When is Conflict Likely to Erupt?

Henning Piezunka, Wonjae Lee, Richard Haynes and Matthew Bothner have conducted a unique empirical study regarding how and why conflict can erupt between two individuals at times.  They hypothesize that conflict is more likely to escalate between two people if they have similar status.  They describe this condition in which people are at very similar levels in the organizational pecking order as "structural equivalence."   They explain: 

Unlike those in obviously hierarchical relations—manager and subordinate, for example, or professor and student—for whom norms of deference are fixtures of the social background, dyads marked by structural equivalence are susceptible to ambiguous conceptions of their relationship and thus to incompatible rules for interaction. Competition for deference and status may then escalate dangerously,

The scholars developed a novel approach to testing their hypothesis.  They decided to study Formula One drivers competing in Grand Prix events in hopes of being crowned World Champion.  The researchers collected data on 732 races from 1970 to 2014.  They measured conflict by identifying the incidences of race-ending collisions between drivers.   The scholars measured structural equivalence by examining past performance.  If two drivers had performed in a very similar fashion in past seasons, then they were rated as more "equivalent" than if one driver had a far superior record to a peer.  Sure enough, the results confirmed their hypothesis.   Collisions occurred more frequently among drivers of simliar status (i.e. past performance).  

What's the lesson for leaders?  Be aware of situations in which lines of authority as well as roles and responsiblities may be ambiguous.  We often bash hierarchy as ineffective and stifling.  However, this research supports the findings of a series of recent studies demonstrating some important benefits to a clear hierarchy.  In particular, dysfunctional conflict is less likely to arise when people understand clearly where they stand in a pecking order. When people are vying to be the "alpha dog," you could have real trouble.  One such study, for instance, found that NBA teams with clear status hierarchies tended to outperform those where you had a group of players more similar in status.   Do not mistake these results though.  They do not suggest that we should have command and control organizations.  They simply suggest that some clear delineation of roles and authority reduces the risk of destructive conflict.  

Southwest Airlines: Remarkable Customer Service Once Again

Last week, my wife and I tried to book some flights on Southwest Airlines using credits we had for some cancelled flights from last year.  Unfortunately, we had waited more than twelve months, so the credits had expired.     When we called Southwest, they explained that they offered  a six month grace period, and therefore, we could still use the credit toward a new booking.  The customer service agent indicated that it would take thirty days to receive those vouchers though.  We explained that we wanted to travel sooner than that, and we didn't understand why it would take a month to receive our own money.  The agent told us that she did not know how to expedite the matter.  

Frustrated by the phone call, I sent a tweet to Southwest explaining my problem.  Someone responded to me in a matter of minutes.   I provided some more detail, and within a half hour, I was assured that we would receive the vouchers within 2-3 days.  It did not take nearly that long.  In fact, we received the vouchers within several hours, and we were able to book our travel with ease. Problem solved, happy customers.  

I relate the story because it is yet another example of how Southwest Airlines has empowered its employees to act quickly to remedy customer problems.  It also shows, however, that social media can be a powerful tool for customers, if used appropriately.   Great companies monitor social media closely, and they act immediately to address problematic situations before issues get beyond their control.   The best part... satisfied customers take to social media to complement firms that go the extra mile to resolve problems.  That's precisely what I did, and what I'm doing here on this post.  

Crisis Management at Facebook

Facebook executives have received a great deal of criticism for their delayed public response regarding the "Cambridge Analytica" crisis.  CEO Mark Zuckerberg and COO Sheryl Sandberg did not make any public statements regarding the situation for four days. Numerous public relations and crisis management experts have criticized top management for the lack of communication.  When executives began to speak publicly about the situation, the criticism did not subside.  Journalists, analysts, and customers demanded more information from the organization. Josh Constine at Tech Crunch wrote the following:

What’s missing from this response is any indication why Facebook didn’t do more to enforce its policy prohibiting apps from sharing user data, or why it took Cambridge Analytica at their word when they said they deleted the data without proper investigation. Or a straight-forward apology. Facebook is still playing the victim here.

