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Every once in a while air passengers are bound to suffer from disruptions to their travel plans because of strikes in airlines due to work disputes, primarily with their pilots. Disruptions mean they may get as bad as complete cancellation of planned and paid-for flights whereof passengers are left stranded in their home airport or in some foreign country (strikes mostly affect international flights). The painful outcome of those disputes and strikes is that everybody ends up bruised to some extent — the airlines and their management, employees, and obviously the passengers-customers — whether in the short-term or long-term, monetarily and non-monetarily.

The highest-profile strike of recent times relates most apparently to the German major airline Lufthansa. It is actually a dispute lingering since 2014, causing repeated waves of strikes by its pilots. But this blog article will focus more closely on another dispute and chain of strikes at the Israeli airline El Al because it has brought the airline too close to the brink of business collapse.  Incidentally, as in Lufthansa, this dispute is also going on-and-off since 2014.

Of course there have been strikes in other airlines (e.g., Air France, Korean Air, China Airlines [Taiwan]) but the disruptions at Lufthansa seem to surpass them all in scale. Most strikes, as in the cases listed above, are triggered by the pilots, and that is crucial because the whole operation of an airline depends on them, giving them a lot of power over the management and owners of the respective company. Moreover, the lives of so many people (passengers) are in the hands of the pilots, relying on their professional skills and resourcefulness. The hot public debate surrounding those strikes is usually whether the pilots are abusing that power or are they making justified claims towards their employers.

There are, nevertheless, other types of strikes, as in the case, for example, of British Airways where the latest dispute was called by cabin crew members, specifically those hired after 2010 in apparently worse terms than for their more veteran colleagues. The ensuing strike was particularly disturbing because it was declared on last Christmas and the following days running to New Year (a continued strike occurred in January 2017). But the strikes by pilots tend to differ from strikes by other airline employees in impact on the regular flight schedule and implications of the demands made.

  • Unfortunately for some passengers in Britain, that holidays strike at British Airways coincided with other sanctions by airport workers of a Swiss contractor. The article will refer later on to other sources of disruption to air travel versus strikes originated within the airlines.

The primary demand of the pilots of Lufthansa is for a pay rise at an annual average rate of 3.7% to be paid retroactively to 5,400 pilots over a period of five years since 2012. The pilots’ union claimed that their compensation has eroded with inflation due to a wage freeze, causing them “a significant loss of purchasing power”. Lufthansa offered a rise of 4.4% from now on to be paid in two installments and another one-off payment. Drastic disruptions to the airline’s flight schedule occurred most recently in November 2016 as no agreement was reached by that time.

On a single day starting the latest ‘wave’ on 23rd November Lufthansa had to cancel according to media reports around 900 flights, affecting about 100,000 passengers. That leg of the strike extended for four days, causing overall cancellation of nearly 2,800 flights, affecting 350,000 passengers. The strike resumed on 28th November for two more days, forcing the cancellation of 1,700 flights with around 180,000 passengers in total affected. It was planned to start with short-haul flights and then expand to include also long-haul ones. (Note: Only flights under the banner of Lufthansa were implicated, excluding  Brussels Airlines, Austrian Airlines and Swiss Airlines also owned by the  group). [Sources: The Guardian 23rd Nov.; Reuters 28th Nov. 2016.]

It is hard to put an exact figure on the financial damages from those strikes. Reports suggest that the airline’s cost accrued from each striking day runs in millions of euros; total cost to Lufthansa since 2014 is estimated at €500m. It is hoped the dispute is now coming to a close following arbitration; the airline agreed to a four-stage wage increase of 8.7% plus a one-off payment, awaiting final approval and confirmation.

The pilots in El Al have demands for pay rise and improvement of working conditions. The dispute over working conditions may tell even better how deep and bitter is the conflict between the pilots and the company’s management and owners. Two issues are most striking. First, the pilots complain of an unreasonable workload because the airline is adding too many flights to its schedule, including to new destinations, and which they cannot sustain — the pilots argue they risk arriving to flights too tired and unfit to perform them. The second issue concerns the terms of employment of pilots ages 65-67: Retirement age in Israel for men is currently 67 but recent global regulation (2014) determines that pilots of age 65 and above cannot fly passenger aircrafts. The last strike over the dispute as a whole took place in mid-November 2016. An initial agreement was almost signed when the second issue triggered an additional strike in the past month. To resolve the age gap El Al suggested the senior pilots will work as instructors and examiners and in other managerial jobs but their income will be reduced considerably. The pilots did not agree to this condition. Last week a draft agreement was signed that will hopefully put an end to the dispute and the annoying disruptions of flights — but no one yet is ready to assure passengers of no more surprises.

El Al’s passengers had to suffer from flight delays and cancellations during several strikes. Although there were not too many cancellations that El Al had to announce (certainly not anywhere near as many as for Lufthansa), the ‘surprise’ nature of disruption of normal schedule was hard to tolerate and resolve — pilots would simply inform El Al at the last minute that they are sick and cannot attend their flights. El Al would then struggle to find replacing pilots from within and outside the company, leading in the ‘fortunate’ cases to delays of up to 12 hours in flight departures and in worse cases to flight cancellations. This mode of action by the pilots threatens to destroy customer confidence in the service provider as disruption comes completely with no warning and no preparation — the passenger arrives to the gate for his or her flight, yet the pilot does not. El Al tried to hire other airlines to execute the flights in jeopardy, a reasonable reaction that angered pilots even more (they argued it was more of a routine by management to deliver flights added to the already-busy schedule). All this wrangling was fought on the back of passengers.

