Chapter 1 To Lose US $1 Billion in 1 Day – Department of Startup

CHAPTER 1

To Lose US $1 Billion in 1 Day

In the early weeks of April 2017, Oscar Munoz, the CEO of United Airlines, having been awarded “Communicator of the Year” by PRWeeks a month earlier, not only saw his reputation being dragged through the mud, but also witnessed the catastrophic fall of US $1 billion in United Airlines share value, in the next trading day after a passenger-­removal controversy the day before.

What Had Happened?

Physician David Dao was forcibly removed, dragged along the aisle with a bloodied mouth and his following delusional words of “I need to go home” and “Just kill me” went viral within hours, and United Airlines Club members began to cut their loyalty card and post it online.

The reason for the removal was as ludicrous as the event unfolded; to make way for four United Airlines employees and in exchange, volunteered-passengers were compensated with some US $400 in-flight vouchers which were later doubled to US $800 when there were no takers. David Dao was one of the four unlucky ones who was involuntarily selected.

After viewing the video, Munoz the United Airlines CEO proceeded with a challenging press release whereby he labeled David Dao as “belligerent” and “disruptive.” He subsequently had to make three apologies in total, but it was too late as the story had gone viral. Every customer or potential customer was not only turned off by the chain of events, but many had even begun to share it amongst their networks. The disastrous aftermath was unfathomable before the days of Internet, Netizens, and startups.

United Airlines settled with David Dao within weeks on a confidential compensation which some legal analysts had guessed to be in the region of several millions of dollars, but that didn’t stop a rumor from spreading like wildfire in a popular social media in China that the final figure was a whopping US $140 million. This continues to add to the negativity to the United Airlines branding in Asia and especially in China, the world’s largest market at the present moment for any company.

You are right to guess that the aftermath didn’t stop with the settlement. Not only was Munoz told that he would never take over as the chairman of the airline, but he was also the first CEO that had to face a Congressional hearing purely based on his leadership and communication skills or the lack of it. In Jeffrey Sonnefeld’s words when he wrote about Munoz off the mark management, “Sometimes competence should matter, not just character.”

Munoz had earlier inherited an airline in distress from his predecessor before the ugly incident. Confounding the dire state of the airline was also a federal corruption probe and a messy merger with Continental ­Airlines, and Munoz had managed to turn around the company by prioritizing labor relations which led to the award by PRWeek as U.S. Communicator of the Year. This feat he did while having had a heart transplant in 2016, at the age of 57!

In this case, Munoz may not necessarily be lacking in neither leadership nor communication skills, but the skills are mismatched to the current volatile, uncertain, complex and ambiguous (VUCA) world.

The situation is also further compounded by the virality effect of today’s social media. There is always a chance any video could go viral once uploaded to the social media. In this case of United Airlines Flight 3411, the video had “gone viral” within minutes and hours of the incident but Munoz was only able to issue his first statement almost a day after. The perception was built on United Airlines and her hardworking employees without a response from the management of United Airlines, fueling the virality effect of the video. And we know by now, the first attempt at addressing the issues with words such as “re-accommodated” adds further fuel to the fire that is consuming the forest!

It’s safe to say that in today’s world of social media, speed is of utmost importance. However, speed alone kills. What are then the necessary components to allow one to make the right decision on speed?

System Failure

Finally, to end the crisis, Munoz admitted to a “system failure” and vowed, “to put the customer in the center of everything we do.” This action may have been a little too late, however the question lies on whether if there had been a system failure across the board. Up to now, little had been mentioned about the crew of United 3411 and the 86,000-strong employees and the good works they have been doing in flying 148 ­million customers in 2017 alone. In one fell swoop, every one of United Airlines employees was seen as the people who had dragged or had allowed a paying passenger with a bloodied nose being hauled involuntarily off the plane.

To appease the general public, Munoz told NBC that, “We’re going to teach and broaden sort out the cultural impact of respect and dignity, regardless of where you’re sitting.” In our opinion, the prior statement would only enhance the perception that all United Airlines crew and employees had been discriminating passengers based on the seats that they had paid.