Writing in the Washington Post, reporters Elizabeth Dwoskin, Drew Harwell and Craig Timberg revealed that Facebook may not have disclosed the full extent of their relationship with the researcher who gave all that data to Cambridge Analytica:

The psychologist who disseminated Facebook user data to an analytics firm working for the Trump campaign had a closer relationship with the social network than it has let on, co-authoring a research paper based on a massive amount of data that Facebook provided to him.

Undoubtedly, many crisis management lessons will be derived from this incident. Most experts will focus on the lengthy delay (four days) before Zuckerberg and Sandberg issued public statements. I think there's a related lesson though, and it has to do with people's expectations of these two executives. Before this scandal, these two business leaders had highly public profiles. They were everywhere - making speeches, participating in interviews, and being profiled in major publications. The downside of maintaining such a public profile is that people will expect much more of you if a crisis occurs. Four days of silence stands out EVEN MORE for these executives than it would for those who kept a very low profile. The lesson is clear: Be aware of what people will expect of you, bsaed on your past behavior. You will face much criticism if you seek publicity when times are good, and then go underground when scandal erupts.

Should Leaders Speak Last in Meetings?

Canadian enterpreneur Cameron Herold argues in this article in the Globe and Mail that leaders should speak last in meetings.  He writes,

When you have quieter, more reserved people in a meeting, the best thing you can do as the leader is hold your ideas back until the end. Too often, leaders offer their ideas first. But people don't become confident, or grow as leaders, by listening to what you have to say. Instead, you need to encourage members of the team to offer their ideas first, especially those less inclined to speak up.

Herold makes a great point here.  I'm not suggesting that leaders should always speak last.  However, in many cases, the leader does need to exercise some restraint so as to insure that all voices will be heard.  Moreover, leaders frame the problem when they open the discussion.  How you frame a problem often drives the types of solutions that are generated.  Leaders need to be careful about not framing a problem in a way that constricts the alternatives that are put forth.  

What should a leader be doing if they are not putting forth their ideas and proposals at the outset of the meeting?  They should be listening actively, asking questions, probing assumptions, requesting additional data if necessary, and calling on those who may be quiet to encourage them to join the conversation.   

Rethinking the Onboarding Process

How many companies bore the heck out of new employees during the onboarding process?  Do they bury them under an avalanche of forms to be completed and powerpoints to be viewed?  Recently, Dave Gilboa, co-founder of Warby Parker, sat down for an interview to discuss how his firm approaches onboarding.  Here's an excerpt from the article:

Many of the most memorable moments in any employee’s life cycle happen at the very beginning. Everything is new. Everything makes an impact. They either feel supported and excited or lost and bewildered. They feel initiated or left out. In a way, this sets the tone for how they perceive your culture and the rest of their time at the company. “You have to make people feel special and welcome from the very first moment they interact with your organization,” says Gilboa.

What are you doing to make your onboarding process energizing and inspirational?  Are you truly welcoming new employees and helping them begin to make interpersonal connections within the organization?  Are you inculcating the firm's values from the start?   

The Power of Guilt: Understanding Employee Absenteeism

Most of us probably believe that a link exists between a person's attendance record at work and his or her job satisfaction.  The employees who show up every day must be more satisfied than those who opt to stay home a fair bit, right?  Not so fast. Interestingly, the data do not support the beliefs most of us hold about absenteeism and job satisfaction.  

An interesting new study helps us understand what's really going on in the workplace.  Rebecca Schaumberg and Francis J. Flynn examined more than 300 customer service associates at various call centers.   The scholars measured job satisfaction, and they tracked the employee's attendance at work over a four month period.   Interestingly, they also administered a survey to evaluate how "guilt prone" each individual was.  What did they discover?  If individuals were not very susceptible to feelings of guilt, then attendance and job satisfaction are positvely corelated.  In other words, the more dissatisfied people are, the more likely they are to miss work.  That's what we would expect.  However, things change when we examine people who are higly "guilt prone."  For these people, no relationship exists between attendance and job satisfaction.  These people sometimes keep right on showing up for work, even if they are very unhappy, because of their feelings of guilt.  

