Singapore Airlines A380 Refueling

Fuel Hedging 101

Happy New Year! It’s been a while since my last post, as January was a busy month for me. I started this post in December, but wasn’t able to finish it until now. Given the rapid developments in oil prices, I’ve tried to update all the references to reflect current market conditions. Please let me know if you find any remaining inconsistencies!

Last semester, I took a statistics course called STAT435: Forecasting Methods for Management, which essentially covered the fundamentals of time series analysis. This was a good, challenging course that allowed me to apply statistical methods to many of the other quantitative and qualitative concepts from my finance/management education, such as looking at the effect of advertising on sales and analyzing corporate and DJIA returns. The class also allowed me to apply statistics to my passion for aviation. I’ve always held that two of the biggest forces affecting airline profitability are a) passenger capacity and b) fuel costs. To address the first point, I analyzed different forecasts of international airline passenger data, looking specifically for the calendar cycle within airline passenger volumes (i.e. identifying the trend for higher and lower-than-average passenger volumes in a given year). This is intrinsically linked to passenger demand for travel, which is in turn spurred by consumer demand (for holidaymakers) and the state of the global economy (for business travelers). The next logical area of study would look at how airlines forecast passenger volumes and use this data in their operations throughout the year – such as adding or removing certain destinations, and purchasing newer, higher-capacity and more fuel-efficient planes.

The second factor (fuel costs) piqued my interest a bit more, in part due to its relevance to recent events in the global markets. I analyzed the monthly average retail price of unleaded regular gasoline, averaged across U.S. cities, for the period January 1976 through February 2008. My overall conclusion was that unleaded regular gasoline prices lack strong seasonality when compared to other energy products such as natural gas, which is “strong cyclic in nature over a year due to seasonal variation in supply and demand.” A product such as natural gas, which is a main source of heating for homes, has a consumer demand that varies by season and thus “has a general upward price movement in the winter and downward movement in the summer.” Furthermore, the seasonality effects in natural gas prices “can be seen not only through historical spot prices, but also through futures and forward prices.” The product I looked at, unleaded regular gasoline, has a use that is not as greatly affected by seasonality than natural gas. Consumers will tend to drive more or less consistently throughout the year – although they might substitute driving in place of walking short distances in the winter – whereas they will significantly upsize their natural gas and heating demand in certain seasons. Combined with the knowledge that past gasoline prices influence future prices, I concluded that gasoline prices follow a stochastic or random process in the long run, as seen by classic “stochastic drift” in the upwards-trending average value of gasoline prices over the 32-year data range.

Too much statistical analysis for you? Don’t worry, I felt the same way last semester. The point I’m trying to get to is: my analysis of unleaded regular gasoline prices came at a very appropriate time – the day after I submitted (right before Thanksgiving 2014), OPEC announced that it would not cut its oil output, sending crude oil prices downwards (WTI trading near a 5-year low of $55.26 when I started writing this post in December) and generating a knock-on effect in the Russian Ruble currency. Ali al-Naimi, the Saudi oil minister and de-facto head of OPEC, has reaffirmed the cartel’s firm stance against cutting production, which “[spells] out a dramatic policy shift that will have far-reaching implications for the global energy industry.”

I am keenly following the oil markets and the repercussions for the global economy, and it certainly seems to have aligned perfectly with my classwork. The biggest question on my mind, however, is what impact the dramatic oil shifts will have on the airline industry. If I were to continue with my statistical analysis, the next step would be analyze the time series for aviation fuel (designated Jet A, Jet A-1, and Jet B), and pay attention to any stochastic trend in this data. It would be great to apply forecasting methods to aviation fuel prices, to gain a better understanding of how airlines hedge against these volatile indices in order to stay alive. It’s certainly a larger undertaking, one that I might consider doing in the future. For now, I want to look at the practice of so-called “fuel hedging” that many airlines use in their strategic and financial planning.

What is Fuel Hedging?

At its heart, fuel hedging is relatively simple and works pretty much like any standard financial option instrument. Airlines enter into contracts with their fuel suppliers to lock in a set price today for fuel bought in the future. For instance, if an airline enters into a hedging contract at a price of $X per gallon of aviation fuel, it will pay that price in the future regardless of what happens to the market price of the fuel. What this means is that if the market price rises above $X/gallon, let’s say to $Y/gallon, the airline will purchase its fuel at $X/gallon and save the difference between $Y/gallon and $X/gallon. And if the market price declines below $X/gallon, let’s say to $W/gallon, the airline will still purchase its fuel at $X/gallon and will be overpaying for its fuel by the difference between $X/gallon and $W/gallon. Furthermore, an airline may enter into a fuel hedge contract linked to the price of jet fuel or the price of crude oil (per barrel). Since jet fuel is a derivative of crude oil, the prices of the two commodities are fundamentally correlated, but can also diverge due to idiosyncratic factors in the refining and production process. Based on this knowledge, we can already see the implication that recent oil trends have had on airline profitability.

The truth of the matter is that airlines engage in more complex hedging strategies to protect themselves against market volatility. Like a standard options contract, a fuel hedge will cover an airline’s fuel needs for a defined period, and the physical hedging contracts may specify various maturity dates that overlap. Thus, at any given time, the percentage of fuel needs that are covered by hedging contracts varies, with the airline attempting to maintain a target percentage over time. One statistic claims that from 2009 to 2010, the average hedging ratio in the airline industry was approximately 64%.

Regarding the decision to hedge versus not hedge, a 2008 report by Mercatus Energy states:

“A company that is not hedging its fuel costs is saying one of two things:

1. Our company has the ability to pass on any and all increases in fuel prices to our customers, without a negative impact on our profit margins.

2. Our company is confident that fuel prices are going to fall. We are comfortable paying a higher price to fuel if, in fact, our analysis proves to be incorrect.”

So there’s fuel hedging in a nutshell. The real question on everyone’s minds is: what’s the real impact of lowered oil prices on the airline industry? It certainly appears that there are two contrary forces affecting airlines in the current market. The positive (direct) impact: diminished oil prices lead to lower fuel costs, boosting quarterly profits. The negative (indirect) impact: airlines that hedged their fuel costs in the $100/barrel area get hit by volatility and post quarterly losses. To put it simply: much like traders of any other financial instrument, the airlines with the greatest return this year will be the ones that accurately predicted lower oil prices and imputed these expectations into their hedging strategies. Southwest Airlines (NYSE: LUV) – a pioneer in fuel hedging – is up 16.34% in the three months to February 6, 2015. Compare that to a 1.19% increase in the S&P500 (^GSPC) and an 8.34% increase in the NYSE Arca Airline Index (^XAL) over the same period. And Delta Airlines (NYSE: DAL) is up 6.08% even after announcing losses of $1.2 billion on its fuel hedges – because the portion of its fuel that remains unhedged will now be purchased at the significantly lower market price, giving the company a net $0.5 billion benefit from the fall in oil prices. Some more information from Reuters and The Economist on the fuel hedging strategies of various international airlines:

“In Europe, airlines such as Aer Lingus and Ryanair are aiming to take advantage of the low oil prices to lock in fuel costs into 2016 and beyond. Thai Airways plans to hedge 100 percent of its fuel purchases this year… U.S. airlines that hedged based on higher oil prices, such as United Airlines, have had to dump losing bets and are now reviewing their strategies for protecting themselves from oil market volatility… At least one Asian carrier, South Korea’s Asiana Airlines, has stopped hedging since November due to recent price volatility, while Germany’s Air Berlin has said it is considering reducing its hedging rate.”