The pilots and the airline’s leadership were so embroiled in their dispute, publicly attacking each other with all sorts of allegations, that they may have not been able to see anymore how this conflict appears especially to customers, nor how it affects them. Of course each side apologised and claimed they cared dearly about the customers, but it became increasingly difficult to believe them. Some of the details that were revealed were rather bizarre and difficult to accept. For instance, the allegation that pilots are extending long-haul flights by up to an hour to exceed 12 hours (e.g., to North America) to gain a bonus. Or, the pilots’ requirement that they would return from long-haul flights in Business Class and be paid as if they carried out the return flight to Israel. These claims made it harder to support the pilots’ struggle.

The pilots were not doing too well in gaining the support of the consumer public. They have let their grudge with the employer to be targeted at passengers. For example, during a flight in last November from a European city to Tel-Aviv they refrained from talking to the passengers and giving them customary updates about flight progress, weather conditions and other information. The captain indeed gave a welcome message at the beginning of the flight but not at half-time or towards the end of the journey as in the normal conduct of rapport on El Al’s flights. Before landing there was only a standard recorded message. It has to be understood that the Israeli public holds the pilots at high esteem and credits them with making El Al one of the safest airlines globally. Hearing the voice of the captain or first officer giving their messages to passengers is an important part of the relationship — it goes beyond the information conveyed in carrying a voice of authority, reassuring and friendly. At the end of the flight, while passengers disembarked, the pilots also remained seated in their cockpit cabin, another irregular conduct. It is a sad mistake, just like a statement made on TV by the union’s representative in the last strike that El Al’s pilots “could not find the motivation” to attend their flights, an agitating statement and a poor display of disrespect.

However, the owners and senior management of El Al should not feel comfortable and content either about their performance.  It seems they were not listening close enough to warnings from pilots for months about the course of the company. El Al’s leadership has chosen an aggressive strategy of expansion at all cost in an effort to hold on in an open competition on airway routes. This expansion included addition of destinations, increasing the frequency of flights, and the launch of a low-cost subsidiary (“Up”). El Al is trying to do something it simply cannot — it cannot become Lufthansa and it cannot beat airlines like Ryanair or EasyJet. The airline’s leadership must re-consider  the range and number of its destinations with respect to its resources.

The alternative cost of the expansion is negligence of the quality of service on board its flights — over recent years the airline omitted benefits to passengers in Economy/Tourist Class such as drinks served (including personal servings of wine or beer), free Israeli newspapers on flights home, and failing to upgrade their entertainment systems on airplanes in medium-range flights (3+ hours). Creating tourist sub-classes nowadays from standard to premium may start to correct the existing deficiencies. El Al must re-instate a realistic focus on quality of service and regain a competitive advantage on assets it can support — service onboard in addition to security and safety.

Flight disruptions may result from events other than a strike at the airline: take for example terrorist attacks or threats, strikes of airport workers, and phenomena of nature such as heavy snow or the event of volcanic ash clouds created by the eruption in Iceland in 2010. Yet, on these occasions an airline can justifiably claim to be upset by a “superior force” not in its control. It does not have that kind of protection when the disruption originates within its organization. Travel customers purchase their flight tickets from the airline and hence they least expect the airline to be the source of disruption. Besides the legal terms, there is a contract of the airline’s brand with its customers to be consistent and reliable in serving them and providing them value for their money. That is also the essence of keeping a brand’s promise.

Passengers endure different types of cost due to a flight disruption, foremost in the case of outright cancellation: financial losses (e.g., flight fare itself if cancelled, continued flights missed, ground services in the destination country such as lodging and transportation, and business-related damages when applicable), inconvenience of making new travel arrangements or cancellations, and the anguish of going through the ordeal. In some cases being stranded in a foreign country may cause greater costs than if being still in the home country. Beyond the bad experience of dealing with the disruption itself, one should not underestimate additional less direct costs: (a) putting off the excitement of anticipation before leaving on a vacation or for a special event, causing deep disappointment and frustration; (b) spoiling the enjoyment of a trip at its end on return home, causing anger and sadness (happy or unhappy memories of an experience are affected by its peak-moment, up or down, and its ending).

The disruptions in El Al because of the pilots’ strikes may have not been as severe as in other large airlines, particularly in Lufthansa, but the dispute threatened to have  much more severe consequences for the airline:

  • First, because something basic in the trust and confidence of Israeli consumers in El Al, which is essential for its survival, was in critical danger of being broken.
  • Second, El Al does not have the financial backing of a company like Lufthansa and probably other “big players” and cannot tolerate the same level of losses and damages to its brand stature.
  • Third, El Al allowed the dispute to build-up with increasing animosity and disruptions until it was very close to a tipping-point of collapse — pilots in charge of divisions of its aircraft fleet have officially resigned and the final trigger would have been resignation of El Al’s chief pilot. Was it necessary to threaten to fire the last fatal bullet?

The Israeli public still perceives El Al as its national airline although it is now in private ownership.  All stakeholders within the organization should bear that responsibility and share the interest to act carefully and cleverly to maintain that position. It is highly important for preserving the loyalty of their core target segment of Israeli consumers, but no less vital, remaining a preferred airline for Jews around the world. This strength, and further measures of improved business focus, can also increase its attractiveness to any tourists visiting Israel for flying El Al.

