34A-Value in Two Hostile Industries
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.
Over the last twenty years, we have studied and worked in many of these Hostile markets. In about three-quarters of the cases, market hostility is caused by the expansion of industry competition, especially expansion by low-cost competitors. Hostility in both the airline and automobile industry is the result of expansion by competitors. In autos, the expansion of Asian competitors, in particular the Japanese, has gradually put a strangle-hold on the three domestic manufacturers, GM, Ford and Chrysler. In the airline industry, the expansion of low-cost carriers, including Southwest Airlines, Jet Blue and their ilk, have done the same thing with the legacy carriers.
Few of us would volunteer to be in a Hostile market. It’s painful on the best of days. But if you had the choice of working in and managing a company in one of these two industries, which would you choose? In which industry would you be more likely to succeed as an industry Standard leader? Would you rather be a GM, Ford and Chrysler, or any of American, United, Delta and Northwest? The answer depends on your view of the relative strengths of each set of companies against their expanding competition. In this and the next blog, we look at each industry’s domestic competitors compared to their expanding rivals on the basis of Value and Cost.
First, consider Value. Value is the combination of Performance for Price. In turn, Performance is the Function, Reliability and Convenience of the product. The domestic auto industry clearly has a Value problem because it continues to lose share in the domestic market. (See “The Two Best Consultants in the World” in StrategyStreet.com/Tools/Perspectives.) So, where, in Value, is the problem, Performance or Price? It appears that the problem is one of Performance. The domestic automobile manufacturers tend to have slightly lower prices on equivalent cars than do their Japanese competitors, so it can’t be prices. That leaves Performance.
So, where might the Performance problem lie, in Function, Reliability or Convenience? Convenience might be a close call, but the edge goes to the domestic manufacturers, especially to GM and Ford, with their extensive dealer infrastructure. This is a slight nod, at best, since the vast majority of customers are well within striking range of a reputable dealer for any of the Asian and domestic producers. How about Function? Here again, if there is a nod, it goes to the domestic producers. On an equivalent car, the domestic producers tend to have more functionality for the dollar than do their Japanese competitors. No, the problem the domestic producers face more than any other is Reliability. (See “Reliability: The Hard Road to Sustainable Advantage” in StrategyStreet.com/Tools/Perspectives.) The domestic customer base has largely determined that the domestic manufacturers’ cars are not of the same quality as are their Japanese competitors. There is a particular but telling statistic that supports this conclusion. The average Japanese used car sells for a much higher fraction of its original purchase price than does its domestic counterpart.
The industry Standard leaders in the airline industry are in better Value shape than are the automobile industry leaders. They, too, are losing share, though at a much slower rate than they did a few years ago. Most of their share loss has been due to their premium pricing on routes served by discount airlines.
The Performance of these airline industry leaders is relatively good. They have a clear Function advantage. Their hub and spoke systems allow a passenger to get from one place to another far easier than do the discount airline competitors. The legacy airlines also offer the best frequent flyer programs. Convenience also favors the legacy carriers. It’s a wash when it comes to purchasing tickets and printing boarding passes. Virtually anyone with a computer and an internet connection can purchase an airline ticket easily and print boarding passes before the flight. The legacy airlines, though, have a clear Convenience advantage in their willingness to assign seats on their flights. Reliability is another matter. The legacy airlines have a reputation for spotty Reliability. They suffer from delays and lost baggage. Some question their customer service on-board the aircraft and their abilities at handling customer problems. They are in public relations doldrums. Often, the low-cost competitors wear the industry halo, in part, due to their low prices. But there is substance there as well. Southwest Airlines, in particular, has a reputation for good Reliability with on-time arrivals, enthusiastic employees and relatively low levels of customer complaints.
In summary, the domestic auto producers have a big Value problem in Reliability. The legacy airline competitors have a big Value problem in Price, and a developing problem in Reliability. A Price problem is much easier to fix than is a Reliability problem. A slight edge on Value, then, goes to the domestic airline legacy carriers.
In 2020, traditional US domestic manufacturers GM, Ford and Chrysler controlled 48% of the light vehicle market in the US. (GM 18.35, Ford 18.16, FCA 11.9).
Before restrictions took place in 2020, legacy airlines had 14.7 million seats available in mid 2020. This compared to 7.2 million seats available from low-cost carriers. The low-cost airlines include Southwest Airlines. So, legacy airlines hold about two thirds of the seats while low-cost airlines hold 33%.
By 2020, the four leading domestic air carriers (American, Southwest, Delta and United) were mostly among the leaders in customer complaints per 100,000 enplanements. In rounded numbers American had 9, Southwest 3, Delta 7 and United 30. Covid may have had something to do with this. By 2021, an objective quantitative analysis by The Points Guy of the top airlines ranked the big four in these points per hundred in order: Delta 68, Southwest 66, United 61 and American 58. Delta is the consistent leader on quality measures.
In 2021, MotorBiscuit portrayed quality in the US auto market as follows:
- Honda (82)
- Subaru (81)
- Ram (80)
- Hyundai (79)
- Mazda (79)
- Toyota (79)
- Dodge (78)
- Ford (78)
- GMC (78)
- Nissan (78)
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.