The articles explain that American Airlines (NYSE: AAL) has “[benefited] disproportionately from the fall in prices,” having not signed a hedging contract since 2013. The same goes for Air India (AIN.UL) and whose finance director “projected it could shave as much as $375 million off its annual fuel costs of about $1.5 billion based on savings made since prices started to fall in June 2014.” Those airlines might certainly consider entering into various fuel hedging strategies this year, while prices remain low. At the same time, these airlines will hedge cautiously, knowing that the oil markets remain uncertain and thus taking a risk-averse outlook to their fuel needs.

The moral of the story is: hedge intelligently, or look for companies that do. An airline that hedges too much or too little of its fuel needs can be exposed to either the severe upsides or downsides that the oil market is increasingly prone to. The trick is to hedge just the right amount of fuel, and the airlines that do this will come out on top. One can look towards the practice of fuel hedging as an indicator of market sentiment, as well as a measure of price volatility. An airline’s hedging strategy is also indicative of its operational flexibility – its ability to foresee and react to the market environment – and this is one of the many factors that airline investors will look for in 2015.

Boeing employees walk in front of a new 787 aircraft

Talent Retention and People Analytics at Boeing

I recently read an opinion piece called “Greatest Long-Term Threat To Boeing Is The Loss Of Talent,” written by Richard Aboulafia for the industry-leading magazine Aviation Week and Space Technology. Last month, aircraft manufacturer Boeing (NYSE: BA) moved many of its defense services and support functions out of Seattle, citing competitive and cost concerns. While the author agrees with the company’s line of reasoning, he says that “it’s also important to remember that when a company takes aggressive action to move jobs and reduce labor costs, it always creates risk. In particular, key skills and experienced workers can be lost, threatening execution and company capabilities.”

This article had me thinking about what it takes for a large company like Boeing to retain talent in an increasingly competitive business environment. As the author suggests, companies in a growth phase need to focus on attracting and retaining talent, but a company in a “retrenching” phase needs to focus on costs. The analogy given is Tesla versus General Motors, respectively. This in turn reminded me of a talk I attended a few weeks ago by Brian Welle, Director of People Analytics at Google. In his day-to-day role, Welle “conducts research and designs programs that strengthen Google’s Human Resources initiatives.” One of his primary areas of research is on the “unconscious bias,” a set of factors caused by our environments and experiences that influences our decision-making capabilities. Although Welle’s primary focus is to help Google employees become aware of and reduce their personal unconscious biases, during his talk he frequently mentioned the company’s overall drive to recruit and retain talent. The underlying assumption here is that Google remains in a growth phase – but I wonder what will happen when (or even if) Google reaches a point when it needs to shift focus to cost-based “retrenching” like that referred to in Aboulafia’s article. Obviously, this would require viewing Google as a mature corporation – hardly the case given the growth in the technology industry and Google’s new monetization initiatives.

Furthermore, I wonder why a company like Boeing doesn’t have a similar human resources structure to Google. This may seem like an outlandish idea, but I feel that many of the human resources functions at Google can be replicated in the wildly different industry that Boeing operates in. Welle’s People Analytics team focuses on organizational behavior (OB) issues as they pertain specifically to Google – so why doesn’t Boeing focus on the OB issues that affect the aerospace & defense industry? In my earlier posts “The Failure of Crew Resource Management (Part I, Part II, and Part III),” I focused on the failure of an OB system in the aviation sector (Crew Resource Management or CRM). I think it would be interesting to see Boeing expand its human resources functions to address industry-wide OB concerns like CRM. In my mind, Google is able to recruit and retain the best talent because its human resources professionals are focused on remedying OB issues that affect the broader industry, such as the lack of women in technology and the unconscious bias in most recruiting decisions.

At present, the cost issue remains crucial for Boeing’s short-run competitive strategy. But perhaps a shift towards the Google human resources model could help Boeing with its recruiting and retention issues in the long run. It’s definitely something I want to look into more. In Aboulafia’s words: “Boeing management needs to remember the greatest long-term threat to [Boeing Commercial Airplanes] isn’t the cost of labor; it’s the loss of talent and the erosion of core capabilities.”

Panoramic cabin view onboard an ANA 787-800 Dreamliner

Optimal Boarding Method for Airline Passengers (Jason H. Steffen)

Speaking of “Old Dog, New Tricks,” I’ve been thinking about other problems that airlines could very well tackle without physically changing anything about their aircraft or equipment. One of these is the classic boarding nightmare that we’ve all experienced – waiting for what seems like a lifetime just to get to your seat, because everyone needs to lift their hand luggage into the overhead bins. I read an article in the Washington Post by Jason H. Steffen, a professor of astrophysics at Northwestern University, who has spent some time studying this problem. Steffen argues that lengthy boarding queues are driven by two factors.

First, the practice by most commercial airlines of charging for checked baggage leads most passengers to maximize (and often times, exceed) their hand baggage allowance. I’m certainly guilty of this – on my most recent trip, I brought a rolling hand-luggage and a duffel bag that didn’t quite fit underneath the seat as per airline guidelines, so I had to spend the time storing both in the overhead space (after all, I need that space under the seat for my legs). Anyways, it’s simple: the more stuff people bring onboard, the more time it takes to store all that stuff and get everyone in their seats.

The second factor driving the problem is the boarding process itself. Most airlines board their passengers in the following way: first class, business class, membership club members (by rank order), and finally economy class. Within the standard boarding procedures for economy class, passengers will board from the back of the plane towards the front. As a result, the majority of passengers get stuck in the aisles, waiting for those who boarded ahead of them to store their luggage and sit down. This causes the painful boarding queues that frequently extend out of the aircraft and onto the jetway. According to Steffen, “the problem is that boarding from the back to the front is a serial process: only one action at a time is completed…The aisle in the airplane isn’t used effectively.” The only other boarding process currently in service is the “industry gold standard of open seating,” pioneered by Southwest Airlines and popularized by other low-cost carriers such as Ryanair. In this model, passengers don’t have assigned seats at all, and boarding time is significantly improved.