The lesson is clear - be careful how you interpret a strong attendance record on the part of employees.  Low absenteeism may not signal that you have created a terrific work environment where people love to come to work.  It may tell more about the personal attributes of your workers, and what motivates them to act each morning.  

A Constructive Activity on a Snow Day

Another nor'easter rages today in the northeast.   Weather forecasters predict 15-20 inches of snow in my region.  Many people are not working today.  What can and should you with your time if you have some free time?  Besides shoveling the driveway, catching up on email, or taking a nap, you might consider learning something new.  Researchers have demonstrated that novelty stimulates the brain.   Moreover, innovative solutions often arise when people make connections between seemingly disparate concepts.  Therefore, think about reading a book about something outside of your domain of expertise.  Perhaps find a good documentary that intrigues you.  Play a game that you have never played before with your kids.  You may just ignite a creative spark by exposing yourself to a novel experience.  

Choiceology Podcast with Dan Heath

Check out my appearance on the "Summit Fever" episode of Dan Heath's Choiceology podcast.  You may know Dan as the best-selling co-author of books such as Made to Stick, Switch, Decisive, and The Power of Moments.  His books, written with his brother, Chip Heath of Stanford, are just terrific.  

I Already Know That...

What's one of the most dangerous phrases that you can hear a leader utter?  "I already know that..." Why is it so worrisome when we hear those words?  It suggests that the individual believes that their state of knowledge on that subject is settled and complete.   Therefore, they might not be open to learning new things, to questioning what their assumptions, and to considering the fact that they just might be wrong.   We want leaders to at least consider the possibility that they are mistaken, or that changing circumstances make old assumptions outdated.  The next time you find yourself thinking, "I already know that," I encourage you to ask instead, "What questions might I ask that could spur additional learning on this subject?  How might I benefit from reconsidering my views and assumptions here? What could I be missing?"     

United Airlines Reverses Bonus Policy Decision

Well, that didn't take long.  After a firestorm of criticism, United Airlines has walked back their compensation policy change.   They will not be moving to the lottery system that they had proposed to replace regular quarterly performance bonuses for employees.   United President Scott Kirby issued a new memo to all employees.   Here is an excerpt:

"Since announcing our planned changes to the quarterly operations incentive program, we have listened carefully to the feedback and concerns you've expressed," Kirby wrote. " Our intention was to introduce a better, more exciting program, but we misjudged how these changes would be received by many of you. So, we are pressing the pause button on these changes to review your feedback and consider the right way to move ahead. We will be reaching out to work groups across the company, and the changes we make will better reflect your feedback."

I'm certainly glad that Kirby has reconsidered his decision.   Hopefully, Kirby and his team have learned that they would not have "misjudged" the employee reaction if they had simply sought feedback BEFORE issuing this policy announcement.  If senior executives wanted to change the compensation program, why not consult with people on the front lines more extensively PRIOR to making the shift?   The lack of an effort to solicit broad input is rather stunning.   The biggest management failure here is not "misjudging" employee reactions.  The colossal mistake is the highly flawed decision-making process.  The Board of Directors ought to be asking penetrating questions about that process more generally, rather than only focusing on this particular policy.   

United Airlines Eliminates Bonuses, Angers Employees

News reports this morning indicate that United Airlines has announced a significant change to its employee compensation policies.  The company has eliminated quarterly employee bonuses amounting to roughly $1,200 per year.   Instead, employees will be entered into a lottery in which a few lucky winners will receive cash payouts.  Others will not receive anything.  Only those with perfect attendance will be eligible for the lottery-type payouts.  United  Airlines President Scott Kirby issued a memo to employees explaining the change. Inc. magazine reports on several quotes from the memo:

“As we look to continue improving, we took a step back and decided to replace the quarterly operational bonus and perfect attendance programs with an exciting new rewards program called ‘core4 Score Rewards.'" 

"The reason for this change goes to the heart of our strategy: offering meaningful rewards will build excitement and a sense of accomplishment with more bang for the buck." 

