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Strategic Management: an analysis of Southwest Airlines Case Study essay example
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Strategic Management: an analysis of Southwest Airlines Case Study

Executive Summary

Southwest Airlines is an airline company headquartered in Dallas, Texas. The company has been in operation since 1971. It is the leading local airline in the US. Analysed as per the porter’s five forces model, Southwest Airlines has a good chance of weathering competition from market entrants due to its unique approach to business as Simple, Fun and Profitable. The general external environment presents increased population and therefore higher market, better and supportive technologies, non-bureaucratic political and legal environment among other aspects advantageous to the growth of the company. The main weaknesses for the company are understaffing in key departments such as marketing, an ageing fleet, rise of vibrant local airlines such as Jet Blue Airlines among other challenges. The biggest challenge, however, lies in rising fuel costs which currently account for 37% of operational costs. This challenge has been countered by the strategic plans by Southwest Airlines to acquire bigger planes, do power-washing as well as fuel-hedging in order to reduce the fuel costs. Moves such as participation in Corporate Social Responsibility (CSR) could be appropriate marketing strategies to help gain loyal customers and increase market share.

Company Vision/Mission

The mission and vision of Southwest Airlines can be summed up in its slogan Doing the Right Thing. The mission statement for the company reads, “The mission of Southwest airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit”. The vision of the company is for a sustainable future where there will be a balance in its business model between community and employees, the environment and its financial viability.

Company Goals

The goals of Southwest Airlines are to get passengers to their destinations when they want to get there, on time and at the lowest possible charges, and make sure that the passengers have a good time while doing it. The company’s goal was to capitalise and build its business by flying to shorter routes where fares were competitive. The company targeted at minimizing the total travel time for passengers including ticketing and boarding. It also targeted to provide service out of airports convenient to doing business or vacationing in a city.

Company Policies/Values

The company policies and values can be summed up in three words that guide its staff and operations. These are simple, Fun and Profitable. The company values high-quality customer service, timeliness and friendliness. The policies of the company address the needs of the stakeholders, employees, communities and sustenance of the environment.

Corporate and Competitive Strategies Used

Southwest Airlines prides itself as the best airlines in the low-fare, high customer satisfaction airline in the United States. The strategy of the company right from its inception was to serve air transport in the United States. It capitalises on the short-and medium haul routes with a single class targeted at leisure travelers and business people. It focuses on point-to-point rather than hub-and-spoke service in markets. The point-to-point system allows the airline to provide more nonstop flights for its customers by minimizing delays, connections and total trip time.

External Analysis

Industry/Competition – Five Forces
Southwest Airlines operates in a highly competitive and dynamic industry and it is heavily impacted by the external environment. The porter’s five forces model are a suitable way to analyse this external influences. Current rivalry opportunities lay in the following areas; use of technology where Southwest Airlines was the first airline to offer ticketless travel option in 1994 (southwest.com, 2013). This means the company has a solid technological advantage over its rivals to help increase its business volume. In addition, the company has also increased local travel by leisure travellers and business people of which Southwest Airlines stands to benefit largely by it being a leading local carrier (Gittell, 2005).

Current rivalry threats include entry of new airlines targeting the local market, reduction in fares of airlines entering the local market resulting in stiffer competition. Moreover, the entry of better funded airlines to the local market has the potential to pose stiff competition to Soutwest Airlines’s operation. These airlines may have newer and more technologically advanced planes and this could snatch business from Southwest Airlines (Gittell, 2005).

