Get Out of the "Middle of the Road"...

Or go out of business. How is it that Southwest and Honda can make money, while peers like American and Ford don't?

Posted on Game Changer: July 25, 2008 2:08 PM

These days, the only thing more unsettled than the weather is the state of the economy. Ford celebrates the 100th anniversary of the Model-T by posting the biggest quarterly loss in its history. The major airlines fly into the summer-vacation season by adding vast amounts of red ink to an industry that is already drowning in it. (American Airlines, by one estimate, loses $3.3 million per day.) And Yahoo, once the lovable darling of the Internet, caves in to corporate curmudgeon Carl Icahn as it tries to maintain its independence.

And yet…amidst all these dark clouds ands ominous forecasts, there are patches of bright sun and clear skies. Honda just reported profits of $1.7 billion for the quarter ended June 30—a record quarterly performance for a company that's posted lots of great quarters. Southwest Airlines reported yet another profitable quarter—a 15% increase over a year ago, and its 69th consecutive quarter of profitability. And Netflix, the online-movie pioneer whose fortunes skeptics love to question, delivered better-than-expected results and increased its subscriber base to an eye-opening 8.4 million households.

How is it that Honda, Southwest, and Netflix manage to thrive, when so many of their peers not only struggle to break even but flirt with outright disaster? The answers don't just speak to these three competitors, but to the new logic of competition itself.

First, high-performing companies understand that it's not enough to be "pretty good" at everything anymore. As a company, you have to be the most of something—the most exclusive, the most affordable, the most responsive, the most friendly. Companies used to want to be in the middle of the road—that's where all the customers were. But now, in an age of hyper-competition and non-stop innovation, the middle of the road is the road to ruin. What do they say in Texas? "The only thing in the middle of the road are yellow lines and dead armadillos." To which we might now add: "And once-great companies that are slowly going out of business."

There's no doubt that Honda, Southwest, and Netflix have always understood what they are the most of. Honda is legendary for its focus on the performance of its engines and its commitment to grow from the low end of the automobile market up the value chain. Southwest has always managed to combine low fares with great service—anything else is a distraction. And Netflix understands that it doesn't just offer customers the widest variety of movies to watch, but that it helps customer make smarter choices about the movies they watch.

Second, high-performance companies understand that in an era of great turmoil, the best strategy is to stick with what you believe in. Business thinkers love to excoriate big companies and their leaders because they don't have the guts to change. In fact, the problem with many big companies is that all they do is change. They lurch from one consulting firm to the next, from one management fad to another, from one target customer base to a different set of customers. Detroit's Big Three seem to change business strategies with every model year! They diversified into other industries, then refocused on cars, they pushed high-margin SUVs and pickups, now they are scrambling to make more small cars.

Amazingly, even in a business environment filled with dramatic change, Honda, Southwest, and Netflix stick to their guns. Sure, they tweak things at the margins: Southwest has fine-tuned its boarding procedures to appeal to business travelers, Netflix is experimenting with digital downloads as opposed to movies-by-mail. But they have made big strategic bets for the long term—and they don't hedge their bets based on the price of fuel or the latest developments in Silicon Valley.

Legendary management guru Jim Collins puts it best: "The signature of mediocrity is not an unwillingness to change. The signature of mediocrity is chronic inconsistency."

There's a third element that helps to explain extraordinary performance in these extraordinarily difficult times. Each of these companies connects with its customers based not just on price and features, but on identity and emotion. They have become virtually irreplaceable in the eyes of their customers.

The researchers at Gallup have identified an escalating hierarchy of connections between companies and their customers—from confidence to integrity to pride to passion. To test for passion, Gallup asks customers a simple question: "Can you imagine a world without this product or brand?"

It's a lofty goal, but great companies (like Honda, Southwest, and Netflix) get there. Ask yourself, honestly: Can your customers live without you? Because if they can, they probably will.

Before it's here, it's on the Bloomberg Terminal.