Should Southwest Airlines Change?

Source: TripAdvisor

The Wall Street Journal published an interesting article this week titled "Meet the Southwest Superfans Who Don’t Want the Airline to Change." Dawn Gilbertson writes that some very loyal customers do not want the airline to make some of the dramatic changes being considered by management in the face of a push from an activist investor, Elliott Investment Management.  The hedge fund and some other investors would like to see Southwest offer a series of additional benefits and collect fees for those amenities as other airlines do.  Many other airlines generate substantial revenue from those additional charges.  Some of these huge fans of the airline don't want to see these changes.  These loyal customers would like to see Southwest remain committed to its original model.   The hedge fund thinks that Southwest runs the risk of being stuck in the past, tied to an outdated business model.

The situation represents a classic strategy conundrum.  Southwest Airlines became highly successful because it made a series of critical tradeoffs, exemplifying Michael Porter's concept that, "The essence of strategy is choosing what NOT to do."  They didn't offer assigned seats, first class sections, etc.  These tradeoffs not only made Southwest distinctive, but they made the airline difficult to imitate.  When incumbents tried to create new brands to compete with Southwest, they struggled mightily (think Delta with Song and United with Ted).   Southwest used its unique business model to establish a successful low-cost position in the airline industry.  While most others struggled, it produced profits year after year, even during recessions.  Southwest's challenge now is that they no longer have a clear cost advantage in the industry.   Ultra low-cost carriers have lower costs per available seat mile in some cases.  Thus, the problem is not simply that they are missing out on revenue streams others have developed.  They may not have the cost edge that enables lower pricing than rivals and creates a competitive advantage.  

When companies experience slowing growth or other financial challenges, they often feel the pressure to abandon some of the tradeoffs that made them so distinctive.   The thinking goes like this: these tradeoffs limit potential set of customers we can attract, and if we want to thrive, we have to update our strategy to meet changing consumer trends.  All of that makes a great deal of sense.  However, as firms abandon the tradeoffs they have made, they became more and more like other competitors in their industry.   In short, they might just juice revenue and profits in the near term by changing the strategy, but ultimately, the firm becomes less and less distinctive.  Strategy convergence takes place within the industry, and when that happens, industry profits tend to fall.  

Interestingly, Jost Daft and Sascha Albers conducted a study of the European airline industry a decade ago. They studied 26 European airlines from 2004-2012.  They measured the average "distance" between company business models.  They found that the average distance declined by 19% during this time period.  However, they note one exception in the industry:  

"In 2012, a low-cost carrier (Ryanair) again featured the highest average distance (0.4468) to all other airlines. Moreover, Ryanair was the only airline in the sample to increase its average distance and to become more differentiated from all other competitors, while all other airlines were becoming more similar." 

What's interesting about this finding?  Well, Ryanair produced very high profits throughout this time period.  They remained true to a no-frills strategy, refusing to compromise on the bedrock principles of their low-cost strategy.  Many other airlines struggled as their strategies converged with rivals. 

This finding offers a word of caution as Southwest navigates this period during which they are considering changes to the core business model.  They need to cope with changing consumer trends and preferences, as well as new threats from competitors who have changed their strategies in recent years.  At the same time, they don't want to just follow the crowd.  Activist investors should not simply be looking at revenue and profit enhancements in the very near term, but thinking carefully about how the strategy should evolve so as to remain distinct from competitors.  

Customer Experience Hits Rock Bottom

Forrester Research recently released its annual Customer Experience Index (CX Index™) rankings. The results are dismal.   The chart below shows that the index has reached a new low.  

The scores probably do not surprise shoppers who have had some poor experiences lately.  On the other hand, you might be puzzled a bit given that many company leaders talk obsessively about customer obsession.   They appear to be talking the talk, but not walking the walk.  

Why might it be so difficult to elevate customer experience?  Here are a few hypotheses:

1.  Senior executives are extremely detached from the experiences of their everyday customers.  In fact, many of these executives live very different lifestyles than their average customers.  In short, they are out of touch.

