This is an edited version of this article and is reprinted with permission from Rotman Management, the magazine of the University of Toronto's Rotman School of Management.
In January of 2009, TED Airlines flew its final route and ceased operations, after only five years in service. Parent company United Airlines acknowledged that its attempt to create a low-cost carrier had failed, and began repainting the planes and absorbing them back into its general fleet. A few years earlier, Delta's attempt at a low-cost airline, Song, fared even worse, folding after just three years in operation. Both ventures had set out to take on America's most consistently profitable airline, Southwest, along with its young protege jetBlue, and beat them at their own game. At face value, TED, Song, Southwest and jetBlue had several things in common, including budget pricing, 'no frills' service and recognizably-quirky brand identities. Nevertheless, TED and Song were unable to replicate Southwest's success.
In Europe, a similar pattern emerged during the same period, as upstarts Ryanair and easyJet grew to become the largest low-cost carriers on the continent, while more established airlines like Lufthansa and British Airways failed to unseat them with their own budget-minded sub-brands. Even Air Canada , which has long dominated the Canadian market, was unable to keep its low-cost carrier Tango alive for more than three years. In each of these cases, a better-funded competitor, backed by an experienced player in the market, lost out to a younger, smaller company, despite a nearly-identical offering and pricing structure. It's a pattern that defies conventional logic.
When we are faced with the question of why one company triumphs over another, several standard answers tend to emerge, including "smarter business models," "more efficient supply chains" and "being to market first with a new service." In tech-heavy industries, large R&D budgets or extensive intellectual property might be targeted as the 'secret sauce' that sets them apart. But whatever macro-level advantages Southwest might have had were negated when Song, TED and jetBlue copied their business model, so it had to be something else.
The fact is, Southwest was a true innovator: a budget, bare-bones carrier established in the early 1970s, when other airlines were touting the quality of their cuisine or the youthfulness of their (all-female) in-flight service staff. Ryanair and jetBlue took Southwest's innovations and ran with them, including its cost-saving strategy of flying only a single type of aircraft, and offering only one class of service.
This level of imitation is common throughout the modern business world, as car companies, banks, online service providers and retailers all borrow heavily from one another – a natural result of today's easy global communications and free-flowing technology and talent. These days, knocking off someone else's competitive advantage is to be expected, and it now takes months, not years. As a result it's even more unsettling that United and Delta couldn't pull off the same trick that jetBlue and Ryanair did, despite their vast experience and resources.
One clue as to why lies in a Forbes article from 2003, reporting on Delta's launch of Song airlines. "Rebuilding the total customer experience," the article concludes, "is what could make Song sing." Even Forbes understood that jetBlue and Southwest owed much of their success to the way they treated customers, and that Song's success would hinge not on the composition of its fleet, but on what it felt like – as a customer – to get on one of its planes and fly to Miami.
Delta knew this too, and put enormous effort into making the Song experience unique, bringing in a famous fashion designer to do its tropical-coloured uniforms, and having acting coaches train in-flight staff to be quirkier and more spontaneous. But the efforts rang hollow: customers just didn't buy it, and the experiment failed. Unlike jetBlue, Delta didn't have the attitudes, values and motivations that make for an effective low-cost carrier. In short, despite its advantages, it had the wrong organizational culture for the market.
Deconstructing Organizational Culture
'Culture' is one of those fuzzy terms that makes business analysts roll their eyes, but its true power lies in the fact that, unlike other competitive advantages, it is nearly impossible to copy, and that's what makes it the real 'secret sauce.' On the surface, culture is not that complicated: it's simply 'the things that people in an organization do without thinking, often because of a precedent set by management.' But the roots of culture go very deep.
Costco is North America's most successful membership warehouse retailer, and a long-time client of my design agency, Ziba. It's also perfect example of a culture-driven organization. Founder Jim Sinegal is famous for sticking to certain fundamental values, and evangelizing them throughout the company. One of the best-known is 'the 14 per cent rule,' which states that no Costco product will be marked up more than 14 per cent over wholesale – regardless of how it's selling or what competitors are doing.