The entrant of new companies into the American Airlines industry could also present some opportunities. According to Gittell (2005), the entry of new entrants and their traveling to new destinations gives Southwest Airlines a view of the business potential in those new destinations. As a result, Southwest Airlines could start travelling to those new destinations to exploit a huge market that might be unearthed by the new entrants. Additionally, the more the entrants into the local market, the lesser the fares charged. In such a business scene, a more established airline such as Southwest stands to gain from economies of scale by doing voluminous business though with small profit margins
Potential entrants also pose some threats. The first and most obvious is reduced market shares from market entrants such as Jet Blue Airlines, Delta among others. The second is reduced profits besides increased employee turnover- as they “poach” talented employees from already well-established rival companies such as Southwest Airlines. New entrants could also bring about sophistication and obsoleteness of Southwest’s existing technology as they come on board with newer and technologically advanced fleets (Coulter, 2013).
Bargaining power of buyer threats is another external influence on Southwest Airlines’s business. These issues include; reduced fares translating to reduced profits, increased demands from clients for on-board services and increased and costly demands for improved security from passengers
Bargaining power of buyer opportunities also affects Southwest Airlines’s business. There is an opportunity for Southwest Airlines to specialise in the transportation of a given class of travelers say business people or leisure travelers. There is also increased opportunity for product differentiation and thus diversification of profit making avenues for the company (Coulter, 2013)
Bargaining power of suppliers could also threaten the business. The fuel suppliers to Southwest Airlines increased the prices of fuel from $2.44 per gallon in 2008 to $3.25 in 2011. Southwest Airlines’s fuel costs represent 37.7% of all its operating costs (case study). The bargaining power of suppliers could also present some opportunities to Southwest Airlines.
The more the suppliers demand for their products, the more the client demands for improved service, timeliness and customization of services.

Going by Porter’s analysis, the other force that impacts on businesses is the presence of substitutes. In this case substitute product present opportunities and threats. Substitute products in air transport in the US are high-speed rails and these present opportunities for increased business in the country. Increased business and expansion of the economy means more travelling which opens opportunities for air transport as well. A major threat looms from substitute products in this case a different mode of transport besides air transport. The intensification of rail transport with high-speed rails being highly mooted across the US, the airline may have lesser passengers as many of them opt for alternative modes of transport (Gittell, 2005).

General External Environment

There are some economic opportunities in the general environment. The resurgence of the American economy means more business for the company while increased standards of living by Americans translates to more leisure travels. Economic threats include; Instability in the country’s economy which means less business as people cut on leisure and unnecessary costs and chose to save the money. Threats could are also presented by increased fuel costs in the country which translates to reduced profits. The liberalisation of the economy means more entrants to the air transport industry and thus reduced market shares (southwest.com. 2013)
The demographics of the USA also present opportunities and threats. Increasing population means more people that will need to be transported. On the other hand, the more the people, the higher their bargaining power and hence the lower the fares charged for transport.

The more the people needing transportation the higher the threat of terrorism and insecurity and therefore more costs to increase security (Gittell, 2005)
Changing socio-cultural aspects in the American market presents both opportunities and threats. Higher socio-cultural interactions such as intermarriages means that more people will need to travel across the country to meet their loved ones in other cities. In addition, increment in socio-cultural interactions enriches the tourism aspects of the country and hence increase demand for transportation services by domestic tourists (Gittell, 2005). Moreover, socio-cultural dynamics my prompt a demand for diversification of products based on socio-cultural uniqueness such as music themes, colors, and flight customizations for divergent cultural tastes and preferences (Coulter, 2013).

Some of the socio-cultural threats could be; the higher the level of multiculturalism in the country, the higher the risk of characters believed to be sympathisers and collaborators with terrorists. This increases the chances of terrorist attacks in air transport
Political and legal dynamics also present Southwest Airlines with opportunities for growth as well as threats to existing business. Increased political integration and the passing of legislations that remove bureaucracies in transportation enable transport companies to operate with minimal political and legal inhibitions. Some of the threats along these aspects include: Some states still hold onto restrictive and strict transport rules for instance in regard to security checks and this could increase the operational costs of the airline. Political instability in one state may impact on several other and cause a decline to the overall business of the company.

Changes in technology also present opportunities and threats to Southwest Airlines.

Southwest Airlines uses a single type of aircraft-the Boeing 737 which allows for simplified scheduling, maintenance, operations and training. The places have identical configuration which makes it easy for crews to operate and maintain and service them adequately. The more the company maintains this technological advantage, the more it stands to get opportunities for better services, discounts and strategic partnerships with its aircraft supplier-Boeing. The fitting of planes with fuel-saving, performance enhancing blended winglets present the com-any with an opportunity to reduce operational costs and increase its profits. Technological threats include;
the threat of high-tech terrorist attacks, obsoleteness of technology deployed in making current aircrafts, costly maintenance costs due to increasing technological demands to adapt to challenges such as hurricanes thereby posing huge operational costs.

