Tag: business

You can’t cost cut your way to growth

Cosy management leaves a business exposed to disruption as Australia’s Qantas Airlines has discovered.

Yesterday I interviewed Alex Bard, Senior Vice President for Service Cloud at Salesforce for the Decoding The New Economy YouTube channel.

Alex’s interview will be up tomorrow, but during the conversation afterwards he made a comment about modern management saying, “you can’t cost cut your way to growth.”

This is at odds with 1980s management theory where CEOs like Jack Welsh at GE and Al ‘Chainsaw’ Dunlap at Scott Paper slashed costs to bring listless businesses back into profit.

During that period, many businesses were overstaffed and poorly managed so leaders like Welsh and Dunlap were the right men for their time.

To a generation of bean counting executives, Dunlap and Welsh proved that any business problem could be fixed by cutting costs. They were truly men of their times.

Which brings us to Australia’s Qantas Airlines who, at the time Alex Bard and I were having coffee, announced 5,000 job cuts; close to 25% of the company’s workforce.

Qantas certainly does have problems as shown in its $252 million loss and some of them, as with all legacy national carriers, lie with long outdated labour arrangements.

However the airline’s problems are much deeper than a featherbedded workforce and most of the blame for Qantas’ dilemma lies with the company’s management.

Management mistakes have included maintaining an old fleet of Boeing 767s and 747s while pouring investment into their discount subsidiary, disastrous international alliances in Asia that have seen them kicked out of Vietnam and planes for their Japanese venture grounded in Europe.

Probably the biggest mistake though for Qantas though was management’s assumption it had a cosy position in its domestic market.

Like most Australian industries, the nation’s aviation sector is a duopoly dominated by Qantas, a result of the 1980s theory that the country could sustain global champions subsidised by hapless domestic consumers.

This theory has proved disastrously wrong for Australian consumers with the duopolies becoming very good at exploiting their domestic market power after deciding it was simply to hard to compete outside the home country.

For Australia, the consequence of this strategic mistake by the country’s business and political leaders has been to make domestic industries hopelessly uncompetitive as local managers are largely isolated from genuine competitive pressures.

Qantas is the classic case study of Australia’s insular corporate mentality as the airline steadily abandoned its international routes and focused on maximising profits on its domestic operations, particularly those unfortunate rural routes where the Flying Kangaroo has no competition.

Unfortunately for Qantas’ shareholders; Virgin Australia, the other duopoly player in the Australian airline industry, wasn’t going to play by the rules that keeps the rest of the country’s complacent corporate sector relaxed and comfortable.

As a consequence, Qantas found itself in a damaging price war as it sought to protect its 65% domestic market share. Worse still for the airline, its competitor started offering Business Class services and competitive lounge facilities that started to erode its most lucrative fares.

For Qantas, the sensible option is to focus on its strengths and build in its most profitable areas but instead the airline’s CEO, Alan Joyce, chooses to fight for the airline’s precious two third market share while slashing staff numbers.

Alan’s response is classic ‘cutting for growth’ and it won’t work – the airline desperately needs investment and visionary management, both of which it won’t get.

Cosy management can prosper in a cosy market, but it leaves those companies exposed to disruption from keener competitors and that’s what Qantas is learning.

Sadly for Qantas’ management, they aren’t in the 1980s and Joyce is no Jack Welsh. Today, as Alex Bard points out, the game is customer service and slashing your workforce is the wrong starting point.

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An era of exponential innovation

Deloitte Center for the Edge founder John Hagel talks about our era of exponential innovation.

“How do we move to an exponential approach to innovation” asks John Hagel, Director of Deloitte’s Centre for the Edge in the latest Decoding the New Economy video.

The Centre For The Edge is Deloitte’s Silicon Valley based think tank that identifies and explores emerging opportunities related to big shifts that are not yet on the senior management agenda.

John tells us how the cycles of change and innovation have varied over the last thirty years in the industry; “the biggest thing for me is that nothing is stabilising. I often go back into history and look at things like electricity, the steam engine and the telephone – all hugely disruptive to business practices.”

