Wednesday, November 30, 2011

Bad Strategy Bazaar!

Have you heard? American Airlines (AA) just filed for Chapter 11 bankruptcy yesterday. The world’s largest carrier in 2006, today needs a bailout for a clean slate?[1] What gives?

A number of factors have been said to have contributed to the decision to file for Chapter 11. Among those factors were failed contract negotiations with pilots, “cost disadvantages” compared to rivals who had already cleaned their slate through earlier bankruptcies, loss of business travel customers to competitors, and mergers that reduced the company’s operational efficiency.[2] It’s too bad the now former CEO, Gerard Arpey, didn’t have the opportunity to read our readings from week 5 before embarking on his ultimately failed guidance of AA. Had he read those articles, perhaps he could have avoided the following:

1. Stubbornly Staying the Course – as mentioned in the article “Seven Ways to Fail Big” by Paul Carroll and Chunka Mui, an organization mustn’t minimize a seemingly simple problem causing unnecessary delay or reaction. As mentioned above, contract negotiations (between unions and pilots) served as one of the tipping points for filing Chapter 11. Clearly, AA was trying to maintain the low-cost strategy in working through these negotiations, but they failed to achieve a balanced, winning strategy that would meet the needs of their employees, as well as their operational costs. Now, AA is significantly in the hole – predicting to total $1 billion this year alone.[3] This is an indication that AA had been operating less-than-efficiently for some time. Had AA been less stubborn earlier in the decade and considered filing for bankruptcy alongside other carriers, AA may not have had this extended period of losses.

2. Destructive Competition – in an article from Wharton’s online resource, KnowledgeWharton, titled, “Michael Porter Asks, and Answers: Why Do Good Managers Set Bad Strategies?” one of Porter’s takeaway suggestions for preventing bad strategy is to avoid thinking about competition in terms of competitors alone.[4] Instead of a company trying to identify ways in which to become the “best’ of a market, Porter says companies should focus on how to differentiate themselves from the rest of the market. Arpey’s comments to the press regarding “cost disadvantages” as among the main influences for pushing AA into bankruptcy is a clear attempt to absolve their responsibility

3. The Synergy Mirage – again, from the article by Carrol and Mui, companies may use mergers as a method of increasing growth in a particular market. AA’s move to merge with other carriers to capture broader regional markets such as Trans-Caribbean and created problems within the organization. From pilot seniority, to increasingly complicated wage and benefit agreements, AA found themselves losing operational efficiency post merger with these companies in seemingly similar markets.

It’s really interesting how such large and successful organizations can have such quick, sweeping falls from grace from bad strategy. Having to always define your strategy and to always ensure that it is a strategy (and a “good one” at that) requires the input and review of many people who are highly familiar with the organization and its desired direction, while also keeping a focused eye on what is ahead and how the organization will create its next competitive advantage. One interesting argument between Porter and an author from this week’s reading (i.e., Richard Rumelt), was the issue of whether strategy need be tied to economics.[5] While Porter argues that goals for superior economic performance will be reflected in financial results, Rumelt says instead, that “the essence of a good strategy is logical and practical coherence.” In a large organization such as AA, how do you balance the numbers versus the vision?

As a side note: Curiously, despite Rumelt’s confident statement to fathering the term “bad strategy” (in his article on “The Perils of Bad Strategy”), Porter’s Wharton article also includes that term, and it was published a whole year earlier. Who’s term is it?

[2] idem

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