Ron Ventura, Ph.D. (Marketing)

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The New-York Times Company may wish to convince readers of the International Herald Tribune (IHT) newspaper that renaming it as the International New-York Times (INYT) is nothing more than a change of name, not of content or substance. However, this act of re-branding the newspaper to co-align it with the US-based brand could mean overseas much more because the IHT has grown into an iconic brand and an institute of culture, primarily in Europe but also in Asia-Pacific, the Middle East and Latin America. Truly, since its inception as the New-York Herald 126 years ago and through its past forms as the New-York Herald Tribune (1920s’-1967) and the International Herald Tribune (1967-2013), the newspaper has been directed towards American expatriates living abroad as their connection with home. Nevertheless, the newspaper has become popular among a much wider audience of English readers native in many countries, giving them a foreign or global perspective on news in their region and beyond. How necessary was it to rebrand the IHT as INYT at this time?

Statements made by senior executives at the New-York Times Company suggest that they are aspiring to integrate the global edition of the New-York Times closely with its US-based operation and editorial board. From a marketing perspective, the company aims at establishing a stronger consolidated brand of New-York Times globally (i.e., in the US and outwards)  with an eye focused on the digital (online) news media, worldwide. That means a tighter identification of the international newspaper/news-site with the United States.

It is important to reckon that hitherto the IHT offered an appealling, interesting and comfortable blend of local atmosphere, culture and attitudes with the “American Way”. The New-York Herald Tribune, which existed before NYT became an owner, has developed this approach originally and specifically in Paris, then extended all over Europe. Its key force of attraction was the respect it has paid for many years to the culture and values of Europe. So much that for an extended period during the 20th century there existed only the European edition of the New-York Herald Tribune, based in Paris, without its New-York edition that went bankrupt. Following the re-branding of IHT under the title of New-York Times, its management intends to take steps to increase managerial and editorial control from New-York, which risk the global edition of losing that special touch with the local habitats of its various market destinations overseas.

In 1967 the publishers of The Washington Post and The New-York Times salvaged together the defunct Herald Tribune from its previous owner and re-created the brand and format of The International Herald Tribune. The newspaper got its best reputation and expanded outside Europe during that period spanning the last 46 years. Its appeal could emanate from (a) bringing a combination of opinions and perspectives on current affairs from journalists and columnists with different political orientations and background expertise; (b) reliance on the resources of the Washington Post and the New-York Times as well as journalists originated in foreign countries (e.g., at their bases in Paris, London, and Hong-Kong); and (c) their interesting and novel coverage of topics such as science and technology, art, and not least, fashion.

However, the IHT changed its course in 2003 when the New-York Times Company forced the Washington Post into selling its share in IHT to the former. Thus NYT took full control of the newspaper. It is therefore, actually, during the past ten years that the New-York Times has gradually turned IHT singly into the Global Edition of NYT. Particularly in the last three years it could be noticed that the IHT was adopting the liberal line associated with the NYT in the US and a stronger presence of its home journalists. Furthermore, the company marginalised the original website of IHT in 2009 and merged its content with that of NYT.

When explaining their move of rebranding, the editor of IHT in Europe Richard Stevenson argued during an interview in October 2013: ” A couple of words in the name of the paper are changing (but) this paper’s name has changed multiple times throughout its history. The name change on the print newspaper does nothing to change the DNA of the operation here. It is simply bringing more of the resources of the New-York Times to the mix” (1). Stevenson is clearly trying to play down the significance of that ‘couple of words’ known as the “Herald Tribune” but he may err in uncomprehending its meaning and value to news readers in Europe and other regions. The name of the newspaper has indeed changed before, yet the expression “Herald Tribune” was the leading part of the paper’s name for nearly a hundred years. Moreover, it has become a symbol in the news media of a genuine international, open-minded news-source. Even more seriously there is reason to doubt if NYT can maintain the DNA of the “global edition” as Stevenson promises. The power of IHT has arisen in part from being only implicitly American — that is, the American voice in the newspaper was more subtle. A stronger reliance on resources of NYT in the US could lead to diminishing their sensitivity to events outside the US . Effective already, wherever an online reader touches a hyperlink on the front page of INYT (e.g., an article’s title, a topic on the right-hand banner), one is passed to content on a page of NYT — the INYT website appears to be no more than a facade. How does that maintain the DNA of the International Herald Tribune?

At the core of this new strategy is concern of NYT how to expand its exposure and strengthen its position in the digital media because that is where the future lies.  Circulation of print newspapers has been declining and revenue from advertising dropping almost continuously over the past decade as more news readers turn to the Web and mobile devices (e.g., using designated apps). It has led to predictions of the demise of print newsmedia any time soon — which has not happened yet but could still be imminent. Even Arthur Sulzberger, chairman of NYT Company from the dominant owner-family, announced at a conference in September 2010 that the NYT is expected to “stop printing the New-York Times sometime in the future, date TBD” (2), a rather ambiguous intention that yet attracted great attention. Last year the founder of Netscape and digital venture capitalist Marc Andreessen urged Sulzberger and NYT in response to act as soon as possible and not wait for another five or ten years. An important development that nonetheless has already taken place is the establishment by NYT and other news publishers of various paywall models on the Internet in order to put a value-tag on news information online and thereby starting to generate revenue from viewership vis-a-vis print circulation.

