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Everyone hears about the growth at Apple.  But far too few of us hear about great growth stories of start-up companies in non-tech industries that use today’s sales tools to change the game and steal sales leadership from traditional competitors.

Jefferson Financial, which moved its headquarters from New York to Louisville, created dramatic, rapid growth using Twitter and LinkedIn to take on industry giants like Schwab and B of A’s Merrill Lynch.  Readers should take this story to heart, because it shows the kind of success small and medium-sized businesses can have when they break out of traditional thinking and invest in new sales tools while stalwarts remain stuck doing the same old thing with diminishing results.

The Jefferson Financial Story – from Ron Volper, Ph.D

Companies that reduce their sales and marketing budgets in this tough economy—as most have– are doing exactly the wrong thing. While many are trying to cut their way out of the recession, the companies that are thriving in this economy are growing their way out by investing more in sales and marketing. And by capitalizing on new trends, such as social media and technology, to reach out to their customers.

That’s what enabled Jefferson National Financial to grow its 2010 $180 million revenues to $280 million in 2011 (a 55% annual increase!) — and capture the dominant market share from much larger companies like Charles Schwab — selling financial products such as variable rate annuities to registered investment advisors and their clients throughout the US.

While most industry competitors cut their sales and customer service teams in the recessionary economy, Jefferson National tripled its sales team from 2010 to 2011.  While competitors slashed advertising and marketing, Jefferson National substantially increased its advertising and marketing budget. Sound risky?  Read on for the results.

Jefferson National combined hi-tech and hi-touch. For example, it used LinkedIn, Twitter, and YouTube to reach financial advisors (the intermediaries that recommend its products) and their clients (the investors). The company capitalized on a slew of tweets and re-tweets highlighting its relocation to Louisville and the creation of 95 new high paying management jobs. Social excitement induced both the mayor and the governor to attend a celebratory event, and encouraged the governor to designate a day as Jefferson National Day – creating a low cost media following of the company, its products and its success.

Successful viral marketing combined hi-tech social involvement with classic event marketing.

Lacking anything exciting to say, many of Jefferson’s competitors reduced their fees (prices) for products and services to maintain revenues.  Jefferson National was able to maintain its fees by successfully pitching its story directly to customers on-line, then following up with personal assistance, adding value and promoting a successful investor story.  As a result, after only 5 years the company increased its fund offerings from 75 to 350.

Jefferson National leveraged its technology to help financial advisors grow their practices. By hosting financial advisor webinars on how to use Linked-in and other social media to gain referrals from existing clients it created a loyal, growing set of distributors and happy clients.

Image by Getty Images via @daylife

Buy Facebook. I don’t care what the IPO price is.

Since Facebook announced it was going public, and its estimated IPO valuation was reported, doubters have emerged that the company could possibly be worth $75-$100B.  It is.

If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you.  But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook’s IPO may be undervalued.  The longer you can hold it, the more you’ll likely make.  Buy it in your IRA if possible, then let it build you a nice nest egg.

About 85% of Facebook’s nearly $4B revenues, which almost doubled in 2011, are from advertising.  So understanding advertising is critical to knowing why you want to buy, and hold, Facebook.

Source:  Poynter.org

Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising.  On-line advertising itself is generally predicted to grow at 16%/year.  But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook’s share will become a whole lot larger.

The ad market is shifting – which is extremely good for Facebook

At the end of January Procter & Gamble’s stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward.  He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be “moderated” – code for cut.  While advertising had grown at 24%/year sales were only growing at 6%.  He then admitted that the “efficiency” of on-line advertising was demonstrating the ability to be much higher than traditional advertising.

In other words, CEO McDonald is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.

P&G spends about $10B/year on advertising.  2.5x Facebook’s revenue.  Imagine P&G moves 10% – or 25% – of its advertising from television (which is now a $250B market) on-line.  That is $1-$2.5B per year, from just one company!  Such a “marginal” move, by just one company, adds 1-3% to the total on-line market.  Magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi …… the 200 or 300 largest advertisers and it becomes a REALLY BIG number.

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For the last decade, Wal-Mart has been “dead money” in investor parlance.  After a big jump between 1995 and 2000, the stock today is worth less than it was in 2000.  There has been volatility, which might have benefited some traders.  But for most of the decade Wal-Mart’s price has been lower.  There has been excitement recently because the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.

Source: YahooFinance 1/30/12

What happened to Wal-Mart was a market shift. For many years being the market leader with every day low pricing was a winning strategy.  Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.