“But the interesting pattern is they all had a burst of innovation and then a levelling off,” says John . “You could stabilise and figure out how to use all this technology.”

“With digital technology there is no stabilisation.”

That lack of stabilisation leads to what John has termed ‘exponential innovation‘ where he sees business and education being rapidly transformed as technology upends established practices and methods.

Healthcare, financial services and “any industry that has a high degree of information content ” are the sectors currently facing the greatest challenges in John’s view.

John sees the solution for businesses and managers in looking at the current era not as a time of technology innovation but of institutional innovation. That institutions, like companies, have to reinvent how they are organised.

Reinventing well established companies or centuries old bureaucracies is a massive challenge, but if John Hagel’s view is right then that radical change to institutions is what is going to be needed to face a rapidly changing society.

Bank image by Ben Earwicker, Garrison Photography of Boise, ID through sxc.hu

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The taxing business of options

The Australian attempt to reform the tax system is an interesting exercise in international comparisons.

I’m burning the midnight oil tonight pulling together a story for Business Spectator on reforming Australia’s tax treatment of employee option schemes.

This is a fraught subject as Australia bucked the global trend in 2009 after it became obvious the corporate sector was abusing the existing tax rules that were largely in line with most OECD nations.

In a clumsy, poorly thought out reaction – which is sadly the mark of modern Australian governments of all shades –  the then Rudd Labor government radically changed the rules governing employee schemes that made it difficult for any business to offer stock to their staff.

Last week I spoke to Sydney business intelligence company Encompass and after the video the founders told me about the importance of their share scheme, it illustrated exactly the problem facing Australian startups.

Five years on and it’s apparent the strict rules are working against Australian business and various industry associations, accounting groups and startups are lobbying for reform.

One of the lobbying initiatives is Deloitte’s Retaining Talent project that has some fairly modest proposals in bringing fairer rules back for smaller and younger startups.

The story’s particularly interesting for me in that I’m bringing together a number of previous posts citing how other countries and cities like San Francisco and the United Kingdom have changed their rules on option schemes.

For Australia, the closure of the country’s car manufacturing industry and the struggles of the agricultural sector are bringing home to voters and the government just how seriously the country squandered the massive mining boom of the last decade.

While reforming startup option schemes is a useful start, it’s hard not to think it’s way too little and way too late for the country to begin planning for the post mining boom economy.

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Winning the three-legged race

Merging two trouble companies rarely resolves the underlying problems

Does tying together two lame men give you an Olympic sprinter?

It’s quite common in the business world to see two second rate companies merging in the hope that their combined market share will give them enough momentum to overcoming the market leader.

The tactic rarely works as the businesses running third, fourth or fifth in a market are usually doing so because they have ordinary products or indifferent management rather than any inherited size disadvantage.

Merging two second-rate companies usually results with a pair of competing silos of mediocrity where the former workforce and management of the original business squabble over power in the new entity.

Far from being more competitive, the merged company is even more distracted with internal politics and power plays.

The story that Australian department store Myer proposed a merger with its rival David Jones is a very good example of this as two poorly run companies whose managements that have abjectly failed to adapt to the modern times, try to paper over their chronic problems by merging.

Both companies have failed internet strategies – Myer’s website managed to collapse during the Christmas sales season and no-one could be bothered fixing it for over week.

Along with lousy internet strategies, both companies have underinvested in IT systems leaving their point of sales and logistics systems antiquated and incapable of meeting modern customers’ needs.

Probably the greatest mistake that Myer and David Jones’ management made though was a focus on cutting costs through reducing sales staff.

The resulting lousy and often pathetic service resulted in both brands being seriously tarnished and had the effect of driving high value customers away.

Further damaging the stores reputation was the tactic of offering perpetual sales which trained the customers that would still shop with them into waiting for goods to be marked down rather than paying full price.

Merging the two operations would have done little to resolve any of the long term management failings of the two businesses, although no doubt there would have been some fat advisors fees for some of the boards’ friends.

