MODULE 1- CHAPTER 2

MODULE 1 - Chapter 2
ENTROPY, ANOREXIA,
AND EMPTY PROFITS

Topics
 Missing the Bus
 Entropy
 Four Fractured Pillars
 Trouble in Guruland
 Reframing the Issues
 Finding the “Lost” $300 Million
 Going After the Money
© Smriti Singh 2010

Missing the Bus
 The growing uncertainty
 Companies struggling with change
 Strategies adopted
 More problems
 Case study- Greyhound Bus Line

Missing the Bus
 Greyhound Bus Line
 Wall Street Journal
 Dominant player for decades
 1980s
 Competition
 Defecting customers
 Frustrated employees
 Disgruntled shareholders
 Leveraged buyout
 Trip to bankruptcy court

Missing the Bus
 Changes
 Restructuring
 Hiring dynamic new management team
 Downsizing
 Reengineering
 Jettisoning high-cost, long-term employees
 Hiring low-cost part-timers, new recruits

Missing the Bus
 Cost Cutting
 “State of art” computer system
 Automate inventory
 Organize customer transactions
 Up-to-date information
 Operational planning
 Greater access to customer

Missing the Bus
 Wall Street Applauded
 Stock value increased
 Reality
 Strategies made things worse
 Address consumer needs
 Competition increased
 Natural market erode

Entropy
 Amount of energy unavailable for useful work
 German Physicist Rudolf Clausius
 Disorder in processes and systems
 Like gravity, acceleration & magnetism
 Readily observable
 Personal &business lives

Entropy
 Increases over time
 Difficult if not impossible
 E.g.
 Scramble an egg
 Shuffle deck of cards
Things left to
themselves
Higher state of
entropy

Entropy
 Concept of Entropy
 Way to deal, common use
 Growing impact
 Basic principles hold in business
 Disorder increasing with time
 Continue to increase
 Unchecked disorder entropy, chaos

Entropy
 Signs of increasing entropy
 Consumer products introduced & withdrawn
 More information, choices and issues
 Less time
 Marketplace
 Order & homogeneity disorder & fragmentation

Entropy
 Types of Entropy
 Internal Entropy
 Expenditure of unproductive energy within an
organization
 External Entropy
 Disorder and chaos in market place
 E.g. Greyhound
 External : marketplace
 Internal : Turnaround

Entropy
1. Internal Entropy
 People within organization
 Focus on wrong issues
 Energy unavailable for useful work
 Cost- cutting short term tactic
 Leads to corporate anorexia
 Cut cost & employees
 Weak & unable to grow
 Improved

Entropy
1. Internal Entropy
 Corporate anorexia
 Cut cost & employees
 Weak & unable to grow
 Produce short term profits
 Cuts in research and development, marketing, sales
and information technology
 Long term growth & profitability

Entropy
1. Internal Entropy
 Corporate anorexia
 Uncertainty in the workforce
 Job concerns
 Short- term gains empty profits
 Illusory benefits

Entropy
2. External Entropy
 Outside forces
 Direct control
 E.g.
 Consumer attitudes
 New competition
 Geopolitical factors
 Economic gyrations
 Cataclysmic events

Entropy
2. External Entropy
 Mistake
 Internal downsizing changes in external business
environment
 Rapidly increasing
 Irreversible
 Changes happening fast
 Corporate existence
 Stability & certainty

Four Fractured Pillars
 Four major areas
1. Consumers
2. Investors
3. Business environment
4. Information technology
 Understanding  New strategies for
survival

1. Nonconformist consumers
 Restless
 Demanding faster, cheaper and better alternatives
 Brand Loyalty
 Ambivalent about designating a specific brand
 Brand independent
 Try them all

 Amoeba Market
 Constantly change shape
 Subdivide
 Fragment into smaller micro-markets at faster rates
 Consumer today market increasingly chaotic
 Consumer demand  individuals
 Customized products

 Companies
 Anticipate consumer demand & preferences
 Successful marketers
 Challenge
 Consumers
 Skeptical, capricious and rebellious
 Small differential Alter buying patterns

 Price matters- top purchase criteria
 Price promotions
 Discount mentality
 Consumers demand value- trade off price,
quality and convenience
 Blend of product, service and price

2. Activist Investors
 Demanding, impatient, independent, relentless
 No longer passive
 Shareholders
 Tough questions
 Challenge executive salaries and corporate perks
 Dissatisfied with even good results

 CEOs
 Performance increases stock value counts
 Not effort
 Years of profits, immunity from investor scrutiny
 Institutional fund managers
 Consultant lobbyist
 Immediate action, instant improvement

 IBM
 Variance to last quarter profits
 Wall Street negative stock reaction
 Annual revenue growth
 Major concern
 Focus stronger revenue growth
 Rise in revenue
 Shares traded in high volume, price rise

3. Unstable business environment
 Success ability to adapt to constantly changing
situation
 Constant uncertainty
 Inexact, incomplete & contradictory information
 Develop plan of action
 Disorders escalate
 Stealth competitor exist (e.g. druggist)

 Greyhound
 Stealth Competitors  automakers, discount airlines
 Competitors local  global
 Competition substitutable commodities
 Extreme changes
 Globalization, freer trade, privatization

 Extreme changes
 Globalization
 Freer trade
 Privatization
 De-regulation
 Deal with real world

 Vicious circle
CUSTOMERS
EXISTING
CUSTOMER
S
HIGH COST
SUPPLIERS
BANKRUPTCY
RAISE THE RATES
ABANDONDRIVES AWAY

4. The Information Explosion
 Information power
 Winning & losing quality of information
 Risk & certainty
 Creative failures
 Accuracy & completeness
 Risk in decision making
 Entropy successive transmission distorts

