Case 1: The Ritz of Doggie Day Care

This past winter, just days before Ray Goshorn and his wife were leaving for a trip to Cancun, Mexico, their beloved bichon fries, Frosty, had surgery that required serious post-operative care. That put the Aurora, Colorado, couple in a bind: Who would watch their 9-year-old pooch and give him the proper love and medical attention while they were on vacation? Goshorn turned to Camp Bow Wow, a Denver doggie day-care company. With a veterinary technician on site, the outfit tended to Frosty’s needs-changing bandages, giving medicine, taking him in for checkups. “When we picked him up, he was running around with all the puppies,” Goshorn says. “It was an incredibly comforting feeling to know that Frosty was OK while we were away, especially in that kind of emergency situation.” Camp Bow Wow, the nation’s only franchised doggie day-care center, is much like a children’s nursery where working parents drop off their tots. Pet owners leave their canines during the day or check them in for overnight stays. In climate-controlled facilities, they romp with toys, run on exercise machines, and swim in “paw pools.” Overnight campers are given their own beds to curl up on, rather than kennel-style cages. “I wanted to have a comprehensive, safe, fun, place for dogs,” says Heidi Flammang, Camp Bow Wow’s founder and CEO. DOGGED DREAMER. For most owners, dogs have long been considered part of the family. But families today are spending more and more money keeping Fido happy, as an increasing number of goods and services become available for those on four legs: Pet therapists, designer doggie shampoo, and aromatherapy products, to name a few. Indeed, this penchant for pampering now feeds a $34 billion industry, up from just $17 billion in 1994, according to the American Pet Products Manufacturers Association. “There are two groups that are feeding this,” says Bob Vetere, the APPM’s chief operating officer and co-managing director. “The baby boomers and young professionals who are delaying marriage or having families. And they’re turning to their pets as companions. They have mare disposable income that they’re putting into the marketplace, which has ramped up the total spending.” About 10 years ago, Flammang and her husband Bion channeled their love of dogs into a business plan for Camp Bow Wow. But when Bion was killed in a plane crash in 1994, Flammang, then a pharmaceutical sales rep, put her dreams on hold. She briefly switched careers, and in 1996 she became a certified financial planner. But her original dream kept nagging at her. “I’m an entrepreneur, and it was really my passion,” she says. CHECK UP ON YOUR PUP. In 2000 she decided to move forward and plowed her savings of $100,000 into Camp Bow Wow. She took care of the marketing and enlisted her brother, Patrick Haight, to handle operations. In order to entice her target upscale clients, she went to dog parks with

