Management Memos

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September 2019
 

September 2019 Megatrend? Or Herd Instinct?

Megatrends, as discussed in the August Edition, need to be picked up early so you get maximum value. Megatrends give great advantage, so you do need to get into the action. But then, following the herd instinct can have you jumping off a cliff, and that's not good. How do pick the difference?


Virgin Australia: Classic Case

In the news of the last few weeks, there has been a lot of attention to Virgin Australia's poor profit performance. There have been losses for seven years, year on year, with total losses reaching the $1Bn mark.

Virgin Blue painted red

Photo by Montague Smith

Roll back the clock to the days of Virgin Australia's founder, Brett Godfrey. Do you remember 'Virgin Blue' - with its counter-intuitive red livery?

That airline grew strongly, and produced good profits. They were competitive, and crushed Ansett Airlines, taking over its airport gates and terminals. Success was at the heart of the 'Virgin Blue' revolution.

Then it all changed when Godfrey retired, and the airline went through a massive transformation. Forgetting what had made the airline successful, and forgetting what had made them unique, they abandoned their very successful "cheap and cheerful" market positioning. Instead, they decided to follow the herd into what was 'mainstream'.

Virgin Australia painted white

Photo by YSSY Guy

They changed their brand to Virgin Australia, switched their planes to a new white livery, and introduced new uniforms and on-board menu options.

The fleet changed by adding new wide-body aircraft to compete with Qantas, and featured the roll-out of business class across the Virgin Australia network.

Mesmerised by the prospect of higher margin business fares, and the prospect of hiring one of the final shortlist for CEO of Qantas, Virgin Australia had set off in pursuit of aviation glory. They easily spent what was needed to deliver on the offer of a full service airline.

The verdict is in. With seven years of losses, it is clear they increased expense without achieving a sufficient increase in income. Following the herd has led Virgin to the cliff!

When you put it that way, it's a problem clearly not affecting only high-profile businesses. It's fundamental to all businesses. Including yours.

Coles and Myer: An Earlier Case

GJ Coles Store

GJ Coles Store at the time

There was a similar, earlier example of a failed high-profile pursuit of the herd mentality. G J Coles operated small, low cost, novelty stores - and supermarkets. The proposal to acquire the ailing Myer Stores, an upscale department store chain which has nothing at all to do with any of the previous Coles businesses, was widely acclaimed to be a brilliant, strategic stroke. This was a move that would yield back-office synergies, massive back-office savings, and create a uniquely profitable conglomerate.

Twenty years later, the core businesses of Coles Supermarkets and Myer Stores were struggling. The only solution was to undo the 'marriage made in heaven'. The supermarket culture of Coles had destroyed Myer, and getting shareholder value from Myer assets required the costly spin-off.

Everyone, mesmerised by the idea of cost savings in the 'back-of-house' operations of the conglomerate, had failed to consider the whole business fabric. They had not foreseen the conflicts that ultimately tore down the conglomerate - but they should have.

Those conflicts arise because businesses that engage with widely different customer needs just don't work well together. That factor has torn down many dream mergers and acquisitions, and it's the reason a business should 'stick to its knitting'. The key people failed badly in this case.

Different - But the Same

In both cases, once the idea was published, momentum started to build, and herd mentality took over. No dissenting voice was ever heard.

In each of these cases, a populist business notion took hold, was never critically examined, and led to business failure. Now, the new CEO of Virgin has to retrench 750 people, and battle to grow some profit by shrinking the airline to survive.

Similarly, Myer reported a profit this year, and that was remarkable. As finance journalist, Stephen Bartholomeusz, aptly wrote in his article in the Sydney Morning Herald and The Age, "Myer finds retail therapy but still looking for a cure". See the article here.

Myer is still damaged goods even this long after that very popular, well supported, but ultimately damaging acquisition. That department store has had to face tough retail times in a seriously weakened position, has had to shrink to make a profit, and now keep shrinking.

These histories showcase sensible business people following the herd. Herd mentality took the place of objective analysis. Acquisitions were 'the way of the future' for corporations when Coles acquired Myer, and the pursuit of margin growth at the top end of the market is always 'sucker bait' for many in business.

Rover 75 Sedan

Good margin, low volume, Rover 7

Rover Metro

Low margin, 'cash cow', Rover Metro

 

In the 1970's, Rover Motor Group in the UK famously turned their back on the volume market, dropped their low margin, but high cash-flow, models to pursue the higher margin luxury market - later selling the functionally defunct company to BMW for £1.

If this is what the herd instinct does, how do you pick an attitude that's a megatrend you can follow without killing your business?

A megatrend is “gradual yet powerful trajectory of change". The herd instinct isn't about changes in the world around you - it's about following a hunch that doesn't stand critical analysis

A megatrend, being gradual, at first seems to be of no relevance to your business. Only the astute ones make the connection early enough to make it count. For example, 'big data' doesn't hold much promise for you, does it? Well, your customer purchase patterns, preferred payment method, web site visitor history, and whole lot more, are data there in your office, today, offering you insights on how you could improve your business.

A megatrend will destroy your business. So move early to take advantage. Trying to fight the future will only waste resources. For example, the swimming pool service company that establishes itself using the 'Internet of Things' to remotely monitor customer pools, and then offer just the right service at just the right time in anticipation of the customer asking, will do to the pool service man what Uber did to taxis.

A megatrend will change your market. Consider the changing demographic pattern in Australia, as retirees increase in number, and new customers are more technically engaged than you have ever seen customers before. It means that your old ways of communicating to customers have to mean something to a diminishing part of your customer base, while your newer, still unfamiliar, digital messaging needs to speak to a new kind of customer who expects you to anticipate their need.

You can see more on megatrends in our August Edition.

 

So this is the world of megatrends. Tom Peeters, (management writer in the 1980's), coined the expression "Cannibalise your own business before someone else does". That's brave. But smart!

 

Help is readily available. Call us now, and discuss how this important and powerful topic affects your business.


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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.