPCW's Monday business show Mountain Money yesterday, talking mostly about hiring and why it's so hard. I think hiring well is a big key to success in many businesses, but unfortunately it's an area that economists and other management professors don't have enough to say about. We're working on understanding it better.
You can listen to my conversation with hosts Pam Wylie and Doug Wells here, and I'll try to write more about this important topic in the future.
Tuesday, May 8, 2012
Thursday, May 3, 2012
Delta Buys A... Refinery???
According to Tuesday's New York Times, Delta Airlines will purchase a refinery outside of Philadelphia. The idea, at least according to the article, is that Delta will somehow use this refinery to "get control of fuel costs."
This is a clear example of a make-or-buy decision. Delta can easily buy jet fuel on the open market. This has been an expensive option, for sure, in recent years, but this market seems to be working just fine (in the sense that anyone who's willing to pay the market price can get any amount of jet fuel that they like).
Obviously I wasn't in the room for the deliberations by Delta management, and so maybe something else is going on... But it sure seems to me like Delta is falling for one (or more) of the big "Make-or-Buy" fallacies. While there are many good reasons why a firm might want to buy one of its suppliers, this is one of the areas of management where you hear a lot of really dubious arguments.
In our Economics of Strategy textbook, my co-authors and I describe five make-or-buy fallacies (page 123 of the fifth edition), and I'd guess that Delta is falling for number 4. We describe this one as follows:
My view: I think this plan will lead to higher medium- and long-run jet fuel costs for Delta. Not a good move...
This is a clear example of a make-or-buy decision. Delta can easily buy jet fuel on the open market. This has been an expensive option, for sure, in recent years, but this market seems to be working just fine (in the sense that anyone who's willing to pay the market price can get any amount of jet fuel that they like).
Obviously I wasn't in the room for the deliberations by Delta management, and so maybe something else is going on... But it sure seems to me like Delta is falling for one (or more) of the big "Make-or-Buy" fallacies. While there are many good reasons why a firm might want to buy one of its suppliers, this is one of the areas of management where you hear a lot of really dubious arguments.
In our Economics of Strategy textbook, my co-authors and I describe five make-or-buy fallacies (page 123 of the fifth edition), and I'd guess that Delta is falling for number 4. We describe this one as follows:
Firms should make, rather than buy, because a vertically integrated producer will be able to avoid paying high market prices for the input during periods of peak demand or scarce supply. (This fallacy is often expressed this way: "By vertically integrating, we obtain the input 'at cost,' thereby insuring ourselves against the risk of high input prices.)Why is this a fallacy? Well, there's a long numerical example in the text illustrating why this won't increase expected profits, but here are some quick thoughts: First, Delta still has to buy crude to feed its refinery, and it's fluctuations in the price of crude --- not the margin earned by refiners --- that has been causing the ups-and-downs in the price of jet fuel. Second, if Delta wants to hedge jet fuel prices, it can do so in the futures market pretty easily. Finally --- and this I think is the big one --- what is Delta management going to do if/when its refiner falls behind other refineries in terms of cost-reducing process innovation? Note that if Delta has an independent supplier (that is, one that's not owned by Delta) and this supplier falls behind rivals on costs, then Delta can easily switch to a lower-cost supplier. Will Delta management idle its own refining capacity if the managers it hires cannot stay competitive? I bet not, and this will sharply reduce competitive pressures on the in-house supplier relative to the market.
My view: I think this plan will lead to higher medium- and long-run jet fuel costs for Delta. Not a good move...
Tuesday, May 1, 2012
Moneyball
Best.
Movie.
Ever!
And no, it's not because Brad Pitt is so dreamy.
I like baseball, and people would maybe say this is a movie about baseball. I like statistics too, and people would maybe say this is a movie about that.
But it ain't about that; this is a movie about management and strategy, and that's why it's so great. I'll get to the management part in a later post; let's talk about strategy.
(And I'm going to assume you've seen it; if not, stop reading and go watch!)
I was giving a talk about strategy at the Governor's Utah Economic Summit a few weeks ago, and started by asking whether people had seen the movie, and if so, whether they thought the Oakland A's strategy --- essentially using innovative analysis to identify players whose contributions to on-field success were undervalued by the labor market --- was a success. The movie shows that the A's did, indeed, have a couple of very good seasons in the early 2000s, and so the audience mostly concluded that this was a successful strategy.
