JimDubela

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Thanks for the feedback, Farsh. Hope I didn’t Carbon-14 date myself with the Boston story.
You raise a good point: Winning companies pivot to new opportunities. They have vision at the top and talent to make it happen.
Which brings me to a follow-up point as well: Companies–or organizations that win probably stress initiative & timing among their people.

On November 23, 2017, JimDubela commented on 9. Will Market-Creating Innovations Continue Creating Jobs? :

I believe the theory will hold true in an era of robotics and AI for several reasons. I’ll reference the chart to explain my thoughts.
-Direct employment may or may not decrease. Even in the most complicated manufacturing processes, like the manufacture and assembly of a 787 requires supervision and possibly intervention. Yes, the army of workers with rivet guns have gone away–but their replacement has been a smaller workforce of highly skilled workers to set up, supervise, trouble-shoot, and repair if need be. No matter how “perfect” we design equipment, there are always tight spots and nuances that only a person can attend to. Another factor to consider is the replenishment requirements of sophisticated equipment. Simply put, the faster it works, the more it needs to be resupplied–and maintained. For example, during WWII the Germans used a machine gun–the MG-242–that featured an extremely high rate of fire. It fired twice as much ammunition as the US model, and required the crew to frequently change barrels due to heat. However the Germans used slow, inefficient horses to resupply the front lines. Automation gives greater capabilities, but with a cost.
-Value Network Employment. If my interpretation is correct, this deals with the added jobs due to inputs. In the 787 example, Boeing lost jobs in some specialties. However with outsourcing the components for the jet, jobs were added in other parts of the world. At first glance, this may seem like a job destroyer. However with efficient component production methods, Boeing was able to produce more aircraft. This caused them to open a new assembly facility in Charleston, SC and add assembly staff there. So if my read is correct, an efficient, growing value network may increase direct employment numbers, even if the production is mostly automated.
-Empowering Employment. Looking at the 787 Dreamliner, it’s fair to say this NMI brings a lot of jobs due to the efficient manufacturing. For example, the upstart international carrier Norwegian Air (who is currently in the middle of a fair labor practice dispute) is able to use the 787 to reach markets that were previously considered unprofitable by flag carriers. The unexpected “upside” was that smaller cities would be given access to international travel.
-Which leads to Indirect Employment. The capabilities of the 787 make cities like Austin, Texas a contender for long-haul international flying. This has a tremendous effect on an up-and-coming city. Airports are made larger, generating construction and trade jobs. Ancillary services, like aircraft servicing grow jobs. Business relationships often lead to increased staffing or space requirements. And roads, businesses–like car rental agencies or Uber drivers see an increase in demand. That’s only the tip of the iceberg, too. Airlines grow, too.

So for an increase in automation or AI, we will probably see some jobs go away. However the net result will be more, better paying jobs.

One last observation: Not all NMIs create the intended “ripple effect.” For example, the Segway scooter met every metric of the graph, yet it belly-flopped because there was not an underlying need for it.

Thank you for the opportunity to share my thoughts on the pressing issue of job creation. It is a worthy effort to help make the lives of everyday people more fulfilling. Thank you, Professor Christensen & staff.

In the late 1970s the home-grown band Boston topped the record charts with their simply named album “Boston.” Everyone bought the album. Radio stations saturated the airwaves with their hit songs. Concerts sold out. And the public clamored for their next album.

Almost two years later they released their second album and it was a huge disappointment. The common criticism: It sounds just like the first one. Therein lies the problem businesses face today. Go with the safe. Stick to what works. Keep the markets you have. In a sense, businesses are like Hollywood: living on sequels.

So how do businesses break this cycle?

Companies need–an “expanding view” of their products and services. This means that they not only actively look for new opportunities, but seek to develop complementary and bundled products that create brand loyalty. So a tool company doesn’t just compete on battery size and price. They sell a family of products to meet their customer’s needs.

