Strategic Evaluation of South West Airlines

Introduction

Southwest Airlines has been a strong growth company over the last 4 decades. Using its low-cost, no-frill, customer friendly, point-to-point operational strategy, Southwest has been able to sustain considerable growth over the years and reported straight profits since its incumbent. Southwest Airlines now has a market capitalization of $9.1 billion and is positioned as one of the strongest airlines in the struggling airlines industry. Over the last decade, many airlines have reported record losses in the US while many have filed for bankruptcy, Southwest has been able to remain profitable and continue to grow. However, with the airline reaching its maturity, it remains to see whether this growth can be sustained for the upcoming years. This essay uses various tools and frameworks to analyze the external environment and its challenges, and internal resources and capabilities of Southwest airlines. This external and internal analysis is aimed to guide the strategic management of company in understanding the environment it business operates in, and how it can respond to that environment by realizing its internal resources.

External Analysis

Understanding the environment in which a company operates is a critical element of a rational approach towards strategic management. It underscores an organization’s need to appreciate numerous factors in its operating environment, and how these can impact upon it. For the purpose of evaluating the external environment of Southwest Airlines, this essay uses two of the most popular tools; namely: Liam Fahey and V. K. Narayanan’s STEP or PEST concept (1986); and Michael Porter’s five forces model (1980; 2008).

PEST Analysis

Political factors

Southwest Airline operates domestically in US and therefore its strategy is significantly influenced by the airline policy of Federal Aviation Administration (FAA) (see www.faa.gov). Specifically, the 1979 ‘Wright Amendment’; a legislation regarding the ‘Wright Zone’ which prohibits any airline to fly non-stop or provide through-plane service from Dallas Love Field to any city in any state except for location in Texas, Louisiana, Arkansas, Oklahoma, New Mexico, Alabama, Mississippi, and Kansas has been affecting Southwest’s operation for the past three decades. Recently, new legislation has been passed to repeal the Wright Amendment. It would come in effect in 2014 (Thompson and Gamble, 2012). The political environment in the US has been unfavorable for Southwest Airlines over the years due to strong lobbying in congress by supporters of rival airlines against the company’s interests. However, Southwest Airlines has on numerous occasions won legal battles against rivals in the US courts.

An important political factor affecting the Southwest Airlines strategy is terrorism. During the last decade, the threat of terrorism in civilian aircrafts has had a negative impact on airline industry in that it has increased the airport costs incurred due to additional security measures.

Economic factors

Aircraft derives its fuel from oil; therefore a rise in the price of oil has a major impact upon Southwest Airlines’ profitability travel (Thompson and Gamble, 2012). The future trends of oil prices are highly unpredictable due to the political changes occurring within the Middle-East region, especially the relations between US and Iran. On the other hand, the recession in 2008 has had a favorable impact upon Southwest’s operations. Although the customer demand for air travel reduced due to cuts in personal and business expenses across the US, the consumer demand for low-fares no-frills Southwest Airline underwent a growth due to a shift in consumers’ preferences towards cheaper, no- frill airlines (Southwest, 2010).

Concerning monetary issues, since Southwest Airline operates only within US, hence currency fluctuations do not impact Southwest Airlines’ operations.

Social Factors

Unlike other low-fare and no-frill airlines in the Europe, Southwest Airline has a strong commitment towards customer service. The airline has always adopted a customer centric approach for its management and marketing activities (Campbell, 2010). Its customer services personnel are widely encouraged upon going a step forward in appeasing customers through unusual tactics. Their efforts are rewarded through recognition and rewards, and are not punished for implementing their good judgment (Thompson and Gamble, 2012).

Technological factors

Technological developments have both created new opportunities as well as threats for Southwest Airlines. The emergence of teleconferencing and robust communication other the internet has provided businesses with an alternative for frequent travelling. On the other hand, technology has also provided airline industry with the opportunity to expand their outreach directly to consumers through e-commerce sites. Indeed Southwest Airlines was the first airline company to introduce ticketless travel and allows customers to make reservations online through its e-commerce website (Thompson and Gamble, 2012).

Porter’s Five Forces Model

To analyze the operating environment of Southwest Airlines and evaluate the nature of the competition Southwest Airline faces, a Porter’s Five Forces analysis will be used, created by Porter E.M professor at Harvard University Business School. The five forces are as follows:

The bargaining power of suppliers is high in the airline industry. For example fuel is a major input into an airline company (it accounts for 40% of all operating costs) (Thompson and Gamble, 2012), and the companies which provide fuel tend to be large, and hence have immense bargaining power. Their bargaining power is further enhanced due to the absence of any viable fuel alternative. Therefore charging a premium price by oil companies is only natural. Another cause of concern for the airline industry is the bargaining power of aircraft suppliers. The aircraft manufacturing companies have a monopoly as only two companies exist in the industry namely Airbus and Boeing.

