Meissner Research Group

In a recent interview with German business newspaper Handelsblatt, Lufthansa’s Deputy Chairman Christoph Franz mentioned that the airline will implement several strategies so far employed by flow cost competitors (Lufthansa will Billigflieger kopieren, Handelsblatt, November 17, 2009). On certain short routes, the pitch between seats will be reduced. Kitchen and wardrobes will be completely removed to create more space for passengers. Franz mentioned that Lufthansa will have to let go of the old strategy that the profitable long haul business is subsidizing the less profitable short haul routes.

Most importantly, Franz admitted that Lufthansa has underestimated the competition by the low-cost carriers. After some initial panic following the arrival of Ryanair, Easyjet, Air Berlin and others on the scene, most incumbent full-service airlines had settled on the thought that low-cost passengers are a different bread and that their current customers will stay with them not matter what. They now realize that this leniency is dangerous.

For us this is good news, as this might spark some renewed industry interest in choice modeling in network revenue management. Doctoral candidate Arne Strauss and I have been working on improvement in this area for some time now. See for example our articles ‘Pricing Structure Optimization in Mixed Restricted/Unrestricted Fare Environments’ and the upcoming ‘Improved Bid Prices for Choice-Based Network Revenue Management.’

[The following is an English version of the article ‘MBA in Europa: Die Mischung macht’s‘ that appeared as an op-ed in the MBA supplement of the Frankfurter Allgemeine Zeitung (FAZ) on October 29^th, 2009.]

Without a doubt, every MBA applicant needs an excellent GMAT score, a flawless academic record and a unique quality to stand out from the crowd, but social competence is what a potential applicant needs to have to be a winner to complete a MBA program, land a dream job and conquer the business world.

For the past several years, the secret has no longer lied in grades and academic awards but rather in a mix of different mental, personal and even physical strengths. From my teaching experience at the Lancaster University Management School (LUMS), I have learned that the GMAT is a strong indicator for the future academic success of a student, especially if the course in question is heavy on the quantitative side. This is, however, only half the battle.

Well-known MBA critic Henry Mintzberg strongly believes that no student can become a successful manager by just attending lectures. The difference between mere theory and actual practice of management implies that a student cannot learn what it takes to handle the challenges of a manager position without actually taking part in a production or service creation related job themselves. While case studies are in theory useful to get a feel for the daily life of a manager, they also undermine the importance of real-life work experience. The fact is that co-workers and subordinates aren’t just a set of data, but complex individuals who require more than analysis and strategies to be led effectively.

In a sense, this can already be seen during a MBA program where complex projects can only be completed successfully by a team, not just a strong individual. It is not about commenting on and controlling the work of others, but using them for guidance and stimulus. The students who are the most successful can identify the complementary skills of others and are able to motivate them to participate. A good MBA student can be paired up with the weakest team members and still deliver the best project, simply because he or she knows how to effectively lead a team. Authentic enthusiasm and positive attitudes help successful MBA students, and eventual managers, not only to utilize their laborers but to pass their ambitions on to others. By doing so, they create a healthier and more efficient working environment in which common goals and the well-being of the organization are highly valued.

Therefore, social competence is a must for top managers. Business schools are incorporating such components into their programs to enable students to gain this needed skill. At LUMS, we have added three consulting projects to our MBA program, and two of them must be completed in randomly assigned teams. After the projects, many students report that they have been a true highlight of the program, and one of the program’s aspects from which they have learned the most. The idea was developed after the success of International Master in Practicing Management (IMPM), a program for senior managers co-developed with Henry Mintzberg in response to his own criticism of existing programs and offered by LUMS in cooperation with McGill, INSEAD, and a few other partner institutions.

While there are MBA programs that attempt to integrate practical learning experience into the curriculum, the social management skills should already play a role in the admissions process. It is certainly not an easy task, since character can’t be easily evaluated in a short time period. Assessment centers simply cost too much. There have been rumors, however, that GMAC is working on a new version of the GMAT which will also test social components and time management skills, although nothing has been made official yet. It will still be the admissions office’s task to make sure that the right candidates are accepted.

However, one needs to be aware that this argument is often misused as well. A solid, quantitative understanding is still vital for every top managerial position and can not be replaced. But just alone, it is not enough. MBA programs that do not require applicants to take the GMAT, and instead claim it is sufficient to interview potential applicants, must be dealt with carefully. These programs are often more afraid about the external evaluation of its students, like the average GMAT score of their incoming class, than the social character skills of their candidates. These admission interviews often resemble sales pitches to the students. Because applicants also learn a great deal from fellow students, they should pay careful attention in such cases and research the student body of the institution they consider to join.

Altogether the MBA student needs excellent qualities in both academic and character-related areas for ultimate success during and after the MBA program. Just as in most other aspects of life, it’s in the mix.

Dr. Joern Meissner is a Lecturer in Management Science at the Lancaster University Management School in England and founder of the educational institutions Manhattan Review and Lancaster Executive.

How to make your supply chain work during a recession.

The main problem with running your business during a recession is the major cash flow problem. There are no loans coming from the banks. Your inventory is languishing in a warehouse. Your customers are simply not buying like they used to. Freeing up capital is a must during these hard economic times, and since we’ve seen it can’t be done by slashing prices, it must come from your supply chain and by optimizing your inventory.

Forecasting

It doesn’t matter that you didn’t see the recession coming. Even most of the people who did see it coming didn’t think it was going to be this bad. Let this mistake go and focus on your company’s future. Now is the time to forecast. Now more than ever, you need to focus on what is going to happen to your company, in your market, on both local and global scales, in the next few years. Things are changing and if your company wants to be at the top, then you need to be able to see what’s coming.