Another limitation to growth is a failure to understand the social aspect of your products and services. Professor Christensen calls it the social, emotional, and economic aspects of a product. Professor Anand (HBS), in his book “The Content Trap” warns us about the perils of falling into the “best practices” trap and simply becoming your competition. Taken together, it is clear that if businesses are run by looking at sales levels for a particular product or service, and then pouring their effort into the winners, they will lose in the end.

Companies that “hit it out of the park” innovate to build network effects around the job to be done. They sell complementary products. They bundle. They are unique. And they strive to make customers happy.

On November 23, 2017, JimDubela commented on 8. Who Rocks at Market-Creating Innovation? :

SpaceX. Despite their growing pains, they are continually pushing the envelopes of efficiency and performance innovations to create NMIs in the commercial application of space. They are essentially re-creating the Apollo Space Program. And look at the tremendous number of NMI markets that opened up. Did you know modern food sanitation processes for restaurants and providers is a direct result of the space program?

Market Creating Investments are the result of vision. Whether it is building a car the working person can afford or creating the first worldwide air travel network, leaders with vision recruit like-minded people, push industry and technology, and never lose sight of the customer. This effort not only requires a laser-like focus, but flexible organizations that can quickly confront the threats they face.

Unfortunately the large, siloed organizations of today aren’t very maneuverable. Layers of decision-making, an over-emphasis on consensus, and risk aversion usually put MCIs on the back-burner.

Perhaps a collaborative effort by Professor Christensen (Innovation), Professor Bernstein (Organizations), and Professor Gino (Employee Engagement) could provide some ideas on how companies can re-tool themselves for MCIs.

On November 23, 2017, JimDubela commented on 6. Is Venture Capital a Good Place to Produce MCIs? :

Venture Capital is a good place to fund the next generation of Market Creating Innovations. I’d argue that they fund smaller, asset thin companies in accordance with Professor Christensen’s “Good Money and Bad Money” theory and wind up selling them to larger, well-funded businesses.
Simply put, businesses today fear risk more than fire. It is much more economical to allow the VCs and startups create what I call “insurgent” businesses that fly under the radar of the big companies. And as soon as they pop up on the radar screen, they decide if they should shoot it down or buy it. One fatal mistake–think retailing–is to ignore it.

On November 23, 2017, JimDubela commented on 5. When is a Company (or CEO) Focusing on The Long Term? :

In addition to HBX, part of my commitment to learning the “business side” of American Airlines has been to listen or read transcripts of our quarterly conference calls. Some of what I learned may help answer the question.

Simply put, airlines “sell” short-term innovations as long-term ones. For example, AA recently unveiled a new pricing strategy where customers can select travel features that suit their needs and budgets. Now a customer can choose more legroom, early boarding, or the bare economy fare. During our last conference call, CEO Doug Parker stated, and I paraphrase, that our new revenue model will ensure long-term profitability for the foreseeable future.

Another inescapable fact is that airlines have to look very far into the future when they make investment decisions. They are faced with the difficult task of “reading the tea leaves” of future travel trends. As such, their investments are weighted towards efficiency innovations–we just took delivery of two Boeing 737MAX jets with more seating and 18% better fuel consumption than our current 737 NextGen fleet.

However, AA has made a significant commitment to market creating investments with the addition of the Boeing 787 Dreamliner. The ’78’ as we refer to it, allows AA to fly “point-to-point” and bypass congested hubs. It will also allow smaller, up-and-coming cities like Austin, Texas grow its economy. It is a great example of synergies generated by MCIs.

However lofty these ideas are, they still face the hurdle of convincing management to jump in with both feet for a new market. It seems like innovation is locked in a dogfight with opportunity costs, and the latter usually wins. We need to think boldly and encourage MCI innovations–perhaps with an ad-hoc department that has the authority to bypass the slow-moving processes that dominate airline management.