buckets of milk bones and talked to people walking their pooches. She also tapped into her experience in pharmaceutical sales by networking with area veterinarians for referrals. The first site was located in an old Denver war veteran’s hall. Immediately, clients began dropping off their dogs to be cared for. The venture proved so successful that within six months, Flammang expanded the operation to include overnight boarding. A year later she opened a second location near Boulder. The idea caught on. With the success came copycats, but Flammang distinguished her business from the start by providing an expanded menu of services. Unlike many facilities, Camp Bow Wow will care for older, sickly pets as well as puppies. Other features include onsite vaccinations and grooming care. And the strategically placed Webcams that ensure owners can check in on their “babies” anytime, from anywhere in the world, have become a hit. Prices run between $20 and $25 per day session and between $30 and $35 for overnight boarding. OVERSEAS INTEREST. Flammang’s original plan was to establish just three of four centers in the Denver area. Then, in November, 2002, a regular client who happened to be a sales representative for Mrs. Fields Cookies suggested franchising, and the idea clicked. “For me, franchising, took the best parts of my personality,” Flammang says. “I got people excited about building a concept, and I could get more of these places up and running while growing a system.” Flammang sold her first franchise in August, 2003. Today Camp Bow Wow has 11 locations. By the end of 2005, Flammang plans to have 75 sites, from Florida to Indiana. In two years, she predicts, the count will be 150 centers across the country. “We’re on target,” she says. The concept has drawn lots of interest, with inquiries coming from as far as Germany. Franchisees pay an initial fee of $30,000 for a license and an additional $125,000 to $300,000 in capital costs, such as real estate and renovations. In addition, franchises pay a typical 6% royalty fee on gross sales and 1% toward advertising. Flammang says her goal is for each franchise to make between $750,000 and $2 million in revenue annually, depending on size and location. In turn, they get the kind of support and training that will allow each unit to succeed using the company’s proven system as well as its brand name. LOOKING FORWARD. Wendy Caldwell opened one of Camp Bow Wow’s first franchises in Broomfield, Colo., in October,2003. Laid off from her account-supervisor job with Weyerhaeuser, she decided it was time to make a change. And as a dog lover, she figured Camp Bow Wow was a natural fit. “In five months we were bursting at the seams,” she says. “We were getting 40 to 45 dogs a day.” So the following November she opened a second location in nearby North Glen. Caldwell says each shop is on target to make $500,000 in sales this year. In fact, business is going so well that in March, Caldwell decided to sell her franchise and move to her native Calgary, where she’ll head Camp Bow Wow’s Canadian operations. She expects to open at least 15 franchises in the next two years. “I think there’s really a need for a place for dogs to have fun instead of being left alone,” she says. “Owners are more concerned with their dogs’ mental and social welfare. And this is a much better alternative than leaving them in a cage.” Now, Flammang is readying the business for phase two. In may she’ll open the first of a planned series of retail kiosks in mails, beginning in Durham, N.C., that will sell branded logo T-shirts and dog accessories. At the same time she’ll open Camp Bow Wow Barkeries at the kiosk sites, offering doggie treats. A dog’s life indeed.

Questions

1. How would you describe Heidi Flammang’s approach to doing business? 2. In what ways is Camp Bow Wow’s business model creating more value for dog owners

than its competitors? How has Flammang altered her business model over time? 3. In what ways will Flammang’s business model and her use of franchising affect the

profitability of her company?

Case 2: Southwest: Dressed to kill… Competitors

Gary C. Kelly is a steady, mild-mannered former accountant. But don’t let that fool you. The new 49-year-old chief executive of Southwest Airlines Co. is also spearheading some of the most aggressive moves that the low-fare king has made in years. The youthful and energetic Kelly is a good fit for the Southwest image. “Gary brings a lot more of a ‘change agent’ element here” than his predecessor, says one insider. That was abundantly clear at last year’s Halloween party, when Kelly shocked co-workers by showing up as Gene Simmons, front man for the rock group Kiss. Perhaps Kelly, who Joined Southwest as its controller in 1986, has simply figured out that no one was buying the airline’s old “Aw, shucks. We’re just an underdog” act anymore. Says America West Air-line Inc. CEO W. Douglas Parker: “They really were at one point the scrawny kid who was lifting weights in his basement. Now they come out and they’re bigger than anybody else and stronger than anybody else.” In fact, Southwest now carries more domestic passengers than any other U.S. airline. For his part, Kelly insists there’s nothing different about Southwest’s behavior: “We’ve always been a maverick, and have always been very competitive.” The difference now is that Southwest, with the lowest costs and the strongest balance sheet, appears to be permanently shifting the balance of power to low-cost carriers. So it should come as no surprise that Southwest is on the offensive again. It plans increase capacity at least 10% this year, adding 29 planes to its fleet of 417. Like other airlines, it hunkered down after September 11 and the crippling recession that brought four years of industry losses. Southwest grew by just 4% in 2003. But with travel improving, it’s seizing opportunities as big competitors struggle to return to profitability in the face of costly furl and shrinking fares. GROWTH OPPORTUNITIES. Yet Southwest’s game plan is defensive, as well. Its 2004 earnings of $313 million were just half what it earned in 2000. Without financial hedges that helped it manage fuel costs, Southwest would have lost money in three of the last eight quarters. The best way to improve future returns, says analyst Gary Chase of Lehman Brothers Inc. in a research report, is for Southwest “to take advantage of the growth opportunities created by industry duress.” That’s now important because formidable low-cost rivals, especially Air-Train Airways and JetBlue Airways are eager to grow in the same lucrative markets Southwest is targeting. And they can promote arguably better products, including assigned seats, business class, and seat-back televisions. Thus Southwest is rushing to stake its claim in places like Philadelphia and Pittsburgh, now dominated by bankrupt US Airways Group Inc. US Airways and other hub-and-spoke giants are working furiously to survive by slashing labor and other costs. They’re still a long way from matching Southwest, but some are likely to emerge much nimbler. Southwest needs healthy expansion to help

