Chapter 5: The tools of prescriptive choice

Contents:

  • Low cost transatlantic flights
  • Bluetooth
  • Cost leadership in fashion retailing: Primark
  • Regenerative agriculture
  • Buurtzorg in the Netherlands
  • Indicative solutions to questions posed concluding the chapter

Low-cost transatlantic flights: Norse Atlantic Airways/JetBlue (two approaches)

Norse Atlantic Airways will provide low-priced (on the back of low cost) flights between Europe and North America, particularly New York/Los Angeles-London/Paris/Oslo from 2022. It “fills the gap” left by Norwegian which pulled out of the long-haul business to concentrate on inter-Scandinavian and a limited number of key routes across Europe.

Notwithstanding the the global pandemic that has affected most airlines, Norwegian’s growth strategy – from the perspective of Porter (generic strategies) – was “stuck in the middle”. Long- and short-haul businesses are very different to one another; low-cost transatlantic flying has a history of failure. Norse has taken a few of the lessons from Norwegian for its new business model. The airline will do one thing – low-cost, long-haul (transatlantic). The fleet is leased – but relatively new (the planes were once part of the Norwegian fleet) and hence efficient and reliable (the planes themselves – Boeing 787 Dreamliners – have got past their early failures regarding combustible batteries).

JetBlue is a US low-cost carrier that launched its transatlantic service on 11 August 2021. Jet Blue is using existing planes –  Airbus A321LR – to make the service. These are narrow-bodied planes, so the capacity is much less than Norse’s Boeing 787s. JetBlue will continue its US “short-haul” operations. However, the meaning of short-haul in the US is different to Europe – distances are often much greater and continental in scope. It is unclear exactly where the efficiencies come from, but labour costs are a factor.

Note how relatively “easy” it is to set up an airline. Particularly “post-pandemic” when airport slots are in abundance, the leasing market is good because there is an abundance of resting planes and, there are a lot of displaced employees – cabin staff and pilots included – waiting for hiring opportunities. It seems, too, that investors are not put off by the history of low-cost transatlantic airlines, or the risks associated with climate change. Porter, in his five-forces model, has always said that the airline industry is one of the least profitable because the barriers to entry are counter-intuitively low.

So much for the business, what about the climate? Both firms claim that they use efficient aeroplanes. This is true, but that does not make them climate neutral. Moreover, both firms are clearly looking to grow the market for transantlantic flights. Their endeavours further normalise flying, despite the climate emergency, and the contribution of aviation to carbon emissions.

This case was picked up and further developed in the Economist 21 August in a feature entitled: Long-haul sally.

Bluetooth

Bluetooth is a shortwave frequency used in a variety of devices to connect to one another, such as smartphones, speakers/headphones, printers, etc. In 1997 it was a new technology. It was the subject of an episode of a BBC Radio 4 programme called In Business. The programme is still available as a historical record of a technology’s diffusion (strategy):

Cost leadership in fashion retailing: Primark

In clothes retailing – and in the context of the UK – Primark is a cost leader – broad offering, low cost. In a recent article in the Economist, the following represent Primark’s cost leadership qualities:

  • Slow(er) lane. It has not tried to match Zara/Inditex and H&M in converting catwalk into product. It trades off speed for cost
  • concentration of production in low(est)-cost countries (enabled by this slightly slower pace)
    • embraces “off-peak” production
    • limits sub-contracting to controllable and auditable levels (ensuring product and labour standards)
  • shipping using slow(er) ships
  • low marketing costs (few ads)
  • very large stores
  • no online shop – it is a cost

At the time of writing (and before the pandemic), Primark had a gross margin of 41% – significantly lower than Inditex and H&M. It has an EBIT of 12% which in line with the industry norm.

Regenerative agriculture

Regenerative farming fits nicely into Porter’s generic strategies framework. Currently it is niche – narrow market, highly differentiated; relatively high cost. Dan Cox is a 39-year-old chef turned farmer. The farming idea comes from his attempt to supply his own restaurant, but seemingly it has gone much deeper and much more seriously that first thought. Regenerative agriculture involves:

  • no tilling of soil (carbon is not released – it can become a carbon sink)
  • no chemicals – pesticides/fertilisers (huge cost saving)
  • improve soils and the quality of the product increases (in this case, taste)
  • increases biodiversity

There are interesting challenges. Regenerative farmers are quite cooperative in sharing knowledge, equipment, marketing, etc. They often sell directly to restaurants and grow quite unusual vegetables – perfect for chefs looking for their own competitive advantage.

Whilst many of these vegetables do not/will not be for sale in Tesco in the foreseeable future, the relatively wealthy restaurant guest are influencing those with whom they interact, and indeed to publishing industry keen on recipe and hobby farming books!

Equally, have a successful regenerative farm/farmer in the neighbourhood can also affect the behaviour of more conventional farmers, keen themselves to improve margins and protect the environment.

Farming though is subject to climatic conditions. Too much – or too little – rain at key growing times can obliterate a crop and with it the profit/livelihood (margins remain very small).

Source: Sustainable isn’t a thing  why regenerative agriculture is food’s latest buzzword, Tim Lewis, The Guardian, 18 July 2021.

Buurtzorg in the Netherlands – low cost, full service

Jos de Blok is the founder of an innovative home care provider originally in the Netherlands but now in the UK and Ireland. de Blok was dissatisfied with the contract delivery model of home care provision, not least because it disempowered both the care providers and those receiving. Buurtzorg’s model is to flatten the management hierarchy, empower employees – organised into self-governing teams of 10-12 trained nurses – and do more with the resource available (not just medication, but more basic support such as dressing and bathing). This integrated care is appreciated by those in receipt of the services. Information technology plays a central role in delivering the services.

Counter-intuitively, Buurtzorg is a low-cost provider. The organisational form does not add cost. There are six elements to the model:

  • assessment of the client’s needs; holistic capturing medical needs, chronic condition needs and personal/social needs. Care plans are drafted on that basis.
  • Network and engage those involved in informal care – integrate them into the overall service provision
  • recruitment of formal carers
  • delivery of reliable care
  • support for client social roles
  • facilitation of client self-care and independence

The company provides a series of UK case studies. The company was profiled in Martin Parker’s book, Shut down the Business School.

Indicative solutions to questions posed concluding the chapter