34-Value in Two Hostile Industries

Posted 7/7/08

We have two domestic industries in overcapacity: the automobile and the airline industries. We call these industries Hostile markets because returns for most of the players in the industry are low and price competition is intense.

Over the last twenty years, we have studied and worked in many of these Hostile markets. In about three-quarters of the cases, market hostility is caused by the expansion of industry competition, especially expansion by low-cost competitors. Hostility in both the airline and automobile industry is the result of expansion by competitors. In autos, the expansion of Asian competitors, in particular the Japanese, has gradually put a strangle-hold on the three domestic manufacturers, GM, Ford and Chrysler. In the airline industry, the expansion of low-cost carriers, including Southwest Airlines, Jet Blue and their ilk, have done the same thing with the legacy carriers.

Few of us would volunteer to be in a Hostile market. It’s painful on the best of days. But if you had the choice of working in and managing a company in one of these two industries, which would you choose? In which industry would you be more likely to succeed as an industry Standard leader? Would you rather be a GM, Ford and Chrysler, or any of American, United, Delta and Northwest? The answer depends on your view of the relative strengths of each set of companies against their expanding competition. In this and the next blog, we look at each industry’s domestic competitors compared to their expanding rivals on the basis of Value and Cost.

First, consider Value. Value is the combination of Performance for Price. In turn, Performance is the Function, Reliability and Convenience of the product. The domestic auto industry clearly has a Value problem because it continues to lose share in the domestic market. (See “The Two Best Consultants in the World” in StrategyStreet.com/Tools/Perspectives.) So, where, in Value, is the problem, Performance or Price? It appears that the problem is one of Performance. The domestic automobile manufacturers tend to have slightly lower prices on equivalent cars than do their Japanese competitors, so it can’t be prices. That leaves Performance.

So, where might the Performance problem lie, in Function, Reliability or Convenience? Convenience might be a close call, but the edge goes to the domestic manufacturers, especially to GM and Ford, with their extensive dealer infrastructure. This is a slight nod, at best, since the vast majority of customers are well within striking range of a reputable dealer for any of the Asian and domestic producers. How about Function? Here again, if there is a nod, it goes to the domestic producers. On an equivalent car, the domestic producers tend to have more functionality for the dollar than do their Japanese competitors. No, the problem the domestic producers face more than any other is Reliability. (See “Reliability: The Hard Road to Sustainable Advantage” in StrategyStreet.com/Tools/Perspectives.) The domestic customer base has largely determined that the domestic manufacturers’ cars are not of the same quality as are their Japanese competitors. There is a particular but telling statistic that supports this conclusion. The average Japanese used car sells for a much higher fraction of its original purchase price than does its domestic counterpart.

The industry Standard leaders in the airline industry are in better Value shape than are the automobile industry leaders. They, too, are losing share, though at a much slower rate than they did a few years ago. Most of their share loss has been due to their premium pricing on routes served by discount airlines.

The Performance of these airline industry leaders is relatively good. They have a clear Function advantage. Their hub and spoke systems allow a passenger to get from one place to another far easier than do the discount airline competitors. The legacy airlines also offer the best frequent flyer programs. Convenience also favors the legacy carriers. It’s a wash when it comes to purchasing tickets and printing boarding passes. Virtually anyone with a computer and an internet connection can purchase an airline ticket easily and print boarding passes before the flight. The legacy airlines, though, have a clear Convenience advantage in their willingness to assign seats on their flights. Reliability is another matter. The legacy airlines have a reputation for spotty Reliability. They suffer from delays and lost baggage. Some question their customer service on-board the aircraft and their abilities at handling customer problems. They are in public relations doldrums. Often, the low-cost competitors wear the industry halo, in part, due to their low prices. But there is substance there as well. Southwest Airlines, in particular, has a reputation for good Reliability with on-time arrivals, enthusiastic employees and relatively low levels of customer complaints.

In summary, the domestic auto producers have a big Value problem in Reliability. The legacy airline competitors have a big Value problem in Price, and a developing problem in Reliability. A Price problem is much easier to fix than is a Reliability problem. A slight edge on Value, then, goes to the domestic airline legacy carriers.

Update 7/30/25

US domestic automobiles

US domestic automobile manufacturers continue to suffer from a Value (Performance for Price) gap. The industry is likely to continue to drain their market shares slowly.

We will use GM, Ford, Toyota and Hyundai as proxies for developments in the broader US domestic automobile industry. The years from 2008 two 2025 have witnessed the gradual weakening of US domestic automobile manufacturers in the face of both the surging Asian manufacturers and Tesla.

US domestic manufacturers have become less robust. They occupy a much smaller 2025 footprint in the market than they did in 2008. In 2008, domestic automobile manufacturers (GM, Ford, Stellantis) held 50% of the US market. By the end of 2024 their market share had fallen to 38%, losing 12 share points in 16 years. All three of these companies relied on their dominant position in trucks and SUVs, where they have some tariff protection, to produce the profits supporting their companies.  Much of the market share decline is due to poor Reliability reputations. In turn, the poor reputations in the market led to Function failures as the domestic manufacturers withdrew from significant parts of the market.

While US domestic manufacturers were fading, Toyota rose to the second ranking in the US market, about two share points behind domestic leader GM. The Hyundai Kia combination now ranks fourth with an impressive 11% of the market, two share points shy of second ranked Ford, a remarkable performance from the afterthought status it held in 2008. Tesla’s market share had little visibility in 2008 but has risen to 3% by the end of 2024.

