Southwest Airlines is an unusual company. In an industry notorious for losing money, it has achieved over forty consecutive years of profitability. No one else comes close to matching that record. It makes you wonder why everybody doesn’t just copy their model.
Some have, but most can’t, because Southwest’s model is intertwined with its mission. Most air carriers try to dominate routes, but Southwest focuses on being “THE low cost airline” and that drives just about everything it does, from the planes it buys to where it offers service.
Richard Rumelt stresses that good strategy “brings relative strength to bear against relative weakness.” Competitive advantage is far from arbitrary. It does not come from Excel spreadsheets or PowerPoint decks, but from how a firm sees and fulfills its purpose. Great strategy starts then, not with analysis, but from defining and committing to a mission.
The Value Chain
No one has shaped corporate strategy over the past generation more than Michael Porter. His classic, Competitive Strategy, published in 1980, continues to provide the foundation for how enterprises think about how they run their business. At the heart of his framework lies the value chain:
The basic idea is that managers should create advantages along the entire value chain through either operational excellence or bargaining power with suppliers and customers. He also postulated three possible approaches: Low cost, differentiation and niche strategies.
In the airline industry, Southwest would definitely be the dominant low cost player, while Virgin is a good example of differentiation. Regional airlines are following niche strategies. Strategic approaches usually begin as conscious choices, but over time they become ingrained in the culture and operations of the enterprise.
That culture plays a crucial role when the time comes for a strategic shift. Business models don’t last. So when a company hits hard times and management wants to alter is strategic approach, they often find that it’s much harder than simply coming up with a plan and executing it. If the strategy doesn’t align with the mission, the organization will reject it.
Integrated vs. Modular Strategies
Another important element of strategy is the choice between integrated and modular approaches. An integrated company seeks to dominate the entire value chain, while a modular organization seeks to find a choke point within it.
Apple is a classic integrated organization. Steve Jobs was obsessed with controlling the entire consumer experience. From the hardware to the software to even the retail experience, he was adamant that everything should work together seamlessly and he built his company to fulfill that goal.
Bill Gates, on the other hand, was a master at modular strategy. He used Microsoft’s position in operating systems to dominate the entire value chain, even though it only controlled a small part of it. To this day, Microsoft often struggles with consumer products, but makes a fortune in its enterprise and back office businesses.
For the most part, integrated organizations win out in the earlier part of a technology cycle and industries become more modular over time. Automakers, for example, used to be integrated organizations, but now the industry is highly modular. In much the same way, Apple’s dominance in smartphones has been overtaken by Google’s Android.
The New Age Of Ecosystems
More recently, there has been a seismic shift in the strategic environment. Whereas we used to compete in distinct industries with clear boundaries, today business is dominated by open ecosystems. Although Apple is an integrated firm, its App store allowed thousand of developers to enhance its product, without having to coordinate with Jobs or his firm.
This has had a profound effect on how we have to think about strategy. Every media company now must consider Amazon a threat, although Amazon itself is a retailer that competes with Walmart. It also recently launched a Fire phone and is in a pitched battle with Microsoft to win dominance in cloud services.
The result is that strategy is no longer just about efficiencies and capabilities along the value chain, but also widening and deepening networks of connections. In today’s semantic economy, the structure of your relationships is every bit as important—if not more important—than the structure of your organization.
Strategy Is No Longer A Game Of Chess
We usually think of strategy as a rational, analytic activity, with teams of MBA’s poring over spreadsheets. We often forget that strategy has to have a purpose and that purpose is almost always personal and emotive. Herb Kelleher at Southwest, Richard Branson at Virgin, Steve Jobs and Bill Gates all built firms in their own image that matched their own ambitions.
And that matters. It determines what you can and can’t do. Before his death, Steve Jobs commented on how Apple and Microsoft’s different philosophies impacted their capabilities:
You know, because Woz and I started the company based on doing the whole banana, we weren’t so good at partnering with people. And, you know, actually, the funny thing is, Microsoft’s one of the few companies we were able to partner with that actually worked for both companies. And we weren’t so good at that, where Bill and Microsoft were really good at it because they didn’t make the whole thing in the early days and they learned how to partner with people really well.
And I think if Apple could have had a little more of that in its DNA, it would have served it extremely well. And I don’t think Apple learned that until, you know, a few decades later.
Strategy is never created on an empty canvas. While we can make rational assessments about whether we want to pursue low cost, differentiation or an attractive niche and can, through investments and divestments, switch between integrated and modular organizations, the fate of a strategy ultimately hinges on personality and ambition.
Google, for instance, wants to organize the world’s information and everybody who goes to work there is commited to that mission. They can, of course, employ a range of strategies along the way, but altering that mission would be extremely problematic. Most likely, it would throw the entire company into disarray.
Great businesses, in the final analysis, are built by passion. Strategies can come and go, but the mission of the enterprise is fundamental to directing action.
image credit: Wikipedia
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