  • Revenue (US$) from circulation, which accounts for more than half of the total revenue of the company’s NYT Media Group (NYT+IHT), grew by 8.2% in the second quarter of 2013, though it could not offset the decline of 11.4% in revenue from advertising (3). Note however that the report is vague in referring to “circulation”: It is impossible to tell whether the increase reflects return of readers to print issues due to the paywall charges online or is it derived from subscribers of NYT online and in mobile apps.

The New-York Times wants to resemble other prominent newsmedia broadcasters like CNN and BBC and publications such as Wall Street Journal (WSJ), The Times of London, The Telegraph, and Financial Times that are recognized in the same name at home and in countries abroad. The ability to develop into a global brand depends on appearing with the same (root) name everywhere. Especially on the Internet, it is argued, the New-York Times has to appear with that name to be on the same playing level with its close competitors. The NYT, it should be noted, is already accessible online for several years and it is a familiar brand whose news stories are often cited around the world — all that regardless of IHT! The problem is that the NYT is not progressing as the management has expected:

  • The NYT brand is lagging in number of unique monthly visitors to its website (~40m in June 2013) behind CNN (~100m) and BBC (~70m); NYT has about the same number of visitors as the Guardian’s (affiliate of IHT in the UK) and leading on WSJ (~30m). NYT has also shown no increase compared to June last year vis-a-vis improvements for CNN, BBC and The Guardian (figures from comScore published by FT.com, 3).
  • Stephen Dunbar-Johnson, publisher of IHT, revealed while announcing their move in July that about a third of the 41m unique visitors of NYT come from outside the US; however, just 10% of NYT digital subscribers (70,000 out of 708,000) are located outside the US (3) — a gap marking the international weakness of their brand.

The expectation is that by bringing the IHT global edition explicitly under the umbrella name of NYT it will enhance the global image of NYT and attract more subscribers from outside the US. Mark Thompson, chief executive of NYT and former director-general of the BBC, suggested that the IHT’s heritage could be used together with existing international audience of NYT “to build a truly global force in news across digital and print under one brand” (3). There is undoubtedly good logic in joining forces to develop a stronger target brand on the world’s stage. But which brand was in better position to fulfil that role ? NYT was actually trying to compete in recent years with its own global edition name-titled International Herald Tribune, a confusing situation. Moreover, NYT in fact closed down its older international edition in 1967 to make space for developing the IHT. Now, the new move implies that the heritage of IHT so well built-up should be sacrificed to help the NYT succeed as a global brand after it failed to do so alone but really in the shadow of its own global edition, that is IHT.

The strategic thinking that appears to be behind the rebranding act is not only strange but sad. The NYT company does not disclose financial details on its two newspapers but it suggests that IHT was really doing better than NYT. All that Mr. Dunbar-Johnson was ready to tell the Financial Times was that “while the New-York Times does not break out the performance of the IHT, it is profitable” with no further details given (3). This raises a strong suspicion that NYT could not match the performance of IHT and consequently was laid as a burden on the shoulders of IHT re-named INYT.

A stronger global presence of an NYT brand in the digital arena is presented by top management as the main motivation for its move. However, re-inventing NYT as an international brand was not that much necessary. The NYT and IHT newspapers have been different products in attributes and target markets-audiences — one as its American arm and the other as its global arm. The company could have continued to develop the relationship between them, exchange news stories, and emphasise the linkage between their brands: The global arm of IHT benefits from the professional quality and credibility of its US-arm (and parent) NYT while the latter enjoys the popularity and prestige of a global arm IHT that “talks” to many people around the world, Americans and non-Americans alike. Many global companies hold a corporate website next to designated websites for prime products and brands. One just has to make sure consumers know how the websites are related while distinct.

Since the rebranding has already occurred, the INYT needs to keep and add to its bases as “legs” in key target regions in order to maintain the international DNA of IHT. There are already hints that the company may close its base in Paris because of high cost of keeping its staff in France.  While France may not have the same diplomatic and cultural clout it used to have 60 years ago it is still a pivotal player in Europe in many ways. If inevitable, NYT must consider other locations (e.g., Berlin-Germany, Amsterdam-Netherlands) on the European continent since removing that “leg” might ruin the INYT international stature that IHT enjoyed. Relying on its London base could signal to other European countries that America truly does not understand them.

The New-York Times wishes to become a familiar and appraised brand name worldwide like names of other newspapers/news-sites and that is understandable. Yet its situation is different from most others — it already had a strong global arm and unlike others that actually publish the same news-product everywhere NYT-IHT had the advantage of a news-product better adjusted to serve readers round the globe. They could have kept a portfolio of two strong products and associated brands without being suspected of nourishing the ego of NYT. Now INYT must work hard to protect and enhance its connection to places and people outside the United States.