This negative perception cannot be accurate as 148 million customers had chosen to board the 1.6 million flights that United Airlines had operated in 2017. It would be absurd for all these passengers that they had paid to suffer any form of discrimination at all.

Before making any systemic change to organizational culture, we have first to understand and define what is “system failure across the board” mentioned by Munoz; pertinent questions to ask are:

  • What is the failed system that we are addressing?
  • Why is the something that is “across the board”?
  • What then causes the failure?
  • Where is the failure to begin with and was there any lacking areas which caused the failure?

We have to address all these questions before any remedial actions. However, Munoz in his statement had provided only a glimpse of what is this system failure that he had touted.

It is clear as the blue skies in the United Airlines slogan “Fly the Friendly Skies” that there is an imperative need for an organizational cultural change for any organization to meet today’s VUCA world.

New World Order

When Woodrow Wilson first coined the word “New World Order” in his call to the League of Nations to herald in a new world of peace in the aftermath of World War I, it was to unite a multi-polarized world of his time. Since then, we have ushered in several New World Order including the Cold War, the post-Cold War, the Gulf War and what would soon be seen as a New World Order built around China. At the time of writing, China surpassed the United States in economic growth. It is estimated that 35 percent of the world’s growth from 2017 to 2019 would be from China compared to only 18 percent from the U.S. (World Economic Forum 2018).

What is undeniably clear is that in today’s new world order or the next one that is coming along, a new industrial revolution had taken place. Widely known as the Fourth Industrial Revolution or Industry 4.0, we have marched into the era where our daily lives are increasingly infused with technologies, blurring the line of physical, digital and biology spheres at an exponential speed.

In his book “The Fourth Industrial Revolution” Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, describes how the First Industrial Revolution mechanized production through the power of water and steam engine, followed by the use of electricity for mass production, and the on-going Digital Revolution (Third Industrial revolution) which brought us the Internet, smartphones and digital devices.

The Fourth Industrial Revolution (Industry 4.0) sees a further fusion of technologies into the daily lives of human by increasing connectivity among humans especially, through the billions of mobile device users, giving us unlimited processing power to knowledge, information, and storage capacity at an unprecedented speed. This scenario, in Professor Klaus Schwab opinion, marks the arrival of the Fourth Revolution distinctively in “velocity, scope, and systems impact.” He further added that the growth of this revolution is exponential in speed often catching many off guards to its perils and also the advantages it possesses.

United Airlines and Oscar Munoz not only shows us clearly the raw power of the Fourth but also a glimpse into the not so distant future of the challenges and potential of this new industrial revolution.

Governments have changed hands disregarding the rational and logical reasoning of many political analysts and career politicians due to it. Donald Trump, a businessman, and television personality won the 2016 elections and was sworn in as the 45th President of the United States of America with no experience whatsoever in running a government! Neither had he been elected into any positions within the fabric of government of the United States of America. Many were to argue that his personality, his checkered playboy past and his brashness, very often bringing memories of his reality TV show “You Are Fired!” in the early 2000s, lack presidential qualities.

As a businessman, Donald Trump’s empire spans from property development such as the famed Trump’s Towers, casino, golf courses, reality shows and to the often controversial Miss Universe Pageant. (President Trump proceeded to sell off his stakes in the pageant during the run-up to the election.) More accustomed to bulldozing his ways in business, with neither the political legacy such as the Kennedy’s nor the right education or military service for a career in politics, it’s of little wonder why the political elites of his time wrote him off. This political novice not only proved his critiques wrong but went on to slay many giants in his Republican party but also defeated Hillary Clinton, of the Democrat Party, who many predicted then to be the first Female President of the United States of America.

Many Americans, especially those from the coastal cities are still in disbelief that this thrice-married playboy has defeated Hillary Diane Rodham Clinton, a career politician, a former diplomat, Yale Law graduate, former First Lady of the United States and the immediate past Secretary of States of the Obama Administration. Donald Trump has not only won his opponent but with a decisive 304 electors for him versus just 227 for Hillary at the United States Electoral College.