"We want every United team member to picture themselves walking home with a grand prize, or driving home in a beautiful car that announces for all to see that you are committed to your success and ours."

Multiple reports indicate that employees are not pleased, to say the least. "The Points Guy" online travel site obtained a number of employee comments posted over the weekend on tthe airline’s “Flying Together” internal forum (in total, the Points Guy reports that more than 1,700 comments were posted on this forum). Here's one comment:

I find it unbelievable that management is so out of touch with their work force. To tout this announcement as something that workers would be excited about and appreciate just shows how elitist they are. This program is totally contradictory to the CORE4 “we are listening, we are one” philosophy!

Bill Murphy at Inc.com also reported on some of these employee comments.   According to his article, employees offered comments such as:

"It occurred to me and my wife that this is terribly unfair to single parents. ... Imagine your child coming home sick from school, no fault of your own. You are faced with calling in sick thus losing your 'chance' at a bonus or leaving your child/children home alone to care for themselves. What a terrible situation United has put that person in." --First Officer - B-767/B-757

"I can't imagine driving the Mercedes into the employee lot while everyone around me that worked just as hard, or harder got nothing. I would feel like such a jerk. It's quite telling about the people who thought this up. I bet they would be gloating happily if they won." --Flight Attendant - Domestic

I'm fascinated to see how United responds to this furor that has emerged in news reports, social media, their internal forum, and in the form of a Change.org petition.  It certainly sounds as though they did not seek widespread input from front-line employees before making this change, and they did not test the messaging sufficiently before sending out this memo.   What a mess they have created!  As the old adage goes, it takes years to build trust within your organization, and it only takes one big mistake to destroy that trust.  

The Downside of Preaching What You Practice

You are an expert and high performer in your organization, and senior leaders have asked you to share your best practices, your secrets to success. How should you approach the fulfillment of this request. With caution! Why? It turns out that preaching what you practice can backfire. At Stanford, researchers Benoît Monin and Lauren Howe have studied physician and patient behavior.   What happens, for instance, when a doctor shares information regarding his or her own healthy lifestyle with a patient who may be living in an unhealthy manner?   Here's what they found:

Doctors who emphasize their fitness seem like they may be more critical of patients who don’t live up to the same high standards. And it’s not that doctors actually devalue patients; it’s something overweight patients fear might happen to them when seeking out a new doctor, especially a doctor who touts his or her own exemplary health habits in their literature or online. This is called anticipated devaluation, and it can make overweight patients shy away from doctors who emphasize that they practice what they preach. Moreover, the researchers note, when patients feel devalued, they may seek care elsewhere or delay seeking it altogether to the detriment of their long-term health.

We should not be surprised by these results.   For me, the takeaway is that we must demonstrate empathy when we preach what we practice.  We have to step into the other person's shoes.  Moreover, we have to acknowledge our own fallibility.  Talking about our mistakes, and the hurdles we have had to surmount, can help others listen to our ideas and recommendations.  

The Power of a Free Popsicle

Source: TripAdvisor

Chip and Dan Heath, best-selling authors of books such as Made to Stick and Switch, have published another terrific book.   In The Power of Moments, the Heath brothers examine how we can create defining and memorable experiences for our customers, employees, and others.   Chip Heath explains that perfection at every step is very difficult to achieve, but we can identify very important moments where our organizations can shine: 

“Jan Carlzon [former CEO of Scandinavian Airlines] coined the phrase ‘moments of truth’ and talked about getting right the thousands of touchpoints with customers that happen daily. I don’t think you have to fix thousands of touchpoints. Maybe you want to have one defining moment at the gate and one moment at the luggage reclaim area. Maybe you want to invest in an entertaining flight safety video that people actually enjoy watching, like Virgin America.”

The book features a terrific example.  They cite The Magic Castle Hotel, the fourth highest rated hotel on TripAdvisor in Los Angeles, California.  The top three hotels are high-priced, luxury hotels.   Magic Castle costs only $199 per night. The accommodations are not luxurious. The Heath brothers describe it as, "a converted two-story apartment complex from the 1950s, painted canary yellow … [with] a pool that might qualify as Olympic size, if the Olympics were being held in your backyard."  

