Professor Edward Desmarais
BUS 470 Business Policy and Strategy
Spring 2004
SOUTHWEST AIRLINES
CASE ANALYSIS
Presented by: The Stategizers
Lawrence Bluemmel, Irene Johnson, Dennis Mackey, Dorothea Morgan,
Elaine Pereira, Jeff Piecuch, Heather Pontifex, Nicole Soucy
TABLE OF CONTENTS
I. Executive Summary
A. Mission
B. Vision
C. Objectives
D. SWOT Summary
E. Recommendations
3
3
3
3
6
7
II. Current Situation
A. Current Performance
B. Strategic Posture
8
8
9
III. Corporate Governance
A. Board of Directors
B. Top Management
25
25
25
IV. External Factors
27
V. Internal Factors
118
VI. Action Plan
178
Appendix A. Stakeholders Worksheet
Appendix B. Answers to Panel’s Questions
206
212
2
I. EXECUTIVE SUMMARY
A. Mission
To provide a low-cost/low-price/no-frills, reliable, friendly service with “more value for less money”
mode of transportation for consumers traveling short distances for business and/or leisure.
B. Vision
To keep their costs down, keep their ticket prices down and expand into new markets that have a high
traffic potential while maintaining profitability and strong position as an industry leader.
C. Objectives
Short-term Strategic Objectives

To increase market share by 5% within the next 2 years.

Southwest will decrease its downtime for repair of planes by 2% in 3 years.

Continue to increase product quality by 5% over the next 5 years.

Purchase 2 new planes within the next 2 years.

Increase aircraft utilization by 3% over the next 2 years.

Add one or two new cities to each route system in any one year.

Continue to invent new attractive product lines by 5% by 5 years.

To keep improving their Internet capabilities and e-commerce by 5% over 5 years.

Work on improving their on-time performance by 5% within one year.

Continue to be the most admired airline in America for the next three consecutive years.

Work on becoming the top-ranking airline for Involuntary denied boarding within the
next 2 years.

Increase their technological know-how by 5% within the next 3 years.

Introduce new innovative products or services by 5% over the next 3 years.

Increase the number of cities introduced to their route each year to 4 cities with in the
next 3 years.

Continue to rank #1 for the next 5 years in customer satisfaction.
3
Long-term Strategic Objectives

Increase Southwest’s 65% share of passengers traffic in its biggest 100 cities by 10%
over the next 5-10 years.

Over the next 10 years, improve their quicker design to market time by 5%

Increase product quality by 10% over the next 10 years.

Decrease their operating costs by 5% over the next 10 years.

Over the next 10 years, increase attractive product line by 7%.

To increase website sales to 90% within the next 10 years.

To decrease their flight times by 3% over the next 5-10 years.

To decrease their flight times by 3% over the next 5-10 years.

To still be the most admired airline in America in the year 2010.

Over the next 5-10 years, decrease the number of complaints per 100,000 passengers by
2%.

Introduce new systems to decrease time required to create optimal crew schedules by 5%
within the next 5-10 years.

Increase their products or services by 105 over the next 5-10 years.

Increase the number of jets in their fleet by 5% over the next 7-10 years.

Decrease customer complaints by 2% over the next 5-10 years.
4
Short-term Financial Objectives

Increase revenue passenger miles by 6% by year 2001.

Delivery of 23 new aircraft for 2002.

Delivery of 17 new aircraft for 2003.

Add additional service routes to existing route system by 2003 and additional
frequencies.

Operating revenue growth to increase by 20% each year for the next two years.

To build a sales team by 2003 to spike corporate travel by 70%.

To increase daily nonstop departures by 15 by year 2004.

Increase diluted earnings per share to .15 cents by 2001.

Increase diluted earnings per share to $1.00 by 2004.

To hedge 76% of 2003 anticipated fuel needs with cap of $23 per barrel.

Lower agency commissions to a flat 5% over one to two years.

Hedging fuel costs each year through 2002 by 80% to reflect gains of 10 to 15 million.

Decrease unit costs by 2% each year for next two years to account for higher insurance
premiums, security fees, and other cost challenges.

To obtain revolving credit line of $575 million by year-end 2002.

To expand geographic routes to gain market share over the next three years and continue
to expand coverage in their current geographic areas.

To have $2 million in cash on hand by 2002.
Long-term Financial Objectives

Options to purchase rights of 396 aircraft for 2004 through 2012 to allow for expansion
and growth.

Increase diluted earnings per share to $3.00 by 2008.
5
D. SWOT Summary
Strengths
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Low operating cost
Service Innovation
Technological know-how
Advertising and promotion
Product innovation
Age of equipment
Ability to continuously refine service
Intellectual capital
Financial Position
No frills service
Image
Safety Record
Customer Service
Attractive customer base
Culture
Opportunities

