The Hidden Value of Marrying Strategies and Activities

Common strategy trap Failure to perform a different set of activities than rivals 2 * What is Strategy?, Michael Porter, HBR, November 1996

The airline industry is a good example of this 3

4 The result has been a bloodbath for competitors The domestic airline industry reported negative net income in 23 of 31 years since the industry was deregulated New York to Chicago

5 * Uncommon Service, Frances Frei, Anne Morriss, 2012 Most important to price & convenience sensitive customers Least important to price & convenience sensitive customers Attribute map for airline industry Relative performance

6 * Uncommon Service, Frances Frei, Anne Morriss, 2012 Most important to price & convenience sensitive customers Least important to price & convenience sensitive customers That all changed when Southwest entered Relative performance

Southwest’s activities align more deliberately with the attributes that matter most to it’s customers Low prices –No meals –No seat assignments –No baggage transfers –Automatic ticketing machines –Limited use of travel agents Friendly service –High employee compensation –High level of stock ownership –Flexible union contracts On-time arrivals/ Frequent departures –Standardized fleet of 737s –No meals –No seat assignments –No connections w/ other airlines –Flexible union contracts 7

On-time arrivals/ Frequent departures –Standardized fleet of 737s –No meals –No seat assignments –No connections w/ other airlines –Flexible union contracts On-time arrivals/ Frequent departures –Standardized fleet of 737s –No meals –No seat assignments –No connections w/ other airlines –Flexible union contracts Southwest’s activities also align and reinforce each other Low prices –No meals –No seat assignments –No baggage transfers –Limited use of travel agents –Automatic ticketing machines Friendly service –High employee compensation –High level of stock ownership –Flexible union contracts 8 Low prices –No meals –No seat assignments –No baggage transfers –Automatic ticketing machines –Limited use of travel agents Friendly service –High employee compensation –High level of stock ownership –Flexible union contracts

And the alignment of these activities has a compounding effect that is difficult to imitate 9 * What is Strategy?, Michael Porter, HBR, November 1996

Ikea is another company that performs a different set of activities than its rivals do 10

Attribute map for the furniture industry 11 * Uncommon Service, Frances Frei, Anne Morriss, 2012 Most important to young customers seeking low cost Least important to young customers seeking low cost Relative performance

That all changed when Ikea entered the market 12 * Uncommon Service, Frances Frei, Anne Morriss, 2012 Most important to young customers seeking low cost Least important to young customers seeking low cost Relative performance

Ikea’s activities align more deliberately with the attributes that matter most to it’s customers Superior furniture design –Team of highly skilled designers –Catalog and store layouts showcase appealing room layouts –All designs focused on cost of manufacturing and stocking Low manufacturing cost –100% sourcing from long term suppliers –Seamless integration of production and shipping supply chain Self service –Explanatory catalogs –Most items in inventory –Daily re-stocking –Packaged for easy transport and assembly –Limited sales staffing 13

Ikea’s activities also align and reinforce each other Superior furniture design –Team of highly skilled designers –Catalog and store layouts showcase appealing room layouts –All designs focused on cost of manufacturing and stocking Low manufacturing cost –100% sourcing from long term suppliers –Seamless integration of production and shipping supply chain Self service –Explanatory catalogs –Most items in inventory –Daily re-stocking –Packaged for easy transport and assembly –Limited sales staffing 14

And the alignment of these activities has a compounding effect that is difficult to imitate 15 * What is Strategy?, Michael Porter, HBR, November 1996

One implication is that strategies need a long range time horizon to take root Frequent shifts in strategy are costly because companies must not only reconfigure individual activities, but must realign entire systems of activities as well 16 * What is Strategy?, Michael Porter, HBR, November 1996

Summary One of the most common strategy traps is the failure to perform a different set of activities than rivals The alignment of activities is critical because individual activities often affect one another When activities are consistent and reinforcing, the competitive advantage accumulates rather than erodes or cancels itself out Companies like Southwest and Ikea outperform rivals because the cumulative effect of their activity systems are very hard to replicate 17