“Make America Great Again”, Donald Trump’s election slogan had somehow touched and swayed America to choose him, and the virality of that slogan and the following #FakeNews would forever etch Donald Trump to the history books of our time. He had harnessed the power of the Fourth!

Succinctly, ignoring Industrial 4.0 would be like the countless horse breeders who scorned at Henry Ford’s Model T. Henry Ford once famously quipped, “If I had asked people what they wanted, they would have said faster horses.” One can’t help but wonder if that’s describing many of us who are now at the cusp of brand new world order.

In recent years, emerging technologies such as artificial intelligence, 3D printing, driverless vehicle, Internet of Things (IoT), nanotechnology, the block chain, and crypto currencies are already realities. Once considered as science fiction, UBER had test-driven driverless cars since 2017 but had an unfortunate fatal car accident in the U.S. in early 2018.

Old Money Versus New Money

Fortune Global 500 latest list in 2017 saw a combination of 500 global companies generating US $27.7 trillion in revenues and US $1.6 trillion in profits in the year before. These 500 companies employ 67 million people globally, representing 37 percent of global GDP (Fortune Global 500 2017).

Walmart continues its hegemony as the leading Fortune 500 with a revenue pushing past US $400 billion for the fourth year in a row. What is interesting to note is that three Chinese companies—State Grid, Sinopec Group, China National Petroleum—occupied the next top 3 positions. Suffice to say that this is an indication that China is now a recognizable global economic powerhouse.

The year 2017 also saw a list of 33 new companies to the global list with many of them in the technology sector such as Facebook, Alibaba, Tesla Motors, Tencent, Activision Blizzard, and Hewlett-Packard Enterprise. Some of the aforementioned such as Tesla Motors and Activision Blizzard saw themselves as first-time newcomers to the list, having cleared the US $5.1 billion bar for the 2017 list. Technology companies of these new companies also lead in both fastest revenue generation and profit growth.

The next interesting question to pose is how many of the companies in the Fortune Global 500 in 2017 were from the Second Industrial Revolution? Mark J. Perry, Professor of Economics and Finance at the University of Michigan Flint campus asked the same question and made a comparison between the list of Fortune 500 in 1955 versus 2017.

Although the comparison is limited to just U.S. Corporation (­Fortune 500 is exclusively for U.S. Corporation while Fortune Global 500 is for global corporations), the findings are quite thought-provoking. In Mark Perry own words, “only 60 companies appear in both lists.” What it meant was that less than 12 percent of the companies featured in 1955 remains in the list.

What then causes the previous phenomenon? Not only that the big players of its days have dropped off from the list, but some of these names are also no longer recognizable such as Pacific Vegetable Oil, Armstrong Rubber and more.

Mark Perry attributes this “constant turnover in Fortune 500” to Schumpeterian creative destruction, a constant destructive innovative force through the entry of new entrepreneurs which brings about economic growth but also destroys the hold that established companies may have.

Mark continues to argue that the churning of Fortune 500 is a positive sign that our consumer-oriented driven economy remained vibrant and we as consumers are the ultimate beneficiaries.

However, the question remains, how can any incumbent Fortune 500 or established organizations seize, ride and prepare itself for the Schumpeterian “creative gale” that is bound to happen and the cycles are getting shorter in today’s VUCA world?

In an aptly titled 2016 report, “Corporate Longevity: Turbulence Ahead for Large Organizations”, Innosight, a growth strategy consulting firm, forecasted that the next decade would be the most volatile in history by examining companies on the S&P 500 list of most valuable publicly traded companies on the U.S. stock exchange. Based on the turnover of 5.6 percent in 2015, Innosight forecasted that in 10 years, 50 percent of current S&P 500 would be replaced by new entrants. Besides, the average longevity trend line is also a downward slope. In its report, Innosight had offered the following explanations:

  1. Economic cycles are reflecting disruptions from innovation and new technologies;
  2. Active mergers and acquisitions; and
  3. The “unicorn” phenomenon of active startups.