In a boom, products don’t sit around waiting to be bought. Or rather, they sit around just long enough to move from the factory to the warehouse to the store to the customer’s home. In a recession, allowing your inventory to stall in the warehouse or store is going to drain the capital needed in other places. Since leftover inventory means slashed prices and slashed prices does nothing for your company’s image or profits, make sure that your inventory remains as a low as possible while still keeping your company’s customer service up to speed. Be able to forecast just how low your inventory can get. Less has become more profitable than more.

Cash-to-Cash Cycles

A cash-to-cash cycle is the period of time from which a business invests capital in a product to the time it receives payment for the product. Cash-to-cash cycles are essentially the chronological view of a business’s bottom line: the amount of time a product is paid for by the company to the time in which the product is paid for and a profit is made. And cash-to-cash cycles are an intrinsic part of the supply chain.

The supply chain begins whenever the business makes their first investment with purchasing the raw materials and goes all the way down to your customer buying your product, which often also results in the company being paid for that product. And while many executives are all over their supply chain management, they have yet to take a look at their company from a cash-to-cash cycle prospective. Find out where your investment begins and where profit is returned. By altering aspects of your supply chain, especially the amount of inventory purchased at the beginning of your cash-to-cash cycle, you can free up capital at the end of the cash-to-cash cycle.

Free Capital

Companies need free capital, even more so during a recession. The fight for customers, the competitive pricing, and the lack of profit margins are going to quickly decimate the money your company has to work with.

Maximizing your inventory optimization comes from supply chain management, and managing your supply chain is linked to how your cash-to-cash cycle is working. By collecting the data from each aspect your supply chain on a daily basis might seem like an overwhelming task, you must task yourself to do so.

Your capital is used to begin your supply chain, by purchasing your raw materials. You then create your product, using more capital, and then wait for your product to be sold, creating your inventory. When your inventory stalls, so does everything that comes after it, including your profits. To free up capital, go back to the very beginning and buy less raw materials, leading to less inventory.

Small problems in this economy, like extra inventory, can turn into business-destroying problems. Extra capital can be freed up by taking a look at how your inventory fits into your supply chain and your cash-to-cash cycle, so every executive needs to take a good hard look at what’s going on in their businesses at the points long before their products every make their way into the hands of their customers.

Pricing strategies to thrive in the continuing market downtown.

In the current recession, top executives are called upon to make tough decisions to find a quick turnaround for sliding profit margins and reduced sales. And while sale prices, gimmick promotions, and free giveaways might stir up business in the short term, they may also cause long term damage to your company’s image and brand. Executives need to remember that pricing on value, instead of on costs, competition, or even those frugal recession era customers, can reap the largest benefits for their companies.

1. Don’t Slash Prices for a Quick Buck.

Since customers during the recession are looking for the cheapest prices, even going so far as to haggle when they wouldn’t have dared before, businesses are quick to drop prices in hopes of retaining these customers and perhaps even creating new ones. And while the price cutting might lead to short-term increased revenue, it can also create a bidding war that will devastate your future pricing. The prices will drop so far, so fast, that even if you got the sale, you’ll be so far beneath your profit margin that it you’re essentially paying for part of the product yourself.

2. Don’t Ruin Your Brand Name.

Any marketing specialist will tell you that branding is essential to a business’s long-term success. You’ve worked for years to develop your company’s brand, to instill confidence in your products, and to create lifelong customers. If customers suddenly see you dropping prices, they will start to doubt the value of your products, even if nothing has changed. In the eyes of a customer, if your product becomes cheap, so does your brand. To keep your prices where they should, remember that what is unique about your company. Give the customers detailed descriptions of the value of your products, and they’ll remember why they started buying from you in the first place.

3. Luxury Items and Services Are Just That – A Luxury.

Just because the economy is tanking and the recession is continuing doesn’t mean that your high end items should suddenly be sold at Wal-Mart. If you’re going to reduce prices on some items, thereby reducing their inherent value in the customers’ eyes, then reduce the prices of your lower quality products. The customers who want cheap prices will find cheaper alternatives no matter what you do, but your loyal customers, who expect a high level of service and value from your products, will continue to pay for the service and value. Luxury items and top-of-the-line products should retain their top-of-the-line pricing.

4. Fix Pricing the Hard Way.

Pricing products often falls to people who are not in charge of the entire company. They watch the markets and the product flow, and they alter prices according to the old standards of supply and demand. In a normal or booming economy, this is an effective decision. In a recession, this no longer works. As an executive, seeing how each piece of the pricing puzzle fits together, finding where to squeeze that last profit dollar out, is not only your responsibility, it should be a priority. Look at pricing as a whole package deal, taking into account everything from the gas for delivery to the price of raw materials. Improve employee relations by setting new sales standards for your staff, instead of relying on figures from when customers were more apt to buy. Figure out where money is being lost by trimming production costs, cutting back on any expansion project, and slash nonessential perks. Take control of your pricing policy, and don’t let the nagging customers who claim they’re going to go to your competitor force you into bad pricing decisions.

5. If They’re Going to Go, Let Them.

If customers say they’re going to take their business elsewhere when you can’t produce lower prices, let them. Instead, create loyalty programs for the customers who do stay with you and attract new customers with deals designed for recession era economics, like bundling new services into old programs while keeping the same price. Keeping the loyal customers and attracting new customers is far more important than placating the fickle ones, who are just as likely to jump ship as they are to stay. Also, entering into a bidding war with other companies is useless: the customer will go with what they perceive to be the lowest cost, costing your business money in the end whether they went with you or your competitor.

In a recession, your profit margins and overall revenues are not going to be as good as last year. But by taking control of your pricing policy and not cutting prices just to survive today, you help to create a recession-proof product by continuing to build your customer base. If you can keep your customers happy and retain the level of value and service your customers expect, you and your company will continue to thrive long after the recession has ended.