Southwest, Meet Darwin

In an earlier post, "Dell, Meet Darwin," we looked at how a great pioneer of process innovation was coming to the end of a great run of competitive advantage.  A similar case in point, Southwest Airlines, made the front page of The Wall Street Journal yesterday.  The occasion for the piece was Southwest’s expansion of service to the Denver Airport, a tactic that breaks its traditional formula of low-cost second-tier airport service and puts them in direct competition with an entrenched low-cost competitor, Frontier Airlines, as well as bringing them face to face with a legacy competitor, United Airlines, on the latter’s home turf.

Southwest, to be sure, still has reserves of competitive advantage, not the least of which is a hedged fuel position that is the envy of the industry.  Still, one hears the bell tolling when its CEO, Gary Kelly, says things like Southwest’s core advantage is its performance  in areas like on-time flights, baggage handling, frequency of complaints, cancelled flights.  Baloney.  These things are not core.  They are context. 

The distinction is critical to business strategy.  Core is differentiation in some attribute of the offer that leads to customer preference at the time of a purchase decision.  Context is acceptable performance in all other attributes.  Unlike core, with context, while it is critical not to under-perform, there is no reward for over-performing.  Southwest’s core is price, supplemented with availability and selection—the classic retail formula.  That has not changed.  What has is that competitors are now matching these dimensions of their offer.

The impact of this matching is that Southwest’s core is becoming context. This is the essence of Darwinian dynamics.  No form of competitive advantage can deliver perpetual expansion.  All ecosystems find ways to curtail further encroachment eventually.  The difference between nature and business, however, is that the latter has a stock market.  Public investors call for continued growth—in the case of Southwest, 15% per year.  If and when that growth is curtailed, investors will sock the stock, which, in turn, will sock the employees of Southwest who are all share owners.  That is likely to trigger a whole spiral of negative consequences, so we can be sure Mr. Kelly and his colleagues are deeply motivated not to let that happen.

Once again, we are up against what we call “The Nasty Bit,” the transition from one wave of competitive advantage strategy to another.  The key thing right now is for Southwest to target its next innovation vector and actively begin the process of extracting resources from context to repurpose for core.  This is particularly challenging when the context in question used to be core.  To be sure, there is always the possibility of feathering in the new while gracefully retiring the old to legacy status—but the far more common scenario is to cling desperately to the old until you have a near-death experience, then suffer a cataclysmic shock to performance and stock price, and only then emerge phoenix-like from the ashes as a new entity.  Or not.