A common theme in all the aforementioned is innovation. Innovation has not only brought about new fortunes to new companies such as Facebook, which began as a startup in the dormitories of Harvard but it also explains the phenomenon of notable companies such as The New York Times dropping off the S&P 500.

Surprisingly, large corporations are not unaware that the young startups are not only disrupting the industries that they had previously dominated but are also able to build the startup into a “unicorn”, usurping their rankings in Fortune 500 and S&P 500.

Innosight surveyed and received responses from 91 companies with revenue greater than US $1 billion across 20 industries on whether if their organization needs to transform their “core offerings or business model—in response to rapidly changing markets and disruption”, a full 66 percent agreed or strongly agreed with the need for transformation imperative (Innosight 2016). These are captains of their industries with half of them from North America, the rest from Europe, Asia and others.

Again, reinvention and a heavy leaning toward innovation are the only means to survive the disruptive changes of our times. And innovation is precisely one of the key criteria for thriving startups!

Grow a Unicorn

Startups have been gaining a lot more attention in recent years as more and more governments are looking to mirror the success of Silicon ­Valley which propelled the U.S. economy. Today, even Higher Education Institutes with deep roots into traditions such as Harvard, Cambridge, Oxford, Stanford, and INSEAD advocates entrepreneurship and startups as one of their core competencies. Alumni who are startup ­founders, ­especially those who have grown them into unicorns are celebrated and raised to the pedestal as a source of inspiration to the others. Mark ­Zuckerberg, a famous Harvard dropout, in his speech to the graduating class of 2017 famously joked, “let’s face it, you accomplished something I never could.” At the very moment of that speech at the Harvard Yard, Facebook is a unicorn, and Mark’s net worth stood at a staggering US $63 billion, almost twice the size of the Harvard endowment fund. Mark was also conferred an honorary Doctor of Laws degree by Harvard University on that fateful day.

The aforementioned begets an intriguing question. When and how did the startup scene come to life, that a college kid in his dormitory can grow a small idea to connect individuals to a unicorn that by 2012 had over one billion users, inspiring a movie and countless other startups their rightful place amongst the Fortune 500?

The catalyst may have hinged on these famously coined words, “It’s the economy, stupid” by the then 42nd President of the United States of America, Bill Clinton, during his successful 1992 presidential election campaign. At the age of 46, President Bill Clinton became the third youngest President of the United States of America and the first from the Baby Boomer generation representing the post-war generation who had also enjoyed the largesse of a fast developing and recovering world.

Thus, it’s also of no coincidence that President Bill Clinton oversaw the longest peacetime economic expansion in American history. The U.S. had strong economic growth of 4 percent annually, and the ­Clinton administration created a record-breaking of 22.7 million jobs during his tenure as a two full-term President, the first Democrat since Franklin D. Roosevelt to achieve that.

President Bill Clinton was also instrumental in heralding the new generation of Internet economy by signing into law the Telecommunications Act of 1996, otherwise more famously known as the Internet Act. And by the stroke of the pen, President Clinton opens up a world of possibilities on the Internet, allowing startups to thrive. We would not have our thriving startup ecosystem today if the powers-to-be then do not see the need for a whole new world of “information services” to develop on its own free will.

In short, the Clinton administration’s Telecommunications Act of 1996, launched the age of modern Internet policy by “trusting market forces and technological innovation to the maximum extent. It was an act of incredible political maturity. Its authors knew something remarkable was about to happen, and that government could best serve it by stepping back and letting private investment happen” (Forbes 2014).

Unsurprisingly, the Clinton administration also launched the first official White House website www.whitehouse.gov signaling its resolve and drive to information services and the Internet. Information technology is now a buzzword, a New Economy (Free Dictionary), an Internet economy. Any doubts about the resolve of President Clinton in his beliefs that he is heralding a whole new brave world was put to rest when he issued Executive Order 13011—Federal Information Technology on July 17th, 1996, ordering all heads of federal agencies including the courts and military to make all information available on the Internet.