In Steffen’s view, “a more efficient way to board would have only as many passengers in the airplane as can put their luggage away without interfering with each other. Those passengers should also be ordered so as to eliminate the need to pass by anyone either in the aisle or in the rows. In other words, it is better to make passenger boarding a parallel process where multiple actions occur simultaneously, instead of a serial process.”

To satisfy my need for excruciating detail and evidence, I read through Steffen’s 2008 research article in the Journal of Air Transport Management. As per the abstract, “Using a Markov Chain Monte Carlo optimization algorithm and a computer simulation, the passenger ordering that minimizes the time required to board an airplane is found.” (I will admit, after reading the abstract, I almost gave up…but then I kept at it).

Here’s a PDF of the research paper: Jason H. Steffen – “Optimal boarding method for airline passengers” – Air Transport Management, 2008

In his research, which is best summarized by his Washington Post article, Steffen builds on the same optimization technique used to answer the famous “Traveling Salesman” problem: given a set of cities and the distances between them, what is the shortest possible route to visit each city exactly once and return to the original city? The resulting Steffen method features an airline boarding procedure whereby “adjacent passengers in line will be seated two rows apart from each other. The first wave of passengers would be, in order, 30A, 28A, 26A, 24A, and so on, starting from the back. (For a typical airplane there would be 12 such waves, one for each seat in a row and for odd and even rows.)”

Steffen conducted a field test of his proposed method versus others, using a mock Boeing 757 fuselage with one aisle, 12 rows of six seats, and 72 passengers. The experimental results show that the Steffen method outperforms current industry practices, with a 2x time advantage over back-to-front boarding, and a 20-30% improvement on random boarding order. Depending on the specific aircraft used, “the optimal boarding strategy may reduce the time required to board an airplane by a factor of four or more.”

Here’s a PDF of the experimental results: Jason H. Steffen – “Experimental test of airplane boarding methods” – Air Transport Management, 2011

The main problem to implementing the Steffen method is getting passengers to line up exactly as prescribed. In Steffen’s own view, the primary benefit of using his method is that “it allows an airline to measure how much room there is for improvement and identifies where that improvement is to be found.” I think that airlines would consider this proposed boarding process (or something similar) if it were framed in the context of the potential cost savings from its use. I recall watching a documentary on Emirates’ ground operations at Dubai International Airport (DXB), where the airline has placed digital clocks in front of every plane at the gate to ensure precision arrivals, turnarounds, and departures. For every second beyond its scheduled departure that a plane remains at the gate, an airline loses thousands of dollars caused by late fines and delays to other aircraft waiting to park. This is a business dominated by intense negotiations between airlines and airports over the use of parking gates and arrival/departure windows. I’m sure that airlines would react positively to the notion of speeding up the boarding and/or turnaround process, if the ultimate result were to allow them to handle several additional flights per day or save on airport gate costs. And passengers would be relieved from the presently aggravating experience of boarding a plane. Sounds like a win-win for all parties involved.

G-ZZZA, one of British Airways' oldest 777-200s.

Old Dog, New Tricks

Greetings from London! I’m back home for the next three weeks, spending the holidays with family and friends. I flew in this morning on BA0066, one of two daily flights that British Airways operates on the PHL-LHR sector (the other being BA0068). I prefer Flight 66 for time reasons – it leaves Philadelphia at 6:35pm EST and arrives in London at 6:40am GMT, narrowly missing the horrendous rush hour at Heathrow which frequently adds ~1hr of travel time. That being said, BA0068 has a terrific “Sleeper Service” if you’re lucky enough to be seated in Club World (BA’s business class product) or First Class. I tried this service a few years ago through a free upgrade, but decided that the price tag – anywhere between $7-10K oneway PHL-LHR – was not justified by the relatively short flight duration (6-8hrs).

Last night’s flight reaffirmed that point: even with an hour delay at PHL, we caught strong tailwinds over the Atlantic and made the trip in 6 hours and 10 minutes, landing just after the scheduled arrival time. Having barely slept the night before due to a class assignment – which incidentally had to do with international airline passenger volumes – I was prepared to board the plane and pass out in my seat in World Traveler (WT, BA’s economy class product). As it would happen, I received a complimentary upgrade to World Traveler Plus (WTP), a step-up from regular economy class featuring wider seats, greater pitch, more legroom, and business class service (along with USB ports, which are for some reason not available at all seats). In my mind, WTP is the best class to fly on a shorter transatlantic route like PHL-LHR, since it offers the 75% of the comfort in business class at maybe 50% of the cost. As an example of the increased service quality in WTP, here’s the menu we were offered on the flight, a three-course meal with a selection of wines more extensive than the standard “red or white?” option given in regular economy (which, I should add, is still one of the luxuries of flying BA as opposed to its American peers).

World Traveler Plus menu on BA66 (December 17, 2014)

WTP Menu on BA66

At first, it appeared that the delay was caused by the inbound flight not arriving on time. However, even after the aircraft arrived at the gate and passengers deboarded, the expected departure time kept on getting pushed back. I wasn’t too bothered (a combination of being too tired to care, and having linked up with a friend who was on the same flight). Eventually, an announcement came in over the PA system at the gate, informing us that there was a problem with three out of seven onboard lavatories that couldn’t be fixed until the plane got back to home base in London. As a result, passengers were advised to use the restrooms in the airport prior to boarding. It also just so happened that the broken lavatories were all on the left side of the aircraft, where I was seated. Terrific.

The whole incident had me thinking: what could have possibly gone so wrong that they couldn’t fix it in Philadelphia? Without getting into the specifics of sewage systems, I decided to take another angle at the problem: by looking up the tail number of the aircraft scheduled for the flight, G-ZZZA (shown in the main photo above). I found a unique history to this specific Boeing 777-200 aircraft. When it was delivered to BA on May 20, 1996, G-ZZZA was only the sixth 777-type aircraft to roll off the Boeing production line. An 18-year veteran of the BA fleet, the aircraft was originally painted in BA’s iconic “Landor” livery, featuring the airline’s heraldic crest. Indeed, I found several photos of G-ZZZA with this livery in the late 1990s – shown below – before BA made a well-known public relations blunder that involved changing its tail logos to a series of artworks representing what management felt was a more cosmopolitan, international image. The airline has since switched back to a more traditional image with the British flag on the tail, and although I like the current livery, my personal opinion is that they should bring back the retro Landor look.

