What happened to Southwest Airlines has been a popular topic lately. The airline had the biggest meltdown in airline history with thousands of flights canceled and many passengers and hundreds of pieces of luggage stranded at a number of different airports throughout the US. Even now, Southwest is still struggling to recover from this disaster and attempting to compensate the passengers who were impacted. How did this come about and what can we learn from it?
Southwest Airlines and Boeing are very different companies in very different industries, but I think that there is a common reason why both companies have had serious problems. The problem that both Boeing and Southwest Airlines have had is putting too much emphasis on the bottom-line financials without an understanding of the functions of the company that drive those financials and losing focus on the primary value proposition that the company offers to customers.
- In the case of Boeing, it is engineering excellence
- In the case of Southwest Airlines, it is operational excellence
What Is a Systems Approach to Management?
In 2003, I published my first book which was entitled “From Quality to Business Excellence”. One of the ideas in that book was that companies need to adopt “a systems approach to management”. The diagram below shows a simple model of how this might work:
Many companies like Southwest Airlines and Boeing fall into the trap of taking a brute-force approach to attempting to improve financial results without understanding the factors in the business that drive those results. The value of treating a business organization as a system is that it helps to break down the complexity and provides a framework for understanding cause-and-effect relationships that go on inside the system. Instead of a reactive approach to managing financial results, a company can be much more proactive by managing the factors that drive those results long before there is a significant change in financial results.
What Are Value Disciplines?
Another concept that is very relevant to both Southwest Airlines and Boeing is the idea of “value disciplines”. One of my favorite books on this subject is “The Discipline of Market Leaders” by Michael Treacy and Fred Wiersema. It’s an older book that was published in 1997, but it is a classic that is still very relevant today. The idea behind the book is that companies need to have a clear understanding of the primary value that they provide to customers and design their business strategy around maximizing that value proposition:
“…no company can succeed today by trying to be all things to all people. It must instead find the unique value that it alone can deliver to a chosen market… One point deserves emphasis: Choosing to pursue a value discipline is a central act that shapes every subsequent plan and decision a company makes, coloring the entire organization, from its competencies to its culture. The choice of value discipline, in effect, defines what a company does and therefore what it is.”[i]
[i] Michael Treacy & Fred Wiersena, Discipline of Market Leaders, Addison-Wesley, 1995, Page: xiv – xv
Treacy and Wiersema define three fundamental value disciplines:
1. Operational Excellence
“Companies that pursue this [discipline] are not primarily product or service innovators, nor do they cultivate deep, one-on-one relationships with their customers. Instead, operationally excellent companies provide middle-of-the-market products at the best price with the least inconvenience. Their proposition to customers is simple: low price and hassle-free service. Wal-Mart epitomizes this kind of company, with its no-frills approach to mass-market retailing.”
2. Product Leadership
“The second value discipline we call product leadership. Its practitioners concentrate on offering products that push performance boundaries. Their proposition to customers is an offer of the best product, period. Moreover, product leaders don’t build their positions with just one innovation; they continue to innovate year after year, product cycle after product cycle. Intel, for instance, is a product leader in computer chips. Nike is a leader in athletic footwear. For these and other product leaders, competition is not about price; it’s about product performance.”
3. Customer Intimacy
“The third value discipline we have named customer intimacy. Its adherents focus on delivering not what the market wants but what specific customers want. Customer-intimate companies do not pursue one-time transactions; they cultivate relationships. They specialize in satisfying unique needs, which often they, by virtue of their close relationship with – and intimate knowledge of – the customer, recognize. Their proposition to the customer: We have the best solution for you – and we provide all the support you need to achieve optimum results and/or value from whatever products you buy.” Ritz Carlton Hotels is an example of a company that excels at customer intimacy.”
The theory behind this book is that a company needs to choose one of disciplines as their primary value discipline. They need to at least be sufficient in all three of them but choose one to excel in as its competitive differentiation. The value discipline that is chosen as the primary competitive differentiator tends to define the whole company and its culture. For example,
- A company whose primary value discipline is product leadership needs to create an environment, which stimulates creative thought. These companies are typically dominated by engineers who might wear jeans and sweat shirts to work.
- In an operational excellence environment, there is a lot less room for creativity. At McDonalds, there is only one way to cook the hamburgers and creativity in how they are cooked is certainly not encouraged. They do the same thing repeatedly at a low cost; that is what operational excellence is and it is reflected in their culture. People wear uniforms to work and are heavily trained in doing things the same way all the time.
How Does This Apply to Southwest Airlines and Boeing?
The primary value discipline of Southwest Airlines clearly should be operational excellence; and at one time, they were noted for that. They led the airline industry and rapidly gained market share as an industry leader based on a simple, no-frills approach to delivering reliable, low-cost services to their customers. Customers came to expect reliable and dependable service from Southwest Airlines at a low cost.
Boeing’s primary value discipline clearly should be product leadership. At one time, Boeing was noted worldwide for engineering excellence and product leadership with aircraft like the Boeing 747. The Boeing 747, in its time, was considered to be the “Queen of the sky”. It was the result of engineering excellence; however, engineering excellence alone is not sufficient to drive business results. The foundation of Boeing’s success with the 747 was engineering excellence that was well-integrated into a very sound overall business strategy based on an understanding of customer needs.
- Airbus worked very hard to develop an airliner that was competitive with the 747 which resulted in the A380. However, even though the A380 was a model of engineering excellence, it failed commercially to achieve sufficient market share in the marketplace.
- By the time Airbus developed the A380, the market had shifted away from large, 4-engine airliners like the 747 to smaller, more fuel-efficient twin-engine aircraft like the 787.
What Went Wrong?
In an attempt to improve financial results, both Southwest Airlines and Boeing lost sight of their primary value disciplines and tried to take a brute-force appoach to improving financial results without understanding the factors that drive those results.
- In the case of Southwest Airlines, the company had a massive “meltdown” that has caused many customers to have serious concerns about the company’s ability to deliver reliable and dependable service.
- In the case of Boeing, the 737-Max debacle has caused many people to question Boeing’s ability to develop strong, well-engineered, industry-leading aircraft like the 747.
What’s the Solution?
In the case of Boeing, some people have suggested that the problems were caused by “putting an MBA in charge of the company”. That’s an over-simplification and hiring a person as the Boeing CEO who is an engineer isn’t necessarily the right solution. Both Southwest Airlines and Boeing need to recognize their primarry value discipline and develop a proactive systems approach to management that is designed to optimize the company’s performance around that value discipine.
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