Strategy: Choose to fly north before things go south

In an earlier blog on the importance of thinking in an 'action-biased society', I had talked about the importance of being intentional in life choices. A simple 30-minute morning meditation and then an introspection session, where you play out your day in front of you, decide how you are going to meet possible situations (challenges/opportunities) and what values you will represent, can make a great difference in your life.

The same is true for organisations, which exemplifies the role of strategy. The word is immensely attractive, but tremendously misunderstood. In this blog, we will try to uncover what strategy means, with an interesting case study from the aviation industry.

While mission defines what your organization plans to achieve for its customers, strategy is the critical stage when you choose the paths you will take to accomplish your mission. For a conceptual framework on strategy, we first take a look at how two of the greatest management thinkers of the past few decades have defined strategy and how organisations need to look at it.

Michael Porter, globally renowned professor of strategy at Harvard Business School, defines strategy thus:

Strategy is the set of long term choices that an organization makes to distinguish itself from competitors.

Strategy defines a company’s distinctive approach to competing, and the competitive advantages on which it will be based.

If an organisation’s strategy is not clearly defined, any program, project or division you are a part of is literally working in a disconnected fashion to the rest of the organization. Without a coherent, strategy-driven organizational set up, you have people working hard, with some sense of what they are doing. But they are sorely missing a concrete direction, as well as the synergy and focus that comes with it.

Yes, organisations make plans – maybe quarterly, half yearly or annually. But as it turns out, what companies often call ‘Strategic Planning’ does not suffice in the above definition by Porter of strategy. When we put in plans, they are really a set of actions that you have decided to do.

Roger Martin, Professor Emeritus at Rotman School of Management, University of Toronto, who was ranked #1 by Thinkers50 in 2017, defines strategy thus:

“An integrative set of choices that positions you on a playing field of your choice in a way that you win.”

Inherently, when you make these choices, you have to answer some critical questions. Which playing field do you choose and why? How can you be the best at serving customers in your playing field? How are you going to utilize your resources best to win?

Making a plan or deciding on a set of actions, is not easy in itself. For instance, a hypothetical organization may have an annual revenue of Rs 1 crore, and is targeting a 20% increase in revenues this year. There can be several variables that may affect your achievement of this target. It could be something as basic as a competitor taking over one of more of your key accounts. You may lose some key sales resource (s) during the year that you may not have anticipated. Or there may emerge a larger challenge that impacts the industry as a whole (the recent pandemic being an oft quoted example).

But this is still part of regular organizational planning, where you have a reasonably good control over your resources, objectives and variables. This is the typical scenario that you encounter in a highly competitive market, where a set of players have developed certain competencies, but have relatively little differentiation and are relying on market forces remaining favourable for them to achieve years of sustained growth.

Markets do not function that way, however, especially in the current milieu. Moreover, if you are playing in this kind of cutthroat space, price competitiveness is key, and therefore profit margins are depressed (which may still work provided you develop a uniquely efficient business model). You may be prepared to play the current market landscape. But the difference between good and great companies is that the latter thinks strategically about how they can compete better in the future.

Thinking strategically means identifying a set of desired business outcomes in a market space of your choice – market share, revenues, profitability, etc. and then do your planning exercise.

Strategy is the difference between playing to sustain and playing to win.

It is obviously harder than the conventional approach. You need to have a very strong theory that is backed by sound business logic, but it is much harder to predict success, as it is untested. There are a lot of variables that are not in your control, and more that you may not even know about. Therefore, there will be a lot of improvisation required along the way. Therefore, it will definitely involve pushing your comfort zone significantly. When businesses try a new strategy in the market, it goes without saying that they have to invest sensibly and have adequate back up in case of failure.

A very popular case study in business strategy is Southwest Airlines, currently the second largest airline in the US with 17.5% market share after American Airlines (19.5%). In a market where all the existing players were looking at the same pie and making plans around it, Southwest Airlines (as discussed by Roger Martin in the video below) developed a theory to disrupt the market. It would compete on price not just with other airlines, but all modes of transportation – train, bus, automobile, you name it. They were a front runner in the low cost airline revolution that picked up steam in the 1960s and 70s, later inspiring similar models across the world.

