Escaping the commodity threat drives innovation
Regular visitors of this blog may have noted a “pedagogic” line of thought from early posts, which addressed concrete operational and experiential “pain points” to envisioning, since July, the strategic framework of the airline of the future. Today’s post advocates for an organizational clean sheet approach, while the next blog entries will become much more practical and deal with implementation scenarios, practical solutions and concrete tools.
This makes this post longer than normal. But in reality, there are no excuses. As Mark Twain said: “I wanted to write a short letter, but I had no time. So I wrote a long one”.
Please forgive me for beginning with a personal confession. No ego-exhibitionism – just the need to explain why a rara avis approach to the aviation business may actually contain some valid fresh perspectives for new waves of value-generation in our industry:
1) I love being an entrepreneur. I have started up (some alone, others with partners) several companies in different industries, including IT and Internet companies, a small airline and a movie producer. Some were successful, others failed, although the bottom line remained very positive. In other occasions I experienced the opportunity to participate in big “intrapreneurial” transformations at larger companies. But above all, I deeply enjoy creating something that makes a difference while obtaining the resources for the next venture. Unfortunately, the airline industry has little tradition of intrapreneurship.
2) I love aviation. Being a schoolboy in Germany, a cousin who owned a small FBO paid me for cleaning his aircraft with occasional, miserably short plane rides. And I am still feeling the frustration of not having continued my pilot training after another student crashed the only available plane (pilots alive, plane dead) when I was a young man, living in South America. Today my focus changed from planes to airlines, which I still consider the most interesting and challenging industry to be in.
3) I like people. Really. I was going to become a priest before discovering the thrills of entrepreneurship and organization building. And my father, a scientist and university professor, transmitted me the delight of assisting other people to achieve their personal and collective goals. However, I learned to detest all those “experts in what cannot be done”, which populate way too many driving seats in our organisations.
During the past 15 years, the low cost carriers brought some groundbreaking process and product innovation to an industry that was agonizing in self-complacency. But the dynamism generated by Ryanair, Gol, AirAsia, Vueling or Jetblue now needs a substantially new value (=revenue) creation impulse, now that the cost screws have hardly any further turns left.
I will point out a few of those possible future tendencies. I am not inventing anything, I am just trying to describe embryonic realities whose gradual emergence I am observing. Projecting their evolution into the future and connecting the individual dots of a picture whose shape seems still fuzzy may give some insight:
1) From Outsourcing to Networks of Competence Centers.
Do you remember when some airlines considered running hotels as part of their core business? Times have changed radically and today many processes have been outsourced. The problem is that this has been driven by the desire to cut costs, not to create value.
I am seeing huge opportunities in the evolution from a fragmented value (service supply) chain, governed by badly defined SLAs (many do not even include customer experience relevant KPIs!) to a value grid of entre/intrapreneurial entities.
Modern economists say that there are three basic types of economic activities, which perform much better when not organizationally interwoven:
a) The infrastructure operator produces a commodity, like telecom minutes, kilowatts or seat-kilometers. Its competitive advantage is defined by guaranteeing the highest operational reliability at the lowest cost. Many telecoms no longer operate their own networks, they hire specialists like NokiaSiemens or Alcatel-Lucent to do that for them. What prevents airlines from operating in the same way?
b) The brand operator is in charge of investor and customer relations (sales, marketing, service), “selling the seats” provided by the “infrastructure operator”. It converts the “seat-kilometer-commodity” into a differentiated value proposition and can generate extra cash and increase shareholder value by leveraging its brand attributes to create new ventures or spin-offs, such as e-commerce platforms, loyalty programme operators, revenue generating service features, etc.
c) The innovation factory designs features, services or products that can make the customer want to pay a premium or add-on on top of the commodity price of the “capacity” provided by the “infrastructure operator”. Those innovations can come from traditional IT solutions providers or more entrepreneurial inventors of new revenue streams. These will no longer be called “ancillary revenues”, because they will be self-managed core component of the value creation process.