What makes customers so delighted to stay at Magic Castle?   The hotel has created several powerful defining moments for its customers.  These memorable moments demonstrate the hotel's commitment to its guests, and provide a little unexpected delight for those who stay there.  As an example, the Heaths describe the "Popsicle Hotline" at the hotel.   If you are relaxing by the pool, you can dial his hotline and request a free popsicle in your favorite flavor.   Soon, a hotel employee arrives in white gloves to deliver that popsicle to you on a silver platter.    Can you imagine that?  It sounds silly, but it certainly provides a small moment of joy for the guests.  Many of them go on to tell others about this amazing little experience by the pool.   In a world full of brusque customer service and disappointing experiences at restaurants and hotels, this defining moment sticks out.  

What the defining moments that you can create for your customers and employees?   

Scale and Profitability: The Link is Not As Strong as Many Executives Believe

James Allen, co-leader of Bain Consulting's strategy practice, has written a short article for the Wall Street Journal about the scale advantages (or lack thereof) of industry leaders. Allen reviews the findings from research the firm conducted across 45 industries.   Certainly, scale had its advantages in many of these industries.   However, it's far from a guarantee of success.  Allen summarizes the conclusions:

Strikingly, we found that on average, 80% of the economic profit pool was concentrated in the hands of just one or two players in each market. These strong performers generated nearly two times their cost of capital in profits. And among these economic leaders, 40% were not scale leaders at all. These best-performing companies, it turns out, achieve economic leadership in other ways.

As I've written before on this blog, executives consistently overestimate the benefits of scale.  This study should cause them to reconsider their beliefs.   Moreover, the biggest firms should ask themselves:  In what ways are our scale and scope key disadvantages relative to innovative newcomers?  

Cross-Cultural Disaster: Canadian Prime Minister Trudeau in India

www.ndtv.com

Business Insider reports this week on the trip that Canadian Prime Minister Justin Trudeau took to India.    The entire trip represents a classic example of what NOT to do when traveling to a different country.   Trudeau appeared unprepared to deal with some very sensitive issues and committed some political blunders.   Even more astonishingly, he seemed to try far too hard to embrace the local culture, and in so doing, he looked very, very foolish.  Business Insider writes:

Canadian Prime Minister Justin Trudeau, normally a darling of Western media, has been roundly, and sometimes savagely, mocked for a trip to India that included cultural, fashion, and political blunders at every turn...On several occasions Trudeau and his family appeared dressed in traditional Indian clothing, something other Western politicians don't usually attempt with such vigor.  Prominent Indian personalities expressed their distaste for Trudeau's dress, with India Today calling it "tacky." Trudeau showed up at an event full of Bollywood stars in full traditional dress, while the movie stars themselves simply wore black suits.  On social media, popular Indian personalities put it more bluntly, calling for Trudeau to "have some chill" and calling his outfit choices "fake and annoying."

There's a very important lesson here.  Do your homework before you visit another country.   Learn about important customs, rituals, and traditions.  Respect key religious and cultural differences.  Take the time to learn at least a few words of the local language.   However, don't try to pretend that you are a native citizen.  Be who you are.  Be a respectful and authentic visitor who wants to learn, not somebody looking to rack up "brownie points" with the local people.   

Success Theater at GE: Ambitious Targets and Hiding Bad News

Thomas Gryta, Joann Lublin, and David Benoit have written a lengthy feature article in the Wall Street Journal today about GE's struggles. The authors describe a "confidence culture" where senior executives set very ambitious targets and exuded relentless optimism about achieving those goals. Moreover, people found it difficult to push back and suggest that these objectives might not be achievable. Jeffrey Immelt seemed to downplay clear signals that the goals could not be achieved, perhaps selectively looking for information that would confirm his preexisting beliefs about what they could achieve as an organization. Gryta, Lublin, and Benoit write:

GE’s precipitous fall, following years of treading water while the overall economy grew, was exacerbated, some insiders say, by what they call “success theater.” Mr. Immelt and his top deputies projected an optimism about GE’s business and its future that didn’t always match the reality of its operations or its markets, according to more than a dozen current and former executives, investors and people close to the company.... Mr. Immelt didn’t like hearing bad news, said several executives who worked with him, and didn’t like delivering bad news, either. He wanted people to make their sales and financial targets and thought he could make the numbers, too, they said.