Ron Ventura, Ph.D. (Marketing)

References:

1.  “DNA Unchanged in Renamed International Herald Tribune”, The Australian (Online, by AFP), 16 October 2013 http://www.theaustralian.com.au/media/dna-unchanged-in-renamed-international-herald-tribune/story-e6frg996-1226740843145

2.  “New-York Times Will End Print Edition (Eventually), Publisher Says”, The Atlantic (Online, a news agency item), 9 October 2010

3. “Newly Rebranded International NYT Focuses on Digital”, Financial Times (FT.com Online), 25 July 2013  http://www.ft.com/intl/cms/s/0/3d0edc40-f4a5-11e2-8459-00144feabdc0.html

Additional Sources:

NYT Company Website www.nytco.com — See their History Timeline

“In Digital Era, New-York Times Eyes Growth Abroad with Global Edition Replacing Herald Tribune”, Washington Post (Online, by AP), 15 October 2013 http://www.washingtonpost.com/business/in-digital-era-new-york-times-eyes-growth-abroad-with-global-edition-replacing-herald-tribune/2013/10/15/efa1a576-3579-11e3-89db-8002ba99b894_story.html

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The consumer goods global company Procter and Gamble (P&G) is an acknowledged master of brand management. Overseeing more than 300 brands across 160 countries worldwide, its innovations and business practices in branding, product development, marketing and advertising are taught probably in almost every marketing course programme at business schools; over the years it has also been a source for exemplary strategies and tactics to many companies that chose to follow in its footsteps. P&G is actually credited with conceiving in the early 1930s the concept of managing-by-brand and assigning a brand team to be in charge of orchestrating and streamlining all marketing and other managerial activities for any given brand (an idea attributed to Neil McElroy).  It took another fifty years to expand and formalise a theory of brand management, and particularly develop the psychological concepts of brand’s role and functions in consumer decision processes; still, P&G has practically started this ball of brand management rolling.

Now the top management of P&G finds itself in a crossroad, how to sustain its record of excellence and leadership in marketing, product innovation, and business in general. The last four years — since the financial crisis erupted in 2008 and following economic recession– have proven a tough period for P&G: Lower earnings, market shares declining, and a stagnation of its share price (at $60-70 after recuperating from a bottom low of ~$45 at the outset of the crisis); just in the last 4-5 months P&G started to see some improvement.  A decline in consumer spending, particularly in the developed countries, must have aggravated P&G’s difficulties. However, the problems of P&G originate to a large extent from within: Bob McDonald, CEO of P&G from 2009, identified in a recent meeting with investors two key weaknesses, excessive bureaucracy and insufficient product innovation (1). Yet, a higher-order problem seems to hover above these causes, that P&G has allowed its distance from consumers to widen.  Internal problems appear to have inflicted on the company’s competence to reveal changes in consumers’ needs and concerns and react to them soon enough or proactively. Currently, major shareholders, analysts, and P&G alumni are skeptical if McDonald can return the company to the right course. In the last quarter the share price climbed to $76, but more time is needed to see if correction is indeed on its way.

McDonald initiated a vision and strategy ‘driven by purpose’ for guiding the company’s business initiatives and actions with a key motive “touching consumers’ lives”. Critics argue that the directive of McDonald had been at first too abstract and vague to execute, and then in attempt to become more focused he turned to over-emphasis on efficiency of internal processes, making P&G too much inward-looking (1).

The vision called “purpose-inspired growth” directs, as explained by McDonald, towards “touching and improving more consumers’ lives, in more parts of the world, more completely”. It implies for instance that employees were not selling merely soap but cleanliness itself or that diapers let parents sleep through the night and that would enable an improvement of the earning power of middle class families (2). The intention is positive, emphasising the connection of the company to consumers, but the implementation was flawed. On a ladder of product attributes – consequences (benefits) – values (Means-End Chain decision model) McDonald was trying to start right from the top.  Employees had difficulties to interpret the strategy and translate it into action, configuring what is ‘a purpose’ and how to pursue it. Consumers may feel quite uncomfortable relating explicitly to their end-goals and personal values or they may not admit to them in advertising claims made by the company — this has to be done implicitly by hinting consumers from the bottom up on the basis of prior research.

A.G. Lafley, CEO of P&G in 2000-2009, highly respected for helping to salvage the company from a previous major downturn, championed a strategy centered on “the consumer is boss”.  The important contribution of Lafley to make the strategy practical was his highlight of two “moments of truth”: when a consumer first sees the product in a store and when he or she first uses it at home (2). These are decision points at which a consumer makes a purchase decision and, after experiencing the product, decides whether he or she will be a continuing customer of the brand. Thereon, employees could direct their efforts to win on these two crucial moments of truth. In an interview last month to Wall Street Journal, Lafley emphasised that the importance of being close to consumers has to be demonstrated by personal example:”Whenever I went outside the US and into an emerging market, I would go inside a store the first day and shop with real consumers. I could have told my employees ‘the consumer is boss’ a million times, but it wouldn’t have made any difference if that isn’t what we did” (3). That kind of practical guidance and personal commitment to a consumer-centric vision was apparently lacking in McDonald’s executive approach.