Then competitors took aim at Wal-Mart, and found out they could beat the giant.

Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam’s Club) dried up.  Wal-Mart reacted by expanding many stores, making them “bigger and better,” even adding groceries to some.  But that added only marginally to revenue, and even less marginally to profits.

And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart’s success formula offered.

Other U.S. discounters, like Target and Kohl’s, offered nicer stores with more variety or classier merchandise – and often their pricing was not much higher, or even the same.  And a new category of retailer, called “dollar stores” emerged that beat Wal-Mart’s price on almost everything for the true price shopper.  These 99 cent stores, such as Family Dollar Stores, became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart’s stores. And “category killers” like PetSmart grew offering more selection and often better pricing.

But, even more dramatically, the whole retail market began shifting on-line.

Amazon, and its brethren, kept selling more and more products.  And at prices even lower than Wal-Mart.  And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer’s home.  With each year, customers found less need to buy at Wal-Mart as the on-line options exploded.

More recently, traditional price-focused retailers have been attacked by mobile devices.

Image by AFP/Getty Images via @daylife

Turning over a new year inevitably leads to selections for “CEO of the Year.”  Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon.  Comparing the two is worthwhile, because there is almost nothing similar about what the two have done – and one is likely to dramatically outperform the other.

Focusing on the Future

Both share a willingness to focus their companies on the future.  Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies.  Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns.  Both have, and continue to, spend vast sums of money seeking competitive advantage for their organizations.

And both have seen their stock value clobbered.  In 2011 Amazon rose from $150/share lows to almost $250 before collapsing at year’s end to about $175 – actually lower than it started the calendar year.  Google‘s stock dropped from $625/share to below $475 before recovering all the way to $670 – only to crater all the way to $585 last week.  Clearly the analysts awarding these CEOs were looking beyond short-term investor returns when making their selections.  So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners.  Or buy their stock.

Google participates in great growth markets

The good news for Google is its participation in high growth markets.  Search ads continue growing, supplying the bulk of revenues and profits for the company.  Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction.  Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks.

Because Google is in high growth markets, its revenues keep growing healthily.  But CEO Page’s “focus” leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google‘s revenues and profits lag dramatically – mobile devices and search.

Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business mirroring Apple – a big bet using some old technology against what is the #1 technology company on the planet.  Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain.

Simultaneously, the Google+ launch is an attempt to take on the King Kong of social – Facebook – which has 800million users and remarkable success.  The Google+ effort has been (and will continue to be) very expensive and far from convincing.  Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products – as it did with “Search plus Your World” recently.

Mr. Page has positioned Google as a gladiator in some serious “battles to the death” that are investment intensive.  Google must keep fighting the wounded, hurting and desperate Microsoft in search markets against Bing+Yahoo.  While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive.

Image by AFP/Getty Images via @daylife

“Creative Destruction” leapt into the popular lexicon last week.

A lot of excitement was generated when Mitt Romney said the words “I like to fire people.”  I’m sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words.

Nonetheless, the aftermath turned to a discussion of why Bain Capital has eliminated jobs while simultaneously creating some. A number of economists popped up saying that firms like Bain Capital are justified eliminating jobs because they are merely implementing “creative destruction.”

Although the leap is not obvious, the argument goes that businesses are made inefficient and unprofitable by new technologies or business processes – new creative solutions – destroying old businesses and the jobs.  So buyers (like Bain Capital) of distressed businesses cannot “fix” the situation and have no choice but to close them.  Bain Capital, which largely focuses on cost cutting and efficiency improvement to improve profitability, is inevitably stuck with losers it has no choice but to shutter, eliminating the jobs with the company.

Unfortunately, that argument is simply not true.

The only thing that allows “creative destruction” to kill a company is a lack of good leadership.  Any company can find a growth path if its leaders are willing to learn from trends and steer in the growing direction.

Look at the current situation with Kodak and Hostess; both quickly heading for Chapter 11.  Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure.

Kodak watched the market for amateur photography shrink for 30 years – drying up profits for film and paper.  Yet, management consistently – quarter after quarter and year after year – made decisions trying to defend and extend the historical market rather than move the company into faster growing, more profitable opportunities.  Kodak invented much of the technology for digital photography, but its leaders chose to license it to others rather than develop the market because they feared cannibalizing existing sales.

Hostess is making a return trip to Chapter 11 this decade.  But it’s not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new.  While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread “helping grow bodies 12 ways” the trend toward fresher, and healthier, staples has been happening for 40 years.