Nothing fixes poor management better than getting rid of the poor managers, merging two poorly run business like Myer and David Jones does nothing.

Retailers failing as their poor management struggles to deal with changing marketplaces is an international problem, as this story about US chain Sears illustrates. The Australian experience though is a classic case study of two poorly led organisations trying to pretend their failings can be fixed through mergers.

Resolving the problems of troubled companies like Sears, David Jones and Myer involves having good management and smart investment, merging with a similarly troubled organisation solves little except perhaps putting off the day of reckoning.

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Little Boxes, big data and modern management

The careers of folk singers Pete Seeger and Malvina Reynolds have some lessons for modern management.

Yesterday’s passing of folk singer Pete Seeger at age 94 is a chance to think about old age, the Twentieth Century and how we use technology might be restricting us from seeing the opportunities around us.

One of Seeger’s best known hits of the 1960s was Malvina Reynold’s song ‘Little Boxes’ that described middle class conformity in the middle of the Twentieth Century, which had a renaissance in recent years as different contemporary singers did a take of the song for the TV series ‘Weeds’ .

As the ‘Weeds’ opening credits imply, we are probably more conformist today than our grandparents were in the 1960s.

In business, that conformity is born out of modern management practices that insist employees be put into their own ‘little boxes’ – if you don’t tick the right boxes then the HR department can’t put you in the right box.

With big data and social media expanding, increasing computer algorithms are used to decide which box you will fit into. One of the boxes that managers and HR people love ticking is the age box.

Little Boxes’ writer Malvina Reynolds would never have fitted into one of the modern HR practioners’ little boxes as she only entered the folk music community in her late forties.

Despite being a late bloomers, Malvina wrote dozens of folk and protest songs through the 1960s and 70s – The Seekers’ Morningtown Ride was another of hits – before passing away at age 77 in 1977.

Were Malvina Reynolds born 60 years later, she would expect to live to at least Pete Seeger’s age and expect to switch careers several time during her working life.

Modern age expectancy means the modern workplace’s age discrimination and the box ticking of HR managers is unsustainable; there’s too much talent being wasted while individuals, business and governments can’t afford to fund a society where the average person spends the last thirty years of their life in retirement.

With technology there’s no reason why a forty year old air pilot can’t retrain to be an accountant or a sixty year old farmer get the skills to become a nurse, the very tools that are being used to keep workers in boxes are the ones that enable them to break out of those boxes.

Similarly modern technology allows an accountant, farmer or young kid in an obscure developing nation to create a new business or industry that puts the box ticking HR managers in downtown high rises out of work.

Just as today’s box ticking manager might be confronted by a threats they barely know exist, so too is the business that spends all its time looking at data that confirms its owners’ and executives’ prejudices.
Life, and data, doesn’t always neatly fit into little boxes.

Filing box image courtesy of ralev_com through sxc.hu

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Tech security in a tough world

Even the professionals are struggling to keep up with a rapidly changing IT world, which is why businesses should start taking computer security seriously.

Network giant Cisco Systems released its 2014 Annual Security Report last week which should make sobering reading for every business manager and owner.

If you’re looking at a career change, the survey even suggests a possible new job.

Over two million of Cisco’s customers were examined in the survey and every single company had evidence of their systems being compromised in some way, from staff visiting suspicious websites to full scale hacker break-ins.

Keeping up with change

The survey points out IT security risks are evolving quickly as business technology becomes more complex and it’s hard for even industry professionals to keep up with the pace of change.

“Even the most sophisticated and well funded security teams are struggling to keep on top of what’s happening,” Chief Security Officer of Cisco, John Stewart, told a media briefing yesterday.

That concern was reinforced by Stewart’s colleague Levi Gundert, technical lead at Cisco’s Threat Research Analysis and Communications (TRAC) group.

“It’s not about are you going to be compromised,” said Gundert. “the question is how long is it going to take you to detect and shorten the remediation window?”

If even the world’s biggest corporations are struggling what can smaller organisations do to control the risk?