Procter & Gamble owns and manages brands in five head categories: grooming; beauty; fabric and home; health; baby and family. Among its more renowned brands are Ivory, Camay, Tide, Ariel, Crest, Pampers, Pantene, Always, Head & Shoulders, Olay and Wella. The company has been divesting lately from the food category, giving up on brands such as Folgers and Pringles, and, on the other hand, made the substantial acquisition of Gillette in 2005 which brought under the roof of P&G also Oral-B, Braun and Duracell. 25 brands generate each more than $1Bn in sales. The brands have generally been organized and marketed at the level of single products or mostly product lines (i.e., close variants of the same concept and function) so that many consumers would not  know the parent company of the brands they use. On a spectrum of brand architecture that spans over four main grades of brand relationships — House of Brands, Endorsed Brands, Sub-brands, and Branded House — Procter & Gamble is distinctively a House of Brands: the company hosts a pool of brands, each in charge of a narrow range of products, but there are only loose connections between them or to a parent endorsing brand (e.g., the corporate name). The autonomy given to a brand to tailor its positioning and marketing for its product(s) is a blessing for a brand leading in its category but may limit and impose a risk for brands that take the third or fourth place in their categories (4). In practice the autonomy of brand teams has been reduced in recent years in a way that seems to limit rather than support smaller brands. In addition, assimilating acquired brands that arrive with different types of relationships is more difficult and may cause greater confusion in the brand architectural model of the company (e.g., the Gillette brand is an endorser of a broader range of grooming products for men and their sub-brands like razors (Mach 3), shaving creams, deodorants, body wash gel and more).

In the 1980s the company added another layer of category-level management; they shifted focus towards spreading more brands in every category (e.g., laundry detergent, hair care) with aim that every market niche may find its answer in a brand of P&G. McDonald added yet new priorities defined by combinations of category and country. Lafley instated a complex “matrix” structure that involved a system of checks and balances, and its grip is said to have even tightened more under McDonald as CEO. It means that actions have to be approved by executives responsible for marketing, human resources and finance, geographical regions and product categories; brand managers are required to get permission for relatively simple actions or consult a book of PACE models (Process Owner, Approver, Contributor, Executor) for finding who has the relevant authority to settle disagreements (2). Perhaps this was meant to achieve better co-ordination between brands and control of functions and budgets but it has caused much frustration and discouragement of employees.

  • Jennifer Reingold of Fortune magazine (2) summarised the effect pointedly: “Process itself was threatening to become more important than conceiving great products and selling them” (p. 39).
  • Sonsoles Gonzales, former general manager for Pantene (left P&G in 2011) commented to Fortune that “There was lots and lots of measuring for the purpose of promoting productivity, but it resulted in too many internal transactions and negotiations and had less to do with winning the consumer” (p.39).
  • And Ed Artzt, CEO in 1990-1995, expressed his exasperation with the “brain drain” from P&G: “The loss of good people is almost irreparable when you depend on promotion from within to continue building the company” (p. 37).

Complexity is only increasing in the company with time and managing at the brand level is becoming harder as decision processes slow down. Nik Modi, analyst with UBS, suggested that P&G “is not too big to grow, it is too complex to grow”, making the fine argument that in times of volatility this problem becomes critical because the company’s structure limits its ability to confront quick changes and improving competition (1,2).

P&G’s brands are losing market share particularly to competing brands of key consumer goods companies such as Unilever, Colgate-Palmolive and Johnson & Johnson. Criticism claims that P&G is creating too few breakthrough product innovations. The more recent products to be appreciated as successful innovations were a synthetic detergent of Tide, Swiffer sweeping mop and Febreze odour freshener, but they are already more than ten years old (1,2). However, the claims urging more breakthrough innovations may be somewhat impatient and too harsh because such achievements are usually not so frequent — research and development (R&D) processes can take several years (mostly in the range of 3 to 10 years), requiring much experimentation and testing, and deep pockets. It is fair to say that many of the categories in which P&G is marketing are crowded with solutions offering different benefit-strengths and it is increasingly challenging to create new products that truly change the way consumers do things and influence their lives. The question to be raised is how a company like P&G is handling these challenges and works to overcome the obstacles to innovation in its fields of operation.

Going back to 2000, Lafley recognized P&G’s hardship to generate growth by innovation from within the company, in spite of its large apparatus of R&D (7,500-strong). He started a programme called Connect and Develop to import greater knowledge to the company by co-operation with outside sources (P&G’s approach to Open Innovation). The company estimated that for every member of its R&D team there were about 200 scientists and engineers out there who had talents the company could benefit from. The programme directed by Larry Huston linked with suppliers and other business partners, highly experienced retired experts, and young scientists in or fresh out of academia, to initiate new R&D projects (5). This brave initiative has had successes in creating more new products, but unfortunately it came short of impressing the stakeholders. It is claimed the company, helped by Connect & Develop, did not manage to create significant ‘blockbuster’ innovations, more of minor line extensions. The implication is that these product formulations justify much less paying price premiums, turning away consumers especially in the current economic period (2, 6).

In the past decade the ratio of R&D investment as % of sales continuously dropped from its peak of nearly 5% in 1999 to 3% in 2006 and 2.4% in 2011-2012. According to Bloomberg-BusinessWeek, this cutting back in R&D is explained not necessarily by reliance on external resources through Connect & Develop but mostly by decentralising and passing authority for R&D to heads of business-units who have put other priorities before investment in R&D (6).  Notwithstanding, more factors may have had adverse effect on innovative achievements in P&G. First,  a drawback of the Connect & Develop programme may be that drive and commitment to innovate are slipping farther away from P&G. Second, a long tradition of acquiring brands over at least three decades can weaken the ability and motivation to develop home-grown brands and innovative products in-house.