G-ZZZA: Then

G-ZZZA: Then



Why would I care so much to look into the detailed history of a single aircraft? I think the history tells us a lot about this mammoth of a plane. It strikes me as incredible that the plane I flew in last night has gone through so many iterations of re-branding over the course of its life. G-ZZZA and its two sister planes, all 777-200s delivered to BA in the mid-1990s, are referred to by aviation enthusiasts as the “ZZZs.” Prior to being fitted with BA’s modern interiors and luxurious cabins in 2013, the three planes were often scorned by frequent travelers and referred to as “old crates.” Speaking about G-ZZZA specifically, one traveler said: “[I] was on it [in 2012] in Club World and it was the worst BA plane I’ve been on, with shabby seats, ventilation panels falling off, and terrible loop In-Flight Entertainment.” After seeing the inside of the plane last night, I could have never imagined it in such a state – in fact, if I hadn’t looked up the tail number, I might have been inclined to think that the aircraft was a 2000s-era model. Although it might not be the best comparison, I found photos of the first class cabin on G-ZZZA in the old and new styles:

G-ZZZA: Old First Class

G-ZZZA: Old First Class

G-ZZZA: New First Class

G-ZZZA: New First Class

I suppose the point I’m trying to make here is this: you can teach an old dog new tricks, but some things are inevitable with age. Last night’s lavatory problem may serve as a good example of the toll that 18 years of daily long-haul service takes on a flying machine like G-ZZZA. No matter how much grooming you give it over the years – hundreds of coats of paint, plush new interiors and upholstery – eventually, time is going to catch up to it, and the stress of old age will show up in ways that you can’t hide. One day, G-ZZZA will be deemed unfit to fly, and will be sent to one of the famous “boneyards” in the deserts of Arizona to live out its final days. Such was the case with G-ZZZE, a non-BA 777-200 that was disassembled in 2006. That’s just the nature of the business – in an industry driven by fuel efficiency and passenger capacity, the ZZZs will eventually be replaced by bigger, faster, and more cost-effective planes. It’s a trend that has already begun with the Boeing 747, an icon of the Golden Age of jet aviation, now slowly being phased out of airline fleets around the world. Rapid development in aviation, exemplified through new planes such as the Boeing 787 and the Airbus A350, continues to accelerate the aircraft life cycle.

When you look at the sheer pace of development, there’s a lot to look forward to for commercial aviation in the upcoming years. At the same time, it’s easy to forget aircraft that truly revolutionized the industry. The Boeing 747 changed the way the world looked at long-distance travel. G-ZZZA and its sister planes featured high-tech glass cockpits unlike those ever used by pilots, as shown below. Their impact to modern aviation is undoubtable: every new plane that appears in today’s market is a product of the technological expectations set by the Boeing 777. This is the reason why BA remains one of the largest operators of both the 747 and 777 – the sheer reliability and track record of the plane justifies a small trip to the mechanic [veterinarian] every now and then.

As a result, when I fly a plane like G-ZZZA, I don’t see a rusty and outdated dinosaur.

I see an old dog with new tricks, slowly feeling the burdens of time, but just as loyal and reliable as in its glory days.

G-ZZZA: Cockpit

Peter Smart's Idea for Rethinking the Boarding Pass

“Rethink the Airline Boarding Pass” (Peter Smart)

NB: This post was updated on 04-Jun-2016 to remove the photo of my British Airways boarding pass. Although the flight is in the past, I’ve read that it can be dangerous to post boarding passes online as the data contained within the QR code can still be accessed. Speaking of improvements to airline boarding passes, maybe we should be talking about boarding pass security!

I came across the following idea blog by Peter Smart, an award-winning designer from the UK. He proposes a new way of printing airline boarding passes, which are at present unwieldy and complicated. By identifying the three core user groups for boarding passes – passengers, airline staff, and machines – he offers a simplistic design that provides equivalent (if not significantly improved) information quality and format when compared to the existing product.

One constraint that is not completely addressed is colour. While Peter states that the “solution must be printed using only black ink to use existing boarding pass printers and not increase cost implications of printing,” the final designs shown on his website and above make heavy use of colourful airline logos and formatting. However, I don’t see this as a negative – in fact, I think that having colour on boarding passes adds vibrancy and allow airlines significant branding and advertising opportunities (which would likely compensate for the additional cost implications of colour printing).

I think that Peter’s idea is simple, yet fabulously efficient, and I would love to see airlines implement it. My preferred airline, British Airways (BA), has already rolled out a sleek mobile application which has functionality with Apple’s Passbook application. Here are some screenshots of the BA iPhone application:

British Airways Mobile Application - Launch Page

Launch Page

British Airways Mobile Application - Homepage


However, it still makes sense to print paper boarding passes like those suggested by Peter. Firstly, many airlines still don’t have the streamlined mobile interface that BA does. Even for those airlines that allow passengers to print their boarding passes at home, most offer the “collect at the airport” option. I personally always choose this option, since I’d rather not bother printing at home when I could have it done for me at the airport by either an attendant or a machine kiosk – and either way, I usually have to check in a suitcase, so I don’t really save any time by printing at home. Besides, a boarding pass printed at the airport feels much more official than a thin sheet of paper, and my Passbook ticket won’t show my flight’s gate number (it also has some problems with my name, as shown above). Peter’s design can be printed using the existing ticket cardstock, allowing airlines to provide customers an aesthetically-pleasing and efficient boarding pass with the marketing advantages discussed above.

In “Good Ideas and How to Generate Them,” Barry Nalebuff and Ian Ayres explain that there are two simple methods for idea generation: problems in search of solutions, and solutions in search of problems. The former is the most intuitive for the individual entrepreneur to apply – by identifying a problem in the world and crafting a tailored solution to it. Certainly, it would seem that Peter’s redesigned boarding pass came about as a result of this approach to idea generation. In the idea pitch, he first describes the many inefficiencies of the current boarding pass. By placing the reader in his shoes as a frequent traveler, he makes us “feel [his] pain,” which helps us become aware of and internalize this problem.

Furthermore, Peter raises a cost-related constraint to his design: the need for the ticket to be printed in black and white. However, as discussed before, the final design ended up breaching the limitations of this constraint with good reason. In the absence of the colour constraint, Peter’s process represents what Nalebuff and Ayres call the “What Would Croesus Do? (WWCD)” tool. Named after a “supremely rich” 6th century Lydian king whose name has become synonymous with wealth, the WWCD approach stresses idea generation without any cost constraints. Practicality and affordability are not primary concerns in the idea generation phase, although they may later be important in the design and implementation stages. Breaking the colour constraint has ultimately allowed Peter’s concept to take on significantly more aesthetic (and potentially advertising) value than afforded by a B&W design.

