Lessons from one of the great success stories ... and it's not tech (Part 1)

Whether a 40-something exec or a middle manager, you probably look for insights from big tech: Amazon, Facebook, Google; or the unicorns, Uber and AirBnB.  But do you recognise the name Herb Kelleher?

Yet most businesses in Australia are a lot more like Herb’s old firm than any of the ‘new tech’ firms.  Herb was the founding CEO of SouthWest Airlines, the world’s most successful low-cost airline.  To quote Chip & Dan Heath[1]: “in an industry with only a passing acquaintance with profitability, SouthWest has been consistently profitable for more than 30 years”.  A $10k investment in the SouthWest IPO was worth $10.2M 30 years later: a 26% CAGR.  Few firms match this. 

Herb died recently.  What might we learn from his legacy?  Let’s begin with the business model.  This is a story in two parts: the value proposition and the operating model. 

SouthWest set out to ‘democratise air travel’: to give ordinary people the opportunity to go, see and do extraordinary things.  They set out not to compete with other airlines, but to make air travel competitive with other travel options – rail; bus; drive.  This represented a transformative value shift.  It’s not obvious today, but at the time SouthWest was founded air travel was largely inaccessible to the general population. 

This has parallels with other successful low-cost business models.  Before IKEA the options were low cost furniture that looked cheap; or expensive furniture that would take weeks to arrive.   IKEA set out to offer a wide range of home furnishings ‘with good design and function at prices so low that as many people as possible will be able to afford them’.  A transformative value shift. 

From different consumer sectors, each transformed the value equation.  As Roger Martin[2] observes: theirs were ‘distinctive choices utterly in favour of the customers’. 

This search for transformative value also drives the tech sector.  Peter Thiel, co-founder of PayPal and a venture capitalist writes:

“as a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.  Anything less than an order of magnitude better will probably be seen as a marginal improvement”

The SouthWest operating model has features which are specific to their business.  But there are lessons to be learnt.

It begins with an absolute clarity about their market position.  According to Rudolf Arnheim[3], a gestalt psychologist and art and film theorist:

“the designer begins with a centre, an axis, a direction from which the design takes on an increasing level of detail as it unfolds.”    

For SouthWest, we are THE lowest cost airline is their design axis.  From this emerges a coherence of design which is too rarely matched. This is the essence of great business model design.  Each element of the design reinforces the fundamental choices.  The SouthWest business activity system is shown below.

 However, this ‘simple explanation’ underplays the emergence of these models. 

A few years into operations SouthWest was facing potential bankruptcy.  They had to return one of their four planes.  However, Kelleher was unwilling to compromise on the frequency of flights.  He tasked his employees with a simple problem: how do we deliver a four-plane schedule with only three planes.  The result was an unheard of ‘10 minute gate turnaround’.   Much of the operating model we see today reflects these origins.   

IKEA has a similar story.   IKEA was forced to leave Sweden by the anti-competitive behaviour of its competitors, who didn’t take kindly to its low prices. 

‘(competitors) put pressure on local manufacturers to refuse to supply Kamprad (IKEA founder).  In the fear that he’d lose the whole business, he went to Poland in search of new suppliers.  Their prices proved to make a difference, not just in degree, but a difference in kind … it led IKEA to a completely different business model’[4]

Finally, think about SouthWest as a disruptive business model.  It bears a remarkable resemblance to some of today’s tech disruptors. 

SouthWest’s market entry was predicated on circumventing regulatory barriers.  It began life with point-to-point services within Texas.  Because it was going to operate within state boundaries, they argued that they were not subject to the federal airline regulations and price controls.  The incumbents took legal action which delayed SouthWest’s entry, but after 3 years the legal action failed and SouthWest began operations. 

Uber and AirBnB have both become disruptors similarly bypassing regulatory barriers. 

So, what are the lessons you can take from the SouthWest story?  Here’s a few reflective questions:

  • Does your value proposition reflect ‘a distinctive choice utterly in favour of the customer’? Are you working on a transformative value proposition? 

  • Is there clarity internally on ‘the centre, the axis, the direction’ from which all other elements of the business model emerge? And is there strong coherence in the business model design?  (Hint: try mapping your business activity system)

  • What regulatory barriers limit competition in your sector?  What would happen if someone were able to simply ignore them?

Good luck.  (Part 2 will address some specific leadership lessons from Kelleher)

DDB … a strategist’s view

[1] Chip Heath & Dan Heath: Made to stick.  (2008)

[2] Roger Martin: Remembering Jack Bogle and Herb Kelleher, two great strategists. (HBR: 2019)

[3] Jean Liedtka: Strategy as design.  (Rotman Management: 2004). 

[4] Cynthia Montgomery: Thought leader interview.  Strategy + Business (2013)