Much of the pressure on P&G is directed squarely at CEO Bob McDonald, with some shareholders demanding him to step down. Alumni managers are reportedly divided between opponents and supporters of McDonald. Nonetheless, he enjoys the backing of three former CEOs, Lafley, Artzt and Pepper, from whom he sought advice in recent months. He deserves extra time to show what improvement he can make. It may be wise for him to consider giving back more autonomy to brand management teams but promote joint-actitivites between brands, and encourage more co-operation between R&D, the in-house market research division Consumer & Market Knowledge, and brand managers. It is a testing time for McDonald and P&G to convince the company can keep touching and improving consumers’ lives meaningfully.

Ron Ventura, Ph.D. (Marketing)

Sources:

1. “P&G Chief Reassesses His Priorities”, Barney Jopson, FT.com (Financial Times Online), 31 January. 2013 http://www.ft.com/intl/cms/s/0/eb442eda-6b27-11e2-9670-00144feab49a.html#axzz2Oqll9hRr

2. “Can P&G’s CEO Hang On?”, Jennifer Reingold, Fortune (European Edition), 25 February 2013, Vol. 167 (No. 3), pp. 34-41.

3. “Former P&G CEO: What Companies Get Wrong” (Interview with A.G. Lafley), Wall Stree Journal: At Work Blog (Management), 4 March 2013 http://blogs.wsj.com/atwork/2013/03/04/former-pg-ceo-what-companies-get-wrong/

4. “The Brand Relationship Spectrum: The Key to the Brand Architecture Challenge”, David A. Aaker & Erich Joachimsthaler, 2000, California Management Review, 42 (4), pp. 8-23.

5. “Innovating Innovation: Procter and Gamble”, Management Lab (MLab), New Frontiers (case study, pp. 28-32) http://www.managementlab.org/files/u2/pdf/case%20studies/procter.pdf (“MLab is a non-profit  corporation, based in California, with the aim to accelerate the evolution of management”.)

6. “At Procter & Gamble, the Innovation Well Runs Dry”, Lauren Coleman-Lochner & Carol Hymowitz, Bloomberg-BusinessWeek (Online), 6 September 2012   http://www.businessweek.com/articles/2012-09-06/at-procter-and-gamble-the-innovation-well-runs-dry

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Looking over thirty years back, it is quite fascinating to reflect how our customs of viewing films at home have shifted during that period: We started in the early 80s with rental of videotapes at local library stores to be played on our good-old VCR; next, we explored the variety of films offered on multiple movie channels of cable and satellite TV networks; then moved in the 90s from videotape to DVD rental; later-on discovered the convenience of vide0-on-demand (VOD) services launched by our cable and satellite TV providers; and more recently we may have started to select and stream films online via the broadband Internet. Some changes to go through in just three decades! Even when excluding options that involve the acquisition of film copies (e.g., on DVD), much activity in this field is apparent. And all that has come evidently at the expense of cinema theatres whose numbers in city centers have diminished significantly, and urban social life has changed with it.

An important and interesting player in the field of film viewing at home is Netflix Inc. (www.netflix.com). The company started in 1997 in the US with an exceptional rental service of films — order online, receive and return a DVD by mail. Yet in 2007 Netflix moved into the domain of video streaming and it is now a growing part of its business. An early move by Netflix has gained it advantages that other Internet companies try to challenge.

Last December the Fortune Magazine selected Reed Hastings, founder and CEO of Netflix, as Businessperson of the Year 2010  (1). He arrived first ahead of fifty nominees rank-ordered by Fortune. The selection was based on reader’s choice, financial-based metrics (e.g., stock performance, revenue growth, and profit growth), and additional off-the-book factors related to marketing and managerial leadership and style. Hastings scored first on stock performance (during 2010 Netflix share price more than tripled on NASDAQ from $50 to ~$175 climbing at a steady rate) and ranked third in reader’s choice.

Four main reasons emerge from the story on Hastings and Netflix that seem to explain better how he became deserving of the award:

Hastings had a foresight already in the early 2000s that DVDs and the service concept of rental are going to lose favour with consumers and therefore decay before too long. Consumers would want access to films that is much more convenient, fast and direct. Led by this vision, he has been willing to take risks exploring, developing and testing different types of solutions for delivering film videos to consumers at their homes that rely on Internet broadband technology. Significantly, Hastings did not let himself get locked on a solution just because the company has spent that much resources on developing a prototype if he eventually realized it was not the right approach after all. For instance, Netflix developed a branded device of a hard drive type to which consumers would be able to gradually (i.e., rather slowly) download a whole film and watch later. But YouTube that went on air in 2005 quickly convinced him that the hard drive approach is obsolete and that the solution should be in the realm of live streaming, so he dropped the hard-drive concept and changed course. Netflix did not come first with streaming and was inspired by YouTube but it still had to find a way to efficiently stream full feature films. Later on Hastings was also dissatisfied with another branded device, realizing that his customers should not be burdened with proprietary hardware from Netflix. Instead, its current solution is in software applications, giving customers flexibility to stream films to a variety of devices (e.g., computers, TVs, tablets, smartphones). In an interview to Fortune Hastings said with regard to his decision to give up Netflix-branded device: “But if you are not genuinely pained by the risk involved in your strategic choices, it’s not much of a strategy” (p. 54).