 Conscious biases
 Exaggerate situations make point
 Selective memory
 Unintentional biases
 Misinterpretation of data
 Incorrect supposition

 Availability biases
 Readily available
 Order effects
 Undue importance to first & last items in series

 Critical decisions
 Wrong, biased, superficial information
 True picture of facts
 Not based on important factors
 Based on what someone else interprets

 Data
 Collection at point of sale?
 Data is bad?
 Incomplete or wrong data ?
 Information based decision making rapid
turnover
 Staying afloat growing challenge

 Single copy of New York times today
 Person in 17th
century
 Exponential growth in information availability
 IT, rapidly growing
 Greatest challenge rule information

 Speed & accuracy in decision making
 “Speed is the essence of war”
 Development of information systems
 Intelligent sorting & filtering
 Real values for companies
 Right information

Trouble in Guruland
 Top Corporate Agenda
 Dealing effectively with uncertainty
 Managerial techniques
 JIT (Just-in-time)
 TQC (Total Quality Control)
 SPC (Statistical Process Control)
 TQM (Total Quality Management)
 BPR (Business Process Reengineering)

Trouble in Guruland
IDEAS
TRANSLATE
SOLUTIONS

Trouble in Guruland
 Total Quality Management
 Get the process right
 High quality products
 Lowest possible cost
 Success in market place

Trouble in Guruland
 Business Process Reengineering
 Quantum leap in performance
 Redesign of company processes, organization &
culture
 Sometimes boost cost
 Internal entropy
 70% are failing
 Commitment & leadership of senior management

Trouble in Guruland
 Business Process Reengineering
 Failure to see significant benefits
 Radical changes are more complex
 No established scientific formula
 Selection of wrong process, waste of time and money
 Downsizing
 Overwork & insecure work environment

Trouble in Guruland
 BPR
 Throwing out old & start
fresh
 Squeeze more out of
fewer employees &
resources
 TQM
 Continuous incremental
improvement
 Value of individual
employees

Trouble in Guruland
 Stale Company
 Seek motivation & inspiration
 Unfocused Company
 Seek vision, purpose and direction

Reframing the Issues
 E.g. Earth & solar system
 Companies today:
 Must liberate themselves
 Traditional perspective
 Reframe issues facing entropic marketplace
 Brilliant corporate strategies
 External market issues
 Real growth

Reframing Issues
 Adopt broader perspective
 Less corporate centric
 More market centric
 Market  centre of universe
 Focus on
 External market
 Revenue side

Reframing Issues
 Shift in emphasis
 ? Increase revenue production
 ? Address non conformist consumers
 ? Understand unique requirements
 ? Maximize revenue on each and every sale
 Answer
 Revenue management techniques

Reframing Issues
 RM
 Precise understanding of demand
 Dynamic reassessment
 Maximize revenue
 Price optimization
Top-line techniques Drive Bottom-line techniques

Reframing Issues
How much revenue we can generate from the
marketplace with existing resources?

Finding the “Lost” $300 Million
You cannot risk creating the impression that
you are the high- priced product in the
marketplace. You’ve always got to be
competitive to some degree.
-Robert Coggin, Delta Airlines Inc.

 Delta Airlines
 Unique corporate culture
 Strong company, a real winner
 Consistently profitable airline
 Unmatched by any other airline
 Source of pride for employees

 Federal Regulators
 Where to fly
 How much to charge
 1970s, Airline Deregulation Act
 Do whatever and whenever wanted
 Charge whatever market could bear
 Freed from restrictive government shackles

 Established Airlines
 American, United, Pan Am, TWA, Northwest and
Delta struggled to understand
 New low-cost carries with a different strategy
 Cost  half of established airlines
 Steal market share

 War was inevitable
 LCC markets owned by established carriers
 Established airlines  invaded others
 Fares plunged
 Fighting got more intense

 Delta Airlines
 Conservative growth plan
 Resist discounting
 Concentrate on business travelers superior
product
 Business travels cheap airline fares

 Delta Airlines
 No longer competitive edge
 On-time performance
 Friendly customer service
 Efficient operations
 Senior management  fresh new perspective
 Advertising Campaign “meet or beat”

 Delta Airlines
 Fanatic response
 More passengers than ever
 People worked overtime to meet demand
 “But Still lost our shirts”
 Low fares no money made
 Competitors & advertising agency in charge of
pricing

 Delta Airlines
 Close of fiscal year, first annual loss
 Fingers pointed marketing division
 End of “meet or beat” campaign
 Selectively match competitor fares
 “yield/ load factor seesaw”

 Delta Airlines
 Yield Load Factor
 Reservations control, inventory controllers
 Study future flight
 Manage no. of discount seats
 Impact of inventory adjustment in revenue

 Delta Airlines
 Forecast for future demand of flights
 Micro market differences
 Passengers individual characteristics
 Competitors

Going After the Money
 Become revenue driven
 Dynamic decisions at micro-market level
 Inventory decisions individual flights
 More sophisticated decisions

 Use of Computers
 Accumulate & analyze huge amount of data
 Organize & educate inventory controllers
 Supply/ demand specialists
 RM team
 Decision making function

 Task of RM team
 Break through uncertainty
 Forecast customer demand preferences
 Price/ convenience trade-offs
 Uncertainty probability
 Act on single flight

 Maintain huge database
 Historical bookings
 Current booking for future flights
 Standard booking profiles
 Computer system
 Future flight indication
 Higher fare traffic

 Changing mindset of inventory controllers
 Get the most money from the most passengers
on every one of your future flights.
 Predict the value of seats
 “A bird in a hand is worth less than two in a bush”
 Revenue driven

 Revenue- generation techniques
 Application to all kinds of business
 Revenue Management powerful stuff

MODULE 1- CHAPTER 2

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