By Benjamin Gilad
Change Driver: Rivalry
In my workshop Competitive Blindspots I often place “competitive action” as the least important structural change driver. It’s not the least important issue for a company- just the least probable change agent of an industry’s structure. To deliver the point that it is the least probable structural change driver I ask the trainees – 90% of whom work for Fortune 1000 companies- a simple question: When was the last time your company surprised your competitors?
The rationale behind my quip is that rarely do Fortune companies change strategies so drastically as to change the nature of rivalry. They make mostly tactical competitive decisions. They hardly rock the boat. Often, they are very careful NOT to rock the boat. At times, they are not even sure where the boat is.
However, when the dominance of incumbents drives a complacent mindset, it invites new players that do change the nature of rivalry.
Among those are the barbarians at the gate- Private Equity (PE).
Strategy is a bitch
Porter’s contention that strategy is a unique positioning that provides unique value does not imply the absence of course corrections in some of the activities comprising the strategy, so as to continually keep its uniqueness. One of the best examples of such unique positioning has been Southwest Airlines, with its model of no assigned seats, short flights between secondary airports, no business class, etc., etc. It had been the ONLY profitable US airline for 47 years. Its full-service competitors went bankrupt a few times during this period.
Now Southwest Airline, under attack by an activist fund Elliot Management, is pressured to forfeit its strategy.
That’s a pity. SWA might make more money under the new policies (charging for luggage, class-type seating, etc.) but it will lose the “cult” status of its loyal commuters.
Why has Southwest Airline come to that? Some point at rising operating costs- fuel and labor costs are way higher than in Pre-Covid days. Others point at Boeing’s trouble affecting SWA more than others. All true. BUT–
Another perspective simply points out that over time numerous low-cost flying cages popped up. Called Ultra-Low-Cost, none is very profitable (Frontier or Spirit difficulties being an example), but they have chipped at SWA’s uniqueness. Michael O’Leary, the famous Ryanair’s CEO who implemented SWA’s strategy with a mean Irish flare, said recently, “I don’t think Southwest is really a low-fares airline anymore.”
Well, if SWA is not a low-cost airline, what exactly is its identity?
The chaos during the 2023 winter storm exposed SWA’s complacency with antiquated technology. But that doesn’t mean its strategy is bad. It means it has fallen asleep at the helm of operational excellence.
Having a strategy does not guarantee lack of competition, but it ensures survival way longer than fly-by-seat-of their-pants “strategies” that conflate goals with strategy and are changed every 2 years or so (e.g., software startups). But even real strategies that can last 20-30 years require “maintenance.”
Barbarians at the gate
Elliot Management, alas, is not into strategy. Private Equity firms in general are lousy and lazy with business strategy (as contrasted with ingenious financial strategy). Elliot Management is willing to destroy SWA’s unique positioning for short-term profits. Instead of refocusing on relentless cost saving via innovative practices and an activity chain which is hard to imitate, it pushes SWA into the big cluster, looking just like other airlines.
My prediction is the move will prove short sighted. But then, activist funds are short sighted to begin with- they want the share price to rise so they can sell at profit. Nothing wrong with this, it’s part of an efficient capital market, except the times they lose out in the process of not caring at all about strategic positioning. In some of my war games with clients who are owned by PEs, I could “smell” a failure from miles away. But often very smart PE financial geniuses live in their own fairyland, and with due respect to my enormous ego and unprecedented prophetic capabilities, I have no chance of changing their minds. They just don’t care about competitive strategy.
Maybe I am cynical, ok, I am cynical, but just reading a message of “shoring up” a company by a PE acquirer gives me chills. John Mallone, who owns a large stake in Charter (cable network provider) in his Liberty Broadband conglomerate, has been exploring “a merger of Charter with his Liberty Broadband.” That will not return to Charter one customer who defected to new technologies (“cut the cord”).
From a CI perspective, look out for any of your competitors being bought by Private Equity or similar funds. That may signal the disappearance of any unique feature, which will give your management an opportunity to go for the kill. Of course, that assumes they are willing to find a boat, put it into the competitive water, and rock it.
But even more significantly, look out for signs your company will be sold to them. That means you should look for a new job.
Alternative perspective
Not all PE is bad. The one that will buy me out and inject $1B into the Academy will be spared my venom.
Also, not everyone is a fan of Porter. To those who aren’t, my posts are noise. So why do I write? For those who think strategically. To understand that, I highly recommend this Substack blog. This guy is my favorite psychologist. And that says something, since I think most psychology is crap.
If you understand how beneficial looking at competition from Porter’s perspective is for your job, join our CIP™-I program in March. I promise you’ll practice it until you are good at it. Or until you hate my guts. Or both.