But the great thing about this movie is that this is a strategy that failed. And I think understanding why can help businesspeople understand what strategy is, and what a good one looks like.
In my view, the Big Question of Strategy is this: How can a firm deliver long-run superior performance? How can we do what General Electric did in the 1980s and 1990s? Or what Apple has done over the past 10 years?
This is a hard problem because markets work against you. Turning short-run success into long-run advantage is difficult because rivals can so often just copy you. Or worse, take your ideas and improve upon them.
This is exactly what happened to the Oakland A's. The team's ideas were amazingly good. The A's achieved their goals and topped their rivals. For about two years. But then... The rivals took note. They saw that the source of the A's success was in their front office and the people who analyzed the players. Rivals started to copy their methods, poach their talent, and generally compete for the same players that the A's had been after. And there was really nothing the A's could do about this. Their advantage quickly dissipated, and the team has been mostly medium-ish over the last few years.
The business world has dozens and dozens of examples of innovators, like the A's, who were unable to convert short-term success into long-run advantage. (Do you remember Myspace? Yahoo?) The moral of the story is this: A plan for long-run competitive advantage has to be built around things that rivals can't easily copy. The A's were likely doomed from the start, and that's why the Moneyball story fails as a strategy.
To be clear, I'm not saying the A's made a mistake by pursuing this innovation; the team was clearly better off having a couple of great seasons than not having that success. But when you're presented with options about what direction to take your firm and your career, it's important to keep in mind the impact of future competition on your ability to sustain performance. And if you can get to places where competitors will have trouble following... those are the great strategies. (It's a bit easier said than done.)
More on the "management" side of things, upcoming...
Movie.
Ever!
And no, it's not because Brad Pitt is so dreamy.
I like baseball, and people would maybe say this is a movie about baseball. I like statistics too, and people would maybe say this is a movie about that.
But it ain't about that; this is a movie about management and strategy, and that's why it's so great. I'll get to the management part in a later post; let's talk about strategy.
(And I'm going to assume you've seen it; if not, stop reading and go watch!)
I was giving a talk about strategy at the Governor's Utah Economic Summit a few weeks ago, and started by asking whether people had seen the movie, and if so, whether they thought the Oakland A's strategy --- essentially using innovative analysis to identify players whose contributions to on-field success were undervalued by the labor market --- was a success. The movie shows that the A's did, indeed, have a couple of very good seasons in the early 2000s, and so the audience mostly concluded that this was a successful strategy.
But the great thing about this movie is that this is a strategy that failed. And I think understanding why can help businesspeople understand what strategy is, and what a good one looks like.
In my view, the Big Question of Strategy is this: How can a firm deliver long-run superior performance? How can we do what General Electric did in the 1980s and 1990s? Or what Apple has done over the past 10 years?
This is a hard problem because markets work against you. Turning short-run success into long-run advantage is difficult because rivals can so often just copy you. Or worse, take your ideas and improve upon them.
This is exactly what happened to the Oakland A's. The team's ideas were amazingly good. The A's achieved their goals and topped their rivals. For about two years. But then... The rivals took note. They saw that the source of the A's success was in their front office and the people who analyzed the players. Rivals started to copy their methods, poach their talent, and generally compete for the same players that the A's had been after. And there was really nothing the A's could do about this. Their advantage quickly dissipated, and the team has been mostly medium-ish over the last few years.
The business world has dozens and dozens of examples of innovators, like the A's, who were unable to convert short-term success into long-run advantage. (Do you remember Myspace? Yahoo?) The moral of the story is this: A plan for long-run competitive advantage has to be built around things that rivals can't easily copy. The A's were likely doomed from the start, and that's why the Moneyball story fails as a strategy.
To be clear, I'm not saying the A's made a mistake by pursuing this innovation; the team was clearly better off having a couple of great seasons than not having that success. But when you're presented with options about what direction to take your firm and your career, it's important to keep in mind the impact of future competition on your ability to sustain performance. And if you can get to places where competitors will have trouble following... those are the great strategies. (It's a bit easier said than done.)
More on the "management" side of things, upcoming...
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