Good thing I had written an extra post a couple weeks ago because last week I forgot. This will be my fourth post. I have thought the hedgehog concept was awesome since I learned about it, and I found an article that applies directly to it.
The article Pinterest's Right of Web Passage - Huge Traffic, No Revenue in the WSJ talked about a company which my wife loves, Pinterest. Essentially, it is an online website where you can "pin" different media that you have found on the internet. Essentially it is an online scrapbook. Pinterest's popularity is surging, especially among women, because it is a place where they can keep images of clothes, decorations, food, or whatever else they want. They can repost them to facebook, twitter, blogs, etc. without having to search the internet to find it again.
From what the article says, would say that Pinterest has two of the three hedgehog categories down. First, they have a passion for what they do. Everyone at Pinterest seems excited about the company and what they can give to the community. Second, they are the best at what they do. In fact, at the moment, they are the only online scrap booking website. Companies have stopped focusing on facebook and other online advertising. Instead they are trying to get their products on people's pinterests so they can cheaply advertise to all their friends.
On the third section, profitability, they are having problems. At the moment, although they are a huge success, they are not profitable. Additionally, they aren't sure how they will make any significant revenue. The way most online companies that are even remotely similar to Pinterest gain revenue is through advertising. Pinterest feels having ad drops for items you might be interested in, like Amazon or Google, is not what they stand for and may alienate users. Currently, they have decided that they will keep improving their business and that a revenue opportunity will present itself eventually. Investors may be okay with that for now, but soon they will lose interest and take their funding with them. Hopefully Pinterest finds a revenue model soon because I know my wife will be upset if they aren't around anymore.
Friday, February 24, 2012
Friday, February 3, 2012
Alaska Airlines and the Hedgehog Concept
I had prepared another article below, but when I saw this on, I knew I needed to write about it. In the WSJ, the article An Airline That Makes Money. Really. showed a great example of the hedgehog concept. In an interview, Bill Ayer, CEO of Alaska Airlines, described the typical model for the airline industry. If you are losing money, increase capacity to take advantage of economies of scale and ignore the other problems reducing profitability. With this strategy, the airline industry was down 25% last year in the markets.
Alaska Airlines decided to set a different focus: run an airline like any other business. In any other business expanding before you are able, you will run into financial trouble. Instead of expanding, they focused on improving operations to increase profitability, specifically, they focused on the metric cost per available seat mile.
So how was Alaska Airlines able to become the best at running a profitable business while facing the same obstacles as other airlines? First they helped their employees become passionate about the goal. They did this by helping show their employees the importance of a long term profitable business. Even in unions, employees jobs wouldn't be secure if Alaska Airlines wasn't around to employ them. This helped them to eliminate defined benefit pensions for new employees and negotiate reduced union salaries in return for profit sharing bonuses.
In order to learn what they needed to know to become the best at running an airline like a business, Ayer brought in successful businessmen such as Jim Collins, Jim Senegal, and Oren Smith. He also borrowed best practices from other industries and implemented them in Alaska Airlines.
Focusing on this single principle has benefited Alaska Airlines economically. They have a goal to reduce expenses by $300 million from 2003 by reducing their cost per available seat mile metric from 8.73 cents to 7.25 cents. So far, despite fuel costs rising 35% in 2011, they have reach 7.6 cents. Also, Alaska Airlines is the only pre-1978 carrier that has not filed for bankruptcy.
Alaska Airlines decided to set a different focus: run an airline like any other business. In any other business expanding before you are able, you will run into financial trouble. Instead of expanding, they focused on improving operations to increase profitability, specifically, they focused on the metric cost per available seat mile.
So how was Alaska Airlines able to become the best at running a profitable business while facing the same obstacles as other airlines? First they helped their employees become passionate about the goal. They did this by helping show their employees the importance of a long term profitable business. Even in unions, employees jobs wouldn't be secure if Alaska Airlines wasn't around to employ them. This helped them to eliminate defined benefit pensions for new employees and negotiate reduced union salaries in return for profit sharing bonuses.
In order to learn what they needed to know to become the best at running an airline like a business, Ayer brought in successful businessmen such as Jim Collins, Jim Senegal, and Oren Smith. He also borrowed best practices from other industries and implemented them in Alaska Airlines.
Focusing on this single principle has benefited Alaska Airlines economically. They have a goal to reduce expenses by $300 million from 2003 by reducing their cost per available seat mile metric from 8.73 cents to 7.25 cents. So far, despite fuel costs rising 35% in 2011, they have reach 7.6 cents. Also, Alaska Airlines is the only pre-1978 carrier that has not filed for bankruptcy.
Memory-chips and the Value Curve
The WSJ article Micron Chief Dies in Crash, mainly discusses the death of Micron CEO Steven Appleton in a plane crash; however, it also talks about the struggling micro-chip industry. Micron is the last remaining American semi-conductor company. Many of the current Japanese competitors are considering pulling out of the market, and consolidations are likely. The reason for the industry troubles can be seen in the simple value curve shown below.
The article states that with lower demand for computers, computer manufacturers are looking for lower prices. In addition, consumers always want the newest, and best thing. Memory-chips haven't had a drastic improvement in many years. A large reason for this is that research is very expensive in the industry, especially for such price sensitive products. While the chips' performance and reliability are always improving, consumers always want more.
The article states that with lower demand for computers, computer manufacturers are looking for lower prices. In addition, consumers always want the newest, and best thing. Memory-chips haven't had a drastic improvement in many years. A large reason for this is that research is very expensive in the industry, especially for such price sensitive products. While the chips' performance and reliability are always improving, consumers always want more.
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