#35 When Differentiation Dies: Short-Term Wins, Long-Term Losses

Differentiation in highly commoditised markets is hard enough without throwing away the edge you already have. Others have already written and talked about this, but I'll put it here as a reminder to boards and management teams in my network.

Two weeks ago, Southwest Airlines announced that it will no longer allow bags to travel for free. For more than 50 years, this policy has been a central differentiator in a highly competitive and largely commoditized market.

The timing of the decision is not coincidental. It comes shortly after activist investment firm Elliott Investment Management took a significant stake in the company. Their influence appears to be driving a familiar shift: to increase short-term profitability.

From Elliott’s perspective, this is likely a smart move. If the stock price rises, as it did by 8% following the announcement, they can exit their position with a return before the longer-term consequences are fully visible. That’s how activist investing often seems to work: optimize for the near term, and leave the structural risks to the next set of owners.

But for the company itself, the strategic cost is substantial.

Southwest built its brand on a differentiated promise. “Bags fly free” helped create loyalty in a category where loyalty is notoriously difficult to earn.

With that differentiator gone, Southwest now blends into the background, competing on price, routes, and operational efficiency alone. Rebuilding meaningful differentiation in a commoditized industry often takes years, if not decades.

However, this is not a story about aviation. It’s a warning for any business operating in a commoditized space.

My colleagues and I have often helped companies strengthen their strategic position by building meaningful differentiation. That often starts with understanding what customers truly value, then testing solutions that deliver on those needs in ways competitors can’t, or won’t.

It’s frustrating to watch a company discard what may be its most valuable differentiator. These things are hard to build, and once lost, even harder to replace.

So, are you making decisions that reinforce your strategic position, or merely improve the next quarterly report?

Ask yourself:

• What makes (or could make) your offering meaningfully different?
• Are you building on that differentiation, or eroding it?
• What are you optimizing for? Long-term success, or short-term profits?

Differentiation is fragile. Once lost, it’s both difficult and expensive to regain. Sacrificing it for short-term gains may serve the interests of investors like Elliott, but for the business itself and almost every other stakeholder, it’s often highly destructive.