Wednesday, April 8, 2015

When strategy meets capabilities

Coherence premium is the goal of most companies, where strategies and capabilities are aligned. However, few companies have been successful. Southwest Airlines is definitely a textbook example. With its continuous focus on “efficiency, fun, and low fare”, Southwest Airline is the most profitable company in the airline industry. Its business model has been imitated by many with few successes. With its alignment of strategy and capabilities, Southwest Airline is able to live through the toughest time in the industry and still continues to thrive [1]:

-- Herb Kelleher

How can they become so successful? They develop themselves into the “best-in-class”. The company regards their culture as the most important success factor, and reinforces its culture through continuous improvements in every aspect of business. 

The key asset to Southwest is its “people” culture. Instead of naming the department as “Human Resource”, they use “People” Department. In Stanford Graduate School of Business, a detailed analysis of Southwest’s human resource management shows very distinct HR practices, which focuses highly on personalities. In one story, a top pilot was declined because he treated a Southwest receptionist disrespectfully. They also utilize peer recruitment, which pilots interview other pilot candidate. All those practices enable the company to recruit the right people and maintain its “fun” culture [2]. The company has attracted a large amount of job applicants, and retains the lowest turnover rate in the industry. In 2007, Southwest received 329,000 applications with less than 5% turnover rate. In addition, “profit sharing covers all employees … with the firm for over a year”, and most management positions are promoted internally [2]. All those factors bind Southwest employees as a “family,” where they fight and thrive together. Through their distinct HR practice, Southwest is not only able to provide premium and “fun” customer experience; their recruiting costs are also largely reduced. With more dedicated and motivated employees, the flights are functioned very efficiently.

Another “coherent” practice is their logistic strategy. In order to ensure the on-time service and low cost, management carefully evaluated every opportunity and does not rush into “hot” markets. Rather than blindly seeing the opportunity in Philadelphia and LaGuardia, Southwest discussed the potential effects on their philosophies, and whether they could improve revenues without harming their reputation. When evaluating the option of assigned seats, they experimented, surveyed and listened to their customers. When deciding whether to code-share, they started new partnership with WestJet only after success with ATA. In every logistic decision, Southwest Airline carefully evaluates the consequences and impacts. They avoid losing their coherence premium as they expand to such a size.

From Southwest example, the right approach to sustainable success and growth is to understand organization’s core competencies, find the appropriate market, and become the best in class. Gradually, the competitive advantages give the company stable returns, which again are invested in further improvements.

Work Cited

[1] Johnston Theresa. (2006. April 1st). Herb Kelleher: Manage in Good Times So You'll Do Well in the Bad Times. Source: Stanford Graduate School of Business:

[2] Stanford Graduate School of Business. (2006. April 5th). Southwest Airline.


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