I’ll close with two stories to illustrate this point. First, an analyst for AA convinced our CEO, Bob Crandall that AA had to immediately jump into the Latin and South American markets. By his projections, they would be money-makers. Mr. Crandall went with his decision, despite the fact that all of our competitors determined there was no way anyone could earn a profit flying there. Ultimately, those routes became our most profitable routes and kept our noses above water during the severe industry downturn of the early 1990s. On the flip side is the response I received from a question I raised to our former Senior VP of Operations about growth following the end of the fuel spike of 2008-2011. When I asked him if AA was considering getting back into markets we left due to the speculative nature of the fuel spike, he dryly replied, and again I paraphrase: If AA does not forecast a minimum return within a set time period,we don’t even go into the market. As you can see, managers can see either opportunities or minefields. Their perspective is what counts.

On November 21, 2017, JimDubela commented on 4. Should Companies “Care” About Job Growth? :

As a pilot for American Airlines, I doubt job creation is on the agenda for several reasons.
1. We have a mandatory retirement age of 65.
2. Half of our 15,000 pilots will retire in the next ten years. The Allied Pilots Association–which represents the pilots of AA estimate we are 17% understaffed.
3. FAA regulations dictate the experience level of prospective “new hires.”
4. The airlines are on a productivity tear. New scheduling computer software is utilizing every pilot to maximum efficiency. We fly to FAA flight duty limitations.

Without going too deep into compensation, a narrow-body captain at a major airline can expect to earn over $230,000–plus retirement and benefits.

As mentioned, there is little concern for growing jobs for the sake of employment. Airlines think of growth in terms of routes and equipment. If there is new growth, they will either do it organically–with a high hurdle rate, via alliances–think using American’s Boston customers flying to London on British Airways, or through mergers. The latter two are more common today.

Another reality of the airline world is modularity. We used to have armies of specialists all on the American Airlines payroll. Not any more. We see fueling, catering, cleaning, some maintenance, and regional airline feed by separate entities. And they usually pay less than AA used to pay. In fact, regional carriers bid on feeder flying. Winning the contract often means lower pay and harder working conditions for their employees.

Perhaps the only way to grow jobs is through bilateral trade agreements. If the US government is able to secure fair, “open skies” agreements, there will be an incentive to organically grow the airline and strengthen our route structure. We need solid policy to compete with the Asian and Gulf carriers. With the current level of technology–the Boeing 787 or Airbus 350, US airlines can fly almost anywhere in the world and may not need the “hub” system of today.

On November 19, 2017, JimDubela commented on 3. How Much Should Companies Focus on Earnings vs. Long-Term Growth? :

In flying, it is critical that pilots “think ahead” of the jet and anticipate “over the horizon” threats. The same holds true for running a business or organization.

The markets a company is in are really only for today. Competitors are attacking from all sides; leaders have to anticipate these threats and develop new markets and customers. Also, your business is unique–even if it is in a mature industry. By taking the easy route and emulating the competition you make your product or service indistinguishable–and run the risk of being commoditized. Finally, leaders have to ensure the right culture and core values are instilled from top to bottom. Your culture will help your organization ride through the turbulent times and keep their perspective in good times. You cannot achieve these things by looking at the short term only.

Unfortunately, short-term pressures make long-term thinking a challenge for several reasons. First and foremost, there is a prevailing view that public corporations exist for enhancing shareholder value. If the owners of the company are not rewarded, they will vote with their feet and invest elsewhere. Closely tied to this concept is a new view of the role of shareholders. Institutional investors–with their large amounts of cash, have become more vocal in how companies are run. Another factor is the principal-agent problem. Corporate boards hire a leadership team to run the corporation and usually tie their salary to the company’s performance. Finally, the role of buy and sell side analysts has significantly risen in importance.

So how does a company address all of these concerns? With metrics. And they’re usually very short term. It seems like there’s a metric to keep everyone appraised as to the state of the company. There is a plethora of ratios to measure earnings per share, price to earnings, return on net assets, EBITDA margin, return on invested capital, and many others far beyond the scope of the time-tested DuPont Ratios.