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Weaknesses

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Product breadth and depth
Multi-country coverage
No baggage transfer outside Southwest
Lack of intra-airline services
Growth opportunities in relation to
population demographics
Societal values in the changing economy
Growth opportunity as a result of 9-11
due to decline in market size
Vertical integration
Extent of rival’s horizontal integration
Long-term industry growth
Threats
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Economic downturn
Legislative and regulatory
Technology/e-commerce
Number of rivals and their relative size
Rival distribution channels
Extent to which rivals use economy of
scale
Industry profitability in relation to the
changing economy
Consumer confidence
Diminishing pool of candidates
Southwest can employ
6
E. Recommendations
1. Introduce structured continuous learning programs that will be used to maintain current
employees.
2. Adapt services and specials to cater to the population based on their demographics in order to
increase market share.
3. Pursue market growth opportunity created when the market declined as a result of 9-11.
4. Defer delivery of new aircrafts.
5. Create a “shared services” ground crew pilot program with competitors.
6. Create a promotional campaign of a “buy one, get one free” ticket offer on one-way ticket
purchases for off-peak flights.
7. Place smaller sized advertisements in newspapers and magazine.
8. Write a letter to shareholders to quell fears and outline Southwest’s future plans.
9. Advertise to gain market share in the most profitable markets and in market that are not
achieving forecasted projections.
10. Improve turnaround times
11. Hedge gas prices for the coming year.
12. Promote safety record and safety measures taken in order to defend against the lack of
consumer confidence in the airline industry post 9-11.
13. Expand services to add to the convenience of the travelers to defend against the threat of
technology/e-commerce.
7
II. CURRENT SITUATION
A. Current Performance
Overall, Southwest’s performance in recent years has been outstanding. Their ROI’s have been
steadily increasing. Southwest has consistently ranked first in market share in 80-90 percent of its top
100 city-pair routes and had an overall 65 percent share of the passenger’s traffic on its biggest 100
city-pair routes. Its market share is 2000 for the airline industry was 9.4%. Despite being in an
industry that is noted for its “vulnerability to economic cycles and big swings in bottom-line
performance”, Southwest has been profitable every year since 1973. It is also a growth rate of 1.0% in
2000 up from the .5% in 1999.
Overall Southwest’s relative competitive position in the airline industry in which it competes is
high. They have strong market shares, strong management, and strong strategies that keep them
competitive against their rivals.
8
B. Strategic Posture
Chapter 2 Worksheet
Mission
Criteria
What is our business?
Facts
Southwest is in the airline transport
business. They provide low cost air
travel to consumers moving from one
city to another for business or leisure.
What does this mean?
Southwest is in a highly competitive
industry which calls for innovative cost
savings and customer service ideas to
differentiate their product to gain market
share.
Southwest satisfies their customers by
starting with how they hire their
employees. They look for people that
are ‘people-oriented extroverts’ with the
idea that providing superior customer
service will help gain market share and
generate word of mouth business.
Southwest has its employees perform
additional tasks such as cleaning and
clearing planes whereas rivals require
additional employees thus giving
Southwest a competitive advantage.
Southwest’s innovation has helped them
become a leader in the airline industry.
Who are our customers
(stakeholders)?
What do we do for each
of them?
How (technology used
or functions
performed) do we meet
their needs and
expectations?
“See Stakeholders Worksheet”
“See Stakeholders Worksheet”
9
How do we
communicate the
mission to our
organization and our
customers
(stakeholders)?
Southwest communicates its mission
throughout its organization and to its
customers through their website, annual
reports, advertisements and their
employees actions.
Their mission is also transmitted to their
employees through their ‘Culture
Committee’, which promotes the idea of
‘Positively Outrageous Service’ to all.
The company’s executives are the
catalysts in their belief in a strong
corporate culture that will be
demonstrated to consumers every flight.
The mission is communicated in order
to achieve an understanding of what is to
be expected of Southwest. To
understand the mission of Southwest, we
must see the actual mission: (I found
this on their website) “The mission of
Southwest is dedication to the highest
quality of Customer Service delivered
with a sense of warmth, friendliness,
individual pride, and company spirit.”
Southwest keys on the idea of providing
superior customer service as their
competitive advantage over other
airlines. Their mission states the reason
why you as a consumer should choose to
fly with Southwest. Also, Southwest
provides an additional mission statement
directed at employees and prospective
employees as reason why you should
want to work for them.
The idea of Southwest’s mission
statement is permeated throughout their
entire hiring process which heavily
screens for the specific personality types
of people they are interested in hiring for
customer service jobs. Southwest takes
the idea of superior customer service to
its highest level. By screening their
candidates Southwest has found that they
can create a much better (stronger)
corporate culture by hiring certain
personality types that will blend in and
work well with other employees. This
strategy has paid off by creating an
almost ‘cult like’ corporate culture where
all employees work well together. By
having direct contact with customers,
Southwest’s mission is communicated to
their customers.
Southwest uses advertisements to
communicate the fun loving, low cost
attitude to a wide range of consumers.
The strategic implications of having this
mission are to differentiate Southwest’s
customer service from other airlines. The
idea is that consumers can switch to
other airlines because prices are
comparable, because the routes are
comparable but an airline can create an
advantage for their selves by providing
superior customer service.
10
Vision
Criteria
What will our business
be in 5, 10 years?
Facts
The vision is meant to solidify senior
executive’s view of the company’s long
term goals, reduces hasty decision
making, gives purpose to all employees,
and helps the company prepare for the
future.
Southwest plans to continue down the
path they have led over the last 28+
years. Over the next 5 years Southwest
will keep their costs down, keep their
ticket prices down and expand into new
markets that have cities around 150-700
miles apart where there is high traffic
potential while maintaining profitability
in their existing business.
What does this mean?
Southwest has a concise written record
of where they intend to be in the near
future. Southwest’s vision and strategy
has worked so well in the past, they are
going to continue down the same path
while using continuous improvement
along the way.
Southwest will use meaningful goals to
work towards as a company. These
goals can be used as milestones to help
determine whether compensation
bonuses should be given to departments
achieve high marks in pertinent
categories.
Southwest is going to continue to
research new ways to keep costs down
by observing and listening to employee
suggestions. Southwest wants to
maintain their perfect record of no
accidents. They also want to achieve the
highest marks they can in on time
arrivals and departures. The key is
within Southwest’s mission (superior
customer service) to maintain and
strengthen their position as an industry
leader.
Who are our future
customers? What will
we do for each of
them? How
(technology used or
functions performed)
will we meet their
needs and
expectations?
How will we
communicate the vision
to the organization and
our customers?
“See Stakeholders Worksheet”
Southwest communicates its vision
through their website, annual reports,
advertising and through company
meetings. Management is required to
pass on this information to all employees
that haven’t heard in order to get
everyone on the same page moving
forward. Southwest’s focus on customer
service works into advertisements.
Southwest’s vision is a tool, which they
use to attract business.
“See Stakeholders Worksheet”
Southwest communicates their vision
through their website, media and
marketing in order to maintain their
status. Management circulates the good
word from within the organization.
11
ESTABLISHING OBJECTIVES
Strategic objectives
Criteria
Facts
Throughout the past 10 years, Southwest
Market share
has consistently ranked first in market
share in 80-90 percent of its top 100 citypair routes and had an overall 65 percent
share of the passenger’s traffic on its
biggest 100 city-pair routes. Southwest
carried the most passengers in the top
U.S. markets, even when they were
serving only 40 of them.
Quicker design-tomarket times
Higher product quality
What does it mean?
Short-term: To increase market share
by 5% within the next 2 years.
Long-term: Increase Southwest’s 65%
share of passengers traffic in its biggest
100 cities by 10% over the next 5-10
years.
Southwest’s fleet of planes solely
consisted of Boeing 737’s. Having only
one type of plane minimized the need for
spare parts and inventory for several
different planes. This made it easier to
train personnel, improve the proficiency
and speed and simplify the task of
scheduling planes for flights. Ultimately
this would allow Southwest to keep its
planes up in the air and not on the
ground and downtime would be minimal.
Short-term: Southwest will decrease its
downtime for repair of planes by 2% in 3
years.
Southwest was the only major short-hop,
low-fare, point-to-point carrier in the
U.S. airline industry. This is a
competitive advantage for Southwest.
They provided more flight times to
particular locations that other airlines
could not match. Southwest’s low fare
and frequent flights were named the
“Southwest effect”.
Short-term: Continue to increase state
of the art equipment by 5% over the next
5 years.
Long-term: Over the next 10 years,
improve their quicker design to market
time by 5%,
Long-term: Increase state of the art
equipment and technology by 10% over
the next 10 years.
Southwest placed a strong emphasis on
safety. Their high quality maintenance
and reliable operations put them at the
top of the list. In 30 years of operation,
Southwest has never had a plane crash.
Their superior state of the art flight
dispatch system allowed them to
minimize weather and operational
delays.
12
Lower costs relative to
rivals
Having only Boeing 737’s reduced
Southwest’s costs for maintenance and
parts.
Encouraging online reservations over the
traditional over the phone method, saved
costs paid to travel agents.
Short-term: Increase purchase of planes
by 3% over the next 2 years.
Short-term: Increase aircraft utilization
by 3% over the next 2 years.
Long-term: Decrease their operating
costs by 5% over the next 10 years.
Flying passenger to nearby airports and
avoiding congested airports reduced the
fuel costs associated with planes sitting
in line at the airports waiting for land
clearance.
Southwest used a point-to-point system
for scheduling. This was more cost
efficient than the hub-and-spoke systems
that rivals used. This system resulted in
higher utilization of aircraft’s and
terminal facilities, reducing both the
terminal gates and number of aircraft’s
needed to support flight operations.
Southwest’s point-to point reduced their
labor costs and made theirs lower than
that of rivals.
Southwest had the flight attendants clean
up the plane after each flight thus saving
on the costs for a cleaning crew.
Southwest’s operating costs as a
percentage of revenues were consistently
the lowest in the industry. These lower
operating costs ultimately allow
Southwest to offer the lowest price for
airfare in the industry.
13
Broader or more
attractive product line
than rivals
Southwest had 2,700 flights daily in
2001.
Short-term: Add one or two new cities
to each route system in any one year.
Southwest has consistently ranked first
in market share in 80-90 percent of its
top 100 city-pair routes and had an
overall 65 percent share of the
passenger’s traffic on its biggest 100
city-pair routes. Southwest is the only
airline that met the needs of traveler’s in
the cities of Dallas, san Antonio and
Houston with the ‘Love Triangle”
Short-term: Continue to invent new
attractive product lines by 5% by 5 years.
Long-term: Over the next 10 years,
Increase attractive product line by 7%.
Southwest added additional long nonstop
flights. Over 85% of Southwest’s flights
involved actual in-air flight times of less
that 90 minutes. In 2000, about 420
flights were longer than 750 miles
compared to there 140 percent in 1995.
Not only were Southwest’s schedules
attractive but their flight crew and
attendants were attractive too. To gain
customers, Southwest came up with the
idea of dressing their flight hostesses in
hot pants and white knee-high boots with
high heels. This caught the eyes of
passengers.
Southwest offered free alcoholic
beverages during daytime flights.
In 2001 Southwest reported net profits of
$121 Million while other major airlines
reported losses.
In 2000, Southwest passengers on flights
exceeded 60 million. Southwest became
the fourth largest airline in the industry.
In 1999 Southwest added 3 more cities.
In 1998 Southwest was named the best
company to work for in America.
In 1997 Southwest begins service to its
50th city with over 50 million people
flying Southwest.
14
Better e-commerce and
internet capabilities
than rivals
In 2001, Southwest implemented its new
software program that significantly
decreased the time required to generate
optimal crew schedules and help
improve on time performance.
Southwest encouraged customers to
purchase tickets via their website. This
would reduce the number of personnel
needed to handle the large volume of
calls. In 2001, 35% of ticket sales were
coming from their website. Ticketlless
travel accounted for over 80% of all
sales. This reduced back office
paperwork and processing.
Superior on-time
delivery
Southwest provided fast superior on-time
delivery. They were known for their 10minute turns. They took on the
challenge of loading and unloading the
passengers and baggage, and completing
the necessary paperwork all in 10
minutes of time. This became know as
one of Southwest’s signatures. In later
years when passenger volume grew, the
turn around time increase but was still
better than the other major competitors.
Short-term: To keep improving their
Internet capabilities and e-commerce by
5% over 5 years.
Short-term: Increase capabilities that
are better than rivals by 3% in 2 years.
Long-term: To increase website sales to
90% within the next 10 years.
Short-term: Work on improving their
on-time performance by 5% within one
year.
Long-term: To decrease their flight
times by 3% over the next 5-10 years.
Flying passenger to nearby airports and
avoiding congested airports, reduced the
time spent when planes sat in line at the
airports waiting for land clearance.
Southwest’s new software helped to
improve on their time performance.
Southwest was known for its attention
getting ads. One particular ad states
“The All-time On-Time Airline”
Although in 2000 there on-time
performance slipped, they have worked
on improving it since then.
Stronger brand name
than rivals
Southwest is known as one of the most
admired airlines in America. In 1997,