The benefits: the key is to allow management to focus on their core competences and to develop an organization that is much more prone to innovate and to explore new value creation opportunities than airlines with current structures and legacy mindsets. This will go hand in hand with a number of new tendencies:
2) Web 3.0 era airlines – not so far away
As I said in my “Apple Airlines” blog entry, even today there is no real excuse for (for example) not resolving the problem of lost baggage already during the flight and before arrival. Once airline “brand operators” will strip their 1950s integrated “air operator’s mindset” and focus on customer experience, they will be able to overcome the slavery imposed by fragmented legacy IT systems and fully understand and profit from the opportunities created by the “semantic web” or “Internet 3.0″, the real time information-interpretation layer that will make today’s “social web” intelligent and self-improving.
There are first glimpses of these innovations already visible today, such as SAP’s in-memory real-time technology applied to its Hanna suite. Integrating ERP, social media customer listening ability and CRM with operational IT and highly innovative “customer experience plug-ins” can constitute a very powerful framework. However, many airlines are still unable to fully benefit from the wealth of data made available by this type of solutions.
More down-to earth, Comarch did a great job at pulling together information from different sources to convert Jetblue’s customer relations programme in a real value creator for both customers and the airline.
On another front, Google is already showing (thanks to ITA) how lightening fast and intelligently powerful travel search will be in the future. Add service aggregation, booking, social network listening and behavior-predicting neural network based microsegmentation tools for on-the-fly customization and you will get an idea of power of the travel e-commerce platforms of the future.
Future blog posts will deal more specifically with new opportunities to use IT to radically redefine the value proposition to the customer.
3) Humanity brought back to air travel – for the sake of profitability
Four years ago, I became an unconditional CEM (Customer Experience Management) advocate after implementing a strategic end-to-end airline CEM plan as part of a major corporate restructuring process. It generated a direct revenue increase of 8% to its bottom line without huge investments. A welcome collateral effect was a dramatic drop in employee turnover.
But today I am much less enthusiastic: the massive appointment of “Customer Experience VPs”, without applying the necessary changes to the organization and corporate culture, is burning the CEM movement much faster end than I expected.
However, the case for a “people centric” airline remains stronger than ever. CEM is not about who serves the best meals or has the fanciest seats. It is about money, about setting segmented expectations and deliver the corresponding value, bridging the traditional “brand promise vs. operational reality” gap: Ryanair is really good at that – usually you get more than what you expect (because you expect nothing except a cramped aircraft seat from A to B), while Singapore Airlines struggles with delivering potentially excessive expectations created by its increasingly unmanageable “quality myth”.
Beyond the mere removal of operational dissatisfiers, CEM has such a proven positive impact on revenues through improved wallet share, customer retention and effective word-of-mouth promotion that it will continue to be one of the main paths of airline innovation. The “corporate unbundling” (see above) will generate plenty of organizational change opportunities that must break up “legacy mentalities” and force new views on what people really value (and are therefore happy to pay for).
The Service Design movement is developing very effective tools to experiment with, conceive, map, blueprint and implement new valuable experiences. We will have a closer look at them at upcoming posts.
4) Intrapreneurship in the new corporate value grid
Once the concept of the sequential supply chain, infamously “managed” by copy&paste SLAs, has given way to a more integrated organizational view of interconnected value creation units, high potential employees will no longer need to be “disciplined down to average performance” or driven out to companies that do have good use for “out of the box thinkers”.
At the necessary distance from the operations “department”, which must thrive on operational excellence, internal entrepreneurs will be free to design new marketing processes and products creatively and around specific customer segments desires.
Airlines have been traditionally slow to adopt innovations beyond those driven by the operational and the commercial efficiency. Only recently, I am encountering genuine interest at some airlines to inject the genes of innovation into their organization.
There are a number of lean business model generation tools and methods which I have tested successfully in recent workshops and which can help to facilitate a climate for “inventing” new revenue generators within or for airlines (hotels,…).
I mentioned already in previous blogs Alex Osterwalder’s Business Model Generation Canvas and Steve Blank’s parallel product-customer development methodologies are great inspiration, planning and communication tools to facilitate and mange intrapreneurially initiatives. They are quite new and I am currently experimenting with their adaption to the airline and travel industry. Be assured that I will share my experiences with you once I can speak from practice.