In the 1980s Hostess was known as Continental Baking, and even then profits were problematic.  As the company was “shopped” by investment bankers it was clear that to keep what was then the nation’s largest truck fleet profitable required new products.  Consumers were shifting to fresher “bake off” goods in the grocery store as well as brands promising more fiber and taste.  But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it.  It wasn’t that people stopped eating bread, or snacks, but rather that tastes shifted and Hostess’ leaders didn’t.

These stories weren’t “creative destruction.”  They were simply bad leadership.  Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states “the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results.”  Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!

Successful leaders avoid “creative destruction” by shifting with trends

In the 1980s Singer realized the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made.  Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense contractor as President Reagan upped military spending!  Rather than letting itself be “creatively destroyed” Singer’s leaders identified the market trends and moved from decline to growth!

Similarly, IBM almost failed as the “core” computer market shifted from mainframes to PCs. But before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive.

More recently, over the last decade a nearly dead Apple resurrected itself by tying into the trend for mobility, rather than focusing on its niche Mac product sales.  Company leaders took the company into consumer electronics (iPod, iPod Touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.)  Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses “creative destruction” was avoided.

It’s not hard to recognize trends and shift, if you’re willing

There are many businesses today in trouble because leaders simply won’t pay attention to trends.  Avon, Sears and Barnes & Noble are three companies with limited futures simply because their leaders are unwilling to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.

The next big example is most likely Microsoft.  Nobody thinks we will be carrying laptop PCs in 5 years (or maybe 2.)  Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective.  Its efforts in music (Zune) and mobile devices have been indifferent, insufficiently supported and mostly dropped.  Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner.  Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output.  Really.

We’ll learn soon enough just how many jobs Bain Capital created, and killed.  But those lost were not due to “creative destruction.”  They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets.  Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in opportunities for creating winning businesses.

Links:

Using innovation to beat “creative destruction”

The impact of “creative destruction” on retirement/career planning

How Apple overcame “creative destruction” while Microsoft enters a growth stall

Using scenario planning to beat “creative destruction”

“Better, faster, cheaper” strategies lead to being “creatively destroyed”

Successful leaders tie to market shifts by being disruptive

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The S&P 500 ended 2011 almost exactly where it started.  If ever there was a year when being invested in the right companies, and selling the dogs, mattered for higher portfolio returns it was 2011.  The good news is that many of the 2011 dogs were easy to spot, and easy to sell before ruining your portfolio.

A theme to recognizing Dogs

There were many bad performers.  However, there was a common theme.  Most simply did not adjust to market shifts.  Environmental changes, from technology to regulations, made them less competitive thus producing declining returns as newer competitors benefitted.  Additionally, these companies chose – often over the course of several years – to eschew innovation and new product launches.  They chose to keep investing in efforts to defend and extend historical, but troubled, businesses rather than innovate toward a more successful future.

Looking at the trends that put these companies into trouble we can recognize the need to continue avoiding these companies, even though many analysts are starting to say they may be “value stocks.” Instead we can invest in the trends by buying companies likely to grow and increase portfolio returns in 2012.

Avoid Kodak – Buy Apple or Google

Few companies are as iconic as Eastman Kodak, inventor of amateur photography and creator of the star product in the hit 1973 Paul Simon song “Kodachrome.” However, it was clear in the late 1980s that digital cameras were going to change photography.  Kodak itself was one of the primary inventors of the core technology, but licensed it to others in order to generate cash it invested trying to defend and extend photographic film and paper sales.  In my 2008 book “Create Marketplace Disruption” I highlighted Kodak as a company so locked-in to film sales that it was unwilling to even consider moving into new markets.

In 2011 EK lost almost all its value, falling from $3.85 share to about 60 cents.  The whole company is now worth only $175M as it rapidly moves toward NYSE delisting and bankruptcy, and complete failure.  The trend that doomed EK has been 2 decades in the making, yet like an ocean freighter collision management simply let momentum kill the company.  The long slide has gone on for years, and will not reverse.  If you want to invest in photography your best plays are smart phone suppliers Apple, and Google for not only the Android software but the Chrome apps that are being used to photoshop images right inside browser windows.

Avoid Sears – Buy Amazon

When hedge fund manager Ed Lampert took over KMart by buying their bonds in bankruptcy, then used that platform to buy Sears back in 2006 the Wall Street folks hailed him as a genius. “Mad Money” Jim Cramer said “Fast Eddie” Lampert was his former college roommate, and that was all he needed to recommend buying the stock.  On the strength of such spurrious recommendations, Sears Holdings initially did quite well.