keep its own unit costs under control. It boasts the richest wages for pilots of narrow-body jets—38% above those at United Airlines Inc., after that carrier’s deep pay cuts. By growing, Southwest averages in new, lower paid employees and spreads its costs over more seats. At the same time, it is pushing for higher productivity from its already highly efficient workers. Southwest’s pilots say they’re being asked to fly 70 hours a month, up from about 65. Pilots at the traditional carriers average less than 60. SHAKING THINGS UP. How much of the recent aggressiveness-or “assertiveness,” as they prefer at friendly Southwest-reflects new opportunities or a new boss is the subject of much debate. After all, company co-founder and Chairman Herbert D. Kelleher, 73, is still firmly in charge of strategy and route plans, as he was when Parker, a reserved lawyer, was CEO. “We just didn’t have these kinds of opportunities in 2002 and 2003,” says Kelly. But Kelly has been shaking things up inside the company, too. One of his first moves was to realign his management group to improve accountability and cooperation between departments. And while Southwest has long been known for its warm labor relations, those relationships were frayed during Parker’s bitter contract negotiations with flight attendants. Feeling demonized by union leaders, Parker retired soon afterward, citing “personal reasons,” but many believe the contract dispute was a key factor. Kelly created a new department focused on labor relations and now meets quarterly with union leaders to discuss finances and strategy. He’s also insisting that all employees get regular scorecards on productivity and profitability measures. For all of the changes, Kelly hasn’t yet introduced such complications as international flights or the use of smaller regional jets, a move planned by JetBlue, He’s even cautious about assigning seats, a service that new technology would easily allow but that many passengers, believe it or not, have said they would detest. But if Kelly’s early months in office are any indication, Southwest is sure to keep rocking the industry. Questions:

1. Why is Southwest the most profitable U.S. airline company? 2. How is Gary Kelly changing Southwest’s business model to keep the company profitable? 3. In what ways has Kelly changed Southwest’s organizational structure to help improve

relationships with the company’s employees?

Case 3: The New Nike: No Longer the Brat of Sport Marketing, It has a Higher Level of