Furthermore, Hastings did not refrain from introducing the new mode of content delivery simultaneously with the incumbent rental of DVDs by mail even though the new service could hurt or ‘cannibalize’ business from the existing one. Companies who plan to introduce a new product are often cautioned of cannibalizing a product they already offer to fulfill a similar purpose or function for the consumers. Accordingly, many companies that look to expand their product lines test carefully the sources of demand for the new introduction. Managers that become attached to a successful product they previously helped bring about are reluctant to do something that may help “killing it”. Watching out of cannibalization is in place when the company aims to increase variety of models to different consumers’ tastes or merely prove it is not freezing. However, cannibalization can be justified as in the case of Netflix when Hastings projected that the days of DVD rental where in any case numbered. Then progressing a transition proactively, letting the new solution grow at the expense of the old is the more appropriate course of action.

  • The customer base of Netflix has started to expand impressively in 2005, growing from 5 million subscribers to nearly 10 millions by the end of 2008, and is estimated in the end of 2010 at 20 million subscribers.
  • Unfortunately the chart of Fortune does not show how the ratio of subscribers between “renters” to “streamers” changes, but they do report that in the 3rd quarter of 2010 66% of customers used streaming for at least 15 minutes compared with 55% at the beginning of the year and only 37% in mid-2009.

 Netflix was looking for ways to improve on its film recommendation system to its customers. Being able to customize film offers that better fit customers’ preferences based on existing customer knowledge has become a core competence requisite, making search for relevant films by customers easier and more pleasurable. Rather than investing all the effort in-house or outsourcing it to some expert BI company, Hastings took a brave initiative and announced in 2009 a competition, the Netflix Prize of 1 million dollars. Talented engineers, computer scientists, statisticians etc., organized in teams, joined the challenge to develop a new enhanced model of personalized film recommendations. The full story of the competition is beyond the scope of this post; in view of the positive way it worked out it may be concluded that Hastings allowed talented professionals from around the world participate in an important enterprise of Netflix, with opportunities to enhance their careers and win a hefty prize, and in return received a powerful sophisticated model that would improve the service performance of Netflix. There is also reason to expect the competition story added value to the brand (e.g., a story in Fortune).

  • Two points are interesting noting about the model of the winning team (BellKor). The model conceptualized a map of film titles grouped in “regions” where titles in a region may share in common a genre, actors, or specific aspects of content and style.
  • First, the spatial spread of film titles is based on data of customer characteristics, films they viewed and ratings assigned, if any. As such, the inclusion of titles in the same region may not be immediately interpretable based on some objective classification of genres but reflects similarities between films as perceived by the customers.
  • Second, distances between any two titles can matter. Thus, while a film title is likely to match better with another title in the same region than from other regions, if the first film is close to a border it may make a better match with a second film just across the border in a neighbouring region than with a third film that is located in the same region but farther on the other end. 

A fourth factor that may have helped Hastings to succeed with Netflix can be associated with his own character and style of management. Apparently, in a pervious company he founded and managed he has been recognized as a very aggressive boss, impatient and somewhat erratic. It earned him the nickname ‘animal’, courtesy of one his senior managers, McCord, who admits that at first he was reluctant to rejoin Hastings at Netflix. Hastings said to Fortune that one of the problems was he never spent time to build a distinct culture to his previous software company. At Netflix he is reportedly more attentive to other people, willing to listen to their ideas in brainstorming even if he does not agree , and cares more about the development of high-esteemed professional culture that relies on trust in the integrity and commitment of employees (it is a “no perks” company according to McCord, all their fun is from building products).

This is definitely not all of the story of success of Netflix. Probably more contributing factors may be suggested, and there also are challenges that Netflix will have to confront in the near future to maintain its strengths in the market. Notably, streaming applies not only to feature films but also to a wide variety of TV programme series.

In the past three years Netflix was smart and quick to secure agreements for rights to stream content, particularly new films, with leading production studios such as Paramount, Lion Gate and MGM (in consortium via their joint venture Epix). Competition on rights with studios as well as TV networks (e.g., ABC, CBS, HBO) promises to be a hot topic for the foreseeable future in this field. Just in December Netflix signed with ABC. Amazon is already showing interest in offering streaming to its subscribers and is seeking attractive agreements. Netflix is also likely to face resistance from cable and satellite TV networks who feel threatened by their activity. Limitations in availability of films and programmes for streaming will curtail its advantage to customers vis-a-vis rentals and could also reduce the effectiveness of recommendations of content for access by streaming.   

 There is likely to be a continued quest for capacity to stream ever-increasing amounts of video data via the broadband Internet. It is estimated that Netflix already captures 20% of all broadband downstream traffic during peak hours in the US. If indeed consumers look at streaming as the preferred way to access and watch films and TV programmes in coming years, the contest will be more intense. Internet Service Providers already seem to make their own considerations, possibly charging their own customers by volume downstream (as already done with respect to mobile devices). So while Netflix may charge $7.99 monthly on a stream-as-you-can basis, subscribers may be required to pay an additional fee to their ISPs  (2).

On a final bright note, streaming can open new opportunities for Netflix to extend its business outside the US and Canada (started just in 2010). Less constrained by the logistics of rental by mail, it may obtain access to broadband channels to stream film and TV content to customers in more countries, perhaps first in Europe and then in other regions.

Ron Ventura, Ph.D. (Marketing)   

 (1) Reed Hasting: Leader of the Pack, Michael V. Copeland, 2010, Fortune, Europe Edition, Vol. 162, No. 9, December 6, pp. 49-56

(2)  Netflix on a roll as streaming catches on, FT.com, 28 January 2011

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