However, I was quoted in The Chicago Tribune the day of the Sears acquisition announcement saying the merged company was doomed – because the trends were clear.  Wal-Mart was in pitched battle with Target to “own” the discount market which had crushed KMart.  Sears was pinched by them on the low end, and by better operators of vertically focused companies such as Kohl’s for clothing, Best Buy for appliances and Home Depot for repair and landscape tools.  Sears was swimming against the trends, and Ed Lampert had no plans to re-invent the company.  What lay ahead was cost-cutting and store closings which would kill both brands in a market already overly saturated with traditional brick-and-mortar retailers as long-term more sales moved on-line.

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A wise person knows to never be the last person at a business holiday party.  Things never go well for those who stay too late.  And the next day can be really bad.

Yet, far too many businesses stay way, way too long at their market party, focusing on the same strategy when they should move into new behaviors a whole lot earlier.  They keep partying, becoming far too inebriated with current customers, missing important trends benefiting the more sober.

This week Oracle missed earnings estimates, and the stock fell some 14%, from $30 to under $26.  For the year, Oracle is down about a third, from it’s high of $37.  The question any investor needs to ask is the one headlined by ZDnet.com “Oracle Earnings: An Aberration or Trend?”

Oracle is very, very poorly positioned for future earnings growth.  Like most big software companies, including Microsoft and SAP, Oracle built its business on the formula of large data centers running large “enterprise applications” supporting lots of independent corporate PC users.

And it was clear fully a year (or 2) ago that market simply isn’t growing.  Organizations are rapidly shifting away from hard to use, one-size-fits-all (at very high cost) enterprise software applications and large data centers.  Users are moving away from PCs to mobile devices, and refusing to use clunky enterprise interfaces. Worse, software is moving away from data centers in client-server configurations tied to PCs.

Instead, companies small and large are rapidly shifting to software-as-service (SAS) environments where the company can pay “by the use” for software maintained in the “cloud.”  These solutions are scalable, cheaper to buy, cheaper to implement, vastly more flexible and operate on mobile devices a whole lot better.  If you’ve ever used Salesforce.com you’ve experienced the benefit compared to more clunky enterprise Customer Resource Management (CRM) applications – like Seibel, purchased by Oracle in 2005 for just under $6B.

Oracle missed this trend.  Despite all the dozens of acquisitions Oracle has made – such as buying Unix hardware provider Sun Microsystems that sells to data centers, it largely missed the shift to cloud architectures.  It has remained far, far too long at its enterprise customer party, enjoying the profit-laden punch, and hoping the market would never shift.  As the customer base shrank to fewer, and ever larger, big corporations Oracle did not prepare for changes in its business the next day.  Oracle has stayed too long, and its ability to compete in new markets against more flexible solution providers such as IFS with better user interface capabilities now looks really weak.

Somehow, Best Buy fell into the same trap.  In early December the country’s largest “big box” retailer announced lower earnings after cutting prices to shore up revenues.  As a result the stock dropped 20%, from about $28 to $22 – continuing a consistent downhill slide all 2011, dropping nearly 40% from its high of $36.

Best Buy felt like it was doing great after Circuit City failed.  Circuit City had been a darling of the infamous “Good to Great” text.  But Circuit City demonstrated that in a market dominated by a long-term trend away from fixed stores and toward on-line purchases, every retailer is bound to struggle.  It’s not enough to have a hedgehog concept when market shifts take your customers elsewhere, and fixed costs kill your profits.

When Circuit City failed in 2008 investors worried that a weak economy would tank Best Buy as well.  But as all that Circuit City capacity disappeared, Best Buy was a short-term winner.  Some customers switched to the “other” big box company, increasing revenue at Best Buy even as the trend toward on-line accelerated at double-digit rates.

Image by Getty Images via @daylife

Revenue growth is a wonderful thing.  It is so much more fun to work in a growing company than one that isn’t.  And high growth is possible, even in this struggling economy, if leaders focus on trends.

Take for example Chipotle.  Whether you eat there or not, Chipotle has grown rather spectacularly.  From 16 units in 1998 it grew to 500 by 2005 and now has 1,100 company owned and operated stores.  Revenues have more than doubled since 2005, to about $2B, while sales per store increased almost 12% in 2010.  And investors have been well rewarded, with a market cap increase of 6x in the last 5 years!