Unfortunately, these ratios are used extensively to value corporations. Companies therefore have an incentive to plan a strategy that excels at the metrics they are being graded on. For example, Boeing lost $200m in one summer because of their push to increase their RONA without downside quality controls in place.

So what’s the answer? Perhaps there should be a re-focus on only using terms officially recognized by GAAP, eliminating “fad ratios.” Another area for improvement–while harder to implement–is to encourage mid to senior leaders to complete continuing professional education, as the US Armed Forces do. You simply cannot rely on your undergrad or post-grad degree to be your learning experience.

Finally we need to encourage vision at the top, organization in the middle, and initiative at the bottom of the ranks. Engagement–as espoused by HBS Professor Francesca Gino, leads to more disciplined, better organizations.

On November 7, 2017, JimDubela commented on 2. Do We Have a Growth Problem — Economic, Employment or Both? :

Without a doubt, we are in an economic–and employment flat-line period. Perhaps the connection between hurdle rates and cash levels are a big contributing factor.
When companies hold high levels of cash, it effectively becomes a scarce resource. In order to protect this “scarce” resource, companies establish high hurdle rates to justify spending it. These constraints effectively lead them to do nothing or acquire businesses that have already expended cash to develop their markets or products. The result is a lot of companies sitting on the sidelines waiting for a startup to fill a business niche. This translates to fewer jobs and lower economic growth.
Another angle that should be examined by TCD is the macroeconomic effect of high hurdle rates and cash levels causing flat employment and lackluster economic growth. When companies sit on cash and do not re-allocate it back to shareholders, the multiplier effect of it is gone forever. And when they set high hurdle rates for investments, the economic benefit in terms of jobs and growth is gone too.
There is a growing belief among economists that the reason why the Great Depression was so deep was because the Federal Reserve required banks to keep large levels of cash on hand out of a fear of a “run on the banks.” This approach, despite a population willing to work–and spend, kept the economy and job markets in decline. Perhaps the focus on treating cash as a scarce resource and the accompanying high hurdle rates are doing the same thing today?

Before I post my comments on The Capitalist’s Dilemma–I’ll refer to it as TCD for brevity, I’d like to introduce myself so you can better understand the context of my answer. I’ll try to be brief.

As a twenty-six year captain with American Airlines–and former USAF pilot, my career can best be described as an “operator.” If a company or organization failed to meet the “mission requirements” of it customers, then the investors, creditors, and employees all end up with a big “L.”

My view changed when my company filed for Chapter 11 reorganization in November 2011. I realized that employees need to understand the economic dogfight their companies face every day and eventually enrolled in HBX CORe, Disruptive Strategy, and Leading With Finance. While not an MBA, I believe I have a solid grasp of the business side of AA.

Without a doubt, TCD is a much-needed course correction for American businesses. However, it will take a combined effort on the part of business, academia, and the government to move us in a path of sustainable economic growth.

Cash is King
While it sounds like a slogan from a car dealership, Professor Christensen’s observation about the dangers of high cash levels is spot on. In fact, every business should be asking themselves if they have too much cash. My company, American Airlines keeps $7B in cash on hand–more than most US airlines–because of our debt level. However other companies–like Apple or Facebook, have huge stockpiles of cash. One point not mentioned in TCD is that perhaps companies have a different view of cash today: It is essentially a “war chest” that allows them to swoop in and make an acquisition without “telegraphing” their intentions by securing loans or selling more stock.
Unfortunately, this mindset hasn’t worked too well for businesses or the economy. Too often we see companies overpay for the firms like Twitter or LinkedIn. This practice also discourages market-creating innovations by shifting the focus from internal growth to acquisitions for growth. It’s easier to acquire a capability than organically grow it. Ultimately, this practice is neutral on job creation, at best.