Building this kind of competitive advantage required operational ingenuity in a number of areas. The management of Southwest Airlines had to make a series of choices, both on what they will and what they will not do:

• They decided to do only point-to-point flights rather than rely on the hub and spoke model as standing planes do not make money.
• Only flying Boeing 737s so that the staff gets operationally better at one type of aircraft, thereby improving efficiency.
• Operating only short haul flights.
• No meals on flights.
• No booking through travel agents. Online ticking saved it around 1% of annual ticketing revenue.
• Interestingly, in high demand season, Southwest doesn’t raise fares. Instead it increases the number of flights.
• Turnaround time was around 15 min for 2 out of 3 planes, compared to the US industry average of 55 minutes.

Eventually, a price only strategy can be duplicated by the competition. But since the beginning, Southwest also ensured a strong emotional connect and brand building with its customers in a number of ways. They use the word ‘love’ in their communication to signify how they love their customers. And they promise not just low, but transparent air fares, for which they introduced the term 'Transfarency'.

In an interesting turn of events few years after launch, competitor Baniff international offered a 60-day sale of tickets between Dallas and Houston, offering them at US$ 13 (below than cost) as opposed to Southwest’s US$ 26 fare. Southwest countered with an ad that exclaimed,

“Nobody is going to shoot Southwest out?of?the?sky?for?a?lousy?$13”.?

They?offered?an unusual choice to customers - they could choose to pay either $26 or $13 for exactly the?same seats on Southwest?flights. Those opting for the higher option were rewarded with attractive gifts such as ice buckets or whisky. Eventually, around 80% of customers requested for $26 tickets!??????

Service is a highly people oriented profession, and Southwest Airlines ensures a positive, family like culture in its organization that keeps people motivated for peak performance. Their core philosophy is:

Happy employees = Happy customers = Happy investors

Some of the core tenets of their HR philosophy are:

• Empowering employees to do the right thing for the customer and the company.
• Providing employees with the latitude and support to do what they believe is right.
• Set clear expectations about what the Southwest uniform means, how Southwest employees behave and treat people.
• Southwest believes that employees need to be passionate about their work, which will reflect in how they treat people.

Their people first approach has given them higher scores on a range of important parameters – customer satisfaction, loyalty, productivity, employee well being, low absenteeism, turnover, safety incidents and quality defects.

The leadership engages with employees constantly and even attends new employee orientations. They hire very selectively, prioritizing people who fit their values. It hires and fires for attitude. Further, they invest heavily in onboarding, employee recognitions, strong internal communication that values feedback and having culture teams at all locations.

This kind of company-wide commitment is bound to reflect in how employees interface with each other and the customers, thereby building a powerful brand. For customers flying Southwest, therefore, it is not just a question of the cost benefits, but also a matter of personal satisfaction and pride in travelling with an airline that they respect.

Southwest could have let it go considerably at the operational level, and said, “Well, we offer customers the best rates. What more could they want?” But they wanted to create a space for themselves where they could create strong and sustainable competitive advantage. That explains why, in an industry with such high failure rates and bankruptcies, Southwest has managed to stay among the leaders in the American aviation space.

Interestingly though, Southwest airline has suffered a major backlash last Christmas, when it cancelled 17,000 flights between December 17-31. This happened because, in the company’s communication, of a "weather event," that "uncovered a functional gap in our technology." That left many of its passengers in the lurch and furious. It already has seen a series of cancellations in January and February this year, as well as a slowing growth in bookings, which are attributed to customer ire. And a tongue-in-cheek response in an advertisement from competitor United Airlines in February said, “United got more families in and out of Denver this holiday than any other airline. Despite the weather.” Ouch! That must have hurt real bad!

Well, not everything is a fairytale, and you should never assume that you can foolproof your business, no matter how hard you try. Strategy does not insure you from failure or setbacks, but it ensures your organisation is better prepared for them.

A serious challenge for one of America’s most iconic airline indeed, as it tries to compensate with increased flights to new destinations, reinstate operations and also win back customers. Certainly, it will be interesting to see what counters the airline comes up with in the coming months.