2.  High employee turnover makes it difficult to maintain consistent customer service. 

3.  Company resource allocation processes are distorted.  It's often rather simple to quantify the return on investment from initiatives intended to reduce labor costs.  It's much more difficult to quantify the ROI when it comes to projects aimed at improving the customer experience.  Thus, programs aimed at cutting expenses get funded more easily.   

4.  Metrics drive behaviors in ways that harm customer experience. For example, one of my daughters once worked at a large national coffee shop chain.  One key metric focused on the time required to serve customers in the drive-thru lane.  The manager's focus on that metric caused employees to de-emphasize service to customers who came into the shop.   Frustration ensued for customers walking up to the counter. 

5.  Young people working in many retail locations have weak interpersonal skills, in large part due to the rise of the smartphone and social media platforms. During their childhoods, as Jonathan Haidt has eloquently argued, we have seen the smartphone cause a substantial decline in vitally important in-person interaction.  They never developed key skills that come from free play, in person, with other children.  

What Happens When Your Team Adds an AI Teammate?

Source: Getty Images

Bruce Kogut, Fabrizio Dell’Acqua, and Patryk Perkowski have conducted a study to examine how team performance changes when we replace a human member with an AI agent.  In their research project, more than 100 two-person teams played 12 rounds of a video game. For the first six rounds, only humans played the game. For the next six rounds, the researchers replaced one human on each team with an AI agent. Interestingly, they found that performance in the game initially declined when an AI agent replaced a human team member, though performance ultimately bounced back after several rounds of game play. This effect occurred even though the AI agents were actually superior to humans when playing the game individually.  Kogut explained why team performance declined at first:

Despite the AI’s superior individual performance and the fact that bonuses were paid to the entire team if it performed well, 84% of respondents preferred to play with their human teammates. From surveys conducted at the midpoint and end of the experiment, we learned that AI causes team sociability to fall, and that lessens members’ motivation, effort, and trust.

Perhaps most surprisingly, the scholars found that all-human teams adjacent to a team with an AI agent also experienced a decline in performance.  The scholars described this phenomenon as a spillover effect.  What's going on there?  Kogut explained that the AI agent disrupted the environment, perhaps affecting the routines and processes within the all-human teams.  He likened to the impact that losing an employee, or hiring an inexperienced one, can sometimes have on adjacent teams in an organization because of the disruption of usual work routines.  

Companies Learning from Their Histories

Fortune's Phil Wahba has written an excellent article titled "From Tide Pods to Coach bags, how Fortune 500 companies use museums of their hits and misses to drive success."  He documents how business leaders have developed company museums and assigned individuals to serve as corporate historians.  Many firms derive great benefit from these efforts to preserve and highlight important facets of their histories.  What are some of the key uses of these company museums?

1.  The museums keep track of substantial failures, enabling the the firms to heed the lessons of those setbacks in the future.  Moreover, sometimes companies can resurrect failed projects, find new uses for old technology, and simply find that the time is now right for something that may have been ahead of its time.  Documenting and highlighting failures, and not just successes, also sends an important message regarding the culture.  Employees come to understand that intelligent failures are acceptable, and even encouraged, because they represent the type of experimentation that can lead to breakthrough innovation. 

2.  The museums enable product developers to tap into past designs for inspiration, as the Wahba article illustrates by pointing out that designers at Coach enjoy looking back at the bags that were fashion hits in previous decades.  

3.  Executives can dig into the artifacts and records to examine how leaders addressed similar challenges in the past.  Wahba writes that Coca-Cola executives dug into records from the 1918 pandemic when the COVID-19 virus swept across the globe in 2020.  They sought to understand how the company responded then, and what lessons might be applicable in the 21st century.  

4.  Perhaps most importantly, these museums enable companies to highlight the values that they hope will endure at the company.  What aspects of the company culture do they want to highlight for current employees?  How can they demonstrate the company's commitment to making life better for customers, and not just producing profits?  The museums have a role in telling the story of the founders and giving employees a sense of the impact that the organization has made on people's lives.  

In short, history matters.  Companies have much to learn from their past, and investing in telling the story of past success and failure can be incredibly valuable.   It's so important to examine the good and the bad, because people learn very effectively when they can compare and contrast success and failure.