Disable Java

The biggest computer security risk is Java software. Cisco found a shocking 91% of software exploits were related to the application, “2013 was the year of the Java exploit.

It was a bad year for Java.” Says Gundert. It should also be noted that the first successful malware targeting Apple Macs, the Flashback Trojan, was a Java exploit.

The best way to deal with this risk is keep Java off your systems, the problem with that advice is many business applications – and games if you have a home office or kids use your computer – need the software to run.

If you have to use Java packages, make sure you have the latest version running on your systems.

Keep your systems up to date

It’s not just Java that is a risk, Cisco identified Adobe PDFs and Microsoft Office vulnerabilities as being other threats.

It’s important that all systems – Mac, Windows or any other operating systems – are kept up to date with the latest patches.

Lock down office systems

Except when your computers are being updated, there’s no reason for office computers to be running in Administrator mode.

Day to day use should be done in restricted user profiles; on a Windows machine, workers should be logged on as standard users, while on Macs they should be managed users, the only time an Administrator needs to be logged on is when maintenance is being done.

Watch those mobiles

The IT security industry has been watching smartphones for a while and 2013 started seeing large scale malware appearing on mobile devices, although it’s still small scale compared to PCs.

Cisco’s survey found only 1.2 percent of web based malware coming from mobile devices with almost all the infections being on Android systems.

Most of these Android infections were game add-ons downloaded from unofficial Android app stores so the message is to stick to the official, trusted services for Android apps.

Website risks

Another risky area for businesses identified by Cisco identified are websites being compromised and hijacked.

The software on these needs to be updated to the latest versions just as office computers should be.

Often, disused websites and blogs aren’t updated, the ABC discovered last year that abandoned, neglected websites are a great way for hackers and malware distributors to launch attacks or spread problems.

So if you have older websites or blogs, shut them down and redirect the domains to operating addresses.

For those operational websites password security needs to be beefed up as Cisco found ‘brute force’ attacks – where automated systems try every conceivable password combinations – were up threefold in 2013.

Professional skills shortage

A big problem facing the IT industry is a worldwide skills shortage: “There are essential a million jobs across the globe that can be filled but we don’t have trained people to fill them,” says Cisco’s Stewart. “We’ve got a dearth of talent and skills.”

For smaller businesses that means it’s harder to find someone to fix problems when they happen, for both business managers and owners it’s smarter to reduce the likelihood of having a problem rather than scrambling to find an IT professional to help after the event.

The good news from Cisco’s survey is if you’re thinking of a career change, or you have a teenager moping around looking for a job, then IT security could be the answer.

For everyone else, as business and the world in general becomes more connected the security of the systems our world is coming to depend upon is something we have to take more seriously.

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On looking foolish

Looking foolish is one of the biggest risks when taking chances in business. It’s something every innovator and entrepreneur has to consider.

Looking foolish is one of the biggest risks when taking chances in business. It’s something every innovator and entrepreneur has to consider.

Venture Capital investor Mark Suster explains why he doesn’t mind looking foolish with his choice of investors on his blog today.

One of the toughest things in life is taking the risk of looking foolish in front of your peers yet that’s what the real high risk inventors, innovators and entrepreneurs do with their ventures.

Light bulbs and the telephone looked ridiculous to many at the time they were invented and no doubt the inventor of the wheel or the Neanderthal who came up with the idea of cooking meat in a fire both probably received a far bit of scorn when they told the others in their tribe about their idea.

While Suster is talking about ‘moonshot investments’, even the most modest venture is going to attract scorn.

There would be few people who decided to buy a doughnut franchise, establish a cafe or set up a lawn mowing service who weren’t told by some of their relatives, friends or colleagues that they are doing the wrong thing and they should stick to their safe job in their cosy cubicle.

Should someone want to change the way doughnuts are made or lawns mowed, then they can expect even more naysayers laughing at them.

In this current craze about ‘entrepreneurship’ it’s easy to overlook the real costs and risks of running any sort of business. Looking foolish is another of those risks.

Having a thick hide is another useful attribute when you’re investing, running a business or changing an industry.

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