The Rest Was History

Two years on, the world saw the booming of “dot.com” and heralded in the “dot.com era.” To put it simply, dot.com were mainly new idea companies which conduct their businesses over the Internet in the New Economy via websites that were using the top level domain “.com” Most of these companies were technology focused, but many were also trying to disrupt traditional businesses such as Pets.com, selling and delivering pet food online.

Billions of dollars were handed over to entrepreneurs to fund ideas that were riding the Internet Economy. Many of such companies were, however, without a sound business model. At the height of the “dot.com bubble” in 1999, the combined value of the top 6 tech companies were US $1.65 trillion, the equivalent of 20 percent of the United States GDP. Nasdaq was at its frenzy, and everyone was throwing money into any company which had a dot com to its name.

By March 10, 2000, NASDAQ peaked 5132.52 points (Investopedia 2011). Excessive speculations into fledgling Internet-based companies without strong fundamentals or even business model has reached the point of no return.

The “dot.com bubble” burst was imminent, and the crash was as spectacular as how it had risen. NASDAQ faltered for the next two years until 9 October 2002, losing 78 percent of its value (Investopedia 2011).

The top 10 dot.coms alone lost a combined US $2.7 billion. Their names are now forgotten but would forever etch into the financial history books:

  • Webvan.com—US $800 million
  • Go.com—US $790 million
  • Pets.com—US $300 million
  • Kozmo.com—US $280 million
  • E-Toys.com—US $247 million
  • Boo.com—US $100 million
  • MVP.com—US $65 million
  • GOVWORKS.com—US $60 million
  • Flooz.com—US $50 million
  • Kibu.com US $22 million

    (CNET, Nationalpayday.com, Marketing minefield, ­Wikipedia)

Although the crash was a painful experience, it provided the platform for the current startup scene today. Furthermore, the better and more innovative dot.com not only survived the crash but continued to thrive, reaching new heights; one of such companies is Amazon.

Today Jeffrey Bezos’ dot.com is ranked number 8 in the Fortune 500 list with a revenue of US $178 billion, employing well over 500,000 employees globally. Amazon had also forever changed the way consumers make purchases; from trusting an online platform with credit card details to sharing and reading comments on product reviews before making an informed decision. Drawing from its know-how, Amazon is also now providing cloud computing services, Amazon Web Services to companies allowing especially startups to have an Internet presence quickly and cost-effectively.

Jeff Bezos is also now the founder of Blue Origin, a startup focused on the creation of space tourism but with an ultimate aim of moving all heavy industries into space, turning Earth into a residential area only (Business Insider 2018).

Although, startups are still known to have high failure rate with a general understanding that 99 percent of startups fail, it’s without a doubt that startups are at the forefront of the Fourth Industrial Revolution pushing innovations to better human lives with technologies such as artificial intelligence, 3D printing, social media to drive the power of collectivism and more.

All these disruptive technologies are part of the reasons of today’s VUCA world, and startups thrive in these environments. It’s not a matter of how but when another new obscure startup will disrupt an industry, grow into a unicorn and subsequently find their rightful place amongst the Fortune 500.

The aforementioned begs the question on why startups thrive, and the Fortune 500 fear the turbulence ahead. Innosight in its Spring 2016 report surmises that’s due to organizational inertia and a lack of long-term vision.

The authors of this book agree that although the Innosight finding is correct, the fundamental reason lies in the organizational culture of the company. Culturally, a startup is designed since its inception to solve an existing problem giving it a “meaning of life” and “shared values” for which the startup could build upon—the essentials DNA of startups!

In later chapters, the reader will discover and unravel the elements that forged the framework we call—the Department of Startup—that will be the bedrock for corporations steering and moving ahead in a VUCA Industrial 4.0 era and beyond.