In Peter’s words, “These ideas are the result of 14 flights, 14 boarding passes and one, simple question: “How could this experience be better? The solution is by no means perfect and further iterations will see greater levels of refinement. However, as designers our aim should be to question what is otherwise accepted – a relentless mission to better, simplify and improve the experiences of other people. Innovation starts with a natural distrust of the status quo. When you’re prepared to start asking simple questions of everyday things – the world is suddenly full of possibilities.”

The approach to both runways at San Francisco International Airport (KSFO).

The Failure of Crew Resource Management (CRM) – Part III

Part III: Asiana Airlines Flight 214

This is Part III in a series of blog posts on “The Failure of Crew Resource Management.” Click here to read Part II. 

NB: The following post is adapted from a script for a TED-style video talk that was submitted in Dr. Adam M. Grant’s Management 238: Organizational Behavior course (Fall 2014). Special thanks to Harikrishnan Joy, who was my teammate in research and execution of this project. We conducted an analysis of the Asiana Airlines Flight 214 crash in 2013 through the lens of the Hackman and Ginnett research presented in Part II. In order to paint a picture of what happened in the cockpit on that day, we listened to the tapes stored by the plane’s cockpit voice recorder (CVR). We later found the official NTSB report and CVR transcript and acknowledge several omissions in our own transcript that were picked up in the NTSB’s detailed audio analysis – so please forgive what may at times appear to be a dramatization from the original events.

July 6, 2013. Asiana Airlines Flight 214 is on final approach into San Francisco International Airport. The hot California sun beats down on the Boeing 777’s aluminum exterior. It seems like a pilot’s perfect day – light wind, no precipitation, maximum visibility, no wind shear. At the controls is Captain Lee Kang Guk, a 45-year-old with 9,793 flight hours under his belt and completing his required Initial Operating Experience training. It is Captain Kang Guk’s first time landing the Boeing 777 aircraft at San Francisco International, an airport notorious for its seaside runway requiring an approach pattern over the Bay. It is also his first time flying with the gentleman in the right seat, Captain Lee Jung Min, a 48-year-old Asiana veteran with 12,387 flight hours. As the highest ranking pilot on board, Jung Min has the title of “Pilot in Command,” assuming responsibility for the safety of the 291 passengers and 16 crew on board. Although this senior position would have generally placed him in the left seat of the cockpit, on this flight Captain Jung Min also serves as a “checkride instructor” tasked with evaluating Captain Kang Guk’s performance. Behind both Captains is their subordinate First Officer, Bong Dong-Won, 41 years old, and seated behind the cockpit in the cabin is yet another Captain, Lee Jong-Joo, 52 years old.

As the plane passes through 1,700 feet and three miles out from the airport, Captain Jung Min notes that the airspeed is too high. This leads Captain Kang Guk to disengage the plane’s autopilot and set the engine thrust to idle, which causes the plane’s onboard computers to switch the automatic throttle into a “Hold” setting. Although both pilots expect this, Captain Kang Guk appears to misunderstand this feature of the autothrottle, believing that it would hold the plane’s airspeed at a desired level, when in fact the plane was now responding purely to his controls. As a result, the plane begins to sink below its intended glide slope to the runway. About two miles out from the runway, First Officer Bong Dong-Won alerts both captains to the unusually fast descent, by calling out “Sink Rate, sir”.

No response.

“Sink Rate, sir” he repeats.

No response.

One final time: “Sink Rate.”

No response.

Finally, at around 1.4 miles from the runway, Captain Kang Guk responds to this warning and begins pulling the plane’s nose up – and with the engines still at idle, this action causes the plane to slow even more. At eleven seconds before impact, the airspeed warning in the cockpit begins to ring. Four seconds later, Captain Jung Min appears to take control of the aircraft, pushing the thrust levers up to maximum. Air Traffic Control, noticing the plane’s unusually low altitude, calls out: “Asiana 214, go around.”

It’s too late.

At 11:27am and 50 seconds, Asiana 214 slams into the seawall at the end of the runway. The plane tears apart, making a 330-degree spin before smashing into the ground and catching on fire. Three passengers, Chinese students on their way to summer camp, are killed.

Crew Resource Management, or CRM, is a set of training procedures that focuses on decision making, leadership, and communication between pilots in the cockpit. The CRM concept was developed in response to the United Airlines Flight 173 crash in 1978, where two pilots failed to work effectively together in troubleshooting a mechanical problem. In a 1990 study on pilot interpersonal behavior, Robert Ginnett found “repeated evidence of poor crew work resulting in errors, accidents and incidents…” Following the crash, United Airlines revamped its crew training program, and CRM has since become the global standard for airlines. A 2014 study by Ford, Henderson and O’Hare in the Journal of Safety Research claims that CRM increases safety by reducing communication barriers in the cockpit and decreasing the traditionally hierarchical and authoritarian relationship between senior and junior pilots. This is evidenced by several pilots’ first-hand accounts of various accidents. As Captain Al Haynes (of the UA232 Sioux City incident) states: “…we had 103 years of flying experience there in the cockpit, trying to get that airplane on the ground, not one minute of which we had actually practiced, any one of us. So why would I know more about getting that airplane on the ground under those conditions than the other three. So if I hadn’t used [CRM], if we had not let everybody put their input in, it’s a cinch we wouldn’t have made it.”

What happened on Asiana 214 is a clear example of the failure of CRM. As pilot in command, Captain Jung Min failed to take any overriding action or make any commanding statement until it was too late. Caught up in an unbiased evaluation of Kang Guk, Jung Min may have been reluctant to intervene. Even more shockingly, both captains neglected the first officer’s repeated warnings. Kang Guk later said that it was “very hard” to make the decision to abort the landing, given the deference shown to superiors in Korean culture. By misinterpreting Jung Min’s silence as a sign of approval from a senior pilot, Kang Guk failed to act decisively even when he felt uncomfortable with the landing. And perhaps there was an element of face-saving – he didn’t want to look weak in the eyes of his superior by heeding a junior’s warnings. Furthermore, First Officer Dong Won may have been reluctant to speak up in the face of two senior pilots. His first two warnings contained the respectful suffix “Sir.” His third warning did not and was more authoritative in nature. Unfortunately, this came too late.

In an interview called “Why Teams Don’t Work”, J. Richard Hackman claims that many teams consistently underperform their potential. From his research, small teams who stay together for a long time perform the best. In the context of flight crews, the NTSB found that 73% of incidents occurred on a crew’s first day of flying together, before having the chance to learn how best to operate as a team. A NASA study found that fatigued crews who had a history of working together actually made about half as many errors as crews composed of rested pilots who had not flown together before. Hackman points out that while crews are cycled in and out due to financial and efficiency constraints, this often comes at the expense of team effectiveness. Decreased communication and less support break down positive team dynamics. Hackman found that the Strategic Air Command, a Cold War nuclear bomb squad, had teams that trained together and performed better than any other flight crew ever studied.

