Last Updated Aug 8, 2008 2:44 PM EDT
The Idea in Brief
Southwest Airlines keeps soaring. Its stock price rose a compounded 21,000% between 1972 and 1992 and leapt 300% between 1995 and 2000.
Why does Southwest succeed while so many other airlines fail? Because it sticks to its powerful strategic principle: "Meet customers' short-haul travel needs at fares competitive with the cost of automobile travel." This pithy, memorable, action-oriented phrase distills Southwest's unique strategy and communicates it throughout the company.
An effective strategic principle lets a company simultaneously:
- maintain strategic focus,
- empower workers to innovate and take risks,
- seize fleeting opportunities,
- create products and services that meet subtle shifts in customers' needs.
In today's rapidly changing world, companies must integrate decentralized decision making with coherent, strategic action. A well-crafted, skillfully implemented strategic principle lets them strike that delicate balance.
The Idea in Practice
Hallmarks of Powerful Strategic Principles
A successful strategic principle:
- Forces trade-offs between competing resources.
Southwest Airlines' 1983 expansion to the high-traffic Denver area seemed sensible. But unusually long delays there due to bad weather and taxi time would have forced Southwest to increase ticket prices--preventing it from adhering to its strategic principle of offering air fares competitive with the cost of auto travel. The company pulled out of Denver.
- Tests the strategic soundness of particular decisions by linking leaders' strategic insights with line operators' pragmatic sense.
AOL's strategic principle, "Consumer connectivity first--anytime, anywhere," tested the wisdom of a powerful business decision: expanding AOL's global network through alliances with local partners, rather than using its own technology everywhere. Partners' understanding of local culture greatly increased customers' connectivity.
- Sets clear boundaries within which employees operate and experiment.
At mutual-fund giant The Vanguard Group, frontline employees conceived a potent idea: Let customers access their accounts on-line, but limit on-line trading. This move kept Vanguard's costs low, enabling the company to stick to its strategic principle: creating "unmatchable value for investors/owners."
Creating and Communicating Your Strategic Principle
Capturing and communicating the essence of your company's strategy in a simple, memorable, actionable phrase isn't easy. These steps can help:
1. Draft a working strategic principle. Summarize your corporate strategy--your plan to allocate scarce resources in order to create value that distinguishes you from competitors--in a brief phrase. That phrase becomes your working strategic principle.
2. Test its endurance. A good strategic principle endures. Ask: Does our working strategic principle capture the timeless essence of our company's unique competitive value?
3. Test its communicative power. Ask: Is the phrase clear, concise, memorable? Would you feel proud to paint it on the side of your firm's trucks, as Wal-Mart does?
4. Test its ability to promote and guide action. Ask: Does the principle exhibit the three essential attributes: forcing trade-offs, testing the wisdom of business moves, setting boundaries for employees' experimentation?
5. Communicate it. Communicate your strategic principle consistently, simply, and repeatedly. You'll know you've succeeded when employees--as well as business writers, MBA students, and competitors--all "chant the rant."
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Harvard Business Review
by Michael E. Porter
An effective strategic principle helps a company to maintain strategic focus, including forcing trade-offs and creating carefully integrated systems. In this article, Porter expands on those points within his definition of strategy. As he explains, operational effectiveness--producing, selling, and delivering offerings faster than rivals--can reap advantages. However, rivals can quickly copy these "best practices." Therefore, companies need to hone their strategic positioning, enabling them to achieve sustainable competitive advantage through 1) preserving their distinctive qualities, 2) performing different activities from rivals, or 3) performing similar activities in different ways. Effectively implementing strategy requires trade-offs ("what we won't do") and reinforcing "fit" among company activities.
Harvard Business Review
by Frederick F. Reichheld and Phil Schefter
This article applies Gadiesh and Gilbert's insights about strategy to the special challenges of e-commerce. Using several of the same company examples cited in "Transforming Corner-Office Strategy," including The Vanguard Group, AOL, and Dell, Reichheld and Schefter emphasize the importance of making trade-offs and the dangers of "trying to be all things to all people." They also stress the importance of maintaining strategic focus and integrating all operations, including on-line activities.
Harvard Business Review
by Noel Tichy and Ram Charan
This interview with General Electric CEO Jack Welch examines in greater depth the everyday ramifications of GE's strategic principle: "Be number one or number two in every industry in which we compete, or get out." As Welch makes clear, this principle translates into five "keys" that unlock the energy of GE's people: 1) candor (seeing the world as it is), 2) simplicity, 3) self-confidence in communicating objectives, 4) two-way communication between leaders and followers, and 5) evaluation of and reward for agility and candor.