People Express’s Model T
No person changed the industrial landscape this century more profoundly than Henry Ford. The $850, widely available auto provided unheard-of options to the American public.
Statues to Ford deservedly are tall; yet in the context of lasting corporate success, Ford held on far too long to the narrow vision that his Model T represented, and almost lost the company as a result. He yielded market share to General Motors, which eventually nearly closed the price gap and then beat Ford hands down by providing a diverse product line and by offering financing for all GM customers.
Today Ford is making its greatest relative resurgence in almost sixty years. This time, GM is suffering from a strategy reminiscent of the Ford of old, which emphasizes volume and that has cloned all its models to look alike. Ford is regaining long-lost market share at a handsome rate through styling—e.g. the Taurus; differentiation—turbos, for example; and superior quality.
The headlines in late June, portending the possible demise of People Express Airlines, are a carbon copy of Ford’s decline earlier this century.
Even if People Express goes the way of the Model T, founder Don Burr would nonetheless deserve a statue almost as high as Ford’s. Like Ford, Burr significantly expanded the horizons and possibilities for millions of Americans by reaching a new plateau in affordable air transportation. Indeed, it’s hard to remember less than a decade ago, flying was almost the exclusive province of businesspersons and the well-to-do.
Burr rushed to take complete advantage of deregulation. He forced overwhelming and lasting changes on other, more established air systems—from two-tier wage settlements, to mergers, to efficient hub-and-spoke networks. Many of the changes would have come without Burr or People Express, as doubtless would have come some other version of the Model T without Ford. Still, the boldness of People’s moves probably cut the process by a decade.
And now Burr and his airline stand a good chance, like the first Mr. Ford and his company, of losing it all. Competitors have closed most of Burr’s once-imposing cost-per-seat-mile gap. And now Burr is stuck with a customer-perception problem similar to the Model T’s image that it would make a car in “any color as long as it’s black.”
Despite belated investment of hundreds of millions of dollars on a new Newark, New Jersey, terminal and a new reservation system, People is burdened by too many memories of the dingy and
congested North Terminal, ridiculous overbooking incidents and a primitive reservation system that has turned the entire community of travel agents against the airline.
Thus, no-frills flying had its hour in the sun. It dramatically and permanently changed the landscape, and it is now in eclipse. Others are matching People on price, while providing amenities that People does not offer, and pouring money into reservation systems and other notable value-added differentiation.
American Airlines, in particular, under aggressive chief Bob Crandall, has almost step-for-step, done to People what GM, under Alfred Sloan, did to the first Mr. Ford.
Another, almost exact parallel, may be unfolding in the telecommunications industry. MCI was the all-time giant slayer, destroying AT&T’s monopoly. Even more proactively than People,
MCI took advantage of the larger environmental drift toward less regulation. MCI provided no-frill alternative service to AT&T at up to a 50-percent-price discount in the early 1980s. It started, as People and Ford, a major and permanent revolution from which the American consumer has benefited immensely.
Again, the gap is closing on MCI and its no-frills image, which is fast becoming a most intractable millstone. The price gap has been narrowed to an almost undiscernible difference, and thus AT&T’s genuinely high level of service and superior transmission quality is now proving to be a decisive value-added advantage.
The strategic implications for businesspersons from the three cases, and a host of less prominent other cases that could have been discussed, are profound. A no-frills provider takes advantage of (a la People and MCI in the face of deregulation) or creates (as did Ford) a true discontinuity by providing a widespread, low price/low cost, undifferentiated product or service.
In the marketplace, both older and newer players respond as basic economic theory proclaims they must—by narrowing the price/cost gap. Once the gap is somewhat narrowed and a new, substantially lower-than-the-start plateau is reached, the winning strategy becomes differentiation—via service, quality and variety.
Ford, People Express’s Burr and MCI’s Bill McGowan deserve the accolades that appropriately have been heaped upon them. However, the pioneer, no-frills provider almost inevitably sows the seeds of his own destruction. His position is ultimately fragile and vulnerable to the clever differentiator. The effective differentiators will likely win both the customers the profits
over the medium-to-long term.
(c) 1986 TPG Communications
All rights reserved.