Monday, July 20, 2015

The Coherence Premium and Southwest’s Cohesive Strategy

“The Coherence Premium” by Paul Leinwand and Cesare Mainardi presents the idea that coherent companies start by looking inward to identify what they do best, selecting between 3 – 6 capabilities. Then, they develop a strategy for how they will use these capabilities to sell their products and succeed within their particular market. Embedded in this strategy is the recognition that a company cannot be good at everything, but that it is possible to excel in its strengths and base every decision on the capabilities in focus.

The article raised some questions for me. In the authors’ view, which would be better:  A company that identified and pursued its capabilities, but did not yield strong profits as a result; or a company that did not develop a focused capabilities-based strategy, but still reaped high profits? Based on the arguments in the article, I would guess that they would favor the first scenario, but they would argue that an organization will undoubtedly be profitable if they develop and execute a strategy based on their strengths. But is it possible for any organization to reap the benefits of being capabilities-focused? Or will some still fail?

The history of Southwest Airlines exemplifies the coherence premium as one of the factors that set it apart. At the beginning, their strategy was based on unique offerings that other airlines could not claim:  low airfare costs, no first class or assigned seating, punctual arrivals, fast turnaround times at airports, and a genuine customer-focused approach that tried to make flying fun.

Post-September 11, Southwest faced challenges of rising energy costs, new airport security regulations, and continuing to stand out as other carriers lowering their fares and costs. The airline successfully maintained their strategy without increasing fares, and continued to improve their customer service. The “bags fly free” strategy was innovative, attractive to customers, and a financially smart move, as it was another way to stand out against other airlines. In reevaluating their non-assigned seating policy, they remained customer-focused. Expanding northeast and adding service from Philadelphia and LaGuardia airports was an expansion into new geographic locations and types of airports. This new territory did not have to mean that they were unaligned with their core strategy. It was just new locations where they could apply their core capabilities.

Since Southwest’s beginning, they have adapted to the changing market, while still maintaining their core capabilities. Their major decisions, whether in continuing their established operations or introducing new practices, can all be described as focused and cohesive.

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