Posts Tagged ‘strategy’

Why Tiger Australia is so toothless

August 5, 2011

A couple of weeks ago I was contacted by a newspaper journalist seeking some comments on the troubles of low-cost airline Tiger Australia.

The reporter was specifically interested in the likely impact of the current grounding on the firm’s relations with its parent back in Singapore (with a particular focus on the cultural aspect of ‘losing face’).  I offered a few insights – that I couldn’t speak to any cultural dimension, but that HQ clearly was very worried given the group CEO was talking of basing himself in Australia presumably to kick some heads… and that the airline was clearly struggling well before pilots (allegedly) started flying a little recklessly.

These nuggets of wisdom never hit the papers, but I thought I should expand upon the latter point – namely why the firm hasn’t won the hearts or wallets of Aussie flyers.

Low-cost airlines have been a business revelation in the past decade or two.

Innovators like Ryanair and Easyjet, and copycats like Air Asia and Jetstar Asia have sliced enormous costs out of the process of offering international air travel.  This has both sliced into the market share of the older full-service airlines, and also expanded the pie considerably by bringing less wealthy passengers into the market (and also allowing greater frequency of short trips away).

In the typically moribund US domestic market (see Michael Porter’s excellent explanation of why US airlines are typically loss-making – from about the 2 min mark of this video), both Southwest Airlines and JetBlue have been very successful using a low-cost model.

Yet Tiger Australia has been a money pit since kicking off in late-2007. So what is Tiger doing so wrong?

It would seem this a combination of mis-reading the local environment and under delivering on customer value.

Air travel in Australia is an awkward exercise.  While there is little threat of substitutes due to the enormous distances between our major cities (other than Sydney-Canberra driving between mainland capitals takes >7 hours), the fact that there are single airports in pretty much every major city (other than Melbourne’s inconvenient Avalon option).

Low cost airlines typically seek to avoid the high landing costs (and associated parking costs etc for price-sensitive passengers) by using smaller second airports and secondary cities, especially to cross-subsidise those flights that must go through hubs.  In Australia that simply isn’t an option.  The two big local players have very stable and mutually beneficial arrangements with airport management, and upstarts like Tiger are burdened with either tin-shed outhouses or pricey general gates.

The concentration of Australia’s population into a small number of large cities, unlike the more dispersed US markets, has meant Tiger has developed no local monopolies, and struggled to find a niche of consumers willing to sacrifice certainty and convenience for the limited price savings on offer.

At an operational level the firm has also failed to deliver then minimum service required to develop any customer loyalty.  Too many flights are cancelled (and given the infrequent schedule, too long a wait ensues), and the airline is notorious for being close to uncontactable for assistance.

The current grounding of all flights could (and perhaps should) be the end of line for this failed business strategy.

Could Yellowtail ales be Blue Ocean brews?

February 16, 2011

While Australia’s largest brewer slowly tears apart its less than successful attempt to also run a wine empire, one of our most internationally competitive (and innovative) winemakers is stepping into the beer business.

Casella Wines, who have grown extremely fast off the back of the game-changing Yellowtail wines (see this short case study for a sense of this success story), are advertising for a head brewer (see the ad here), and intend to brew “probably a few million litres a year” from a new facility at the Griffith, NSW winery site.

The firm’s wine brand has been lauded as a classic example of a Blue Ocean Strategy.  The central contention of Kim & Maurborgne is that:

“Casella created a social drink accessible to everyone. By looking at the alternatives of beer and ready-to-drink cocktails, Casella Wines created three new factors in the US wine industry – easy drinking, easy to select, and fun and adventure. It eliminated or reduced everything else. [Yellow tail] was a completely new combination of  characteristics that produced an uncomplicated wine structure that was instantly appealing to the mass of alcohol drinkers.

The result was an easy drinking wine that did not require years to develop an appreciation for. This allowed the company to dramatically reduce or eliminate all the factors the wine industry had long competed on – tannins, complexity and aging. With the need for aging reduced, the working capital required was also reduced…

In July 2001, Australia’s Casella Winery introduced [yellow tail] into this highly competitive US market. Small and unknown, they had expected to sell 25,000 cases in their first year. In fact, they had sold nine times that amount. By the end of 2005, [yellow tail]’s cumulative sales were tracking at 25 million cases.  [yellow tail] soon emerged as the overall best selling 750ml red wine, outstripping Californian, French and Italian brands.”

While the winery has made no claims that it is adopting such a strategy in its entry into beer production, it does raise some challenging questions:

What characteristics of beer are holding back new customers? Could Casella remove some?

The taste? The big name brews (think Bud, Miller, VB, Stella etc) tend towards the bland, but there is a lot of variety in the second tier (think wheat beers, stouts etc).  Certainly there are gains to be made in explaining such options in clearer language to neophytes, but a simply “this is beer message” doesn’t necessarily seem the best option. I will be very surprised if Casella if can stumble upon a clearly communicable alternative taste that is an inoffensive entrée into beer-drinking. Bitterness (i.e. ‘hopping heavy’) has become a big fave of craftbrewers, but that tends to play towards those already enamoured with beer’s dominant characteristic. Casella could perhaps go down the sweeter, more malted path… or, more courageously,  the fruity flavoured path (e.g. radler, kriek etc).

The fizz? Certainly the big name brews (think Bud, Miller, VB, Stella etc) have been reluctant to make non-gaseous product. Reductions in bubbles would match up with exploration of less typical styles of beer.