Chart source Yahoo.com 12.12.11

Chipotle hit on new trends with “Food with Integrity.”

While that phrase is far from explicit, Chipotle has made a practice of talking about being “natural.”  Chipotle often buys local produce for its units, claims to use “natural” meat, presumably with fewer additives, and brags about having no hormones in its dairy products.  Such claims have tied to customer trends for better nutrition, higher food safety and improved taste.  This allows Chipotle to grow in the most intensely competitive of industries, even during a struggling economic time.

Compare this with McDonald’s.  This is not a random selection, as McDonald’s was a 1998 investor in Chipotle, and put around $360M into the chain fueling early growth.  McDonald’s was handsomely rewarded for this, receiving around $1.5B (4x) return on its investment when selling Chipotle to the public in 2006.

At the time, McDonald’s was in a horrible situation. It’s stock had dropped from a high of $50 in 2000 to a low of $14 in 2004.  McDonald’s took the money from the Chipotle sale and invested all of it in new capital expenditures to defend the McDonald’s franchise.  The good news was that “turnaround” worked and McDonald’s recaptured its value, roughly doubling market capitalization the last 5 years.

One could consider both of these success stories, unless you look deeper.

Since 2006 Chipotle increased its valued by 6x, McDonald’s by 2x – so investors in the former did fully 3x better than the latter.  And where Chipotle is expected to increase the number of its stores by at least another 1/3 in the next few years, McDonald’s struggles to find growth markets. Clearly, investors that swapped their McDonald’s stock for Chipotle’s stock in 2006 did far better – and have prospects of continuing to do even better still with at least some analysts expecting Chipotle to hit $400/share within a year, for another 20% pop.

Source: Yahoo.com 12.12.11

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There are few organizations as efficient as the U.S. Postal Service.  Really. But operational efficiency is insufficient for survival in today’s competitive marketplace, and almost impossible to create success!

The U.S. Postal Service is remarkably efficient

Think about the Post Office’s value proposition.  They send someone to almost every single home and business in the entire United States 6 days/week on the hope that there will be a demand for their service – sold at a starting price of 44 cents!  For that mere $.44 they will deliver your hand crafted, signed message anywhere else in the entire United States!  And, if you want it delivered fairly close they will actually deliver your physical document the very next day!  And, if you are a large volume customer rates can be even cheaper!

And the Post Office has been fantastically good at operational improvements. Literally billions of items are processed every week (about 700million/day picked up, sorted and distributed across one of the physically largest countries in the world.  The distance from Anchorage to Miami covers a staggering 5,100 miles, and works out to a miniscule .009 cent/mile for a first class letter! Compare that to Pony Express pricing (in 1860 $10/oz and 10 days Missouri to California,) and adjusted for inflation you’ll be hard pressed to find any business that has continually improved its service, at ever lower (constantly declining when adjusted for inflation) prices.

And while AMR is filing bankruptcy largely to force a new union contract, the Post Office has accomplished its record improvements with an almost entirely union workforce.

Executive compensation is surprisingly low.  The CEO makes about $800,000/year. Competitor CEOs make much more.  At Fedex (the Post Office delivers more items every day than Fedex does in a whole  year) the CEO made over $7,400,000, and at UPS (the Post Office delivers more items each week than UPS does annually) the CEO made $9,500,000.  So, despite this remarkable effectiveness, the CEO makes only about 1/10th CEOs of much smaller delivery organizations.

The Post Office understands what it must do, and does it extremely well.  It knows its “hedgehog concept” and relentlessly pursues it to unparalleled performance. Yet, it is barred from raising prices, is losing money, and is now planning to close 3,700 locations and dramatically curtail services – such as overnight and Saturday delivery – in a radical cost reduction effort.

The U.S. Postal Service is rapidly becoming irrelevant.

In the 1980s faxing was the first attack on snail mail, but the big market shift began 15 years ago with the pervasive availability of free email.   Today mobile devices provide texting and social media, shifting the acceleration away from physical letters.  Fewer people write letters, send bills or even pay bills via physical mail.  Are you mailing any physical holiday cards this year?  How many?

Even the veritable “junk mail” is now far less viable.  Coupons are used by consumers less and less – and to the extent used they have to be much more immediate and compelling – such as offerings from GroupOn and FourSquare et.al. which arrive at consumers by email and social media usually through a smartphone or tablet mobile device.

The market shifted.