Discipline and Performance

In many ways, the sleek, four-story building that houses Nike Inc.’s Innovation Kitchen is a throwback to the company’s earliest days. Located on the ground floor of the Mia Hamm building on Nike’s 175-acre headquarters campus in Beaverton, Oregon, the Kitchen is where Nike cooked up the shoes that made it the star if the $35 billion athletic footwear industry. In this think tank for sneakers, designers find inspiration in everything from Irish architecture to the curving lines of a Stradivarius architecture to the curving lines of a Stradivarius violin. One wall displays models of every Air Jordan ever made, while low-rise cubicles are littered with sketches of new shoes. The Kitchen is off limits to most visitors and even to most Nike employees. The sign on the door says, only half in jest: “Nobody gets in to see the cooks. Not nobody. Not no how.” This is where, nearly20 years ago, Nike star designer Tinker Hatfield came up with the Air Jordan-the best selling sport shoe of all time. Right now, Hatfield and his team are tallying the results of the Athens 2004 Olympic Games. Hatfield and his design geeks produced an array of superfast sneakers for the Games, including the sleek track spike called Monsterfly for sprinters and the Air Zoom Miler for distance runners. As befits a global company, Nike’s sponsored athletes hailed from all over the world. They took home a lot of hardware from Athens, including 50 gold medals and dozens more silver and bronze. And Nike apparel had its day in the sun, too. The top four finishers in the men’s 100-mater race all wore the sign of the Swoosh. GOING ESTABLISHMENT. The most telling events for Nike didn’t take place on the track, however. The brash guerrilla marketer, famous for thumbing its nose at big-time sporting events, was showing a new restraint. Eight years ago in Atlanta, Nike ambushed basketball sponsor Champion (a brand of Sara Lee Corporation) by sneaking giant Swoosh signs into the arena. When the cameras panned the stands, TV audiences saw the Nike logo loud and clear, while Champion had nothing. Nike has even signed up to become an official U.S. Olympic sponsor in four years in Beijing, and it has toned down its anti-Establishment attitude. For good reason: These days, Nike is the Establishment when it comes to global sports marketing. With revenues exceeding $12 billion in fiscal 2004, the company that Philip H. Knight started three decades ago by selling sneakers out of the back of a car at track meets has finally grown up. The kind of creativity that led Bill Bowerman, the University of Oregon track coach who co-founded the company with Knight, to dream up a new kind of sneaker tread after studying the pattern on his wife’s waffle iron, is still revered at Nike. When it comes to the rest of the business, however, it’s a whole new working on little more than hunches, would do just about anything and spend just about any amount in the quest for publicity and market share. But in the past few years, the company has devoted as much energy to the mundane details of running a business-such as developing top-flight information systems, logistics, and (yawn) supply-chain management-as it does to marketing coups and cutting-edge sneaker design. More and more Nike is searching for the right balance between its creative and its business sides, relying on a newfound financial and managerial discipline to drive growth. “Senior management now has a clear understanding of managing the creative process and bringing it to the past,” says Robert Toomey, an equity analyst at RBC Dain Rauscher Inc. in Seattle. BUSINESSLIKE-AND UNCOOL? In the old days, Nike operated pretty much on instinct. It took a guess as to how many pairs of shoes to churn out and hoped it could cram them all onto retailers’ shelves. Not anymore. Nike has overhauled its computer systems to get the right number of sneakers to more

places in the world more quickly. By methodically studying new markets, it has become a powerhouse overseas-and in new market segments that it once scorned, such as soccer and fashion. It has also beefed up its management team. And after stumbling with its acquisitions, Nike has learned to manage those brands-Cole Haan dress shoes, Converse retro-style sneakers, Hurley International skateboard gear, and Bauer in-line and hockey skates-more efficiently. Indeed, part of Nike’s growth strategy is to add to its portfolio of brands. To many of the Nike faithful, those sorts of changes smacked of heresy. Lebron James is cool. Matrix organization and corporate acquisitions aren’t. But cool or not, the new approach is working. In fiscal 2004, ended May 31, Nike showed just how far it had elevated its financial game. It turned in a record year, earning almost $1 billion, 27% more than the year before, on sales that climbed 15%, to $12.3 billion. What’s more, orders worldwide were up a healthy 10.7%. In North America orders rose 10% following eight stagnant quarters. Nike believes its newfound discipline will enable it to meet its targets of 15% average annual profit growth ad revenue growth in the high single digit. Wall Street shares that optimism. Says John J. Shanley an analyst at Susquehanna Financial Group, an institutional broker in Bala Cynwyd, Pennsylvania: “Nike is probably in the best financial position it has been in a decade.” In fact, some analysts believe Nike is poised to become a $20 billion company by the end of the decade. That would have seemed laughable just a few years ago-sales started falling after hitting the $9.6 billion mark in 1998. Even before Nike’s superstar endorser and basketball great Michael Jordan retired from the game in 2003, Nike’s creative juices seemed to have run dry. Air Jordans at $200 were collecting dust on store shelves as buyers seeking a different look began switching to Skechers, K-Swiss, and New Balance shoes. Nike wrestled with accusations that it exploited Asian factory workers. Ho-hum new sneakers and troubled acquisitions didn’t help. Nike, eager to regain its old momentum, bumped up production-only to end up pushing more sneakers into the market than the customers wanted to buy. As for financial discipline? Well, just consider this: From 1997 to 1999, Nike didn’t even have a chief financial officer. It was during those tough times that Phil Knight, who had disengaged from Nike in order to travel and pursue other interests, came back to the company. The year was 1999. Co-founder Bowerman had died, and Nike was floundering. Knight, now 66, needed to set things straight. Standing before thousands of employees at a company meeting, he admitted that the managers who were running the place had failed. And he went on to blame himself. “He said he wasn’t as engaged as he should be, and he said there were things he could to better,” recalls Steve Miller, Nike’s former global sports marketing director, who was there. “I was personally stunned he would be so open about his failings.” Still, when his iconoclastic company faltered, Knight looked beyond the technology and marketing antics that had served it well in the past. Upon his return to the company five years ago, his first order of business was to put together a new executive team. Knight drew on the some Nike veterans, executives who carry the heritage and culture of Nike’s early years. But he also recruited some key players from far outside Nike and its industry. CFO Donald W. Blair, who came aboard in 1999, was plucked from Polo Ralph Lauren Corporation the next year with the mission of redefining Nike’s $3.5 billion global apparel business. The-day-to-day boss, Chief Operating Officer Thomas E. Clarke, now runs Nike’s new business ventures division. Knight made his boldest management move in 2001, when he named two longtime Nike insiders, creative brand and design wonk Mark G. Parker and operations maven Charles D. Denson, as co-president. With Grossman and Blair providing an outsider’s perspective and with Parker and Denson steeped in the company’s culture, Knight hoped to achieve a balance between the old and the new, the creative and the financially responsible. The unusual co-president structure was hardly Business 101,