1998, 1999, and 2000 they were ranked
one of most admired companies in the
world. Southwest is the lowest priced,
customer friendly airline around. This
gives them a strong brand name superior
to rivals in the airline industry.
Short-term: Continue to be the most
admired airline in America for the next
three consecutive years.
Long-term: To still be the most
admired airline in America in the year
2010.
15
Superior customer
service
Southwest always went out of their way
to make sure that passengers had a fun
flying experience. Gate personnel were
cheery and witty; and flight attendants
were encouraged to let their personalities
show. Throughout the years,
Southwest’s employees had built up the
reputation of Southwest. By providing
continuous superior customer service,
always smiling, and showing common
courtesy to customers.
In 1993, Southwest wrote a book, which
explained how employee’s attitudes and
personal commitment to serving other in
a caring manner brought the highest level
of customer service to Southwest.
Short-term: Work on becoming the top
ranking airline for having the lowest
involuntary denied boarding within the
next 2 years.
Long-term: Over the next 5-10 years,
decrease the number of complaints per
100,000 passengers by 2%.
One of Southwest’s managers stated
“Our fares can be matched; our airplanes
and routes can be copied, but we pride
ourselves on our customer service.”
Southwest had the lowest cumulative
number of customer complains from
1996-2000. They ranked #1 for five
years in a row. Southwest’s percentage
of scheduled flights arriving within 15
minutes of scheduled time was the
lowest for the period of 1996-2000 based
on a cumulative rating.
Their mishandled baggage was ranked 1st
with the lowest number of mishandled
bags for the 5 year stretch. This ranking
is cumulative.
Stronger global
distribution than rivals
Industry leader in
technology
N/A Not a global company
N/A Not a global company
Southwest’s superior state of the art
flight dispatch system helped to
minimize weather and operational
delays. Thus saving them time on flights
going in and out of airports.
Short-term: Increase their
technological know-how by 5% within
the next 3 years.
Their ticket sales were 35% via their
technologically superior website.
Southwest is working on increasing their
sales via their website.
Long-term: Introduce new systems to
decrease time required to create optimal
crew schedules by 5% within the next 510 years.
In 2001, Southwest introduced their new
software that significantly decreased
there the time required to generate
optimal crew schedules and help
improve on time performance.
16
Industry leader in
product or service
innovation
Southwest was the only short-hop, lowfare, point-to-point carrier in the U.S.
airline industry in 2001.
Short-term: Introduce new innovative
products or services by 5% over the next
3 years.
Southwest had the simplest fare structure
of any of the major U.S. airline carriers.
Long-term: Increase their products or
services by 10% over the next 5-10
years.
Southwest introduced new ideas to their
Company that no other airline in the
industry matched. They decided to allow
passengers to sit wherever they wanted
on their flight.
Southwest did not have first-class
sections on any flight. All passengers
were treated equally.
Southwest’s Marketing and service were
like no other airlines’. They were known
for their unique attention getting ads.
Flight attendants wore attractive clothing
with high heel shoes and were told to let
their personalities show and have fun on
their jobs.
Southwest believed that employees came
first and customers came second.
Without the employees the company
wouldn’t be where it is today.
Wider geographic
coverage than rivals
Southwest was operating 353 jets to 58
airports in 57 cities in the continental
U.S. They were the dominant carriers at
4 airports: Baltimore/Washington, Las
Vegas, Kansas City, and Chicago
Midway.
Short-term: Increase the number of
cities introduced to their route each year
to 4 cities with in the next 3 years.
Long-term: Increase the number of jets
in their fleet by 5% over the next 7-10
years.
Each year, Southwest introduced two
new cities to each route system.
Higher levels of
customer satisfaction
than rivals
Southwest had ranked #1 in customer
satisfaction among U.S. major airlines
for 10 consecutive years in a row-19912000. Southwest was ranked as the most
admired airline in America and one of
the most admired companies in the
world.
Southwest ranked #1 for 5 consecutive
years for their outstanding low number
of customer complaints. They also
ranked #1 in mishandled baggage and
on-time flights.
Short-term: Continue to rank #1 for the
next 5 years in customer satisfaction.
Long-term: Decrease customer
complaints by 2% over the next 5-10
years.
17
Financial objectives
Criteria
Revenue growth
Facts
In 2000 Southwest Airlines ranked
number 7 in operating revenues of the
top ten commercial airlines in the
industry. In 1995 Southwest’s operating
revenues were $2,873.5 mil and
increased each year through 2000 to
$5,649.6 mil. The growth percentage
rate from 1995 to 2000 was 97%.
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
= 19% growth rate
= 12% growth rate
= 9% growth rate
= 14% growth rate
= 19% growth rate
2000
5,649.6
Southwest
Continental
American
North West
US Air
TWA
United
American
West
Alaska
Delta
1995 % of growth
2,873.5
97%
19.30%
12.74%
12.63%
11.03%
8.52%
8.34%
7.60%
6.71%
3.95%
2.82%
The Southwest strategy for growth has
been a threat to competitors as shown by
the above chart. They have taken market
share away from their top 9 competitors.
The growth rate for 2000 was the same
as in 1996 at a rate of 19%.
Even though Southwest was ranked
number seven in operating revenues,
they are beating their rivals by having
the highest percentage of growth in
comparison to the top ten rivals from the
year 1999 – 2000.
What does it mean?
Long-term/Short-term: Southwest’s
short-term growth was increasing each
year from 1995 - 2000.
Increase revenue passenger miles by 6%
by year 2001.
Short and long term goals of growth
plans and adding new aircraft to
accommodate these goals.
Delivery of 23 new aircraft for 2002.
Delivery of 17 new aircraft for 2003.
Add additional service routes to existing
route system by 2003 and additional
frequencies.
Operating revenue growth to increase by
20% each year for the next two years.
Continue with their current strategy to
run special promotions and attention
getting advertising.
Southwest plans to keep the market share
in the long term by staying ahead of the
competition with their low flight rates
and no frills strategy. They will continue
with this strategy as long as they can
sustain it.
Options to purchase rights of 396 aircraft
for 2004 through 2012 to allow for
expansion and growth.
To build a sales team by 2003 to spike
corporate travel by 70%.
To increase daily nonstop departures by
15 by year 2004.
By bringing in the lowest fare prices, that
brought flight pricing down and more
people are able to afford flying. This
increases the market for travel.
18
Earnings growth
Earnings Growth 1991-2000
2000
625,224
150,846
31.80%
1999
474,378
40,947
9.45%
1998
433,431
115,659
36.40%
1997
317,772
110,435
53.26%
1996
207,337
24,711
13.53%
1995
182,626
3,295
1.84%
1994
179,331
25,047
16.23%
1993
1992
154,284
97,385
56,899
64,237
58.43% 193.79%
1991
33,148
In 1990 Southwest was the only major
U.S. airline to record both an operating
profit and a net profit.
In 1994 Southwest acquired Morris Air.
The acquisition costs would explain the
decrease in earnings growth from 1994
to 1995.
Long-term/Short-term: In Feb 1982
Kelleher became President, CEO and
Chairman of Southwest Airlines. Part of
his fiscal conservatism focused on
bottom line profitability. He said,
“Manage good times so that you are
ready for bad times”. This philosophy
will make it easier for Southwest
Airlines to get through the 911 crises.
They will have an advantage over
competitors during rough times.
Southwest will continue with this
philosophy in both short and long term
by making cost reductions before they
get into a financial crunch. They will
continue with their pro-active approach
to profitability to take them into the
future while maintaining profitability and
staying ahead of their competitors.
They will continue with the philosophies
of Kelleher to stay financially strong.
Southwest will continue with its current
business strategy, which includes their
competitive cost advantage to endure the
hard times to come from the 911 crisis.
Will change hedging from 80% to 76%
of anticipated fuel expense to plan for
falling fuel prices in 2002.
In 2001 Southwest reported net profits of
$121 million, while Delta, United,
American and U.S. Airways reported
losses.
Based on their earnings from 1991-2000,
we can see that Southwest has always
shown a net profit and each year it has
increased. The increases from year to
year varied because of the economic
situations. However, their largest
earnings percentage increase was from
1991 – 1992. Because of Kelleher’s
leadership and philosophies, his hard
work was starting to reap the rewards in
1992.
19
Higher dividends
Excluding the cumulative effect of
accounting changes, in 1991 cash
dividends started at .00987 and had
reached .02200 by the year 2000. Each
year since 1991 Southwest had increased
its cash dividends, with the exception of
1994 to 1995, in which it stayed the
same at .01185. In 1994 Southwest
acquired Morris Air, which would
explain the dividends staying the same
from 1994 to 1995 due to acquisition
costs.
Long-term/Short-term: For ten
consecutive years, from 1991-2000,
Southwest was ranked number one in
customer satisfaction, while at the same
time managed to keep costs down which
enabled them to show a To continue
current strategy to continue into the long
term to increase dividends each year.
Their performance was number one in
comparison to all U.S. major airlines.
Increase diluted earnings per share to .15
cents by 2001.
Increase diluted earnings per share to
$1.00 by 2004.
Increase diluted earnings per share to
$3.00 by 2008.
Wider profit margin
2000
1999
Revenue 5,649,560 4,735,587
Costs
4,628,415 3,954,011
Oper Prof 1,021,145 781,576
Margin
18.07%
16.50%
1998
1997
Revenue 4,163,980 3,816,821
Costs
3,480,369 3,292,585
Oper Prof 683,611 524,236
Margin
16.42%
10.30%
10.91%
1994
1993
Revenue 2,591,933 2,296,673
Costs
2,275,224 2,004,700
Oper Prof 316,709 291,973
Margin
12.22%
Southwest will increase their revenues
10% each year by expanding to new
geographic areas.
Southwest will continue with their
present strategy to be clever in
advertising and promotions to gain
market share from rivals.
13.73%
1996
1995
Revenue 3,406,170 2,872,751
Costs
3,055,335 2,559,220
Oper Prof 350,835 313,531
Margin
Long-term/Short-term: Southwest will
use their hedging strategy to keep the
cost of fuel at rates that will produce a
wider profit margin.
12.71%
1992
1991
Revenue 1,802,979 1,379,286
Costs
1,609,175 1,306,675
They will continue to maintain the
lowest costs in the industry by using
their proactive strategy.
Lower agency commissions to a flat 5%
over one to two years.
Hedging fuel costs each year through
2002 by 80% to reflect gains of 10 to 15
million.
To hedge 76% of 2003 anticipated fuel
needs with cap of $23 per barrel.
Decrease unit costs by 2% each year for
next two years to account for higher
insurance premiums, security fees, and
other cost challenges to increase profit
margins.
To increase profit margin by 3% each
20
Oper Prof
193,804
72,611
year from 2001 - 2004.
Margin
10.75%
5.26%
To increase profit margin by 5% each
year from 2004 – 2010.
With exception of 1994 through 1996,
Southwest has been able to increase their
profit margin each year. Kelleher was
always cost conscious. In 1999 he was
concerned about the price of jet-fuel
going up so he hedged 80% of
Southwest’s anticipated 2000-2001 fuel
requirements. This moved paid off when
the price spiked to almost double of 1999
prices. Kelleher also wrote a letter to
employees asking to institute actions that
would save the company $5.00 per day
in non-fuel costs. The result was a drop
on non-fuel costs in 2000 by 5.6% below
1999 levels.
We can see from 1994 to 1995, the time
Southwest acquired Morris Air, there
was a drop in margin due to acquisition
costs.
In 2000 Southwest records its 28th
consecutive year of profitability and 9th
consecutive year of increased profits.
The profitability of Southwest is a threat
to rivals in the industry. This shows that
Southwest has been gaining market share
from its competitors. For the last ten
years going back from 2001, Southwest
consistently ranked first in market share
in 80 to 90% of its top city-pair routes
and overall 65% share of passenger
traffic on its biggest city-pair routes.
Southwest’s operating costs, as a
percentage of its revenues, were
consistently the lowest in the industry.
EVA performance
EVA=OP-IT-WEIGHTED AVERAGE
COST OF CAPITAL
Long-term/Short-term: To continue
with their current financial strategy for
both short and long term.
Weighted average cost of capital is not
available.
MVA performance
(Current Stock price*#Outstanding
Shares)- Shareholders Equity
Current stock price not available
If stock price were available it would be
used to calculate how management used
Stockholders investment to appreciate
the Stockholders value in the company.
Long-term/Short-term: To continue
with their current financial strategy in
both short and long term.
21
Strong bond and credit
ratings
In May 2001, Southwest’s capitalization
of $14 billion exceeded the combined
market capitalization of American
Airlines, United Airlines, and
Continental Airlines.
Southwest has been the strongest in their
industry financially. This will make it
easier to obtain funds on credit and give
them an advantage over their
competitors.
Long-term/Short-term: Management
of finances at Southwest will continue to
be superior to their rivals in both the
short term and long term.
To obtain revolving credit line of
$575 million by year end 2002.
Continue to become stronger each year
financially to maintain a strong bond and
credit rating.
They had a revolving credit line of $475
million.
Recognition as a bluechip company
N/A
Southwest was the first U.S. airline to
win the Triple Crown award in 1988 and
has been ahead of the rivals in profit and
market share. However, this case does
not refer to them as a blue-chip
company.
N/A
More diversified
revenue base
Southwest Airlines focused their
attention on other strategic methods than
diversifying their revenue base.
Special promotions and treating their
employees as being their most important
asset has enabled them to grow and
prosper without having to rely on
diversification.
Long-term/Short-term: Southwest will
expand geographic routes to gain market
share over the next three years and
continue to expand coverage in their
current geographic areas.
They did, however, diversify their
geographic market by adding more cities
to their routes.
To expand and diversify revenue base by
20% by the year 2005 and continue to
increase revenue base by 10% each year
through 2010.
In the airlines industry since the 911
crises, diversifying would be a wise
strategic move for Southwest. They
have been one of the top performers and
have the financial strength and
leadership to accomplish diversification.
22
Stable earnings during
recessions
Southwest’s profit margins have shown
excellent management from 1991–2000.
There have been economic ups and
downs throughout this time period and
Southwest was able to maintain and
grow earnings and market share.
Stable earnings will continue with their
consistency to have the lowest operating
costs in the industry and growing
revenues.
Long-term/Short-term: From year to
year they always look ahead and plan by
using strategic moves, such as hedging.
To defer delivery of seven aircraft to
November 2001.
