In This Issue:
Another Example of Value from Broader, Less Focused Strategy
In the world of business strategy, having a narrow focus and concentrating on a niche are often favored. While this is useful to a certain extent, it is important to understand the advantages and disadvantages of an extremely focused strategy versus a strategy with a lesser degree of focus. During the pandemic, as entire industries were weakened or even completely shut down, the downside of narrowly focusing on a niche in those hard hit areas becomes glaringly obvious.
The airline industry is a good example of how a strategy with a bit less focus can have advantages. Like other pieces of the travel sector, airlines have been harshly impacted by the recent pandemic. Yet, some segments of the airline industry have been hit harder by the pandemic than others. Airlines that relied most heavily on the hardest hit segments are obviously facing tougher challenges. However, most airlines don’t focus exclusively on one narrow niche within their industry. And, it is this bit of broader focus that may bring a little touch of the brighter side to an otherwise struggling industry.
For example, the pandemic drastically reduced business travel. It also severely curtailed leisure travel. However, as some of the pandemic restrictions are gradually eased, the leisure airline business is recovering a bit more than is business travel. Thus, airlines that are more concentrated in the business travel segment can be harder hit by the pandemic than those with a greater mixture of business and leisure travel.
Interestingly, since the business travel segment is often willing to pay higher fares, it has been a very attractive niche from a financial perspective. Yet, as the economic impact of the pandemic gradually improves, the leisure segment can be more attractive financially because it is slowly recovering, much more so than business travel. Thus, airline strategists who chose to focus on the apparently lucrative business travel niche, would not currently see a financial win for their company, compared with those targeting leisure travel. Although leisure travel can entail more discounts and lower margins, it at least may be making a bit of a comeback. Under these circumstances, an airline focused exclusively on allegedly more profitable business travel would be hit devastatingly hard.
Another potential bright spot for airlines is cargo. While passengers are shunning air travel due to the pandemic, cargo often still needs to be shipped. This can add a revenue stream to beleaguered airlines, even though it is not their primary niche. The added revenue during pandemic weakened times illustrates the benefit of being in businesses beyond a narrow niche.
The airlines shift to more cargo is discussed in the September 22. 2020 Wall Street Journal article, “How a Fortunate Few Airlines Profit in a Pandemic: Lots of Cargo” by Eun-Young Jeong. The article says, “When the pandemic hit, it wiped out some 40% of the world’s capacity for air cargo carried in the bellies of passenger planes, according to the trade group IATA. Plenty of airlines looked to fill the gap and boost cargo capacity” during the pandemic.
I want to point out, however, that while the pandemic strongly emphasizes the value of not being tied to a narrow niche, it is still important to be strategic about selecting the various market segments in which the business will compete. Not being narrow does not mean a company’s strategy should be excessively broad. It is important to have a strategy that fits together. Business travel, leisure travel and cargo are diverse sectors of the airline industry, but they still do share operations commonalities.
Furthermore, what is discussed here in light of the pandemic reinforces what I covered in a previous newsletter a few years ago when corporate spinoffs were hot. That newsletter explained how greater focus doesn’t necessarily improve a company’s performance. Additionally, I discussed the topic of less focus using Pepsico as an example in a newsletter earlier this year.
In conclusion, it is important to think through what sectors a company will serve. There are definite benefits to not being spread too thin. For some, this may mean a narrow focus. But, as discussed above, there can be advantages to competing in additional related areas. Since narrow versus broader strategy is not one size fits all, it is important to think through what is right for the company. And, it may not be a narrow focus.
If you’d like help with thinking through how focused your organization should be, just contact us.
La Grange Park, IL