StrategyStreet Blog:

We have two domestic industries in overcapacity: the automobile and the airline industries. We call these industries Hostile markets because returns for most of the players in the industry are low and price competition is intense.

Some analysts have estimated that the domestic airline industry needs to reduce its capacity by 20% in order to become profitable. This estimate sounds very high to me, as I’m sure it would to most of the flying public. If you miss a flight today, or if one should happen to be canceled on you, you are not necessarily going to get to your destination today. Airlines are flying with a high percentage of their seats filled.

How and where you raise prices is an important question. The legacy airlines are doing it badly.

I am surprised and confused by the airline industry today. All the legacy airlines have announced substantial capacity reductions, in some cases by more than 20% of capacity. For example, United Airlines plans to ground 100 of its 460 planes in the foreseeable future. Some smaller cities will lose airline service completely. The legacies’ hub and spoke system is about to have fewer spokes.

Deutsche Post AG is surrendering in the battle for the ground shipments, the U.S. market for express delivery. Over the last few years, Deutsche Post has purchased both DHL and Airborne in order to compete in the U.S. market. These two competitors were numbers 4 and 3 respectively in the industry. Deutsche Post plans to transfer DHL’s North American Air parcel deliveries to UPS and reduce its U.S. capacity for ground shipments by a third in order to cut losses.

Recently, Intel announced the Atom chips. These chips are inexpensive, built for ultra-cheap desktop or portable computers called Nettops and Netbooks. The Atom chips for Nettops cost $29 each, while those for the Netbooks will sell for $44. These are both Price Leader products.

Two years ago, Dell bought Alienware, the leader of the game-oriented personal computer business. Game-oriented PCs are the high-end of the market. They usually sell for several times the price of the average PC. A game-oriented PC is a Performance Leader product (see “Why Do Leaders Lead?” in the Tools/Perspectives section of StrategyStreet.com). In the computer hardware business, the differentiator at the high end of the market is Functionality. This Functionality includes both design and computing capability. If you have these two functional benefits, you can generate word-of-mouth among buyers and become a hot product.

The RV market is in hostility. A hostile market sees low returns on investment, even for the industry leaders. One of the largest players in the market, Fleetwood Enterprises, has seen five straight years of losses. Another leader, Winnebago Industries, while still profitable, has seen four consecutive years of falling sales. This hostility has been caused by a rapid and deep fall-off in demand.

This entry is the last in our series of four entries on the HP/ED deal.

This entry is the third in our series of four entries on the HP/EDS deal.

This entry is the second in our series of four entries on the HP/EDS deal.

This entry is the first in our series of four entries on the HP/EDS deal.

Microsoft has problems getting its stock price up where it thinks it belongs. Some analysts believe that the reason, in part, is that Google has introduced free substitutes for the Microsoft Office products. These substitutes are called Google Apps and include spreadsheet and word processing applications. The fear is that Google’s advertising-supported free applications will force Microsoft to reduce prices on Office products where it enjoys a 70% gross margin. These fears are premature and probably overblown.

Microsoft, at least for now, has failed in its efforts to acquire Yahoo. If it had succeeded in this acquisition, Microsoft would have had to do some radical surgery on Yahoo’s search business, and on its own as well.

Even high-end brands can offer lower-end products. We call the high-end companies and products Performance Leaders. These companies and products offer better performance than the Standard Leader products in an industry for prices starting at least 10% over the Standard Leader product prices. Price Leader competitors are those companies who offer less performance than the Standard Leaders products for prices generally starting about 25% below those of the Standard Leader.

The modern hotel industry is really two separate businesses. The first business includes companies that have the hotel brand names. These companies manage and operate hotels. These companies include InterContinental Hotels Group, Starwood, Wyndham and Marriott. The second group are companies that are owners of the hotel properties. Most of these are REITs.

Heico Corporation is a Predator. In our research, we have found that there are four types of low-end competitors. They differ from one another in the benefits they offer, compared to the industry-leading products, to either the user or the buyer of the product. We call the industry-leading companies and products Standard Leaders.