To defer delivery of 12 aircrafts to April
2002.
Defer 113 aircrafts delivery from 2003
through 2008.
Lower costs of agency commissions over
next year. Clever marketing strategies
and promotions are planned for
Southwest in both short and long term, to
continue to show a profit through
economic changes and the aftermath of
911.
Higher ROI
Higher ROE
Return on Assets has been steadily
increasing along with the return on
equity.
ROA
10.1% - 2000
9.2% - 1999
9.7% - 1998
8.0% - 1997
5.9% - 1996
6.0% - 1995
6.6% - 1994
6.2% - 1993
4.6% - 1992
2.0% - 1991
Southwest ability to use their assets that
they have invested in to generate a
return, continues to increase each year.
ROE =
19.9% - 2000
18.1% - 1999
19.7% - 1998
17.4% - 1997
13.5% - 1996
13.7% - 1995
15.6% - 1994
16.0% - 1993
12.9% - 1992
5.3% - 1991
This percentage shows that they use
equity to fund capital investments
and have continued that trend since
1992.
Long-term/Short-term: To keep return
on investments steady.
Southwest plans to continue using their
assets to generate a return.
To increase ROI by 5 % in the next 3
years.
To increase ROI by 12% from 2004 –
2010.
Long-term/Short-term: Southwest has
a conservation philosophy on running a
business. Being prepared for adversity,
maintaining low levels of debt, attention
to bottom line profitability, and paying
attention to the economic environment.
They plan ahead for downturns in the
economy and competitive maneuvers by
hedging and always cutting costs.
With this continued strategy, they plan to
increase ROE by 2% each year through
2004 and to increase ROE by 3% each
year from 2005 – 2010.
23
Higher cash flow
There are no balance sheets provided for
Southwest. However, we can infer that
there were no cash flow problems based
on their financial performance.
In 1996 they were able to make a
$34,000 cash donation to the Ronald
MacDonald house.
They have been able to pay cash
dividends for the last ten years.
They have negotiated with Boeing for 19
new aircraft carriers.
Cash was over $1 billion in 2001 with a
revolving credit line of $475 million.
Long-term/Short-term: Southwest
plans to continue superior financial
performance and gaining market share,
by fiercely competing with rivals.
Southwest plans to continue to increase
their cash flow by continuing to gain
market share from rivals and following
their current business strategy for
operating cost structures being the
lowest.
To defer delivery of seven new aircraft
scheduled for Sep/Oct 2001 to 2002
delivery in preparation for the aftermath
of 911.
To have $2 million in cash on hand by
2002.
To obtain $600 million credit line by end
of 2002.
To increase cash flow by 5% each year
from 2001 – 2002.
To increase cash flow by 7& each year
from 2003 – 2010.
Financial ratios
superior to rivals
In 1990 Southwest’s operating profit and
net profit beat all of the other U.S. major
airlines.
In 1993, again, Southwest was the only
major U.S. airline to show net profit and
operating profit.
Long-term/Short-term: Southwest
plans to continue to compete fiercely as
they have in the past with their rivals.
This strategy is going to continue into
the long term.
To lower debt to capital ratio by 5% by
2002.
Consistently lower operating costs, as a
percentage of revenues, in the industry.
They have a competitive cost advantage
over rivals.
To lower debt to capital ratio by 2% year
through 2010.
At year end 2000, Southwest had the
lowest Debt to total Capital ratio at 33.3
% compared to top competitors.
From these facts, we can infer that
Southwest has a superior financial
performance in relation to their rivals.
In 2000 Southwest had the highest
growth rate of the top ten in the industry.
To cut costs by 1.5% each year through
2010.
To cut costs by 2% by year 2001.
To show net profit each year and
increase each year by 2% through 2004.
To increase net profit each year by 3%
through 2010.
24
III. CORPORATE GOVERNANCE
A. Board of Directors
The chairman of the board of directors is Herb Kelleher. Mr. Kelleher was the CEO of Southwest,
from February of 1982 to June of 2001. He will continue to be the chairman of the board until
December of 2003. Herb is a cofounder of Southwest.
Mr. Kelleher has a law degree from New York University and had his own successful firm, in
which he represented Southwest. In September of 1981, the newly appointed CEO Howard Putman
requested that Herb become more involved in the day-to-day operations of Southwest. Mr. Kelleher
did not believe in managing from his office; instead he got to know the employees and operations of
Southwest, directly. Mr. Kelleher in February of 1982 replaced Howard Putman as CEO and the
chairman of the board of directors. Since then he has been the chairman of the board. He has been
highly visible in the organization and held in the highest regard by the employees of Southwest.
As chairman of the board of directors and head of the executive committee, Herb is in charge of
strategy, expansion to new cities and aircraft scheduling, and governmental and industry affairs.
The chairman of the board of directors is the only one mentioned directly in this case. However
the board of directors as a whole is regularly mentioned throughout the case as having a major role in
the operations of Southwest.
B. Top Management
At Southwest there are only four layers of management between the frontline supervisor and the
CEO and COO. This makes the CEO and the COO the top managers of Southwest. The two newly
appointed top managers for Southwest are James Parker, the CEO and Colleen Barrett, the COO.
James Parker has been with Southwest since 1986. He was the vice president, the general counsel,
a chief labor negotiator, and had been a member of the company’s executive planning committee. He
skills include good relations with the employee unions, experiences ranging from properties and
25
facilities to technical services to alliances with company vendors and partners. Parker was more of a
straight-arrow kind of guy, which was honest, but got tough if the situation needed it.
Colleen Barrett has been with Southwest since 1978. She was the executive vice president of
customers. Barrett has been the driving force of Southwest’s strong customer service and its strong
cultural underpinnings. She is the builder of morale, culture, and customer service for Southwest. She
is well known to the Southwest employees because of her ability to make them feel that they are part
of one big family.
Parker and Barrett have only been in the top management for a short time but they have been a
part of the Southwest management for over 20 years. In Southwest it’s not only the top management
but all employees are held accountable for their performance. That is why management has given
substantial authority and decision-making power to all employees so they can increase the overall
performance of Southwest.
Top management has a high level of evolvement in the strategic processes. With only four levels
of management there is informal sense of resolve between managers and front line employees. This
lets all employees have a sense of comfort in making their own decisions and being able to openly
resolve problems with management. All management are also required to spend at least one third of
their time out of the office and see first hand what is going on.
In the Southwest culture, the top management, lower level managers, and the board of directors
have always needed to work as a team to create high productivity. All decisions are made with the
well being of their employees and customers in mind.
Overall, the top management of Parker and Barrett are highly skilled and are well prepared for the
future challenges Southwest may face.
26
IV. EXTERNAL FACTORS
Chapter 3 Worksheet
Macro-environment forces
Criteria
The economy at large
Facts
The economy, during the time of
this case, went through many
stages. The case closes at the end
of 2001. About ten years prior,
the economy was in a recession
and started to slowly recover
over the course of the mid 1990s.
Following this recovery was a
fantastic boom. Businesses were
sprouting everywhere. Just about
anyone holding stock from the
years 1996 to 2000 was making
money. Of course, the economy
remains in a constant cycle and
moved into time of recession,
again, starting at the end of 2000.
What does this mean?
The huge economic boom in the late
1990s encouraged many businesses to
increase spending, renovate and
purchase new assets. The companies in
the airline industry were taking
advantage of the good market by
expanding to more cities, buying more
aircraft, and setting up new
administration offices. Consumers’
wallets were growing as well, or at the
very least, the contents were sustaining
and reliable during this time. Therefore,
these consumers were flying more
frequently for both leisure and business
and should be considered an opportunity
for the airline industry.
In September of 2001, the
terrorist attacks on the World
Trade Center accelerated the
intensity of the recession that had
started in the prior year. The fact
that this massive attack was
carried out by the hijacking of
various airplanes was detrimental
to the airline industry.
However, when the economy started to
dip and was accelerated by the terrorist
attack of 9/11, the airline industry
plunged alongside. Pilots and flight
attendants were paranoid about their
flight being targeted in another attack,
causing many to refuse to travel.
Consumers were frightened to fly for
fear of being killed. Flights were not
even filled enough to make break-even
points. The firms in the airline industry,
despite their new expansions and
purchases, were being forced to cut back
on flights, shut down service to many
airports, and dip into lines of credit just
to try to keep their heads above water.
Some firms were forced to file for
bankruptcy.
Disposable income of the
population starting in 2000, and
especially following terrorist
attacks, was starting to decline.
People were being laid off. Those
that did hold jobs were fearful of
losing them at any time.
However, the occupations of
many people require, benefit
from, or encourage travel.
Although people are much less
loose about how often they
travel, where they travel to, and
how much they pay, businesses
still need to take care of their
Because of the lay offs and fear of
losing jobs, people were much more
meticulous about budgeting what money
they had. Their budgeting was unlikely
to include trips and vacations for leisure.
Businesses would be more strict and
apprehensive about trips that their
27
traveling needs in some way.
They cannot abandon all
previous needs for travel without
causing a detriment to their own
business.
employees would have previously taken.
Ticket prices would have to be deeply
discounted just to get most people to
even consider booking a flight.
Although business travelers (and their
employers) must be more conscious of
costs, locations, and frequency of trips,
they must satisfy their traveling needs
somehow. Airlines must work hard in
order to make traveling safe and cost
efficient in order to take advantage of
the business travelers’ sustained need to
travel. Attempting to capitalize on this
need will be difficult, but success is
possible.
The poor economy at this time is a
definite threat to the airline industry.
Legislative, regulatory and
political environments
Immediately following the
attacks, there was a mandatory
three-day shutdown of all flights.
The mandatory three-day shutdown
“threw major airlines into a financial
crunch of huge proportions.”
Stricter security measures were
enforced from that point on. The
Federal Aviation Administration
required that the airlines and
airports pay “greater attention to
baggage; check-in of passengers
at ticket counters rather than at
curbside or at departure gates;
and careful security screening of
caterers, cleaners, and flight
crews.
The stricter security measures caused
the ground times of flights to increase.
The federal government required
that air marshals be present on
flights to ensure safety to the
passengers and flight crew.
Although, air marshals were present on
flights to keep passengers safe, the
public remained frightened. After the
attacks, some people remained fearful of
flying even with the air marshals.
Beforehand, there were no air marshals,
but people weren’t frightened because
they were ignorant to any threat that
could occur. Once the air marshals were
on the flights, people knew the marshals
were there for a reason. Protection or
not, the air marshals’ presence made
customers very aware of the hazards
that could occur.
Also, many union contracts that
were previously made with the
airlines contained no-furlough
clauses.
The political environment
following the terrorist attacks
was a delicate one. Countries in
the Middle East, as a whole, were
often generalized to be a danger
to the first world countries of the
world. Petroleum dependent
countries, like the United States,
had to be careful not to ruin
The stricter security measures also
meant that passengers would need to
arrive at their departure airport earlier to
allow for lengthy screening procedures
and long lines. This added “headache”,
in some ways, influenced people to
avoid making unnecessary ticket
purchases.
The no-furlough clauses in union
contracts forced many airlines to avoid
making layoffs, which caused those
airlines to try to find other ways to cut
28
business relationships with the
quasi-political party OPEC.
Ruining a relationship with
OPEC could be detrimental to the
import of fuel from those
countries.
Following the attacks, Congress
passed a $15 billion aid package
to assist airlines in coping with
their financial troubles. This
program included $5 billion in
cash grants and $10 billion in
loan guarantees.
expenses, if that was even possible.
The regulatory environment in the
industry is a threat.
The delicacy of the political
environments caused damage to
international airlines and their flights.
People were frightened to travel outside
of their own countries. Governments
advised consumers to not make certain
international trips. If the relationship
between the United States and OPEC
was harmed, gasoline supplies would be
greatly limited and prices of the
available gas would sky rocket. This
would cause the operating costs of the
firms in the airline industry to increase
dramatically. And it could even cause
many flights to be indefinitely
grounded. The political environment is a
threat.
The $15 billion aid package that
Congress passed was an opportunity for
the companies within the industry to
help cope with the financial troubles
that could, otherwise, drive the firms to
bankruptcy. The bailout is an
opportunity.
Population demographics
The actual population of the
United States is increasing every
single year. Because of rising
living expenses, the population is
moving away from expensive
metropolitan areas and into
sparsely populated, less
expensive areas of the center of
the U.S.
Consumers of the airline industry
vary in age. Elderly people are
less likely to fly, in general,
because of fear, health, and
income. Children and teens
through age 18 do not purchase
tickets for flights on their own.
This leaves the general age
categories of early adulthood to
late middle age and everything in
between as the airline industry’s
main target age demographic.
Airline customers include all
The age span of consumers with the
most purchasing potential in this
industry is very wide. The group would
be making purchases for themselves, as
well as purchasing seats for children.
And chances are good that those people
may also be purchasing tickets for their
elderly family members, for example,
who are willing to fly but, perhaps,
cannot afford to. Also, since people are
waiting longer to get married and start
families, they have more freedom to
travel. Age is an opportunity for the
airlines.
The geographic location of consumers is
an opportunity. People are spreading
