Southwest Airlines: Linking Strategy to Excellence by Abandoning Traditional Practices
Imagine a company that knows what its customers expect and chooses to do the opposite. Ludicrous, you say! Well, this is exactly what led Southwest Airlines to a stunning success in an unpredictable airline industry. Based on historical airline procedures, customers expected assigned seating, but with Southwest, they were given seating options through a first-come, first-serve system. Customers also expected free meals, but instead, received a selection of snacks available for purchase. Furthermore, customers expected their luggage to be transferred from one airline to another, but Southwest refused to participate in this process.
Why would a company do such absurd things? Southwest wasn’t just trying to be different; it had a clear strategy.
In an issue of Harvard Business Review, the guru of corporate strategy, Michael Porter, defines strategy as: “performing activities differently than rivals do.” According to him, this requires “defining a company’s position, making trade-offs, and forging fit among activities.” He goes further in arguing that companies who focus on operational efficiency are playing a losing game. In other words, they are benchmarking and copying the activities of their competitors and simply cannibalizing each other’s profit margins.
Southwest has been a benchmark for its success, experiencing its first quarterly loss in 17 years in 2008. It has dominated the limited point-to-point markets where it does business and has typically traded out about twice the price-earnings ratio of its competitors.
Southwest Airlines’ purpose is:
“To connect people to what’s important in their lives through friendly, reliable, and low-cost air travel.”
The company invests heavily in its culture of friendly associates who are known to take extreme measures to entertain and please customers. In fact, it is even able to achieve low-price ticketing while paying among the highest wages in the industry.
To do this requires a network of interconnected and innovative activities. The core activities are shown in green in the figure below.
These include focusing only on short-haul, point-to-point routes, limited passenger service, high utilization of aircraft, and lean, productive ground and gate crews. A large number of specific activities support these as shown in the more detailed activity system map from Porter’s aforementioned “What Is Strategy” article. For example, lean productive gate crews enable high aircraft utilization, and these together support low-ticket prices. Lean productive gate crews also support frequent, reliable departures, and the combination of reliability and low prices is very attractive to customers.
Thus, strategy by definition involves tradeoffs, and Porter, in fact, says that you cannot have an effective strategy without defining what you will not do. Many companies define what they want to accomplish, but the subtext is to do anything that will earn a profit. In the table below, we list the decisions that Southwest chose to do to support its mission, which required consciously choosing not to do other activities.
The activities that support these strategic choices in turn depend on engaged, committed employees who feel more like part of a team than cheap labor. For example, it takes dedication and teamwork to consistently turn around a plane in about 20 minutes and still maintain a friendly, smiling face for all customers. Yet, Southwest employees came to view challenges as inspiring.
In its formative years, the company had only four planes. To afford staying in business, it had to sell one of them. As a result, it challenged its highly motivated ground crew to turn around a plane in 10 minutes when the process typically took 45 minutes to an hour. The crew had no idea how they were going to do it, but through a series of experiments, they were able to successfully achieve a 22-minute turnaround, enough to keep the flight schedule with 25 percent fewer planes.
Those familiar with lean, and with the concept of the improvement kata discussed in my previous blog posts, will recognize Southwest as an engaged group continuously improving toward a challenge.
Southwest Airlines could have followed the lead of its giant competitors and simply tried to beat them on cost. It could have benchmarked best practices and imitated them. Instead, Southwest chose to develop a real strategy making clear its distinctive purpose and positioning in the market, which included deciding what it would not do. Realizing this strategy was an evolutionary process, it engaged the entire workforce to meet challenges to its very existence. By hiring well, paying well, and developing a culture of fun and engagement, Southwest created advocates in every employee who represent the company philosophy and rally to meet each challenge.
What is it you will not do? Are your employees taking on the most important challenges your business faces to achieve its strategy?
Dr. Jeffrey Liker is professor of industrial and operations engineering at the University of Michigan and author of The Toyota Way. He leads Liker Lean Advisors, LLC and his latest book (with Gary Convis) is The Toyota Way to Lean Leadership.
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