In Hackman’s eyes, there are 5 things for building an effective team. Teams need to have:

1) Realness

2) A Compelling Direction

3) Enabling Structures

4) A Supportive Organization

5) Expert Coaching

In addition, the use of a deviant, such as junior pilots speaking up, helps propel an effective team.

Moving forward, we suggest altering the process by which CRM is implemented. The breakdown of teamwork and communication between pilots can be disastrous. Even with CRM implemented, there have been many examples of improper decisions being made due to factors such as cultural norms. It’s critical for CRM training programs to explicitly acknowledge these teamwork impediments through the lens of previous failures. By using Hackman’s principles, we hope to see safety standards greatly improved and CRM failures reduced.

On Saturday, March 8, 2014, Malaysian Airlines Flight 370 disappeared while flying from Kuala Lumpur to Beijing. Although we do not know yet what happened to the plane, the dynamics in the cockpit that day will certainly be interesting to analyze in this organizational behavior context. Teamwork takes more than simply having a group of people; in the case of airlines and especially crises, a successful team needs to train together, stay together, and deal with the situation together.

Best Friends or Worst Enemies?

The Failure of Crew Resource Management (CRM) – Part II

Part II: An Evidence-Based Approach to Analyzing Failures of CRM

This is Part II in a series of blog posts on “The Failure of Crew Resource Management.” Click here to read Part I.

Continuing on my previous post, I looked into the surprisingly vast body of academic research on Crew Resource Management (CRM), and settled on two research works.

I’d first like to examine the work of J. Richard Hackman, a leading organizational psychologist and mentor to my own professor (Dr. Adam M. Grant). Dr. Hackman “spent a decade of his career studying how to improve the effectiveness of airline crews.” Below is an Harvard Business Review interview with Dr. Hackman entitled “Why Teams Don’t Work,” along with a link to his namesake publication.

Why Teams Don’t Work – J. Richard Hackman, Harvard University

Harvard Business Review interview conducted by senior editor Diane Coutu:

Original Work:

Dr. Hackman’s research is really interesting – I remember learning about his Job Characteristics Theory in MGMT104: Human Resources Management (Fall 2013). I didn’t realize that he had spent so much time researching airline crew effectiveness. In particular, I found it really fascinating that two pilots will only work together as a team every 5.6 years. On one hand, this completely makes sense – in the race for pure efficiency and cost savings, airlines need to have their pilots be transferable to different routes and aircraft at a moment’s notice. A good example of an airline that really buys into this mentality is Emirates – I recall watching a documentary about their new hub airport in Dubai, where everything is timed to the second to ensure that unnecessary costs are not incurred. I wonder, though, if this drive for financial efficiency is implicitly exposing the airline to safety risks – and not the usual physical/engineering risks afflicting airlines, but rather risks related to the way their crews function together. Dr. Hackman would certainly say that the airline crews need to stay together to achieve the best performance as a team. At the same time, a good team requires a strong leader to ensure that group members don’t get complacent. Finding that balance between “individual autonomy and collective action” is especially crucial for pilots – and in the case of Air France 447, the individual decision of one co-pilot was at complete odds with the actions of the other co-pilot and the captain.

The Hackman paper is great context for the next reading, which is written by Robert C. Ginnett, a former Senior Fellow at the Colorado-based Center for Creative Leadership. Dr. Ginnett wrote a chapter entitled “Crews as Groups: Their Formation and Their Leadership” for the academic publication Cockpit Resource Management (Wiener, Kanki, Helmreich, 1993).

Crews as Groups: Their Formation and Their Leadership – Robert C. Ginnett (LinkedIn)

“Cockpit Resource Management (1993), Chapter 3:

One of the examples given in the reading involved United Airlines Flight 173, a DC-8 aircraft that crashed in 1978. I shared this with my grandfather, who worked on this type of aircraft in the 1970s and recalls the incident. He was able to shed some technical insight on the crash – and in particular, he noted that many of the problem with the DC-8 aircraft (including a conditionally-faulty fuel gauge) were widely known by ground engineers but largely ignored by pilots. All in all, it was the failure of the crew to stay cognizant of, prevent, and then respond to the technical fault that caused the ultimate breakdown in teamwork and resulting crash. What happened 31 years later with AF447 is almost identical.

This is Part II in a series of blog posts on “The Failure of Crew Resource Management.” Click here to read Part III. 

"Inside the automated cockpit of an Airbus A330—like the one belonging to Air France that crashed into the equatorial Atlantic in 2009." -Vanity Fair, 2014

The Failure of Crew Resource Management (CRM) – Part I

Part I: “The Human Factor” – Air France Flight 447

Over the past few weeks, I’ve been discussing the following article with Dr. Adam M. Grant, my professor for MGMT238: Organizational Behavior (OB). It’s an analysis of the 2009 crash of Air France Flight 447, and is truly a captivating piece of journalism. By reconstructing the plane’s last few hours (based on cockpit voice recorder data), the article discusses the failings of an organizational behavior system in helping to prevent this disaster.

The topic of OB as it pertains to aviation/aerospace is beyond fascinating to me – and it’s something we touched on briefly in class a few weeks ago when discussing the 1986 Challenger space shuttle disaster. Here are my preliminary thoughts on the topic.

The concept of Crew Resource Management (CRM) became widespread across airlines in the 1990s. The idea was to encourage junior pilots to speak up when they felt that their senior captain was making a wrong decision. At the same time, massive technological advances meant that these junior pilots were not receiving the same quantity or quality of flight experience as their seniors (many of whom had flown for their countries’ air forces or had otherwise received intensive “fly-by-stick” experience when this was the norm). This automation in modern aircraft was designed with two fundamental expectations: a) that CRM is practiced by all pilots present in the cockpit, and b) that in the event of a technical failure, “pilot knows best.” As a result, you have planes that require pilots to communicate very effectively and fly the plane completely manually in an emergency. In the case of Air France 447, neither of the junior pilots were truly comfortable with the aircraft – indeed, the article notes that each pilot only had 4 hours per year of actual hands-on-stick flying time – but they assumed that the built-in autonomy would take care of them. This was combined with an unusual deference of the junior pilots to the senior captain, and a complete breakdown of effective communication. The CRM model failed, and the results were catastrophic.

I notice an interesting pattern between the events described in this article and a more recent crash: Asiana Airlines Flight 214 in 2013. The planes involved in flights 447 and 214 – an Airbus A330 and a Boeing 777 respectively – were both introduced in the early 1990s. Both aircraft were products of the same technological expectations described above, and both crashes involved some failure of the pilots to communicate effectively and respond adequately to the plane’s autopilot. Furthermore, the article mentions how the breakdown in CRM may be caused by cultural norms, and for this reason I wonder if the deference to one’s elders rooted in Asian culture may have in some way played a role in the Asiana tragedy.