themselves out throughout the country,
filling in areas that were formerly
sparsely populated. People are also
more willing to separate themselves
from their family and friends because of
the difference between their income and
expenses, which will cause people to
29
education levels and geographic
locations.
The occupations of consumers
vary greatly, however whitecollar business people, sales
people, and executives account
for many repeat and frequent
fliers.
The age of most customers in the
industry is between 15-64 years.
There are nearly 194 million
people in the United States that
lie in that age group (66.7% of
the entire population). The male
to female ratio in that range is
practically 1:1. The median age
of all of the population is 35.8
years of age and the life
expectancy is 77.14 years. The
growth rate, itself, is 0.92%.
possibly need a flight to keep in touch.
This spread of the population will
develop into new regions for demand in
travel.
The occupations of consumers are also
an opportunity. Many white-collar
business people, sales people, and
executives need to travel frequently.
The airline industry has the ability to
cater to these individuals’ needs. Also,
the people in this class of occupations
tend to be frequent and repeat
customers. The airline companies can
use these tendencies to their advantage
by developing the loyalty of those
customers.
The average annual per capita
income is $37,000. The
population’s living expenses are
constantly rising. However, their
income increases at a slower rate.
Societal values and lifestyles
Ethnographics and
psychographics provide the
following categories: personality,
values, and lifestyle.
Many people are staying single
long and starting families later.
Aside from the influence the
terrorist attacks made, over time,
society has gradually begun to
see the boundaries of their states
and countries less as borders to
travel within and more as lines to
cross. Society is much more
willing, excited, and determined
to travel further abroad than ever
before. The idea of a location for
a family trip has shifted from
being in a different state than
home to being in another
country.
Simply put, if people are more willing
to fly both short and long distances that
they have in the past, then those societal
values and lifestyles pose as an
opportunity for the airline industry.
People have also started
considering state-to-state flying
more as a “minor trip”. Many
people have started to use air
transportation as an option for
weekend travel, where as shorthaul ground transportation has
been the only reasonable mode
previously.
30
Technology
More and more often, airlines are
using forms of electronic
ticketing instead of traditional
printed ticketing. Consumers are
encouraged to use the Internet to
both research and book flights.
Technology creates the means to
make more accurate baggage
screening equipment.
Every day, new audio and visual
technology is being created. Cell
phone, camera, and computer
technological advancements are a
few among many. However the
most important audiovisual
technological advancement that
impacts the airline industry is
video conferencing. With video
conferencing, business people
need not travel thousands of
miles to meet in person to discuss
matters. They can sit in their own
offices, halfway across the world
and have as much of an
interactive meeting as they would
in person. People can even have
“video conferencing” in their
own homes with the use of
computer cameras and the
internet. A woman in Boston
could talk to and see her sister in
Sacramento all without leaving
her desk.
Although the Internet and technology, in
general, can cut the costs of using a
middleman (in this case a travel agency)
and decrease the cost of producing
tickets, it can be bad for the industry as
well. The independence and information
that the Internet provides to consumers
allows them to find the best deal. This
increases competitiveness in the
industry.
Technological advancements that have
surfaced in the area of audiovisual
communications pose a threat to the
industry. Because people have the
ability to communicate in a sort of
“face-to-face” manner, such as what
video conferencing offers, they are less
apt to make flights. Business people will
avoid taking flights and making trips if
they can have a conference with similar
satisfaction to that of “face-to-face”
meetings using video conferencing.
People using computer cameras and the
internet to videoconference with friends
and family members are going to make
flights less often to see those people.
Technology and E-commerce pose a
threat to the industry.
31
1. What are the Industry's dominant economic features?
Criteria
Facts
Market size
Year 2000 ”Industry”
total revenues 98.1B
scheduled revenue passenger miles
651.8B
operating profit 5.5B
Year 2000 SW
Total revenue 5.65B
Rev passenger miles 42.2B
Operating profit 625M
Types of Markets
First class customers
Business customers
Customers flying for their pleasure
What does this mean?
Prior to 9-11 the market was large in
size. There were several sizeable rivals
competing for market share. Their fierce
rivalry was a threat to the profitability of
the industry because it has driven prices
down.
Their competition has caused the price of
tickets to drop considerably making
flying competitive with automobiles,
trains, boats and busses. This in turn has
increased the market size. Flying offers
consumers the convenience of rapid
transportation, which cannot be offered
by the other forms of transportation. This
allowed the size of the market to grow at
a rate of approximately 5% per year
between 1995 and year 2000.
Subsequent to 9-11 there was a
significant drop off in passengers due to
their concern for safety. The market can
be expected to grow rapidly once the
passengers overcome their fears
providing the economy rebounds as well.
The rapid growth rate is an opportunity
for existing rivals to grow their share. If
profitability increases, additional
competitors may enter the market to take
advantage of the growth. Growth will be
maintained as long as the cost and
convenience of air travel remains
competitive with other forms of
transportation.
32
Scope of the competitive
rivalry
(The competitive scope
criteria addresses
geographic scope
(Global, National,
Regional, Local),
product scope, market
scope and so on.)
Many competitors offer flights both
domestically and abroad but Southwest
competes in the US only.
Many rivals are similar in size and
capability. For this reason they often
resort to price, convenience, quality and
rewards as methods to increase or hold
on to their market share.
Rivalry is very high with competitors
often resorting to illegal tactics to drive
others from the market
Competitors will use every avenue
possible to discourage competition,
which will improve their profitability.
The scope of competitive rivalry is a
threat to the airline industry. The rivalry
continues to depress pricing which drives
down profits. This is turn deters others
from entering the industry.
This industry has little opportunity for
differentiation and many rivals similar in
size and capability compete for the same
market share. This forces them to rely on
cost reduction and rewards to hold on to
existing customers and lure in new ones.
This type of action drives the
profitability of the industry down.
Past history has shown the benefit from
wrongdoing outweighs the penalty for
operating in an illegal manner. The party
with the deepest pockets prevails. This
type of strategy is a threat to the industry
and the consumers it serves. While this is
not suitable as an offensive strategy,
companies need to be aware of the
strategy others could use towards them.
The Market scope varies between the
rivals. While some rivals compete on a
global basis, others compete only in
North America or on a smaller regional
basis. Those who compete on a global
basis require a more diverse portfolio of
airplanes, which increases their operating
costs.
The product scope also differs between
rivals. The majority of the rivals offer
multiple classes of seating as well as
other amenities such as meals and
baggage transfer between competing
carriers. This increases their operating
cost which is passed on to the
passengers. Lower cost airlines do not
provide these services.
33
Market growth rate and
position in the business
cycle (development,
growth, maturity,
decline)
US Market growth based upon scheduled
revenue passenger milesyear
1995
1996
1997
1998
1999
2000
miles B
509.6
534.7
570
583
616.8
651.8
% growth from
prev
na
4.7
6.2
2.2
5.5
5.4
The market grew at a steady pace of
approximately 5% since 1995 with the
exception of 1997.
Number of rivals and
their relative size
(Relative size refers to
each rival’s market share
based on total sales for
the overall market or,
when applicable,
individual market
segments.)
10 major competitors in the US ranked
by revenues. Year 2000- 98.1B total US
Market
Number of buyers and
their relative size
(Address the number of
buyers in each market
and market segment.
Buyer size refers to the
buyer’s volume of sales
for the industry.)
595,945,486. enplaned year 2001 per
Bureau of Transportation Statistics.
Airline
United
American
Delta
Northwest
Continental
US Airways
Soutwest
TWA
Amer. West
Alaska
Revenue
19.3B
18.1B
13.5B
11.0B
9.5B
9.2B
5.6
3.6B
2.3B
1.8B
% M Share
19.7%
18.5%
13.8%
11.2%
9.7%
9.4%
5.7%
3.7%
2.3%
1.8%
At this point there has been a significant
dip in the business cycle caused by 9-11.
Development is at a low due to this
decline in passenger service.
We can expect rapid growth as
passengers regain confidence in the
system. The growth rate prior to 9-11
will continue as long as the cost and
convenience of air travel remains
competitive with other forms of
transportation and the economy is in
good shape.
The size and number of the rivals reduce
the threat of new entrants to the market.
Smaller companies will not be able to
benefit from the economy of scale,
which the larger rivals enjoy.
Fierce competition is a result of the
number of rivals and their size. While
some of the rivals compete in diverse
areas of the market, they all compete for
the business and leisure travelers. This
makes it difficult for the players to grow
their market share without resorting to
price reduction, which threatens the
profitability of the industry.
There are a significant number of
individual buyers, which is an
opportunity for the airlines to take
advantage of.
Consolidators buy tickets in bulk at the
request of agents and consumers then sell
them at a discount.
Travel companies and consolidators are a
significant threat to the industry due to
Travel companies, which set up vacation their buying power.
packages, buy tickets in bulk.
All forms of third party sales are a threat
Ticket agents sell directly to consumers. because they can influence consumer’s
choice in airlines.
Business travelers, which are the largest
and more lucrative segment of the
market, are now being drawn towards
low cost operators, which is a threat to
the profitability of the industry.
34
Extent of rivals’ vertical
integration (How far
forward or backwards
have the rivals extended
their value chain?)
Vertical integration was achieved by
rivals who chose to offer sales directly
through the internet. This eliminated the
travel agent and increased profits.
Some rivals provide their own food and
baggage services.
Vertical integration is an opportunity
because it resulted in a direct savings to
the airline.
Vertical integration deters others from
entering the market because it is a hurdle
they have to pass to be competitive.
Rivals often partner with other
companies to provide companion
services at a discount rate as opposed to
vertical integration. Example being
hotels, car rentals, cruises etc.
Partnering with other companies offered
the consumer one stop shopping along
with an additional discount which helps
bring in additional business.
Extent of rivals’
horizontal integration
(Horizontal integration
applies to using the
synergies in your value
chain to produce
different products or
provide services for a
different industry or
market segment.)
There are multiple segments of the
market that the rivals participate in. The
majority of the rivals carry business and
leisure travelers. In addition to this,
others carry intercontinental travelers
and local commuters. Different types of
aircraft are often required to service a
specific segment of the market.
Horizontal integration in this industry
provides limited increase in economy of
scale because different capital equipment
is needed to serve specific markets.
Types of distribution
channels rivals use to
access customers. (Do
the channel types vary
by customer segment?)
Ticket/travel agents
Direct sales
Internet
Consolidators
Airports
Operating a shuttle service taps into the
bus and train market where customers
have reasonable assurance they can
utilize the transportation without
reservations. This provides additional
income for the airlines.
Horizontal integration is an opportunity
for the industry because it is difficult for
competitors to enter the market. It is a
threat to existing rivals because it is
difficult for them to expand into other
segments of the market.
Consolidators and travel agents who
purchase in bulk pose the greatest threat
to the airlines because they can shop for
the best price. Business travel is more
often arranged through travel agents than
leisure travelers.
The internet is a threat because data is
readily available showing airline
performance and it allows consumers to
shop for the best price.
The selection of airports is important
because the efficiency of the airports will
impact the airlines operating costs. Less
congested airports result in shorter
holding times and permit faster turn
around time. Less congestion and smaller
airports are more convenient for the
customers.
35
Pace of technological
innovation in
production process
innovation
The pace of technology implementation
is occurring at a rapid pace.
Computerized planning system used to
schedule ground and in flight resources
needed to support the flights.
Computers are used for on line
reservations and allow passengers to
complete their initial check in.
Improvement in computers and
communication systems improve video
conferencing.
The pace at which technology is being
implemented will deter others from
entering the market and require those in
the market to invest in the technology or
face declining profits.
Its purpose is to improve efficiency and
reduce cost.
Improvements in video conferencing are
viewed as a threat to the industry
because it will reduce the necessity of air
travel.
Pace of technological
innovation in product
introduction
Extent to which the
rivals differentiate their
products and/or services
NA
NA
Rivals differentiate themselves by
catering to the needs of specific
customer groups
Rivals who are successful at
differentiating themselves are a threat to
the balance of the industry.
An example is setting up the flight
schedules and routes based upon their
customers needs. Business class
customers typically travel early or later
in the day to and from airports in heavy
industrial areas. Schedules for
vacationers are not as rigid and they
typically travel to leisure spots such as
Florida or California.
Airlines who can take advantage of
differentiation have an opportunity to
grow market share. Airlines, which
fulfill customer specific needs, will see
both market share and profits rise.
Frequently customers have specific
needs relating to destination, availability
of on board meals, and take off/departure
times. Customers who choose their
flights based upon meeting these needs
often will pay a premium for them. Cost
conscious customers will give up these
benefits for less expensive flights.
Low cost rivals have cut the frills from
travel which significantly reduced the
cost. Cost conscious customers are