The article raises an important question for all leaders: How do you know if you have set overly ambitious goals for the organization and put harmful pressure on your people? How might we rethink what it means to stretch the organization? Here are my thoughts. It can be very productive to set a long term goal (3 years or more) of creating a breakthrough new product or entering a whole new market. Framing that goal in a way that provides meaning to people's work is important when setting that long term goal. Ask yourself: What is our purpose here? How are we trying to make our customers' lives better? Stretching your people in this way can be very inspiring. Setting over-the-top ambitious short term financial targets, on the other hand, can be dangerous. It can even lead to unethical or illegal behavior, as people feel pressured to deliver and to hide bad news. It also doesn't inspire people if you simply aim to achieve higher ROI or market share. Think about goals about which your people will feel passionate and inspired. 

Moreover, co-creating highly ambitious goals can be much more productive than establishing them in a top-down manner. What do your people want to achieve? What bold moves would they like to pursue? What do they care passionately about, and what do customers care deeply about as well? Finally, You have to create a healthy feedback loop. How are things really going? Where are we finding it difficult to meet our objectives? Being honest doesn't mean walking away from stretch goals. It does mean understanding how things are transpiring differently than you had hoped, and adjusting your plans accordingly. Work together with your people to figure out how to surmount obstacles, rather than simply telling them to charge up that hill again. 

Stop the Reorganizations!

Many chief executives initiate a substantial reorganization during the early stages of their tenure.  for some companies, reorganiations become a seemingly annual event.   No one has any idea what the updated organization chart looks like, because it is changing so often.    Does all this reorganization add value? Probably not. One recent McKinsey and Company study concluded that only 16% of restructurings could be characterized as an “unqualified success.” Similarly, Bain and Company found that most reorganizations do not generate improved results.  Why do leaders enjoy redrawing the boxes and lines on the organiation chart so often?  Frankly, it's easy to do.  Taking other types of actions to enhance performance can be much more challenging and time consuming.   Too often, leaders choose the easy path, despite the proven lack of efficacy.   Somehow they think that their firm will be different.  

Confusion and ambiguity hamper productivity in these organizations that are constantly changing reporting relationships.   Moroever, people become frustrated by the disruptions to work processes and routines.  Wharton’s Peter Cappelli compares serial reorganizing to prescribing antibiotics very frequently for minor infections. You might alleviate the pain at that moment, but harm the patient over time. Cappelli notes, “The constant churning caused by these reorganizations generates costs and develops long-term cynicism about why they are done and what they mean.”

Secrets to Success for Norway's Ski Team

Source: www.wwlp.com 

Bill Pennington has written an interesting article about the Norwegian ski team in today's New York Times.  I first heard about this ski team's interesting dynamics during a feature on NBC's Olympic broadcast a few days ago.  The Norwegian ski team has amassed many medals and championships over the years, including a strong performance at this winter's Olympics in South Korea.   Naturally, many factors might account for their success.  Interestingly, though, the Norwegian skiers contend that team dynamics plays an important role, despite the fact that the sport is highly individualistic.   Team members explain that they abide by five basic ground rules:

1.  No jerks allowed - You have to subvert your ego and abide by the golden rule - treat others the way that you would like to be treated.  

2.  No class structure - Aleksander Kilde explains that there is no pecking order on the team.  They treat each other as equals, whether someone is a champion or a rookie.  

3.  The social quality of the team is of primary importance - you must act in ways that preserve the collaborative environment within the team.  People share knowledge and best practices with one another, rather than hording information and keeping secrets.   They try to help each other achieve their personal best. 

4.  Talk to each other, not about each other - Don't go behind other's backs with complaints. Have honest conversations directly with one another.  