The overtly male/working class associations? Now, this might well be a possible target market.  Brewers have really struggled to ‘feminise’ their product (not helped by an obsession with perpetuating some other-beers-makes-you-fat-but-ours-doesn’t myth). De-rednecking has been the effective message in both the ‘imported’ and ‘craft’ segments, but that tends to have just pushed beer down wine’s snobbery path.  Targeting a more youthful market might require soft-drink/spirits type marketing (and, again, perhaps a sweeter/fruitier palate).

Is beer as confusing as wine? As snobby?

Again, there is some bifurcation here.  Major beer brands are typically presented as simply ‘beer’. Meanwhile, craft-brews tend to play up nuance and complexity, although to varying degrees. I guess if some of the current associations of non-beer drinkers can be overturned then confusion might decline.

What are the big element along which beers and brewers compete?

The Blue Ocean idea is that there are big gains to be made in making the normal battlegrounds less relevant and/or alleviating your firm of the ‘burdens’ of your competitors.

Despite all the discussions above of what’s in the bottle, most folks in the beer business will tell you it’s about access to drinkers (i.e. distribution), and finding a cost-effective production method to suit your intended price-point.  Beer’s core ingredients (malt/sugar, hops, yeast, water) are costlier when chasing more exotic/substantial flavours. Currently the big cost-savings come from large scale in bottling, packaging, trucking, marketing etc  Getting product on shelf and on taps is tough in the face of existing brand loyalties. Finding alternative delivery mechanisms that don’t cost much more is very, very hard (and even tougher given the legal constraints in multiple domains).

Might this just be diversification?

It is possible this is just old-school diversification, and Casella will ‘simply’ aim to leverage some of their current capabilities (in brand management, packaging, distribution, etc). They’re far from the first Aussie winery to go down this path (precedents include Moorilla, De Bertoli and Knappstein), but they’ll be the first with real international muscle.

What Blue Ocean opportunities (if any) can you see here?


It’s Short-O-Matic

January 20, 2011

Just over two years ago I posted about the potential of (and possible pitfalls associated with) launching an online design-your-own boardshorts operation (a la T-shirt phenomenon Threadless). was intrigued today when I stumbled upon a magazine mention of just such an entrepreneurial endeavour.  A mob out of California (now that shouldn’t surprise) called Shortomatic have been building up a portfolio of user- and guest designer-provided shorts through a pretty nifty website.

They have a number of similar elements to Threadless, although users cannot vote on prospective designs (instead the firm is the complete gatekeeper once artists submit).  There is a revenue stream for successful designers of up to $1000 per design ($5 a pair up to the maximum run of 200), and a feel-good pledge to donate a similar amount to a charity.

Contrary to our discussions/expectations, all the materials are sourced and stitched together in the US (rather than China), which does push the pricing a bit higher than I expected ($US a pair).

The operation also suffers from a pretty slow turnaround from order-to-shipping – 21 days or so – which would seem to narrow the potential customer base a little (to those explicitly seeking a rare item of clothing).  Again, you might argue this is a move away from Threadless’ model, as the t-shirt vendor’s speedy delivery (obviously built on an ability to print and warehouse shirts confident of sales from their much bigger customer base) allows for pretty spontaneous purchase, while Threadless’ policy of limited runs also encourages a “buy while you can” attitude.

Nevertheless, this looks like a pretty neat play at this considerably smaller and tougher fashion segment.  Again it does beg the question what other design-your-own, crowdsourced interfaces can we foresee (remembering we’ve also looked at custom bicycles on here too)?

Give the man music

September 26, 2010

This blog has been silent of late due to my travels to, first, a conference in Rome, and then, a couple of weeks of R&R around Puglia.  As such, my ponderings have been banking up while I waited for decent internet access.

All this travel and stays in hotels of various quality and other accommodation has got me thinking about lost competitive opportunities for hoteliers.  The one that is really starting to aggravate is the failure to provide facilities for listening to music.

In a world were huge numbers of travellers are carrying Apple music players of various descriptions, I am stunned that it has not become de rigeur to provide an iPod dock in hotel rooms.  I would love the chance to move beyond headphones or the tinny speaker on my iPhone.

The cost to a hotelier would be low (decent units go for less than $100), and the payoff in terms of satisfaction would be high.  As travellers become more and more linked, and more vocal, through feedback sites such as Tripadvisor, hotels should be looking for simple but effective ways to make the stay more enjoyable and to differentiate themselves from others.  This would be one of them.

I can only recall one hotel that I’ve stayed in which provided a dock. It rocked and was well-named!

e’s doing it, I’m doing it, we’re all doing it

August 22, 2010

It seems a price-war is breaking out in the electronic book market.  British retailer WH Smith halved the price of its entire e-book range last week.

This raises an important business strategy question: How can the e-book vendors avoid ending up in a downward price spiral?

Consider the situation: the actual marginal cost of selling each book is very close to zero for all vendors.  Sure there are a range of ‘lumpy’ costs in setting up the web interface, the transaction system, the relationships with publishers and developing a brand that consumers know and trust.

But selling the next electronic copy of any book is pretty much costless. The publisher needs to get their cut, but for the retailer there are no warehousing or inventory costs and no delivery costs.

Why chase a 100% margin in vain, while your competitor is selling the same title at a 50% mark-up?  And if you drop to 49%, why won’t they drop to 48%? And on it goes?

This becomes a classic low-cost wins scenario.  Can the retailers do anything to differentiate themselves?

And how to the retailers running both “clicks” and “bricks” stores cope?  How do they reconcile their pricing of physical books relative to the e-versions?


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