willing to accept fewer services for a
reduction in cost. Business travelers
often will not accept a reduction in
services.
Rivals have found unique ways to
improve convenience for their customers
since reducing their ticket prices further
will have a significant affect on their
profitability. Rivals often provide
companion services such as ease of
booking rental cars, hotels etc.
Airlines that reward frequent flyers are a
threat to others. For others to
successfully compete against them, they
have to offer similar program, which in
turn reduce the profitability of the
industry.
Rivals pride themselves in providing
services customers perceive as “quality”.
Examples being on time flights, no
cancelled flights and no lost luggage.
Rivals often offer “elite” bonuses to
reward frequent flyers- shorter check in
lines, upgrades to first class, mileage
bonuses and first to board.
36
Extent to which rivals
use economies of scale
in:
Purchasing
Manufacturing
Services
Transportation (logistics)
Marketing
Advertising
General and
Administration
Other steps in the value
chain (Refer to chapter 4
for the description of the
value chain.)
Some of the rivals make use of economy
of scale by owning and maintaining a
limited variety of aircraft. This allows
the airlines to keep a smaller spare part
inventory and does not require
mechanics with diverse skills to maintain
the aircraft. The majority of the airlines
who fly both domestically and
internationally can not take advantage of
this.
Southwest has used economy of scale to
reduce the turn around and boarding
times. They have simplified the boarding
process by eliminating tickets. Decreased
turn around times by eliminated the need
to bring food on board and baggage
transfer between planes.
The use of economy of scale by rivals is
limited except in the areas of fuel
procurement and shared terminal
services.
Rivals who take advantage of economy
of scale are a threat to the industry
because their decreased cost allows them
to gain market share in an industry which
has limited revenues. This assumes they
passed the saving on to the consumer in
the form of lower fares.
Rivals using economy of scale will deter
new competitors from entering the
market due to its profitability.
Larger companies with considerable
buying power negotiate procurement of
planes, fuel and services to their
advantage.
Economy of scale in advertising is more
effective by rivals who aim their
advertising at one particular market.
There are few rivals who can take
advantage of this.
General and administrative services are a
function of the size of the organization
and how it is set up. Therefore, the
economy of scale is minimized.
Extent to which the key
industry participants are
clustered in one
geographic location
Rivals often use their buying power to
offer customers a larger discount for the
companion services (rental cars, hotels
etc) than they could obtain by
themselves. While there is no realized
savings to the airline, it amounts to a
considerable savings to the customer
which helps increase ticket sales.
Competition is fierce in the airline
industry because rivals are constantly
competing against each other in just
about every region in the country. There
is no place in the U.S. that is not served
by the majority of the rivals in the airline
industry.
The clustering of the airlines in every
region in the U.S. is a threat to the
industry. With more competition come
lower prices for consumers and less
profitability for the rival airlines. With
more options for passengers airlines will
not be able to fill their airplanes and will
incur losses. With less costumers airlines
will find it necessary to discontinue
service in some areas and will lose
revenue which will threaten their
existence
37
Extent to which certain
industry activities result
from learning and
experience curve effects
The learning and experience curves can
be the result of airlines watching each
other’s moves. If a rival airline is
successful on a certain route, then other
airlines will follow in order to take
advantage of those routes as long as
there is gate availability. Rivals will also
learn from prior experiences of what
routes are profitable and are not
profitable.
By watching each other’s moves, airlines
are better able to compete with their
rivals and this would be threat. The
ability for an airline to learn the most
popular destinations would allow for the
development of more cost effective route
structures. With better knowledge of
aircraft type and capabilities along with
increasingly more fuel-efficient aircraft,
would increase competition greatly.
Airlines take advantage of more fuelefficient aircraft in order to achieve
lower operating costs. The main
suppliers of aircraft are constantly
educating the industry of why their
aircraft are the best for the airlines. This
is a great advantage to the airlines. This
is an opportunity for them to purchase
specific aircraft to cater their needs.
Capacity surplus or
shortage in the industry
(Capacity refers to the
total manufacturing
output capability for the
industry. Capacity
surplus would indicate
that the industry has the
capability to produce
more products than the
market demands.)
The airline industry has reached maturity
yet there is a capacity surplus in the
airline industry. Most airlines are
operating well below full capacity.
Capital requirements and
the ease of entry into or
exit from the industry
Capital requirements for the airline
industry are great. Aircraft can cost
anywhere from 20$ to 160$ million. This
makes it very difficult to enter the
market. Unloading such capital can also
take a toll on a company and make it
costly to exit the industry.
The industry operates where passengers
want to travel. The airline industry can
suffer from a shortage and not offer
enough routes, but in order to remain
profitable the airlines fly to destinations
that can guarantee them positive
revenue.
Capacity surplus on aircraft is a threat to
the industry. Rival airlines are competing
at a high level in order to maintain their
share of passengers in order to fill their
aircraft. With fierce competition comes
more costs to the airlines in marketing
and advertising and therefore is resulting
in less profitability for the airlines.
The capital requirement to purchase
aircraft is a threat to the airline industry.
Airlines are strapped with debt before
they fly one revenue mile due to the high
cost of purchasing and operating an
airliner. Unloading an aircraft is also
very difficult because there is a limited
market for buyers of commercial aircraft.
38
Industry profitability
(The annual net profit
margin for the industry.)
Net profitability for the airline industry is
very low. Even those that are profitable
do not make a large profit. Indications of
the lack of profitability in the industry
can be seen in the teaming up of rival
airlines, or alliances. These alliances
allow airlines to sell seats on each
other’s planes and keep the revenue from
those sold seats. The alliances that are
happening allow them to spread out the
costs of operations as well as the
revenue. The attacks of September 11,
2001 also have put a great burden on the
airline industry and have decreased
revenues considerably.
Low profitability is a threat to the airline
industry. Not only does it make it
difficult for airlines to operate and keep
out of bankruptcy, but also it increases
competition between rivals. Airlines that
are operated at close or above
profitability are able to market
themselves better and can result in taking
away customers from those airlines that
are grappling with financial difficulties.
Degree of alliances
Alliances within the airline industry are
ever increasing. Alliances allow airlines
to book passengers on flights to
anywhere in the world, even to places
that the airline itself does not fly. When
airlines have alliances they are able to
sell seats on each other’s flights. A
passenger may start out on United
Airlines but finish their trip on Thai
Airways. This allows the airlines to keep
their customers by allowing a seamless
trip even though they may not fly the
same airline the whole trip. Airlines also
have alliances with hotels, rental cars,
and theme parks that increase their
visibility to the traveling public. These
alliances will entice travelers to fly on
their airline if they know they can
receive a free hotel stay for example.
The degree to which these alliances have
taken place is a threat to the airline
industry. Even though the cost of
operating, marketing, and advertising are
shared, and there is increased revenue for
all the parties’ involved alliances create
complex relationships in the industry.
Although by creating alliances the
airlines can begin to share the burden of
the overwhelming competition that exists
in the airline industry, the ability to
create strong alliances in the industry can
put a strain on the resources of individual
airlines and increase competitive
pressures.
39
2. What is competition like and how strong are each of the competitive forces?
Criteria
RIVALRY
How many competitors
are there in this
industry?
Facts
What does this mean?
There are 10 major competitors in the
United States Airline Industry.
There are United, American, Delta,
Northwest, Continental, US Airways,
Southwest, TWA, American West, and
Alaska Airlines.
The number of competitors makes
rivalry strong in the Airline Industry.
The rivalry is intense which is a threat to
the industry. Competitors have to
continually advertise, provide quality
services, provide convenience and
improve their reputation to stay
competitive.
What is the relative size
(market share based on
their percentage of
industry sales) of each
competitor?
The relative size of each competitor is in
2000:
The relative size is weak for the Airline
Industry. The competition is fierce in the
Airline Industry due to the large size of
competitors and the number of rivals.
The relative size of the Airline Industry
is a threat. Competitors have to
continually keep a close eye on their
competitors’ fares to provide the “most
value for less money” for their
customers.
What is the industry
concentration ratio (C4)?
 Top 4 company’s sales
Industry sales
The Airline Industry Sales for 2000 were
98.1 Billion.
Airline
United
American
Delta
Northwest
Continental
US Airways
Soutwest
TWA
Amer. West
Alaska
Airline
United
American
Delta
Northwest
Revenue
19.3B
18.1B
13.5B
11.0B
9.5B
9.2B
5.6
3.6B
2.3B
1.8B
Sales
19.3B
18.1B
13.5B
11.0B
% M Share
19.7%
18.5%
13.8%
11.2%
9.7%
9.4%
5.7%
3.7%
2.3%
1.8%
Industry
Concentration
Ratio
19.7%
18.5%
13.8%
11.2%
Total
What is the product or
service demand growth
rate? (Use the industry’s
total sales over multiple
years to determine the
industry growth rate.
Use the rival’s sales over
multiple years to
determine individual
growth rate.)
With 63.2% of the market share being
held by the top four companies, there is
fierce rivalry due to the tight market
share available. Therefore is a threat to
the Airline Industry.
63.2%
Industry Growth Rate:
2000-1999
8.5%
1999-1998
5%
The growth rate for the Airline Industry
is strong. With the airline being in a
growth stage there are opportunities for
rivals to increase their market share by
decreasing the cost but increasing the
convenience of flying for new customers.
1998-1997
1.1%
1997-1996
5%
1996-1995
5%
40
Growth Rate of Rivals
Airline
00-99
99-98
98-97
97-96
96-95
United
1.3%
0.5%
0.2%
1.0%
1.4%
American
2.0%
0.2%
0.4%
0.8%
-0.1%
Delta
0.4%
0.3%
0.4%
0.9%
0.3%
Northwest
1.0%
1.2%
-1.3%
0.2%
0.8%
Continental
1.0%
0.5%
0.8%
0.8%
0.6%
US Airways
0.7%
-.01%
0.1%
0.8%
0.7%
Southwest
1.0%
0.5%
41
0.4%
0.4%
0.5%
TWA
0.3%
0
0
-.03%
0.3%
Amer. West
0.1%
0.2%
0.1%
0.1%
0.2%
Alaska
0.1%
0.1%
0.1%
0.2%
0.1%
Are rivals using price
cuts or other competitive
weapons to boost unit
volume?
Competitors are using price cuts to
increase volume of passengers, which
will decrease revenue erosions.
In 1971, Southwest starting using a
“two-tier on-peak/off-peak pricing
structure” to decrease their revenue loss
but increase their passenger traffic. It
increased passenger traffic so
significantly that it soon became
standard across the whole Airline
Industry.
Rivals using price cuts to increase unit
volume is a moderate force in the Airline
Industry. The competition between rivals
is a threat for the Airline Industry due to
rivals introducing new ways to increase
profit margins without passing it on to
the customer.
42
Are the customer's
switching costs low?
The switching costs are low. Passengers
can change airlines at any time; however
difference in customer service, cost of
fares, and/or convenience can depend on
the different airlines.
“Southwest has been rated number 1 in
customer satisfaction among U.S. major
airlines for 10 consecutive years for the
years of 1991 through 2000.”
“Southwest has also received the Triple
Crown six times which is awarded based
on best on-time record, fewest reports of
mishandled baggage, and fewest
complaints for a single month.”
Northwest is rated 2nd in arriving within
15 minutes of the schedule time.
Continental is tied with Southwest for
ranking of the fewest number of
mishandled bags.
The rivalry in the Airline Industry is
strong due to the low switching cost.
These low switching costs are a threat
for the Airline Industry as the rivalry
among competitors is fierce. Competitors
differentiate their service constantly to
keep customers and market share that
can cut into their profit margins.
Are rivals launching
moves to change their
market share or industry
position at the expense
of other industry
participants?
Rivals are launching moves constantly to
change their market share position. The
expense to other rivals is high.
Braniff and Texas International were
indicted by a federal jury, of trying to
deliberating put Southwest out of
business. It cost Southwest a lot of time
and cash to fight the legal battles the two
competitors engaged in.
Southwest moved their flights from the
new Houston Intercontinental Airport
where it was losing money, to the
Houston Hobby Airport in 1972. This
move caused Braniff and Texas
International to move some of their
flights there also to regain some of the
market share Southwest gained.
However Braniff and Texas International
were unable to regain their market share
and switched back to the new airport.
The payoffs include gained loyalty of
customers; increased market shares;
decreased operating costs and increased
revenues. So overall the payoffs are big.
Southwest had the lowest labor costs in
the Airline Industry due to its point-topoint system.
“Southwest has been rated number 1 in
customer satisfaction among U.S. major
airlines for 10 consecutive years -1991
through 2000.”
Southwest has the greatest increase in
growth of the Airline Industry due to its
management, operating costs, and
The moves rivals are making are
moderate for the Airline Industry. The
rivalry among competitors is so intense
that it is a threat to the Airline Industry.
Rivals are using their size to compete
against smaller more innovative
competitors.
What are the payoffs for
strategic moves?
The fierce rivalry between competitors is
a threat for the Airline Industry. The
rivals have to be fierce and improve the
daily operations and using new
technology to make the industry more
convenient. By improving the operations
it increases the operation expenses and
decreases the profit margin.
43
Does it cost more to exit
the industry than to
continue participation?
How consistent are rivals
strategic visions,
strategic intents,
objectives, strategies,
resources and origins?
The greater the
consistency, the more
likely there is increased
rivalry.
Are strong new entrants
acquiring weaker rivals
and launching wellfunded, aggressive
moves?
customer service.
The cost of exiting the Airline Industry is
high than to continue participation.
The rivals in the Airline Industry are
more volatile and unpredictable when it
comes to its strategic visions, strategic