and many observed figured the new team wouldn’t last. Few believed co-presidents could survive the inevitable political maneuvering and clash of egos. Possibly because there was little time for politicking or backstabbing, given Nike’s plight, Parker, Denson, and the rest have mostly steered clear of those pitfalls and focused on shoring up Nike’s weaknesses. In the old days at Nike, the culture encouraged local managers to spend big and to go flat-out for market share instead of profitability. In Paris, for instance, the company spent lavishly for a soccer park at the 1998 World Cup to promote itself. Analysts estimate, conservatively, that it was more than $10 million over budget. The cost, which Nike never disclosed, caused Wall Street to start asking whether anyone was in charge. So Parker and Denson engineered a matrix structure that breaks down managerial responsibility both by region and product. Because the company pumps out 120,000 products every year in four different launch cycles, local managers always had plenty of choice-but also plenty of ways to screw up. Under the matrix, Nike headquarters establishes which products to push and how to do it, but regional managers are allowed some leeway to modify those edicts. The matrix won’t guarantee that another fiasco like the Paris soccer park cannot occur, but it makes it a lot less likely. FILLING THE ORDERS. Nike also overhauled its supply-chain system, which often left retailers either desperately awaiting delivery of hot shoes or struggling to get rid of the duds. The old jerry-built compilation strung together 27 different computer systems worldwide, most of which couldn’t talk with the others. Under Denson’s direction, Nike has spent $500 million to build a new system. Nike has also had to grapple with the touchy topic of sweatshop labor at the 900-odd independent overseas factories that make its clothes and sneakers. When Nike was getting pummeled on the subject in the 1990s, it typically had only two responses: anger and panic. Executives would issue denials, lash out at critics, and then rush someone to the offending supplier to put out the fire. But since 2002, Nike has built an elaborate program to deal with charges of labor exploitation. It allows random factory inspection by the fair Labor Assn., a monitoring outfit it founded with human rights groups and other big companies, such as Reebok International Ltd. And Liz Claiborne Inc., that use overseas contractors. Nike also has an in-house staff of 97 which has inspected 600 factories in the past two years, grading them on labor standards. It’s overseas, in fact, where most of Nike’s sales now come from. Last year, for the first time, international sales exceeded U.S. sales-still the company’s single largest market. Under Grossman, Nike is making sports fashion a core business, something unthinkable until recently inside Nike’s male-dominated culture. Thanks to stylish athletic wear-think tennis star Serena Williams at the U.S. Open-Nike’s worldwide apparel sales climbed 30% in three years, to $3.5 billion in fiscal 2004. SWIFTEST KICK. Just before this summer’s European soccer championships, Nike launched its Total 90 III, a sleek shoe that draws inspiration from cars used in the Le Mans 24-hour road race. Nike realized that millions of kids around the globe play casual pickup soccer games in the street and developed the shoe especially for them. That insight does not impress soccer purists. “Nike is selling a lot of the Total 90 street shoes and is including them in the soccer category,” huffs Adidas CEO Herbert Hainer. “They are trying to turn the business model into a lifestyle.” He’s right, of course. Just as Nike made basketball shoes into an off-the-court fashion statement, its Total 90s have become fashion accessories for folks who may never get closer to a soccer pitch than the stands. What’s the lesson? Let other companies worry about the traditional boundaries between sport and fashion. Nike has built its empire by transforming the technology and design of its high performance sports gear into high fashion, vastly expanding its pool of potential customers. If competitors want to get hung up on what exactly Nike’s selling, that’s O.K. with the folks in Beaverton. It’s all Nike to them.