5.  Friday night is taco night - They step away from their busy schedules to share a meal together every Friday night.  

Clearly, the five rules do not explain all of the Norwegian team's success.  However, they do offer a good template for how to begin building a better team, even if you are far from an alpine ski course.  

Strong Airline Profitability? Is it Really About Fees?

Source: Dallas News

For decades, the airline industry has been characterized by abysmal profits. The list of airline bankruptcies is seemingly endless. However, the Wall Street Journal reports this week that U.S. airline industry profitability is very strong at the moment - "healthier than ever" according to the headline.  The newspaper credits the litany of fees charged by airlines for the strong income numbers:  

Profit per passenger at the seven largest U.S. airlines averaged $19.65 over the past four years—record-setting profitable years for airlines. In 2017, it stood at $17.75, based on airline earnings reports. In truth, airlines now cover their costs with tickets and get their profits from baggage fees, seat fees, reservation-change fees and just about all the other nickel-and-diming that aggravates customers. You might also call those extra 12 to 15 passengers now crammed onto each flight “Andrew Jackson” for the profit they bring... U.S. airlines were on pace to take in more than $4 billion in baggage fees and $3 billion in reservation-change and cancellation penalties in 2017, according to Transportation Department data. (The full year hasn’t been tallied yet.) Most of that drops straight to the bottom line. The two categories add up to about more than half of the net profits airlines posted last year.

A couple of sentences toward the end of the article identify the airline with the highest profit margins in the industry.   Accoridng to the Wall Street Journal, Southwest tops the industry with a 16.5% net profit margin, nearly double the average margin in  the industry (9%).   Actually, the newspaper does not account for a one-time tax benefit of roughly 6%.  After adjusting for that figure, Southwest's advantage over the rest of the industry is much narrower.   Still, Southwest generated strong profits, as it has in the past.  The article does not delve into the reasons for that profitability.  Southwest Airlines does not charge baggage fees, unlike nearly all of its rivals.   Southwest also does not administer ticket change fees, unlike nearly all of its rivals.   How then does it generate strong  margins in the industry?  That's the question that the newspaper should explore.   

In weaker economic times, the other airlines may find it much more difficult to continue to generate strong consumer demand while charging so many fees.  A more sustainable competitive advantage comes from a distinctive strategy and organization, as Southwest has developed over many years.   Many scholars have studied this question over the years.  Perhaps it's old news to the Wall Street Journal, but that old news offers much more enduring lessons for managers than the story of how piling on fees has juiced profits recently for some players. 

Nordstrom Unlocks Its Changing Rooms

Source: NY Times

Luxury retailer Nordstrom continues to innovate in hopes of surviving and thriving in the embattled department store business. The Wall Street Journal reports today on many of the experiments that the firm is conducting. For example, Nordstrom chose to stop locking its fitting rooms recently. The WSJ reports on the change:

In November, the company unlocked the fitting rooms in its department stores. Many retailers keep them locked to discourage shoplifting, but the practice annoys customers. Although theft has increased slightly since Nordstrom made the change, executives say, the retailer is sticking with the new policy.  “Analysts don’t like it,” Jamie Nordstrom said. “But I’m thinking about the next 50 years, not the next quarter.”

I've always found these types of moves interesting.  Typically, managers conduct cost-benefit analysis when they make key decisions.  However, in certain cases, the costs can be quantified rather easily, but the benefits are not as well-defined.  Many managers would not go through with this decision because the cost-benefit analysis does not justify it.  Here, the costs of increased theft can be measured precisely.   The benefits from increased customer satisfaction may be much more difficult to evaluate and quantify.  Still, Nordstrom knows that its loyal customers do not appreciate the locks on the changing room doors.  Will this small change enhance customer loyalty?  Will people be more likely to try on multiple outfits now?  Might it increase the size of the average transaction per store visit?  Some of these things can be measured with time and some creativity.  In certain cases, though, managers simply have to side with the customer, recognizing that it may not pay immediate dividends.  In the long run, Nordstrom won't win against online competition through better assortment or lower prices.  They have to create a superior in-store experience.  This small step appears to be moving in the right direction on that front.