A failing brand lives on borrowed time

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As the example of Alitalia suggests, negative brands do not survive for long in competitive markets.

I doubt if I am the only traveller who would rather walk than fly Alitalia. My experiences with the airline are truly memorable. On my last flight but two, an aggressively unhelpful supervisor handed me a complaint form without being asked, as he turned away to talk to a colleague: his insouciance reflected a well-founded belief that no action would follow the complaint. On my last flight but one, the company insisted I check in my small cabin bag; baggage handlers extracted the foreign currency it contained.

And on the occasion of my final flight with Alitalia, the power supplies to Rome airport failed. This was in no way the fault of the company. But the disappearance of almost all of their ground staff, leaving a milling crowd of bemused and increasingly angry passengers, was. Dante might have been able to describe the resulting scene, but words fail me.

The market provides the mechanism by which consumers can take revenge. Alitalia has lost money in 10 of the past 11 years, despite the Italian government injecting more than €1bn ($1.23bn). Last month, the state agreed an emergency loan and has found a loophole in European competition law to try to force the company’s competitors to raise fares for passengers whose final destination is outside Europe.

Business school case studies are almost uniformly devoted to management success. But failure is also illuminating. Most business collapses result from poor judgments. The company mismanages the nuts and bolts of corporate organisation – financial controls, personnel management or customer relationships. Or its executives make a fundamental strategic error – misunderstanding a market, underestimating an investment or making an acquisition too far. The resulting losses absorb more equity than the business can afford. Most recent high-profile failures are the product of poor business judgment, sometimes compounded by fraud.

The organisation that destroys value on a continuing basis is less common. Such an organisation may be a dysfunctional team – a group of people producing less together than they would as individuals. This often stems from internal politics – each is manoeuvring for their own position within the business, not for a common goal. Other bad organisations emphasise process at the expense of output, or adopt purposes irrelevant to the objectives of the business. In the public sector, in particular, there are organisations that value the orderly conduct of business above all else, or are so busy not engaging in anything discriminatory or politically incorrect that they are not doing anything of use. A brand is a good that customers prefer to a functionally equivalent commodity. Negative brands are “value-subtracting”. Inept brand extension is found where the brand values do not match the market – the Genghis Khan playschool, for example. But the truly negative brand destroys most value in its own core market.

This happens most frequently when the brand has ceased to be fashionable. Watney’s Red Barrel was one of the UK’s first nationally advertised pasteurised beers, offering the same bland taste everywhere, but its very success made it the derided target of real ale enthusiasts. Babycham and Mateus Rosé, once marketed as symbols of sophistication, acquired the opposite connotation. The most spectacular example of brand destruction in recent years is the collapse of Andersen. Clients deserted it after that name on an audit report began to suggest dodgy dealing rather than a ring of confidence.

But, as this example illustrates, negative brands do not survive for long in competitive markets. And dysfunctional organisations continue only if they generate larger economic rents from their operations, through branding or monopoly, than they dissipate in internal bickering. The distinctive feature of Alitalia is that it is a value-subtracting organisation in a competitive market. Such an operation can continue only with continued life support from an indulgent shareholder.

If you were establishing an efficient airline, you would want Alitalia’s planes and airport slots, but not its brand or labour relations. You would want the assets but not the organisation. The lesson for policy towards Alitalia is obvious.

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