Internal Analysis

There are also several internal dynamics that affect the success or decline of Southwest Airlines’s business. The first of these is strategic strengths and weaknesses of the company’s managers. The strengths of the company’s managers include; ability to maintain a fun and employee-friendly work environment, great experience and understanding in running the airline.
Strategic weaknesses of the managers include; an ageing chairman who might not be adequately conversant with the goings-on in the airlines industry.
Southwest’s corporate structure also presents an interesting internal influence on the company. Corporate structure strengths include; Presence of a strong and well established corporate culture, widely recognizable corporate colors, friendly and fun working environment, good reputation of the company among customers. To cap this, Southwest Airlines is clearly and properly established as the most preferred domestic carrier in the US.

Corporate structure weaknesses include; lack of diversification in the type of aircrafts and reliance on only one model presents a weakness should the model develop technical problems while over-reliance on an ageing management team presents a challenge for the company’s future (Coulter, 2013). The company also lacks highly differentiated uniqueness- any other airline can choose to be casual, friendly and introduce fun and games in its operations. Allegations of scandalous plane maintenance program could have impacted negatively on the company.
Production operation is another internal aspect of which Southwest Airlines has different strengths and weaknesses. Some of the strengths include; use of a single type of aircraft-Boeing 737 which makes it easy for scheduling, maintenance, operations and training. The fitting of planes with fuel-saving, performance enhancing blended winglets helps minimise operational costs on fuel and help to extend the flight range. Fuel hedging enables the airline to pay less for its fuel as compared to its competitors. Production-Operation weaknesses include; overreliance on one major fuel supplier. This may be a weakness to the company since the supplier can fail to supply the required fuel or supply low quality fuel.

Internally, the company has varying strengths and weaknesses in marketing. Some of its strengths include; significant recognition among Americans as a cheap and effective local airline, its approach to customers by engaging them in fun activities appeals to many customers, well recognised brand names, a strong corporate culture which appeals to many clients and increases customer loyalty while attracting many new customers. However, in times of national catastrophe such as the 9/11 attacks, South west Airlines’s marketing strategy of appealing to customers through fun activities and teasing them may not work and it may work against the company. In addition, the number of people employed in marketing is relatively few (only 5% of all employees serve in the management, marketing, accounting and office support functions) (Southwest.com, 2013). Few marketers could be overwhelmed by the workload and thus render the marketing strategies ineffective in the face on increasing competition.
Another internal aspect is research and development. Strengths in research and development include; prior to venturing into the airlines industry, the company performed adequate research in its area of business-low cost and timely local transport industry. The company is also well established, makes high profits and can thus fund its research and development expenses (Gittell, 2005). Research and development weaknesses include;
Specialization in the local air travel industry is attracting high costs due to market entrants and this impacts on operational costs, understaffing of the Research and development team
Human Resource management strengths include; maintenance of happy and highly motivated employees, the rigorous interviewing process by Southwest Airlines assures the company of quality and talented staff. In addition, maintenance of the company’s founder, Mr. Herb Kelleher as a chairman emeritus provides the company with an experienced father figure and valuable advice. Human resources management weaknesses include; understaffing in some key departments such as marketing, management, accounting and other office jobs and hence they may be ineffective
Strengths in Information System include; a well developed information and technological system full with automation and ticketless travel, downloadable applications such as DING makes it easier for clients to be aware of exclusive deals. In addition, the presence of an interactive website gives the airline a suitable platform to exchange information with its customers. Information System weaknesses include; overreliance on technology opens loopholes for hackings and potential fraud. Nearly all other airlines can match what Southwest can do and therefore the airline must seek other avenues to present its uniqueness.