intents, objectives, strategies, resources
and origins.
Southwest believes that employees come
first and customers come second.
Southwest used a point-to-point system
rather than using some rival airlines that
use the hub-and-spoke systems.
Southwest management strategy was
“more value for less money” rather than
“less value for less money”.
The cost of exiting is a strong force for
the industry. The high exiting cost
increases the threat for the Airline
Industry. The industry is “noted for its
vulnerability to economic cycles and big
swings in bottom-line performance”; the
losses incurred from exiting keep
competition fierce among the rivals.
The consistency of rivals strategic
visions, strategic intents, objectives,
strategies, resources and origins is a
strong force. The Airline Industry has a
threat with rivals using different
strategies and objectives to increase
profits and market shares. The Airline
Industry is benefiting from the
innovative and out-of-the-box thinking
some of the rivals are using to compete.
N/A
44
THREAT OF ENTRY
What economies of scale
exist in each of the
following areas:
 Production
 Purchasing
 Inbound and
outbound logistics
 Advertising
 Financing
 Customer service
 Raw materials
 R&D
 Other steps in the
value chain?
(Please note that
synergies across the
value chains of related
diversified corporations
also constitute
economies of scale.)
Economies of Scale in Production:
N/A
Economies of Scale in Purchasing:
Are high for the airline industry.
Companies in this industry are
relatively large in size so they have
purchasing power.
The high economies of scale will
provide an entry barrier to new
entries. New entries will unlikely
have the volume, purchasing power,
variety, recognition, and cash flow,
needed to use the economies of scale.
The economies of scale pose an
opportunity for the existing firms in
the airline industry.
Economies of Scale Inbound and
Outbound Logistics: N/A
Economies of Scale in Advertising:
Are high in the airline industry.
Airlines use advertising as a way to
increase in the number of passengers,
the number of flights, and the number
of cities they service.
Economies of Scale in Financing: Are
moderate in the airline industry.
Airlines need to have the ability to
keep operating costs low and to be
prepared for hard economic times and
rival’s competitive moves.
Economies of Scale in Customer
Service: Are moderate in the airline
industry. Airlines want to provide the
best customer service, with low
customer complaints, while keeping
prices low and keeping their
customers satisfied.
Cost and resource
disadvantages
independent of size
What are the learning
curve and experience
effects to enter the
industry?
Economies of Scale in Raw Materials:
N/A
Economies of Scale in R&D: N/A
The costs of high landing fees and
terminal gate costs at high-traffic
airports are a disadvantage in the
airline industry. Landing slots were
controlled and rationed to the airlines
willing to pay these high fees.
The learning curve and experience
effect to enter into this industry is
high. A start up airline may have
knowledge of the industry but would
not have a lot of experience in dealing
with the industry; its rivals and the
regulatory agencies.
Cost and resource disadvantages
independent of size are an opportunity
for existing airlines. The entry barrier
is high for new entries and they will
need to have the cash flow for the
costs required to gain good landing
positions at high traffic airports.
The learning curve and experience
effects to enter into this industry are
an opportunity for existing firms who
have the knowledge and experience
and would pose a threat to new entries
who lack the knowledge and
experience.
45
Inability to match the
technology and
specialized know-how of
firms already in the
industry. How
accessible is the
industry's technology?
The industry’s technology is barrier
for new entries. The technology is
accessible to those companies whose
personnel have the specialized skills
to access and operate this technology.
The inability to match the technology
and specialized know-how of firms
already in the industry poses a threat
to new entries that are unable to match
the specialized skills needed to access
and operate this technology. The lack
of know-how by new entries leads to
an opportunity for existing firms who
have these skills can take advantage of
the technology.
Brand preferences and
customer loyalty
Brand preferences and customer
loyalty is a high barrier for new
entries. New entries must have strong
financial resources in order to have
access to large amounts of capital for
advertising and promotional
campaigns that can lead to attracting
new clients and building a solid
foundation of customers.
Brand preferences and customer
loyalty pose an opportunity to the
existing airlines. The entry barrier is
being lowered by new entries with
quality, low priced service, which
threatens the existing airlines.
What are the capital
requirements to enter?
The capital requirements to enter the
airline industry are high. Available
cash flow is needed to pay for the
costs of high landing fees and terminal
gate costs at high-traffic airports. New
entries need to have the financing
available to acquire planes, pilots, and
personnel to operate an airline in a
way that will increase overall profits.
The high capital requirements to enter
are an entry barrier for new entries.
New entries are unlikely to have the
high capital it needs to pay for good
landing positions at high traffic
airports. The capital requirements
pose an opportunity to the existing
airlines.
What other resource
requirements are
necessary to enter?
The ability to pay high landing fees
and terminal gate costs at high-traffic
airports provides a high barrier for
new entries to the industry. Landing
slots were controlled and rationed to
the airlines willing to pay these high
fees.
The entry barrier of high landing fees
and terminal gate costs at high-traffic
airports pose a threat to new entries
into the airline industry and an
opportunity to the existing airlines.
What is the access to
distribution channels?
Access to distribution channels is
readily available to companies in the
airline industry.
Access to distribution channels are an
opportunity for new entries and a
threat to existing firms because
companies in the airline industry all
use the same distribution channels.
What regulatory policies
apply?
The Airline Deregulation Act of 1978
and Civil Aeronautics Board (now the
Federal Aviation Agency).
Regulatory policies pose an
opportunity for new entries into the
airline industry to gain market share
and a threat to existing airlines due to
a reduction of their current market
share.
What tariffs and trade
restrictions apply?
N/A
46
SUBSTITUTES
What is the availability
of attractively priced
substitutes?
The airline industry competes against
substitutes such as personal automobiles,
buses, trains and transportation by boat.
The price and availability are equal and
or better to the airline industry.
The availability of substitutes that are
attractively priced is a threat to the
airline industry. Substitutes take
business away from the airline industry.
Bus transportation runs through most if
not more cities then major airlines can
serve. Train tickets are attractively
priced and although are slower then
flights, they do serve many major cities.
Transportation by boat is also slow and
is not used as widespread as it once was
but is considered a threat as some
vacationers will use major cruise lines as
means to getting to their vacation spots
rather then flying. Personal automobiles
are not attractively priced to begin with
but their overall value can be judged
over time.
Is the substitute of better, Bus transportation is of equal or worse
worse, or equal quality?
quality then airline transportation
because it is slower, they offer only one
class of seating, and they usually make
many stops before reaching their final
destination. Train transportation may
offer the same types of services that the
airlines do but again, they are much
slower and they also make many stops
along the way before reaching its final
destination. Transportation by boat,
consumers receive a very high level of
quality as long as the consumer is willing
to pay for it. Transportation by boat
might be considered a vacationing option
in itself but is not used for business trips.
The substitutes to the airline industry all
have their own level of quality. Bus
transportation quality can be considered
of equal or worse quality. Train
transportation can be considered of equal
quality. Transportation by boat,
especially cruise liners should be
considered of higher quality. The quality
of substitute products should be
considered a threat to the airline
industry.
Is the substitute of better, Bus, train and boat transportation are all
worse or equal
of worse performance since they cannot
performance?
provide the speed that the airline industry
can.
The performance provided by the airline
industry cannot be rivaled by any other
substitute industry and can be considered
an opportunity.
September 11th showed that the world
was not going to stop due to the airline
industry closing for a few days. Some
buyers were able to use substitute
products. Other buyers, such as business
travelers cannot expect to make to
meetings in a fast paced work
environment using substitute products.
The pricing of substitute products makes
it easy for consumers to switch but the
performance of the airline industry
outweighs the price for most travelers.
Speed rules in the travel industry and is
an opportunity for the airline industry.
Can buyers easily switch
to the substitutes?
47
SUPPLIERS
Is the item or service a
commodity available on
the open market from
many suppliers who are
capable of filling the
order?
There are few major suppliers in the
airline industry of aircraft. There are not
many suppliers of jet fuel.
There are many airports scattered around
the United States and many are not being
used up to the amount of potential traffic
they could generate.
The amount of aircraft manufactures
capable of filling orders is small which
creates a threat to the airline industry.
The small amount suppliers forces the
airline companies to be accurate in their
predictions of the direction of the
industry and the amount airplanes they
are going to need in the coming years,
and forces them to place orders years in
advance. Having accurate forecasts is a
threat.
The amount of fuel suppliers is small,
which is also a threat. This forces the
airline industry to be innovative in ways
to conserve fuel to lessen their reliance
on fuel.
Are there good
substitutes for the
product or service to
which the buyers can
easily switch?
There are no substitutes for the aircraft
or jet fuel in this industry.
Some air transportation companies will
use airports that are less congested and
offer lower landing and terminal fees.
Being able to use airports that may not
be at full capacity for the amount
potential business is an opportunity.
Since there are no feasible substitutes
(i.e. other airplane manufacturers or gas
companies) for the products supplied to
the industry, the lack thereof is a threat
to the industry.
Although the alternative airports may not
provide the largest cities with traffic they
are considered an opportunity as some
airlines have proven.
48
Is the company a major
buyer?
Southwest is a major buyer of the Boeing
737. Southwest’s size of firm orders for
new aircraft has averaged 24 new
airplanes over the years 1995 through
2000 and they have firm orders for 25 in
2001, 27 in 2002, 13 in 2003, 29 in 2004,
5 in 2005, 22 in 2006 and 25 in 2007.
“Southwest became the launch customer
for the new Boeing 737-300, 737-500
and the 737-700 models, and were able
to acquire these aircraft at favorable
prices.”
Southwest has made innovative strides to
conserve fuel, but they will always rely
on the supplier’s prices since demand is
fairly constant. Southwest is a major
buyer of jet fuel.
Southwest is a major buyer in the smaller
airport markets. In the first years of
Southwest’s service to Manchester
airport, passenger counts went from 1.1
million in 1997 to 3.5 million in 2000. In
the first year of Southwest’s service to
Tampa to Fort Lauderdale the annual
number of passengers jumped 50%.
Does the supplier
dominate the industry?
(The supplier provides
the industry with an item
that accounts for a
sizable fraction of the
costs of an industry's
product (or service), is
crucial to the industry, or
significantly affects
product quality.)
The suppliers of commercial aircraft are
small in number but large in size. No
one airline manufacturer dominates the
entire airline industry.
One jet fuel supplier does not dominate
the industry. There are a few suppliers
and they compete for the major airlines
business.
Southwest is considered a major buyer of
new 737 airplanes through Boeing.
Southwest has cut costs by only using
one type of aircraft. Even though
Southwest was able to receive their
airplanes at favorable prices, using only
one aircraft puts Southwest in a
threatening position as Boeing can
dictate pricing any way they choose.
Southwest’s strong relationship with
Boeing is an opportunity.
The small amount of aircraft
manufacturers in the industry is a threat.
Southwest is a major buyer of jet fuel
which is supplied by a small amount of
companies. The price of fuel is a threat
to the industry since prices cannot be
controlled through economies of scale.
Southwest usually turns out to be the
major airline at the smaller airport
markets where they serve areas relatively
near major metropolis’, which would
make them a major buyer and can be
perceived as an opportunity.
Since no one aircraft manufacturer
dominates the industry, the competition
is increase giving the airline industry an
opportunity to obtain better prices for
airplanes as long as they don’t mind who
the airplane is coming from. Some
airline industry rivals like to use only
one style of aircraft to cut down on costs
of operations (spare parts and training).
For those who implement this type of
business strategy the size of the supplier
and whether or they dominate the
industry doesn’t matter. The threat of
using only one supplier is real, as all
operations depend on that one supplier.
There is an opportunity for the major
airlines to choose whom they are going
to give their business to so they can use
economies of scale to try to dictate the
price.
49
Does an outside supplier
provide a cost advantage
over vertical integration?
The outside suppliers in this industry do
provide a cost advantage over vertical
integration.
There is no sense for any company in
this industry to try to vertically integrate
backwards to build their own aircrafts or
to build their own fuel refineries. The
cost of undertaking a task such as
building a reliable aircraft would be
huge. The suppliers of the aircraft have
the tools, the skilled personal, the
knowledge and years of experience. All
of which are considered essential to
building something that lives will depend
on to deliver safety and reliability.
What types of working
relationships exist? Start
by listing the types of
working relationships
that exist. Then, focus
on the strategic
importance of
relationships with
suppliers in this industry.
Are these relationships
of strategic value for the
competitors in the
industry? If so, why and
how do the relationships
impact the competitive
structure and
environment of the
industry?
Relationships exist with:
Making agreements to purchase aircraft’s
in bulk will offer airlines a lower price
for the purchase of planes. This
relationship can be kept strong and can
be maintained by purchasing in high
volume. This is an opportunity for a
company in the airline industry because
they can use this relationship with
Aircraft suppliers to gain a cost
advantage. This will cause intense
competition within the airline industry.