Bargaining power of buyers is also high as the customers of airline industry are constantly looking for alternative air travel companies to get best value for their money. Additionally, many other full service airlines are considering adopting a low cost model for shorter routes with no frills, thus increasing choices for customers (Mouawad, 2010).

Competitive Rivalry: Southwest Airlines’ no frills model is been widely pursued by various long-haul, full-service airlines within US. Therefore, the airlines industry is highly competitive for Southwest Airline.

Entry Barriers; There are high barriers to enter the airline industry as it requires a large initial capital investment. Furthermore, the airline industry is faced with increased competition and is no longer as lucrative as before in conjunction with the price wars, thus making survival difficult for new entrants.

Substitutes: Although customers can switch to travel through train, coaches and cars, such travel modes are considered as uncomfortable and the cost advantage is neither too substantial. Therefore, the threat of substitute is very low.

Internal Analysis

The resource base view of strategy emphasizes upon a company’s internal capabilities in formulating strategies to achieve a sustainable competitive advantage in its market (Prahalad and Hamel, 1990). It deals with the competitive environment faced by an organization through an inside-out approach. The following are Southwest’s internal resources.

The Combative and Can-do Culture at South West

Southwest Airline has a strong combative can-do attitude ingrained in its corporate culture. The company’s legal struggle in its formative years produced a strong ‘esprit de corps’ among the company’s employees. With the media reporting Southwest Airlines difficulties, the company’s employees were clearly aware of the fact that the airlines existence was on the line. According to Colleen Barrett, the challenges faced by Southwest Airlines due to fierce adversaries by rivals and local officials were instrumental in building the passion of Southwest employees and ingraining a combative, can-do spirit in the corporate culture (Thompson and Gamble, 2012).

Southwest’s Leadership and Management

One of the most celebrated leaders of the company was Herb Kelleher, under whose leadership the company prospered for almost four decades, including its formative struggles. Kelleher preferred to do much of the management from outside the office whilst being among the staff members. He was a good listener, and a proponent of direct observation. He always encouraged his staffers in performing their duties. He attended most of the graduation ceremonies of his flight attendants classes and even helped load bags on ‘Black Fridays’. He was highly combative and had a flamboyant lifestyle; both of which were reflected in the company’s operations and management. Surprisingly, Kelleher was an adherent of conservatism when it came to the financial side of the business (Thompson and Gamble, 2012).

Much was the future leadership of the company was directly mentored by Kelleher himself. For instance, James parker (CEO 2001 – 2004) was associated with Kelleher with more than 23 years. Kelleher and Parker were considered to think much alike. Similarly, Colleen Barrette (President 2001 – 2008) was also associated with Kelleher and the company for more than two decades. Both these executive also followed Kelleher footsteps in spending most of their time on culture building, morale building and customer service. Gerry Kelly (CEO 2004 – Onwards) further advanced the corporate culture by through a steadfast focus upon triple bottom line of Performance, People, and Planet (Thompson and Gamble, 2012).

Human Resource Management

Herb Kelleher was a strong believer in the principle that if a company keeps its employees happy, its employees will in return keep its customer happy. Therefore, he contended that the employees- not the customers- came first. Kelleher knew thousands of employees by their name. Likewise, Colleen Barrette, put much efforts in creating a family like atmosphere within the company and put forth a network of contacts to stay in touch with each employee (Baum, 2006).

The company’s corporate culture treats its employees like a family, insisting upon their important contribution towards having a satisfied clientele. It regards its employees as the ‘creators’ of the company. The company has a strong ethos of listening to its employees ideas, and does not believe in constraining their thinking.

The company also insists upon hiring only those who share the same values as its corporate culture and does not lay off any of its employees (Thompson and Gamble, 2012)

Southwest Airlines Strategy

Southwest has pursued a low-cost, low-price, no-frills, strategy from day one. It made air travel affordable to the mass American population. Southwest advance ticket purchase requirements are more lenient than rivals and the company offers deep discounts for some seats purchased through its website.

The company offers ‘Business Select’ fares for economy minded business travelers. This fare offers early boarding privileges to passengers along with extra Rapid Rewards (Anthony, 2011).

Despite many of its rivals charging extra for add on services, like checking bags, in-flight snacks, buying a ticket in person from airport, fees for changing reservations, etc., Southwest insists upon an all-inclusive lowest fare. Its concept of price elasticity that is, the erosion of profit margins through offering lowest fares in more than compensated by increases sales volumes is proven to be true for most of its markets.

Southwest’s point to point route system also minimizes connections, delays and total trip time. Its emphasis on non-stop flights between pair of cities allows 75 % of its passengers to fly non-stop to their destination.