This is something Costco management won't budge on, and something its employees take for granted. These beliefs have helped to create a culture of fairness, transparency and respect for the consumer that shapes not just how Costco does business, but how its work force sees itself, and how customers experience the brand.
Every organization has a culture, of course, based on whatever beliefs and values its managers and employees pass around. But for a business to be highly successful, that culture must align with the values of its consumers – as Southwest's offbeat interactions and common-sense policies do for its independent, budget-conscious fans.
Rediscovering Your Core Culture
As culture's role in an organization's success becomes increasingly important – and visible, Ziba's clients are increasingly asking us to help them transform their culture. Shifting your culture to align better with your customers is a worthy goal, and an exciting creative challenge; what could be more interesting than helping a company re-design itself? But it's far more difficult to achieve than most people realize. That's because changing an organizational culture is a bit like a person trying to change his or her personality: it's possible, but it requires a true shift in beliefs and diligent follow-up, sometimes for years. For a company, this entails much more than a new policy, or making a few new hires.
The kind of cultural shift that is most likely to succeed is one that re-embraces the values on which an organization was founded. IBM did exactly that in the early 1990s, selling off its consumer-facing units and focusing on B2B services. Critics at the time called out IBM for getting rid of its highly visible PC and printer businesses; but the result has been a consistent, consolidated offering from a company that's always had more in common with corporate clients than independent consumers.
Intel, by contrast, has been expanding and contracting around its core for years, trying to transform itself into a customer experience innovator by creating new departments and hiring designers and researchers, but refusing to alter the rest of the company in any way. What's resulted, multiple times, is a deep internal split, in which designers and project managers are told to embrace risk-taking (the core of any innovation process) – as long as they don't mess up.
Power, Pain and Patience
Despite their missteps, Delta and United survived, as did IBM and Intel, by rediscovering their core culture. Each was fortunate enough to have a core customer base with shared values, and wise enough to shed the aspects of the business that didn't serve these customers: Delta and United refocused on business and international travel, IBM doubled down on its business services, and Intel embraced its role as a technology innovator. These companies have succeeded by being the best possible versions of their true selves, and appealing to a consumer base that loves them for it.
Some companies don't get that luxury. JC Penney and Sony are both formerly-dominant players in their categories who have recently woken up to discover that their customer base has moved on. Both have publicly announced their intentions to completely transform their business and return to their former glory. Because they are in a crisis situation, reinventing their culture may be the only way out; but it's also a gut-wrenching process with a low rate of success.
It's a daunting challenge, but JC Penney is smartly addressing the three main challenges of an organizational culture shift: Power, Pain and Patience:
· They're putting power behind the initiative, by starting at the top with an executive staff that embraces the new culture, and is making fundamental changes in policy and training;
· They're willing to endure the pain of abandoning business as usual, even when it requires extra effort from established management, and "the way we've always done it" may not be the right way; and
·They have the patience to wait two or three years between the initial effort and the eventual benefit.
In closing
Unlike a marketing push or even a brand identity, culture is internal to an organization. For its effects to be felt by the customer, it must be understood and embraced by the organization, and that takes time.
If there is a common thread in the success stories recounted herein, it's a C-suite that considers culture to be important enough to merit consistent, long-term action. Clear expressions of company purpose and values – like Costco's 14 per cent rule and Southwest's playful– renegade stance – aren't measurable advantages in the way that a supply chain or IP portfolio is. Yet as we have seen, they may be a company's most important differentiator in the long run.
It may seem strange for a designer to be talking so much about organizational beliefs and values; but in our experience at Ziba, they have a profound effect on the effectiveness of design. We can develop a new line of products or services, a new visual identity or even a far-reaching brand strategy; but whether these efforts succeed depends heavily on the culture of the company that has to live with them.
This is both the difficulty and the strength of culture in the creative world: when all is said and done, it's the one thing you can't design around.
Sohrab Vossoughi is the founder, president and chief creative director at Ziba. He has been named one of the top five innovation gurus in the U.S. by BusinessWeek, was elected as a Global Leader of Tomorrow by the World Economic Forum, and has served as an elected advisor to the Hong Kong Productivity Council since 1998. He holds more than 40 patents.