This is Part I in a series of blog posts on “The Failure of Crew Resource Management.” Click here to read Part II. 

There's a reason British Airways doesn't operate these anymore...


I am re-designing my blog to position it for my upcoming independent study in aviation entrepreneurship and finance, as well as for future posts on any of the millions of topics that interest me. The posts below are idea analyses and reflections from my Management 230: Entrepreneurship class in Spring 2014. The first post is a reflection on my team’s final venture project, Recover-All, which was effectively a healthy snack product. The venture didn’t come to fruition due to several reasons discussed in the post, but it was still a great experience in idea generation, identifying a target demographic, testing the waters, and implementation. The posts before that relate to an idea I had for building a flight service on the Pune-Bombay route in India called Helios Air (using helicopters, which I quickly discovered were ridiculously expensive to operate). The calculations were quite back-of-the-envelope but once again, it was a great first-round experience in idea generation and preliminary testing.

Recover-All: Team 110 Entprentice Exercise, 2014

Lessons in Entrepreneurship: Reflections on the Entprentice Exercise


I had the chance to catch up with Professor Wry on Wednesday to discuss a common interest of ours: microfinance. Over the last few years, I have built a microfinance portfolio on, making $25 loans to entrepreneurs across a variety of industries in emerging markets. It’s always empowering to see how far my $25 goes towards helping these businesspeople achieve their dreams – but I always remember that my investment is only a small fraction of the large pool of crowd-funded capital received by each entrepreneur. For this reason, I was rather shocked when Professor Wry gave each team $20 in convertible debt at the beginning of the Entprentice exercise. I wondered: “How could we possibly expect to turn this measly startup capital into thriving retained earnings?”  My skepticism soon disappeared, once I realized how much our team could truly achieve by applying several rigorous analytical frameworks to ideate and implement our venture.


The Team

I would be remiss not to acknowledge my team members before diving into the major aspects of the Entprentice. I had previously worked with Sean Murphy for Management 100 in our freshman year, so I knew a lot about him from both a personal and professional standpoint. And it didn’t take long for me to get close with TJ and Quincy, as they are both incredibly personable, witty and intelligent people. We had the misfortune of losing one of our team members, Larry, shortly before the end of the drop period. While this was slightly demoralizing for the team, we came together and pitched in to fill the gap left by Larry. Altogether, our team was incredibly diverse, and this provided a unique set of perspectives as well as a wide range of on-campus networks to use when implementing our project.


Idea Generation: Strategy, Challenges and Reflection

Given our team’s dynamic personalities, we approached idea generation with great enthusiasm. However, we soon found ourselves stuck in the ideation trap: wanting to create the next Venmo, but only coming up with ideas for grocery stores. It was a good idea to utilize various frameworks from the course readings in order to broaden our thinking. In particular, Nalebuff and Ayres’ “What Would Croesus Do?” theory allowed us to recognize the global trend of students become a) more health-conscious and b) more stressed about their time-constrained lives. Our strategy became centered on addressing the need of students to fuel their constantly moving (and often unsustainable) lifestyles. Thus, Recover-All was born, and our team launched the venture with boundless optimism for where it might take us.

In retrospect, however, it seems that our approach to idea generation restricted us and almost ensured that we would not end the Entprentice with the highest retained earnings. Using the “Croesus” theory – an approach that encourages idea generation without monetary constraints – led us to choose a business idea that involved significant costs compared to the other ventures. Looking back at the Entprentice, we can see that the highest-performing teams excelled because they had little to no costs. A prime example is the “Penn Portraits” team, which consisted of a skilled photographer and did not need to invest in a camera nor pay for the use of prime locations on campus. Even Selfie Straws, which had to produce physical goods, was able to manage its costs effectively by gauging customer demand before placing any manufacturing orders. By comparison, we lacked this ability to determine demand for Recover-All prior to purchasing the raw materials. As a result, we were frequently left with leftover inventory and sunk costs – often times of perishable goods, such as bananas – when sales did not match our expectations.

If we were to complete this exercise a second time, I think that we should have approached idea generation with a different mindset. Prior to using the “Croesus” framework to come up with the idea for Recover-All, we had focused on coming up with a business idea that did not necessarily address an existing problem but, if properly executed, would create a need for itself. Ironically, this “Solutions in Search of Problems” or ignorance management approach led us to an idea very similar to Penn Portraits: we wanted to use TJ’s photography skills to help Wharton students take professional LinkedIn-style photos. Recognizing that people inherently love to be photographed, we hoped to create a market where people would see us on Locust Walk every few days and want to “renew” their photo for LinkedIn or any other social media platform. However, we readily discarded this idea because we felt it lacked originality, and we feared that there would be too much competition for similar services. This is an important lesson about entrepreneurship: you are not required to have the most revolutionary business model. While venture originality definitely provides a distinct competitive advantage, there are numerous other ways to differentiate yourself in what appears to be a mature market – for instance, by being “faster, better, and cheaper” than the competition. We approached the Entprentice wanting to create a “high potential” business similar to our individual ventures, but it was unfeasible to roll out a brand new product and turn a large profit in such a short amount of time. The most successful Entprentice ventures used existing products and services, and by taking advantage of low cost barriers to entry, accessed new markets of customer demand. Perhaps if we had entertained the simpler photography venture idea, we would have saved significantly on costs and turned a much higher profit.


Venture Implementation: Strategy, Challenges and Reflection

Although Recover-All was a relatively successful product (with final retained earnings of $157.00), we faced several challenges in implementing our venture. In general, our response to these problems was appropriate, but did not align with our overall strategy of being “faster, better, and cheaper” than our competition. A prime example is the initial dissatisfaction expressed by our customers towards several items in Recover-All. In our survey for Challenge 1, many respondents suggested that we remove the water bottles from the package, citing environmental concerns along with the readily available water fountains on campus. In addition, many students felt that adding a bottle of Gatorade or other energy drink would raise the package’s intrinsic value. However, we had invested a lot of our startup capital into water, and thus we didn’t have the cash to buy Gatorade in bulk until Challenge 3. Meanwhile, we still had a surplus of water bottles, which we were forced to continue selling as part of the package. This was detrimental to our brand image, because customers didn’t feel as if we were adapting to their preferences quickly enough.