Strategic Options

Based on the aforementioned external and internal analysis of Southwest Airlines this essay presents a set of strategic options for the company. First this essay presents a TOWS matrix to generate strategic options:

StrengthsWeaknesses

Opportunities

Southwest Airlines can use its huge customer base to sell ancillary product apart from free add-ons service in its flightsSo far, Southwest Airline is the only airline making a consistent profit and undergoing constant growth in the US. It does not have any particular weaknesses in its current corporate strategy
Southwest Airlines can further imbibe e-commerce technology in its operation through developing applications for smart phones that enable customers to purchase tickets, check for promotional and discount offers, and check in.
Southwest Airline can promote its Triple Bottom line ethos as its commitment towards environment and promote a ‘green’ image.
Sustain its employees motivation and devotion level through further improving the company human resource policies pertaining to:

• ·Performance management and appraisal
• ·Rewards and amenities
• ·Stocks and shares options as compensation and bonus

Threats

Southwest Airline has so far not engaged in strategies that promote the Airline’s ‘green’ and environment friendly image. This can be a threat as customers are increasingly involving environmental concerns in their purchase decisions.The company can react to unstable oil prices by hedging for oil prices

Strategic Direction for Growth Strategies

Business firms must undergo continuous growth and change in order to retain their relative position in the market and in order to improve their position, they must grow “twice as fast as that” (Ansoff, 1957, p.113). According to Ansoff, there are four growth strategies namely: market penetration, market development, product development and diversification. Southwest Airlines can pursue growth strategies as its strategic direction for the company. Based on Ansoff’s growth matrix, the following is the strategic growth direction strategies for Southwest Airlines:

Products
ExistingNew
MarketExistingMarket Penetration and ConsolidationProduct Development
This should be a key strategic direction for the company. Southwest Airlines should consolidate existing routes and increase its market share on existing routes. The company should also exist from its current routes with low customer volumes where many of the flight seats go empty.Southwest Airlines should expand into ancillary products and services such as car rentals, hotels and accommodations, taxi services, etc. This could be a good strategic fit for its popular destinations. These services should also adhere to its corporate strategy of best value for the money and lowest costs.
NewMarket DevelopmentDiversification
The company should continue to explore new destinations to expand its business operations. It can be a profitable strategy.

Over the years, the company has associated several values with its brand image such as a highly competitive, survivor, and best value for the money. This brand equity could be used by the company to expand into related diversification such as, catering and hospitality business.
Expansion outside the US domestic market might not be a viable strategy for the company and it might be a diversion from the company’s core competenciesSouthwest Airlines’ diversification into long haul flight or flying more than point to point flights might not be a good diversification strategy as this would again be a drastic shift from the company’s core competencies

Evaluation of Strategic Options

According to Goold and Luchs (1993), the management literature and practice has extensively explored how organizations could best exploit their corporate expertise since the early 1990s. This exploration led to the emergence of themes such as core competencies and dominant logic view in formulation corporate strategic direction for companies. Based on these views, three important principles have emerged for corporate growth strategy:

Growth and diversification should be limited to those businesses that generate synergy; synergy occurs when the performance of several products and services (or businesses) adds up to more than the sum of its parts. It pertains to the creation of economies of scales in that two or more products/services or businesses can lower their costs by combining operations or manufacturing facilities, using common sales force or advertise jointly (Thompson and Martin, 2005).
The corporate strategy focus should be on exploiting core competences across a diverse product and service portfolio, and,
Successful growth strategies depend on building a portfolio of businesses or products/services which fit with the managerial “dominant logic” of top executives and their management style.

(Goold and Luchs, 1993; Lasserre, 2003)

Coinciding with this dominant business view, the aforementioned strategic directions for Southwest Airlines are deemed suitable and viable for its corporate growth. For instance all the aforementioned strategic options for Southwest Airlines pertain to:

• Using the airlines strong customer base to sell ancillary products;
• Further advancing its e-commerce services;
• Promoting its Triple Bottom line for ‘green’ image
• And enhancing the company’s human resource policies

All of these options are based on the Southwest existing core competencies and management dominant logic view as identified in the internal analysis.

Similarly the company’s growth and diversification strategies, which pertain to:

• Consolidation of existing markets
• Refraining from diversification is un-related products and services (long haul flight, international flights, hubs-spoke flights)
• Expansion into ancillary products and services and new profitable destinations within US
• And diversification through related business (hospitality and catering)

All of these options reaffirm the company’s core competencies and management dominant logic view along with creating synergies for the company.

Conclusion

Southwest Airlines has faced fierce competitive environment and averted intense market entry barriers over the years to emerge as a highly successful and sustainable airline business. It operates in an industry with high bargaining power of suppliers and customers and strong rivalry from well established competitors. The company has successfully mitigated political hurdles and used its core competencies towards its advantage in an economic environment where others have scaled down. Moreover, the company has used technologies in its favor to sustain efficiency in its business operations. The internal strengths of the company lie within its corporate culture, and motivated and committed workforce. It core competency pertains to its point to point, no-frill, low-cost and low-price air travel service business model.

Concluding this strategic analysis, this essay recommends Southwest airlines to implement strategic options and embark upon growth and diversification strategies which reaffirm the company’s aforementioned core competencies and further advance its internal strengths. These strategic directions are vital for the company’s continued growth and survival in the upcoming years within its respective industry.