SWOT Analysis

Strengths of Southwest airlines include; cost advantage over traditional carriers. The company charges lower than most of its competitors. There is also reasonable valuation- price to earnings ratio of 14:10 which is relatively cheap, widespread reach-by 2011; the company served 72 cities in 37 states in US (southwest.com, 2013). The company has enjoyed modest sales growth due to a dedicated and talented workforce. Southwest Airlines has a well-established brand- the company enjoys a good reputation among Americans.

Southwest Airlines has the following weaknesses; debt-the company has a debt of more than $361 million which can significantly affect their business. The other weak aspect is mounting operation costs-increased fuel costs and customers are demanding higher quality services and the company now enjoys reduced profits. Some customers have complained that Southwest Airlines is relatively expensive. It is relatively expensive for passengers to buy tickets on a plane and in times of economic downfall the customers may not have extra money
Southwest Airlines has the following opportunities; in 2011 South Carolina, Newark, New Jersey, Charlestown among other and more expansion is still possible (Gittell, 2005). The company also has chances for acquisitions. In 2011, the company acquired AirTran and further acquisitions are still possible since Southwest Airlines is a relatively large company. In addition, Southwest Airlines can gain more market share in the local US market. The woes that have befallen American Airlines presents Southwest with an opportunity to expand and grow its market share by acquiring the market once owned by American Airlines.
Threats faced by Southwest Airlines include; high fuel costs, uncertain economic conditions, enhanced security measures, uncertainty in weather conditions (especially hurricanes) in the US poses a threat to the air transport within the United States to some parts. Immense competition in the airlines industry also presents the company with a huge threat of losing market shares.

Strategic Issues

One of the strategic issues by Southwest Airlines is power-washing jet engines to get rid of grime. This is a strategic move aimed at reducing the fuel consumption of the aircrafts. Fuel costs currently account for 37% of the total operational costs and by reducing these costs the company could make higher profits. The acquisition of a Boeing 737-800 is a strategic move that will lead to the transportation of more passengers (175). This plane has features to help reduce operation costs and ensure environmental compatibility of Southwest Airlines’s planes. The third strategic issue is fuel hedging-(where the company pays for fuel upfront) enables the company to purchase fuel at a lower cost as compared to its competitors. This is a strategic issue aimed at reducing the fuel costs, rake in more profits and gain competitive advantage over other domestic carriers such as Jet Blue Airlines, Delta among others. The fourth strategic issue is the acquisition of AirTran. This was a strategic issue aimed at gaining more market share in order to assert dominance over market entrants.

Strategic issue alternatives

The first alternative to the above strategic issues is collaboration with its main partner-Boeing. The management of Southwest Airlines could collaborate with Boeing to have them offer quality maintenance of their planes. This could give the Airline better quality services; ensure durability of their fleet and therefore minimal operational costs. This ultimately increases the profit margins since the operational costs are effectively reduced.
The second alternative by Southwest Airlines could be to participate heavily in corporate social responsibility by for instance sponsoring environmental sustenance activities. Other than being way to help the community from which their loyal customers come from, CSR helps to market the company greatly (Gittell, 2005).
The third alternative for Southwest Airlines could be mergers. Besides acquisitions, Southwest Airlines could also get into mergers with other large domestic carriers in order to dominate the local market through synergy.

Recommendation

It is recommended that Southwest Airlines revamps its marketing department and becomes more aggressive in marketing. This will increase its market share. A large and loyal client base will assure the company of massive business going into the future. Moreover, the large market share will lead help the company to reduce costs of production, and therefore make larger profits to help it weather increasing competition in the airlines industry.

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Implementation

The implementation of these recommendations entails reorganization of business priorities and to give marketing a high priority. The recruitment of marketing experts would help to inject professionalism in the process while adequate funds would also help execute the mandate effectively.

References

Coulter, M. (2013). Strategic management: In action. (6 ed.). New Jersey: Pearson Education Inc.
Gittell, J. H. (2005). The Southwest Airlines way: Using the power of relationships to achieve high performance. New York: McGraw-Hill.
Southwest Cares. Retrieved July 15 2013 from: http://www.southwest.com/assets/pdfs/corporate- commitments/southwestcares.pdf

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