If we were to complete this exercise a second time, I think that we would need to better manage our inventory. As discussed in Idea Generation, above, the best Entprentice ventures were able to estimate demand prior to incurring any production costs. This was hard to achieve with Recover-All because we needed to show our customers a tangible product in order to convince them to buy it. However, we could have created a minimum viable product using items from our personal pantries (it’s not too hard to find a water bottle, a pack of Oreos, and a granola bar lying around). Then we could have showcased this MVP for one or two days at the start of the project, and directed potential customers to a landing page where they could express their interest in buying Recover-All, as well as any comments they may have. Based on these “pre-orders,” we would buy just the right amount of each product, minimizing both initial costs and inventory surplus. In addition, this MVP could have helped us test the core “must-have” features of our product, and we could have used the money saved to dynamically adapt to the customer’s preferences. This is something that could also be achieved by simply creating our venture’s Facebook page at the very beginning of the project, instead of during Challenge 2 – after all, being millennials, we didn’t have to wait until the “Marketing” class to know that the most basic advertising medium is Facebook. Thus, determining customer demand and forecasting our inventory needs earlier on in the project would have given us more flexibility in the start-up phase.

Addressing our marketing strategy in particular, I believe that my idea for the “dual station flyering” tactic (discussed in Challenge 2) provided additional value to the venture. However, this tactic, although unique, did not raise sufficient awareness about our venture – indeed, we only received 5 flyers in exchange for a $1 discount at the actual sales station. Although we distributed 120 flyers, we were unable to make a widespread impact because students tend to disregard and throw away flyers shortly after receiving them on Locust Walk (something I know from personal experience). Instead, we should have dedicated our resources to mass marketing, as this would have reached a wider audience and driven greater sales without the discounted price. The same goes for a sales tactic used by one of my teammates, Quincy, who regularly discounted the unit price by $1 “just to make the sale.” Although these tactics certainly drove additional sales, they were ineffective at raising sufficient awareness of our venture to justify the discounts offered.

The discounts offered as part of our marketing strategy highlight yet another challenge to our venture: keeping track of the financials. As with all retail businesses, it is incredibly important to keep track of sales as they are made. However, since each of us played the role of individual salesperson, it was difficult to tally up the sales unless we were all in one place at one time. Considering myself quite skilled with Excel, I created a spreadsheet to record the sales, and shared this with the team through GoogleDocs. However, it was difficult to ensure that people actively updated this spreadsheet as sales were made. When it came down to calculating retained earnings at the end of each period, it became a nightmare for me to reconcile the cash that Quincy had been collecting with the number of sales recorded – in part due to the fact that certain sales were also made at a discount. In the end, we had $5 in unrealized gains because recorded sales exceeded cash by one unit. This problem could have been easily avoided with a bit of task management – by putting one person in charge of holding the cash and recording sales.

Finally, there was a legal problem that we overlooked, and which a customer kindly brought to our attention during the final challenge: several of the items included in Recover-All were ineligible for re-sale, since we had bought them in bulk. For example, the packets of Oreos we bought at Walmart were originally contained in a large box marked “Not For Resale” (although we only bought individual packets, not the whole box). If we were to continue with our venture, we would either need to a) attain explicit permission from the manufacturers of these products or b) become a channel partner for these manufacturers. In the latter case, becoming a licensed distributor would most likely require us to share profits with the manufacturers, depleting our margin even further. This is a central reason for why we are closing down our venture after the Entprentice exercise.


Key Takeaways and Lessons on Entrepreneurship

The Entprentice has been a great exercise for me to learn about myself as an entrepreneur. As someone who has taken on many leadership roles in several extracurricular activities, this project really opened my eyes to the various types of entrepreneurial management. In comparison to established organizations, which already have a defined vision and merely require the execution of activities and events, startup ventures must both craft a vision and innovate on it to create a meaningful product or service. From a leadership perspective, this involves working effectively with a high skilled management team to apply ‘design thinking’ and drive core success factors.

I explored my own entrepreneurial leadership style while working with Sean, TJ and Quincy in the Entprentice. In terms of ideation, one of my core strengths as an entrepreneur is having a risk-taking attitude. When we were coming up with our venture, I offered several ideas that had a high potential for growth but also required us to spend our entire startup capital at once, with the risk of losing it all if the venture failed. I was willing to pursue these ideas, but my teammates expressed their desire to undertake a more predictable project with at least some guaranteed cash flows. I adapted to this attitude and demonstrated my ability to be cautious of risks by suggesting we keep some of our funds aside as “working capital” for any possible contingencies (although I didn’t speculate as to what these contingencies might be). After seeing how this working capital was insufficient to allow a product switch from water to Gatorade, I learned the importance of building flexibility into the venture’s business model. By tempering my entrepreneurial drive with careful financial planning, I will one day be able to run a startup that pursues its high-level vision while still remaining prepared for any pivots in its business model. Although I may have a high “tolerance for stress and discomfort” (Bhide 9), I should always remember that certain members of my team may not share this temperament and accordingly, my vision may need to reflect this balance of risk tolerances.

I am a results-driven entrepreneur: I like to see tangible actions being performed that lead to profitability and measurable product awareness and virality. While this “powerful bias for action” (Bhide 12) is certainly a positive trait to have as an entrepreneur, I have the opportunity to grow by thinking about the bigger picture. There’s more to success than having an extremely profitable and well-known enterprise, and it is important for an entrepreneur to think about the “goals, strategies, and capabilities” (Bhide 12) of his venture in order to drive its long-term growth. Entrepreneurs must constantly ask themselves about the direction they want for their venture, and whether their business decisions align with, or compromise, their vision. Where profitability is not the main motive – as with many social enterprises – there are a whole host of other concepts to consider when building a startup, many of which can ultimately lead to profitability. By asking myself tough questions about my vision and goals as an entrepreneur, I will hopefully one day create a highly successful venture.

After participating in the Entprentice, I have a much greater appreciation for the men and women whom I’ve been funding on Many of these entrepreneurs wish to start businesses in mature industries, such as clothing retail or entertainment – but I have learned that this is perfectly acceptable and equally deserving of funding as high-potential ventures. At the end of the day, what truly matters to a venture’s success is the entrepreneur’s vision: where they want the business to go, and how they want to get there. A strong, codified vision with testable hypotheses and tangible goals allows a venture to maintain a distinct competitive advantage. I also have gained a deep appreciation for the value of the team in entrepreneurial ventures. Many microfinance loans go to small groups of entrepreneurs who operate in the same space and collaborate to develop their businesses and ultimately repay their startup capital to the original lender. A quote from New Venture Creation really stuck out to me:

“The lone-wolf entrepreneur may make a living, but the team builder creates an organization and a company – a company where substantial value, and harvest opportunities, are created.” (New Venture Creation, p.277)

At its heart, entrepreneurship is all about the individuals that come together to ideate, innovate and potentially revolutionize the world.