Most people are so used to everything about airlines sucking that news a major filed bankruptcy simply wasn’t surprising.

Conceptually, business is not hard to understand.  Create a product or service that people want.  Make it appealing enough so people will pay price to cover costs and make a profit, allowing you to re-invest in growth and repay your investors.  Pretty simple.  The key variable is to make your product or service good enough that people pay an appropriate price.  Do that and profits are no problem.

But AMR, like most airlines, simply doesn’t understand this concept.  Yes, people want to fly.  But how much will they pay to fly?  And, how much will they pay when, overall, the service really sucks?

Ever since deregulation, airline service has become worse and worse.  Ask anyone what they think of American (or United or Delta or any “major” airline) and answers are the same.  They hate them:

–Pricing is incomprehensible.  You may pay $800 for a ticket, and the person beside you $200 and the reason is completely unclear. In fact, someone who paid $400 may be in first class, while for $800 you are in a middle seat in the last row by the lavatory and galley.

–There is never enough room on the plane for all the carry-on luggage, but that is free while the airline charges for checking bags. What they don’t want (carry-ons) is free, what they want (check your bags) requires you pay?

–You are charged for a checked bag, but if the bag is late, damaged or items stolen you have no recourse to the airline.

–When planes are late or cancelled, nobody cares how much customers are inconvenienced. Literally. You have no recourse for bad, or failed, service.

–Planes are cramped and dirty, often looking well worn – or worn out.

–Every year planes are becoming smaller and less comfortable.

–The food is gone – or wildly expensive.  And that little bottle of rum costs as much as a fifth at home.

–Employees appear uncaring at best, or simply rude.  It’s like there are way too many customers, and not enough of them, so “PLEASE stay back and do what we tell you to do!”

This list of dissatisfiers could go on forever (readers, feel free to comment on your favorite stupid policy or practice of any airline.)  Why?  Because the airline’s leaders have completely lost track of what business is all about.  In the rush to cut prices, trying to sell that last empty seat on that midnight feeder flight to Omaha, the entire industry has driven out all the customer satisfaction, and profitability.  Everyone has learned that it doesn’t matter how much you pay, the experience is going to suck.  So the industry leaders have taught customers to be price sensitive, above all else.

Shortly after deregulation Robert Crandall became AMR‘s Chairman.  He was a notorious cost cutter.  The Wall Street Journal ran a front page article highlighting his efforts to build American, highlighting how on a flight Mr. Crandall noticed that few customers were eating the 3 black olives on their salad.  He claimed to have told company managers to remove the olives, thereby saving (ostensibly) $700,000/year.  Nobody would notice, he claimed, and money was saved.

And that’s been the trajectory for American ever since. Cut this, cut that.  Shave costs everywhere, including employee pay, benefits and pensions.  And after 30 years, the sum total is that not only are the olives gone – the whole meal has disappeared!  Where working at an airline was once considered a great job (pilot, flight attendant, gate agent or baggage handler, ) today compensation has been cut and complicated (remember tiered compensation that has 2 people doing the same job, but at different pay just because of hire date?)  so that employees are largely overworked, under-appreciated and constantly being pushed by management one direction, while pulled by customers in another.

Where once we didn’t mind flying, maybe even enjoyed it, now everyone thinks of flying as the opportunity to learn what life is like as herded, and penned, livestock!

It has been a fallacy of “modern management” that leaders have a primary job to optimize the business – largely by limiting innovation and cutting costs.  The famous business guru, Jim Collins (author of Good to Great,) actively advocates (IndustryWeek.com 11/29/2011) that businesses focus exactly on the kind of business optimization that has driven AMR to bankruptcy!  His recommendations have inevitably led businesses down a road of commoditization as they offer less and less to customers, and fall into vicious price wars.  Inevitably a market shift happens that undercuts their ability to compete at all!

Great companies do not fall into this trap.  They constantly add customer value, utilizing new technology and business processes to improve performance.  They grow revenues, rather than focus on cutting costs.

Think about how Google has made doing research easier, and placing internet advertisements.  Or how Apple has improved personal music and mobile information access.  Or how Whole Foods has delivered more organic and tasty products.  Or how Amazon has made access to books, periodicals and much of retailing a better experience.  These companies have seen their market capitalization explode as they eschewed optimization in favor of innovation to make things better – not just cheaper.  Where AMR‘s value went from $40/share to zero the last 5 years, you would have had big gains in these companies that focused on innovation and delivering better customer results.

Chart Source Yahoo 1 December, 2011