In This Issue:
Southwest Airlines Growth Challenge: Radical versus Gradual Change to Woo Business Travelers
In going from start-up to giant, a company can eventually run out of opportunities to keep using strategies that built its business. To foster further growth, decisions must be made about changing the strategy. Yet, to preserve and further build the company's brand, changes that might reignite growth must be adeptly balanced with what drove the company's impressive track record of success.
Southwest Airlines now faces that kind of challenge. And, what Southwest is currently going through serves to highlight important points about the right way to modify strategy during changing times.
The September 23, 2015 Fortune magazine article "Southwest bets big on business travelers" by Shawn Tully said,"In fact, after years of consistently outsmarting and outperforming the traditional carriers, Southwest is today remaking itself to operate more like them." The article reported that Southwest is adding more long haul routes and trying to attract more business travelers, both of which are the opposite of what built Southwest into the colossus it is today. The article points out that the strategy shift is needed because growth opportunities are changing. Short haul traffic, on which Southwest's success was built, has been declining. And, attracting more business travelers offers opportunities.
This isn't the first time Southwest has been in the media for updating its strategy as growth became more challenging. For example, a few years ago, the media reported that Southwest was addressing this challenge by starting to fly from major airports like La Guardia, rather than sticking with the secondary airports it had traditionally used. Back then, I wrote a newsletter about Southwest no longer being able to grow the way it once did and starting to fly from major, not secondary, airports. Today, as the Fortune article discusses, Southwest is still updating its strategy to deal with its growth challenges.
The Fortune article portrays Southwest's latest strategy changes as a major overhaul. The article says Southwest is radically changing its strategy and that it "plans to fly in a totally new strategic direction." Even the article's title uses words like "bets big" to describe Southwest's new strategy.
Based on my 25+ years researching business success and failure patterns, however, big bets and radical changes generally do not bring business success. I discussed this in my previous writing, such as in my newsletter article, "How Small Bets are Valuable--even for Big Bet Business Models (example-Boeing)" and in my special report/white paper "Evolution, not Revolution." Essentially, more gradual stepwise change is the key to success.
So, how Southwest's strategy updates will fare depends upon whether they will be more gradual and stepwise, rather than radical changes that tear apart the existing brand. And, despite Fortune's portrayal of Southwest's strategy as radical change, from what Fortune describes, however, it looks like Southwest's proposed strategic shift could entail a more gradual, evolutionary approach that has a far better chance for success.
Fortune uses the phrase "they're ambitious" to describe Southwest's plans to attract business travelers. Yet, the article points out that Southwest's so called ambitious plans call for raising the percentage of its customers that are business travelers from 35% to 40%, which is more like traditional carriers' 50%. But, as I see it, there are reasons why boosting its pursuit of business travelers and acting a bit more like traditional carriers may not be so radical for Southwest after all.
The business travel market can be segmented. Southwest can pursue those segments that resemble the business travelers already comprising 35% of its customers. Like typical Southwest customers, these business travelers are holding down costs. They are willing to forgo business travel luxuries such as first class, business class or airport lounges. Yet, to get conveniences they do value, some in this group may be willing to spend more than Southwest's most price sensitive leisure passengers.
Essentially, Southwest may be able to target and attract a lower cost segment of business travelers much like mid-tier lodging brands do. Those mid-tier hotel brands target business travelers that need to hold down costs, but will still pay for some conveniences that the rock bottom discount segment of the leisure market won't buy. So, although this segment of business travelers doesn't spend for the ultimate of luxury, they still can be a more lucrative market than price sensitive leisure travelers. Thus, they can represent opportunity for Southwest.
Since 35% of its customers are business travelers, Southwest may already be serving this lower cost, still willing to pay for some conveniences, business travel market. And, Southwest may already offer them value. Some of them might value the location or smaller size of Southwest's secondary airports. And, of course, business travelers value Southwest's policy of no fee to reschedule a flight. Furthermore, without drastically remaking itself, Southwest might be able to find additional conveniences that serve those business travelers.
Thus, Southwest may be well positioned to increase its revenues by more intensely targeting this segment of business travelers, offering new long haul routes to serve them and, possibly, adding conveniences aimed at them. Doing so does not require radical change to Southwest's brand.
In addition to targeting business travelers, the Fortune article reports that international expansion, particularly to Latin America, represents a growth strategy for Southwest. Here again, this can work if it's more gradual, as I discussed in my recent blog post about the international expansion of WestJet, a Canadian carrier that has grown far beyond its upstart position and flies a Boeing 737 fleet, much like Southwest.
According to the Fortune article, Southwest's CEO "dismisses any suggestion that Southwest is mimicking its competitors" and he emphasizes that Southwest will offer its traditional advantages. As I described above, there seems to be room for Southwest to grow by targeting business travelers in ways that fit its brand. Thus, Southwest wouldn't be strictly imitating the traditional carriers and has the potential to grow without radically changing.
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