Monday, July 20, 2015

Diluting the Coherence Premium

              Companies that develop a capabilities system and align their product/service to an appropriate market will eventually be faced with choices that threaten to dilute the coherence they’ve built.  Success leads to opportunities to grow in both scale and in scope.  Managing this growth to leverage and build upon core competencies is a critical element of long term strategic planning.  Markets also change and companies need to evaluate if their capabilities system can still effectively compete or if they need to identify new products and services in a market that aligns with their core competencies.

              Southwest was faced with such a decision of whether to expand into the market at La Guardia New York.  They had built their capabilities system around being low cost, quick turn-around, point to point airline and had thrived in the market place.  They expanded to markets that allowed them to leverage these capabilities but as the market changed, they faced more competition and increasing fuel costs.  One of their expansions was into Philadelphia, which presented challenges to their quick turnaround times driving higher costs.  Rather than change their capabilities system to adapt to the challenges presented by this different airport environment, Southwest worked hard to bring their style of operations to this east coast environment.  This worked as relative to other airlines operating from Philadelphia, they maintained their capability of being low cost and quick turn.  In evaluating their decision to bid for the La Guardia time slots, this experience was key since Southwest was able to apply their capability system to a different market environment leveraging instead of changing their core competencies.    The same strategy could be applied to work with the conditions at La Guardia, applying the operating principles of low cost, quick turn to maintain a competitive advantage relative to rest of the industry.
              Companies that do face challenges to their capabilities systems need to evaluate whether they will be able to leverage their core competencies in the new environment, or will the new environment require them to change or develop new competencies.  If the later, coherence will be diluted and at some point, the performance premium enjoyed by the company will disappear.

Ted Anderson, tbanders

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