Low-end competitors don’t think like industry leaders. As a result, they often blow big holes in the leader’s plans.

The automobile insurance market has seen price declines since 2006. During this declining-price period, Allstate has done well, gaining market share by offering innovative pricing.

One of your competitors may be a low-end player today. If that competitor stays at the low end, the likelihood is that its share of the market will not exceed 15%, even if it is quite successful. However, the very success may breed a significant challenge to industry leaders in the future. If the low-end competitor is earning a good return on investment, it may enter the market for the industry’s higher-end products in order to enhance its own profits and future.

Garmin is having big trouble these days. As one of the leaders in the personal-navigational device business, Garmin is besieged by much larger competitors from an adjacent industry. In particular, the cell phone hand set makers are doing the same thing to GPS functions that they did to the PDA market a few years ago. They are turning GPS into one of the functions on smart phones. In 2007, 18% of mobile phones already had the GPS function embedded in them. That percentage may double within a couple of years.

The North American auto market has turned ugly. Normally, analysts expect the industry to sell about sixteen million vehicles a year, about what we sold in 2007. We seem to be on track to sell around fifteen million in 2008. Today GM, Ford and Chrysler are all losing money in the North American market. This is a market that we would define as Hostile.

Google has entered Microsoft’s most treasured domain, the office suite. Google offers its Apps for free. Using these Apps, a consumer may prepare basic reports and spreadsheets. Google claims two advantages over Microsoft with its Apps product: it operates on the internet, and it is free or very inexpensive in its premium version. So, what might be the outlook be for both Google and Microsoft?

After thirty years of unmitigated success in the airline industry, the smaller discount airlines are starting to fall by the wayside. Aloha, ATA and Skybus recently shut down. Others are likely to follow. Even Southwest is feeling the pressure. None of these discounters is able to fully recover the burgeoning cost of fuel.

Remember the grade school experience when you learned of a party to which you did not receive an invitation? For most of us, that was a hurtful experience. But the failure to receive an invitation can cost real money in the business world, both now and in the future.

Delta recently announced that it was trimming its domestic capacity and shifting that capacity to international flights. It will cut its domestic capacity by about 5%, which will bring its capacity in August of 2008 to a level 10% below that of one year earlier. United Airlines did something similar earlier in the year.

There were two items of interest in recent press reports. Both suggest something about our fundamental beliefs in our economic system.

Bear Stearns is gone. The explanation is in my old neighborhood.

For those fortunate few out there who travel to London regularly, I envy you. What I don’t envy are the hotel rates you pay, which are averaging over $600 a night in the city. We have seen hotel rates go up a great deal in the U.S., as well, over the last few years. New York is a particular example of that phenomenon.

I ran into a neighbor today. He is an attorney who, for many years, has run a successful practice specializing in working for creditors to recover defaulted debt payments. We began talking about the economy and I, half jokingly, said “at least your business should be up in this credit crisis.” He quickly corrected me. “My business is really getting squeezed now because of this credit crisis.”

I was fortunate to work for some years with McKinsey and Company. As an alumnus of that organization, I receive regularly the McKinsey Quarterly. Every once in awhile, the McKinsey Quarterly emails a feature called Chart Focus.

A recent San Francisco Chronicle article on Southwest Airlines revealed some interesting information:

Sprint Nextel appears to be in real trouble. A recent Wall Street Journal article offered a long analysis of the company and its current challenges. Sprint Nextel is illustrating the way market share is lost in most markets. In short, Sprint Nextel is losing the most profitable customers (post paid contract subscribers) to the top two carriers, AT&T and Verizon, as well as to the fourth ranked competitor, T-Mobile USA. Sprint Nextel’s losses in customers may be as much as 2% of these valuable customers in a quarter. These are the best customers so the company’s percentage loss in revenue would be much higher than the percentage loss in number of customers.

Over the last few weeks, both GM and Sears, while leaders in their markets, have announced a new round of lay-offs. This is a sad development to watch, especially since these lay-offs are unlikely to be the last.