Both GM and Ford products are fading due to Reliability failures compounded by Function failures. General Motors declared bankruptcy in 2009 and took a government bailout, severely damaging its reputation with consumers (a Reliability failure). Ford’s product line fell behind its competition in the early 2000s (a Function failure). It lost market share and reported substantial net operating losses in the years 2006 through 2008.

Both companies’ reputations for mediocre product quality (Reliability) have been very slow to recover despite strenuous efforts to improve product quality. The Consumer Reports ranking of brands according to customer reported data on quality in 2025 had eight of the top 10 brands originating with Asian manufacturers. The top American brand was Buick, ranked number 11.  The JD Power Vehicle Dependability Study in 2025 found that Ford had improved its ranking by 10 places, moving up to 13^th in brand ranking, still low for one of the market leaders.

Product missteps haunted both GM and Ford. Customers perceived GM as slow to innovate and offering products of uncertain and variable quality.  Ford’s quality reputation suffered from problems with its initial infotainment systems and transmission concerns, especially with smaller cars. GM failed many customers seeking electronic vehicles and some of its discontinued traditional brands.

Both GM and Ford failed potential customers by dropping several brands (Function failure). After its 2009 bankruptcy and government bailout, GM shed several brands (i.e., Hummer, Saturn, Pontiac, Saab), which reduced its product lineup and market reach (Function failure). in 2017, GM sold its European division to French automaker PSA group after 16 consecutive yearly losses. In 2018, Ford dropped virtually all its sedans and mini vans and created a laser focus on trucks, SUVs and the electronic Mustang product line.  By 2025, both legacy manufacturers had committed themselves to full participation in the electronic vehicle market, GM with its Ultium line and Ford with its E Mustang products.

On the other hand, Toyota with its superb reputation for Reliability, especially with its superb product quality and fuel efficient product line continued to gain market share. Hyundai-Kia showed the most impressive share gains based on its emerging reputation for Reliability, with its industry best warranty, and Function innovations in the form of advanced technology and superb design in both exteriors and interiors. Hyundai– Kia has continued to broaden its product line over the last few years, gaining new customers in the process.

Company reputations reveal themselves in pricing. Toyota is now the effective price setter in the US market because its automobiles enjoy quality reputations and strong resale values. Its US domestic competitors are Price Shavers who must offer somewhat less expensive products in order to keep Toyota from running away with the business, much as private label products must offer lower prices to overcome the superior reputations of their branded competitors. Toyota’s customers look past its slightly higher prices to get the dual benefits of its Reliability and effective Price savings in the resale market. Hyundai’s pricing strategy is that of a Predator, offering benefits equal to the leading products for somewhat lower prices. In turn, the other domestic manufacturers are in a Leaders Trap, allowing these unique low prices. The Korean combination has been aggressive in its market pricing as it has gained share. GM and Ford maintain premium pricing in trucks and SUVs where they have some tariff protection. On the other hand, their other products command lower prices both as new automobiles and as used cars.

US domestic airline industry

By 2025, the US airline industry is no longer hostile. The legacy airlines have gained control of pricing through consolidations, the introduction of multiple lower price points and dynamic pricing. Delta and United airlines enjoy high returns on equity.

The changes in the US domestic airline industry from 2008 until 2025 have been dramatic. The most obvious change is in product market shares. As far back as 1995, legacy airlines, including today’s three leaders and several others, controlled 90% of the US domestic market. By 2008, the traditional industry was already besieged by Low Cost Carriers, who controlled a substantial minority position. The top three legacy airlines controlled 54% of the market. By 2022 they held only 50% of the market. The leading Low Cost Carrier, Southwest, controlled 16%.

But then things changed. Southwest continued to increase its market share, to 19% in mid 2025. But the three leading legacy carriers began to reverse their share losses and again held 54% of the total market by 2025. This share trend reversal for the three reflects their introduction of new Price Points, pricing policies meant to blunt the force of the Low Cost Carriers and their improving competitive cost structures. The three legacy airlines had a favorable product mix. The legacy airlines owned the most profitable business and commercial travelers and still do. They have been challenged in the last few years by new initiatives by Low Cost Carriers. They parried these challenges well.

Two major Value changes by the legacy airlines drastically reduced the momentum of the Low Cost Carriers: new lower price points and real-time pricing. In the first change, the three legacy airlines unbundled their product pricing to create new Stripper Price Leader products at lower prices. These lower price points removed previously free benefits in the base product in return for price savings. These removed benefits often remained available through optional pricing. With the creation of these new price points, the legacy airlines significantly reduced the pricing gap they had with SWA. In the second change, the three legacy airlines freed themselves from rigid rules and technological impediments to institute dynamic pricing. In 2025, the three legacy airlines could change their pricing in real time, even down to the level of the individual passenger.

The US domestic airline industry is today an oligarchy, controlled by the top four airlines. They controlled nearly 75% of the industry seat miles and a higher percentage of the industry’s infrastructure. They have good control over industry pricing. Where do we see this Price control? In two facts: the airlines are gaining share despite relatively poor quality rankings (Reliability) and the high returns on investment of Delta and United, while Low Cost Carrier Southwest struggles.  Passengers are less happy with airline trips today than they were in 2008. The airlines have reduced, or have begun charging for, many benefits. Seats are less comfortable and published flight times are longer. The industry’s leaders also tend to lead in customer complaints. By 2020, the four leading domestic air carriers (American, Southwest, Delta and United) were mostly among the leaders in number of customer complaints per 100,000 enplanements. In rounded numbers American had 9, Southwest 3, Delta 7 and United 30. Despite this decline in quality, American, Southwest and Delta have gained share since 2022, while United remains flat. Customers have limited options.

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