Questions:

1. What was Nike’s original approach to business commerce? What kinds of business occupations and organization did Nike adopt to pursue its business model?

2. What kinds of business problem did Nike encounter as it evolved over time? 3. In what ways has Nike been changing its business operations and processes, especially its

functions, to improve its performance as it has grown and matured over time?

Case 4: Angel’s Seaside Villa

Angel Gomez, a native of Puerto Rico, is the owner/operator of a seasonal restaurant located adjacent to one of Florida’s famous east coast beach resort areas. Everybody loves Angel. He is a jovial, happy go lucky guy. Angel works seven days a week from Thanksgiving to Easter and is always on the floor of his establishment joking with customers and helping out wherever needed. Angel’s wife, four children and a few locals work the restaurant. Angel and his family go back to Puerto Rico shortly after Easter each year where they enjoy the island life with family and friends. The restaurant appears to be a simple but successful operation. The menu consists of only beer and soda, pizza slices, hot dogs and chips. A 10-ounce beer sells for $4, sodas sell for $2, slices of pizza sell for $2.50, hot dogs sell for $3 and small bags of chips sell for $1. All drinks and food are served in and on plastic cups and paper plates. A small building houses a cafeteria-style food line, public restrooms and seating for about fifty. A spacious outdoor patio overlooks the beach and includes sun and shade seating for about two hundred. With the exception of rainy days, a never-ending line of customers can be seen waiting for food and drinks from about 11:00 a.m. till dusk each and every day. Most prefer to eat and drink on site, where they joke around with Angel and enjoy the nice mix of rock-n-roll and island music that plays at all times. The customer base is a combination of tourists, seasonal residents, high school and college kids and locals. Angel and his staff maintain a very clean establishment. The bathrooms are immaculate, trash is properly disposed of and never in sight and tables are constantly cleaned. The addition of palm trees and the warm and sunny Florida skies make for a very appealing and fun beachside hangout. Angel’s four children, each of whom worked in the restaurant throughout their middle- and high-school years, have grown up—two have married, and all have begun to live their own lives and careers in assorted locations. As a result of that, Angel has decided to sell the business and retire permanently to his native Puerto Rico. The asking price for the business is $450,000.

Keith and Jaime Farnsworth, a young couple from the local area, are very interested in buying the business. As longtime local beachgoers and customers, they have been witness to the steady clientele, good food and great atmosphere that Angel has developed over the years. Both Keith and Jaime have experience in the restaurant business. Each has worked wait staff, kitchen and management positions in local establishments. They own a home nearby, have about $100,000 in savings, an excellent credit history and feel that it is their time to buy a business. The couple have met with Angel once or twice so far and have begun the formal negotiation process. They hired a professional building inspector who found the facility to be in good condition. They have conferred with local and state agencies to ensure that the current mode of operation, parking, beer license and so on will continue with no interruptions. A local surveying and engineering company confirmed that Angel has good title to the property and that all environmental specifications are in order. At the advice of their local SBA counselor, who is assisting them with the building of their business plan, Keith and Jaime asked Angel for copies of his tax returns for the past three years. Angel’s mood turned cold and nervous at first. He paced around the room, muttering to himself in Spanish, and after some cool down time, reassurance and persistence from the couple, Angel agreed to meet the next day and to produce those documents. Angel’s IRS Schedule C (profit and loss statement) forms for the past three years follow:

Angel’s Seaside Villa 2000-2002 Profit & Loss Statements (in 000’s)

2000 2001 2002 Sales $255 $265 $280 CGS 102 106 112 GM $153 $159 $168 Expenses 144 148 158 TI $ 9 $ 11 $ 10 Angel’s Seaside Villa—Balance Sheet as of December 31, 2002 (in 000’s)

Cash $ 2 A/P $ 1

A/R 0 Notes Pay 0 Inventory 2 Land $150 LTD $ 15 Building 70 Equipment 30 Owner $238

$254 $254

Angel’s uncharacteristic nervousness and sour mood resurfaced at the start of the next day’s meeting. This was fueled by the unexpected presence of a local college business professor. Sid Parker is an old family friend of Keith and Jaime. Sid agreed to take a look at the business and the financial statements, and to offer an opinion as to the desirability of the investment given the asking price and other conditions. It didn’t take long for Angel to interpret Sid’s blank, open-mouthed expression as she looked over the financials. Angel then proceeded to huddle closely with his three visitors, and began by swearing them to secrecy with regard to what he was about to say. He even half-jokingly looked up Sid’s nose and asked if there was a tape recorder up there or if she was an IRS agent. Following everyone’s assurance of confidentiality, Angel proceeded as follows.

“Just between us, this is a fantastic cash business. We make about $200,000 per year above and beyond what we report. This baby has put all four of my kids through college and then some. I drive a new Cadillac and support half of my family back in Puerto Rico. I report enough income to pay all of my bills and show a profit. This is how I was taught to do business in America. This is what everybody in the cash food business does”. Angel went on to say that, “if you were to just keep doing what I’ve been doing, you’ll have this place completely paid for in less than three years”.

After the meeting, Keith and Jamie just looked at each other. It was plain for Sid to see that the

couple was a bit shocked and confused. The couple is not sure what to do. What specifically do

you recommend and why? What would you do if faced with a similar situation?

Case 5: Turbulence in the Sky: The Airline Industry in Need of a Survival Strategy

The airline industry is in a major tailspin. It faces internal and external environmental (government, technology, competition, bankruptcy, and labor) problems that threaten its very existence if it does not change the ways in which it does business. First, the industry has not fully recovered from the September 11, 2001 (9/11), terrorists’ attacks despite the federal government’s financial support, post-9/11, through $5 billion infusion of cash and some $10 billion in guaranteed loans. Some steep new taxes—a 7.5 percent federal excise tax, a $3.00 tax on each one-way ticket, and a $2.50 tax for the Transportation Security Administration for airport security have added to the airlines’ problems. Second, technology has had a mixed impact on the airline industry. On the one hand, airline Internet websites have made it much more convenient for a customer to purchase an e(lectronic) ticket and boarding pass. But on the other hand, Internet access and capability have allowed computer savvy passengers to secure discounted airline fares by booking their flights directly through discount brokers such as Travelocity.com at significantly reduced costs resulting in hundreds of millions of dollars of lost revenues. Third, low-cost competitors such as JetBlue and Southwest, two leading carriers, have become threats to the major airlines. Low-cost carriers own about a 20 percent market share and their market share is growing rapidly. In fact, some projections indicate that they may double their present market share

