Air War over California

Stung by losses of market share to Southwest Airlines (SWA) in the lucrative California air travel corridor in 1994, two major carriers shifted their strategies to match those of their rival. Each brought a new low-cost “lite” offering to the California market. Those operations mimicked Southwest’s frequent-departure, short-haul, low-fare, point-to-point (versus hub and spokes) strategy, but both failed. Why?

The strategies of the three airlines were essentially the same, as were their customer propositions—at least on paper. The big difference was on the human side. Although the older carriers changed their business strategies to mimic SWA’s, they made no corresponding changes in their people practices and policies. Company-employee relations at those two airlines were downright hostile. Management treated flight attendants like angry adolescents, and flight attendants responded in kind. The pilots and mechanics unions were at odds with management when they weren’t fighting with each other. Neither carrier took steps to resolve those problems before launching their new airline-within-the-airline strategies. They assumed that they could recapture market share through marketing alone.

SWA, in contrast, complemented its strategy with a workforce that was eager and able to make it work. Indeed, most observers attributed that company’s 20 to 30 percent cost advantage over its rivals primarily to the productivity and flexibility of its employees. At the time of the California confrontation SWA handled nearly three times as many passengers per employee as United did. Southwest’s people also served travelers better in terms of every key measure of performance: on-time departures, flight turnaround times, lost baggage, and customer satisfaction.

Southwest’s integration of strategy and human capital was not a lucky coincidence. Customer-facing personnel were selected and trained deliberately to support the company strategy. They operated as a team and would do whatever it took to get their planes loaded and into the air as quickly as possible. In fact, flight turnarounds took half the time required by United and the rest of the industry. SWA employees also reinforced the company’s reputation for friendliness and fun through their behavior and interactions with travelers. Their rivals, in contrast, changed their strategies and relied on their warring parties of mechanics, pilots, ticketing personnel, and cabin attendants to make those strategies work.

The outcome of the air battle over California was practically preordained: The majors failed to regain market share in the nation’s most heavily traveled air corridor.^[5]

This example underscores the first principle cited in this book: system thinking. Strategy and people are part of a larger system. It is impossible to change one without considering the other. The outcome would not have been different if they had simply tried to copy the management practices of the market leader, since those practices would not have fit their existing management practices and workforces.

A new strategy is bound to have an effect on how people work and how they perceive their interests. Similarly, the behaviors and know-how that people bring to the table surely have an impact on strategy implementation. The traditional airlines’ approach to winning back market share did not appear to recognize these system implications. Those airlines followed a traditional approach to strategic change in which executives defined the business strategy and employees were told to “make it so.”

That seemed very logical, but it failed to recognize the “stickiness” of human capital. By that term we mean that changing people is often difficult and takes time. A handful of crack strategists can go off to a mountaintop lodge for two weeks and return with a first-class blueprint for strategic change with all its requirements mapped and measured, including an incentive system aimed at aligning people with strategic goals. This blueprint may satisfy the analytic mind but usually fails the test of practice. Why? Because the strategy and incentive design may be opposed by other practices, such as structure, the decision-making process, and the human assets on which the new strategy depends. The employees may have the wrong balance of general versus firm-specific skills. They may be too entrepreneurial or the opposite: too “by the book.”

Some people may find change antithetical to their interests and become resisters or saboteurs. The organizational system may contain incentives that motivate people to act contrary to the strategy. For example, many pension plans create penalties for staying beyond a specific age or length of service—sometimes, in effect, reducing earnings for each year they choose not to retire. Does this make sense for a company that may depend on scarce skills or that gets dramatically higher productivity from its more tenured older workers?

Factors of human capital are not immutable: They can be changed, but changing them takes time that a new strategy may not have. For example, an organization can reshape its human capital through recruiting and training. It can use normal personnel turnover to bring in new people with the competencies required by the strategy, and it can generate new skills internally through training. Years may pass, however, before the impacts of those efforts are felt. In this sense human capital can be a constraint on an organization’s ability to grow or to pursue a different strategy. Similarly, a firm’s human capital strategy may enable certain strategic responses that are not available to competitors. These things should be considered at the outset of strategy formulation. Strategy and the organization’s unique human capital must be coordinated from a systems perspective. That coordination is generally absent when companies launch new strategies, with the airlines case being only one example.

The status of human capital in the consciousness of U.S. executives rose sharply during the tight labor market of the late 1990s. The supply and demand relationship for labor changed dramatically during that period, and many companies found their growth hamstrung by a shortage of people with critical skills. Nevertheless, most executives continue to formulate and pursue new strategies without giving human capital its due, as can be seen in the following case.

^[5]For more details on Southwest versus United and Continental in the California Market, see case study by Charles O’Reilly and Jeffrey Pfeffer, “Southwest Airlines: Using Human Resources for Competitive Advantage (A),” Stanford, CA: Stanford University Graduate School of Business, March 6, 1995.