by 2008. These carriers have also been able to attract more business travelers, the heart of the airline industry, by charging them substantially less money for last-minute business flights, approximately six times less than their larger competitors; they are more cost effective than their competitors. For example, United Airlines’ costs are some 140 percent higher than at Southwest, while Continental’s costs are double Southwest’s; and while United Airlines has a cost of 11 cents per seat mile, Southwest’s is 7.4 cents. As a result of its business strategy, a low-cost carrier such as Southwest continues to remain profitable. It has not furloughed employees (some 35,000 work there) since it began operations about 30 years ago. It continues to maintain its fleet of 375 planes, and it is currently worth more than all other airline carriers combined. No wonder the low-cost carriers are beginning to seriously erode their counterparts’ market share. Fourth, the airline industry has been reeling from major financial problems. Eastern Airlines is gone, so is Pan Am, and TWA was absorbed in 2001 by another airline. US Airways and United Airlines have filed for Chapter 11 bankruptcy. To add to the financial misery, the first fiscal quarter of 2003 was not kind to the airlines. US Airways lost some $3 billion versus a $1.7 billion loss for the same time period in 2002, an increased loss of $1.3 billion. If these financial losses continue, one airline executive spokesperson has predicted, “The woes of the U.S. aviation industry will prompt a shakeout that will leave it with just a handful of global carriers.” Fifth, labor costs present a grave financial problem for airlines. Since labor (unions) is exempt from antitrust laws, organized labor can make or break an airline. Labor costs represent approximately 40 percent of airline costs. In 2002, labor costs accounted for approximately half of United Airlines’ and American Airlines’ revenues. In the last few years, however, labor has made some major financial concessions to save some of the major. airline carriers. United Airlines may have gotten a major financial reprieve from a six-year labor agreement that will save the company some $314 million in annual salaries, and possibly another $794 million in salary saving if contract negotiations work out with the International Association of Machinists (IAM), but there is much more work to be done. Northwest Airlines needs approximately $1 billion in wage and benefit concessions by the middle of 2003 to compete with other carriers. Personnel cuts at American Airlines include a reduction of 13,000 or 13 percent of employees, and a payroll savings of 23 percent or $1.8 billion; United Airlines has witnessed a reduction of 17,200 or 20 percent and a $2.5 billion payroll savings. While these concessions may have helped the airline business survive, they may have done irreparable damage to staff morale. According to one source, “Unless management can find a way to motivate these employees and their colleagues, the carriers’ woes could drag on even longer.” Sixth, the industry business model of hubs (airports in large cities, e.g., Newark, NJ) and spokes (airports in smaller cities around them, e.g., Buffalo) is passe. Once thought to reduce costs and to allow for more nonstop flights, hubs are now too costly and difficult to manage. Travel has been made “less convenient for the business fliers” by reducing the number of available business flights and by increasing the waiting time for connecting flights at some hubs by an additional 15 minutes. Business travelers are no longer willing to pay higher airline fares for the convenience of hubs. Unfortunately, if the major carriers reduce their number of hubs, they will lose their competitive edge—service—to low-cost carriers, who in turn will benefit from increased business travelers. Seventh, several recent unanticipated issues have seriously threatened the airline business. The second Gulf War with Iraq has impacted the’ industry’s economic burden with increased fuel costs and fewer airline passengers, and Severe Acute Respiratory Syndrome, commonly known as SARS, a

highly infectious and deadly illness, has affected the industry as well. SARS has severely curtailed travel to Asia, particularly to the Chinese cities of Shanghai and Beijing, and to Canada, particularly Toronto, where SARS has registered the highest number of cases. The result has been the losses of millions of dollars to the airline industry. Finally, there are the projected delays in airport expansion plans in San Francisco and Washington, DC; an increase by the five major carriers—United Air, Continental, Northwest, Delta, and US Airways—in the price of tickets to offset some costs; and over the next five years, the number of major airline carriers may decline by one or two carriers. Clearly, a new management strategy is in order for the major carriers in the airline industry. Questions

1. Do the major airlines have a strategy? 2. Do a SWOT analysis for the airline industry. 3. Conduct an internal/ external audit of the airline industry. 4. What are some entrepreneurial and innovative business strategies the major airline carriers should

adopt to avoid extinction?