Aircraft suppliers
Jet fuel suppliers
Financial suppliers
Advertising suppliers
Airports
Relationships with Aircraft suppliers
such as Boeing are strong relationships
that are essential for an airline company
in the industry to have, in order to
operate and carry out business.
Relationships with Jet fuel suppliers are
also essential to airline companies in the
industry. Without fuel the planes would
not run and therefore business would not
exist.
In order to purchase planes to use in
business, money must be borrowed to
finance the purchase of new planes.
Financial institutions supply the loans
and in return Airlines companies pay
back these loans with interest added.
This relationship is crucial for a
company in the airline industry because
without adequate finances, the purchase
of planes would not be possible.
Advertising agencies supply airline
companies in the industry with slogans
and advertising campaigns that will
either make or break a company in the
airline industry. The right slogan is
crucial for the targeting of customers.
To gain customers and build a reputation
of being the best airline carrier in the
industry, your advertising must stick out
and attract customers.
Relationships with fuel suppliers can be
built strong by agreeing to purchase large
quantities in advance for future use. By
doing this, airline carriers can build close
relationships with suppliers and gain
bargaining power over other competitors
in the industry. This will alter the
competitive environment and the
competitive structure of the airline
industry. This close relationship would
be an opportunity for a company
competing in the airline industry.
Financial relationships that exist in the
airline market are built based on how
profitable a company’s operations are.
Therefore, the better the operations the
more financial help a company will get.
This poses as an opportunity for a
company in the airline industry. This
need for financial assistance will cause
intense competition in the airline
industry. The environment will become
more competitive and the relationships
with financial suppliers will become
stronger.
Companies build tight relationship with
advertising agencies. These
50
The relationships between the airlines
and the airports are critical as airports
usually provide space for those airlines
to work from.
relationships are crucial for a company.
The better the campaign or slogan, the
better the product or service will market.
Ultimately, this is used to gain market
share and the more market share, the
more profits. This relationship will
cause intense competition among
competitors in the industry. Each
competitor trying to be the best and gain
customers will change the environment
in which the competition exists. This is
an opportunity for advertising suppliers
in the industry and companies can use
this opportunity to gain a competitive
advantage and win the industry with their
strong advertising and marketing
strategies.
The airline companies build strong
relationships with the airports they use in
order to gain terminal space and receive
good landing times, even though they are
paying for both. The amount of airports
allowing major airline business can be
seen as an opportunity that some airlines
are willing to take advantage of.
What is the relative
quality of the supplier
and his services or
products?
The quality of the products, which
include: planes, fuel, financial access,
and advertising, are all crucial for the
operation of an airline company. Without
these essential tangible and intangible
assets, a company could not run. The
quality is of the highest that a supplier
could offer. Boeing jets and fuel that is
cheaper in bulk are of high quality to the
airline industry. The financial suppliers
offer the money to purchase planes and
the advertising firms offer the best
quality slogans and marketing ideas to
companies in the industry. This allows
the companies to gain market share and
take the lead in the airline industry.
Receiving the highest quality goods from
suppliers, offers opportunities to the
industry as a whole. High quality
supplies will produce high quality
products and services to passengers. The
competitive structure among competitors
will be strong and close seeing that all
competitors have access to suppliers that
offer superior quality products to
enhance their services.
51
BUYERS
What is the cost to the
buyer of switching to a
competitor or a
substitute?
The cost to buyers for switching to a
competitor or substitute is minimal.
Although there are competitors with
lower prices, the product or service
provided may not be what the buyer is
looking for. Buyers are never locked into
any specific competitor; therefore buyers
in the industry have the freedom to
choose whichever seller best suites their
needs.
In the year 2000, there was 98.1 billion
in revenues for the airline industry. This
amount has increased steadily since
1995. These figures show that the
buyers in the airline industry are in the
millions.
The ability for buyers to switch between
airline competitors is a threat to the
industry. This ability for buyers to freely
choose what option is best for them
cause’s strong competition among
competitors within the airline industry.
What is the relative size
(based on the amount
they purchase) of each
buyer?
Revenues for the airline industry in the
year 2000 were 98.1 billion. This
amount was based on passengers in the
millions. Ranging anywhere from
$85.00 to $200.00 per ticket.
The quantity of buyers of airline tickets
are in the billions and it creates an
opportunity for competitors in the
industry. Each competitor will be able to
make a profit from sales due to the fact
that the revenues were in the billions.
No one airline carrier dominates the
industry, even when they offer the lowest
prices. The reason being that buyers
wants and needs differ with regards to
what type of flight they are looking for.
What is the buyer's
knowledge level?
Today buyers’ knowledge levels are
extremely sharp. Internet knowledge,
financial reports of the airlines carriers
and advertisements allow the buyers to
be aware of their options. With this
increase buying power, buyers can make
the best decision about what airline to
choose.
Backward integration is not possible in
this industry.
Increased buyer knowledge will cause
intense competition among the
competitors in the airline industry.
Buyers’ knowledge poses as a threat to
the entire industry. Their increased
buying power will raise the standards for
all competitors and cause a strong
competitive force for the industry.
Backward integration does not affect the
airline industry. There is no threat or
opportunity present.
If buyers are not happy with a particular
airline, they can choose another airline.
The buyers’ choice to buy or not to buy
represents a threat to the airline industry.
The buyers’ preferences determine the
fate of the airline industry. Without
buyer preference there would be no
industry.
How many buyers are
there in this industry?
Can the buyers threaten
the industry with
backward integration?
Are the industry's
products discretionary
purchases?
Yes, this particular industry’s products
are discretionary. Buyers have the
option to either purchase or not to
purchase from the airline industry. This
decision is solely up to the buyer.
The enormous quantity of buyers in the
airline industry poses as an opportunity
for competitors. With so many buyers,
each competitor has a chance to gain a
fair market share within this industry.
With buyer preferences changing, each
airline in the industry has a chance at
gaining a potential customer. This
opportunity is out there for any
competitor willing to go after the
potential customers.
52
3. What is (and how are they) causing the industry's competitive structure and business environment to change?
Factors
Industry competitive structure
This factor is supposed to capture how the drivers of
change are altering the industry's competitive
structure.
Industry business environment
This factor is supposed to capture how the
drivers of change are altering the industry's
business environment.
Strategic implications
The competitive structure of an industry entails the number of competitors and their competitive
relationships. For example, an industry entering maturity causes fewer, larger competitors. This
affects the industry's structural arrangement between rivals, buyers and suppliers. When the industry
approaches maturity or when it is in decline, the industry's business environment will create intense
rivalry for a diminishing market.
Internet and new
e-commerce
opportunities
New business-to-business and business to consumer
market opportunities are altering industry
boundaries. This change driver is a threat to the
airline industry and creating intense competition.
Travel by internet booking gives the consumer a
wide range of trip choices and low prices. This
increases competition among rivals. Alliances are
being formed that may include new options such as,
events available for the destination of choice and
being able to buy tickets for the events as well.
New computer technology made it easier for buyers
to comparison shop for the best travel fares. Change
in technology, such as internet and web tools have
changed how customers shop for travel
accommodations. The customer wants convenience
and quick service as well as the best value and they
can find that by using the internet tools.
New business-to-business and business to consumer
market opportunities are altering industry
boundaries. This change driver is a threat to the
airline industry and creating intense competition.
The business environments as well as personal
lifestyles have become more fast-paced. Video
Today’s corporate environment requires a lot
of meetings and conferences. With the new
technology for conference calling and video
conferencing, the competition is fierce in the
travel industry. Market share could be lost
because of these technology changes. This
would make competition fierce in the airline
business environment.
The internet has many web sites for travel
booking and is another factor that has changed
the business environment. Expedia &
Travelocity are websites that offer internet
services to book trips. You can book your
flights very easily with this tool. However, this
tool enables the consumer to comparison shop
for the best value, which creates a threat to the
industry resulting in increased rivalry.
Using the internet for travel is profitable for
the industry and works very well because
travel is a virtual product. The convenience of
sitting at home or in your office and using
your computer to book a flight has helped the
industry to be more profitable by increasing
market share but at the same time keeping
costs low to compete with rivals.
Internet and e-commerce is an
opportunity in the airline
industry to increase business at
a very low lost by eliminating
the travel agent fees. There is
no overhead when you set up
your business on the internet.
This strategy of internet use has
changed the travel industry and
attracts customers who may
have gone directly to a travel
agent. The travel agent fees are
eliminated when you can go
directly to the airline website
and book the flight yourself.
However, giving the consumer
the opportunity to comparison
shop very easily through the
internet is a threat and can
result in sub par profitability or
losses, if strategic low cost
strategy is not used to counter
the low air- fares.
53
conferencing could be used for business-to- business
communications. Businesses could save thousands
of dollars on airfare by video conferencing. The
airline industry must find ways to compete with this
service. This drives the cost of airfare down to make
it more affordable for businesses as well as the
everyday customer who travels for pleasure. Unless
competitors can find ways to keep their internal
costs down, they will have a problem competing
with low fares and internet tools and surviving in the
industry. Airfares have to be low enough to make it
attractive to businesses and more efficient than the
cost of setting up video conferencing.
For the average traveler that travels for pleasure or
emergencies to meet family obligations, video
conferencing would not be an option. Personal
contact with family and friends can only be met by
physical travel. Airfare has to be competitive with
other means of transportation services, such as
trains. After September 11th, traveling by train was
considered to be a safer way to travel. However, the
time it takes to travel by train cannot compare to
flying. For people who have time constraints, this is
not an available option.
The industry as a whole needs to find ways to
compete with technology as well as travel agents.
On line tools, and cost cutting are needed to take
advantage of this new technology to be competitive.
Rivalry is fierce in this industry and the
internet is an innovative tool that is available
to enable the business environment to grow
without the added cost of leasing of buildings,
and hiring new people to service the customer.
The internet opened up the business to
consumer market in this industry and created
opportunity. The strategy to use the internet
for corporate travel enables airlines to take
advantage of a tool that may not work in all
industries. However, in the travel industry, the
fare is not something that you would look at or
feel before you buy it. Using the internet is a
convenience especially for businesses that use
computers every day.
Using innovation to specialize in the area of
corporate travelers who are looking for low
fairs and convenience to keep their business
costs down helps to get ahead of the
competition. Competition is fierce in this
industry and therefore is a constant battle for
revenue growth.
The airline industry has benefited greatly from
the internet in regards to eliminating or
reducing the need for the travel agent. Travel
agent fees and commissions are saved by
setting up their own on-line reservation sites
allowing for higher profits and lower costs.
After the effects of September 11th, the industry was
in a declining stage. Rivalry was very intense, as
market share was needed in order to survive.
54
Increasing
globalization of
the industry
The demand for air travel is present all over the
world. Air travel is the quickest way to get from one
country to another, and also the only way other than
by boat, which takes much longer than flying.
Globalization opens the doors for revenue growth in
the airline industry. Although not all airline carriers
are global, some restrict their flights to within the
U.S. and are limited to certain areas.
When globalization of the airline industry increases,
the rivalry will also increase. As more airlines
expand globally the competition will increase as
well as market share will be taken from existing
airlines.
Airlines expanding globally will have to compete
with the costs of already existing airlines. Low
operating costs to allow for low airfares are
necessary in order to be profitable.
The increase of globalization in this industry has not
hurt Southwest or any of the other top airlines in the
U.S.
Long term
industry growth
rate
This industry was in decline because of September
11, 2001. People were afraid to fly and would only
fly when they had to. Business trips continued as
necessary. However, there was growth due to special
cut-rate fares. These cut-rate fares produced
increased passenger traffic and ticket sales. This
strategy was a threat to rivals and increased
competition. Low rates stimulated higher passenger
traffic that created long-term growth for the
industry. Industry rivals were forced to compete for
market share and a lot of cost cutting was needed.
The customer is saying that they like what the
When you have ambitious airlines that are
striving to gain significant competitive
position in as many attractive country markets
as they can, the environment will be altered by
these competitors entering the global market.
When cost economies can be used to benefit
from world scale volumes and management
know-how ability can provide a significant
competitive advantage, the business
environment will be altered by global
expansion.
There are opportunities to
expand to other areas of the
world; however, it would
increase rivalry. Market share
would be lost by the existing
organizations in the new areas
of expansion.
Price competition would be
fierce and profitability could be
lost or diminished.
Rivals in the airline industry may increase
their market share by expanding globally.
Increased globalization will create more
competition in the business environment and
cause the fares to go down. This competition
is a threat to the industry rivals, as they will be
forced to lower their rates in order to be
competitive and stay in the market.
The potential to lose profits
would be a risk of expanding
globally.
Globalization would not be
advantageous at this time for an
airline to expand globally
because of 911. The added
security costs resulting from
911 and the restrictions and
requirements to safeguard
against terrorists would be very
costly. There are more oversees
restrictions on travel and the
costs would outweigh the
benefits.
In the 1970’s the airline industry was in a
Long-term industry growth
slump. In 2001 after the 911 crises the
rates create opportunity for
industry slowed down again. This created
increased market share. The
pressure for change because of people not
concept of cut-rate fares to
flying as frequently out of fear.
grow passenger traffic so
The business environment changed when
significantly that the revenue
rivals had to alter their actions to compete with erosion wood be more than
lower fares. Rivalry became very intense and
offset by revenue gains has
changed the industry. Long- term growth in
increased ticket sales and
this industry is attainable if you listen to the
volume of traffic. Smaller
consumer. When changes in the industry take
competitors in this industry
place, rivalry intensifies. Long-term growth
may want to consider merging
55
Who buys the
product and how
do they use it
Product innovation
industry is doing with the lower fares and want to be
able to travel more frequently. This change in the
needs of the consumer has altered the competitive
structure tremendously.
will enable competitors to use economies of
scale and become a low cost leader.
The change in this industry of who is doing the
traveling and how they use it has altered the
competitive structure. In the past, only the more
affluent population used flying for pleasure because
it was so expensive. Flying was more of a luxury for
pleasure trips, unlike today where it is almost a
necessity. Incomes have increased which contributes
to the change of who buys and how they use it.
Everyday people like you and me travel more often
for pleasure as well as for business because it is
more affordable. It was not always affordable to
travel until industry competition caused rates to be
lowered.
The industry environment change of who buys
the product and how they use it alters the way
competitors promote and sell the product.
Making reservations easier by using the
internet and offering other services on the web
site are examples of the changing
environment.
By giving the customer what they wanted with lower
airfare it changed the industry and the competitive
structure. Businesses can grow and conduct business
by using air travel. In a multinational business, it is
important for executives to meet periodically for
important meetings and they can do this by flying.
Because of the affordability to fly, the industry has
changed and has become very competitive.
Southwest is a major contributor to this change by
lower fares, which caused competitors to follow suit.
The competitive structure of the airline industry has
changed with new product and services offered by
rivals. Low cost, no frills travel has rejuvenating the
industry growth. When the market position of the
industry innovators got stronger, this increased
rivalry. Rivals are forced to compete with product
innovation if they wish to stay in the market or risk
losing profitability. The threat of product innovation
from rivals will result in increased competition.
Innovation in this industry was used with low fares,
Frequent flyer programs and low cost, no
frills, have answered the need of the changing
buyers. Lower fares are and frequent flyer
programs have increased market share.
This creates opportunity in this industry for
growth. The business environment of this
industry had to change as a result of
accommodating the needs of the consumer.
More people wanted and needed to fly and the
industry had to answer those needs by lower
fares and more non-stop routes. People are in
a hurry to get to where they are going. The
U.S. is a fast paced country unlike some areas
of Europe where it is slower paced. This
created growth in this industry and changed
the business environment intensely.
The business environment was forced to
change to accommodate the needs of the
consumers, by lower fares and increased
customer satisfaction levels. Industry growth
is the result of these changes for the
innovating companies. The innovative ways of
competitors to accommodate the needs of
businesses and everyday people has changed
the industry environment. In 1994 ticket-less
travel was introduced and in 1995 became
with a larger more successful
organization or risk bankruptcy.
Larger competitors should look
into buying the smaller ones to
gain revenue and expansion to
new travel routes.
The state of competition has
changed as a result of this
factor. Industry rivals have to
lower fares in order to compete.
This change could result in
profit loss if strategy is not used
to also lower costs. The
consumer wants the best value
at a reasonable price. Marketing
strategies directed towards the
changing buyers need to be
implemented. Promotions and
incentives are needed to induce
more travel to the changing
buyer.
Industry rivals will need to find
ways to cut their costs in order
to compete with the low fares
and special promotions. This
will threaten their profit margin
without the low costs strategy
that Southwest has been able to
pride them selves on.
Rivalry will increase with
product innovation since market
56
Technological
change
Marketing
innovation
new routes, and non-stop flights to get you there
quicker and frequent flyer miles on credit cards.
Innovation to change the structure of flying has
forced competition to follow with the lower fares.
This was a threat to rivals and caused fierce rivalry.
This changed in the structure of flights and lower
fares caused intense competition in the industry.
Competitors in the industry who continuously
update their technology will have a competitive
advantage. State-of-the-art flight dispatch systems
to help minimize weather and operational delays are
a must. The technology used for safety, high
quality, high maintenance and reliable operations,
has prevented plane crashes. Extensive and thorough
maintenance programs in the commercial airlines
industry create fierce rivalry. It is tough to compete
with new technology, as it is very costly.
available system wide. Meeting the customers
changing needs induces product innovation,
which changes the industry environment.
Fierce rivalry is a result of product innovation
in this industry.
share will be lost.
The consumer expects strong emphasis on
safety issues. Technology to accomplish what
is needed to make the consumer feel safe and
secure requires considerable capital
investment. Weaker rivals in this area could
be forced to withdraw from the market
changing the business environment by
lessening the competitors.
Successful marketing innovation can widen industry
demand, increase product differentiation and lower
unit costs. These changes can alter the competitive
structure of rival firms and force strategy revisions.
Marketing innovation is a threat to rivals in the
industry by creating product differentiation. Product
differentiation can alter the competitive structure of
the airline industry. Competitors are forced to
respond to the marketing of rivals to remain
competitive and keep their market share.
Competitive marketing strategy, which makes it
tough to compete for rivals, causes fierce
competition. Websites and the internet play a big
part in marketing innovation. Lower unit costs by
The competitive strategy in this industry has
changed the business environment of the
airline industry. Rivals were forced to lower
pricing which also decreased their profit
margins or risk losing market share.
Innovation forces competitors to change their
business environment or risk going out of
business. High rivalry results when marketing
is successful. Strategy revisions are needed to
compete.
Technological changes pose a
threat to the industry because of
the capital investment that is
required.
New security measures since
911 have been very costly by
extending the ground times to
check baggage and the greater
attention needed for safety. This
will lower the profit margins
and threaten some competitors
who will not be able to sustain
these changes. New technology
is always a threat because of the
cost factors involved in making
these changes. The financially
weak organizations may not
survive or may have to merge
with a competitor.
Marketing strategy to spark the
buyer’s interest will widen the
demand.
New software was implemented in 2001 by
Southwest that significantly decreased the
time required to generate optimal crew
schedules and improve on time performance.
These technological changes have changed the
business environment in this industry by
weakening the financial position to make the
necessary changes.
Increased product
differentiation is a result of
successful marketing
innovation.
By monitoring the marketing
strategies of rivals, you can try
to quickly match or exceed
them. Being aggressive and
taking risks should be part of
57
the use of internet, creates intense competition.
These strategies make it tough for rivals to compete
since low costs are important for profitability. The
competitive structure became very fierce because of
the marketing innovation in this industry.
the strategy to market your
product.
Seek to be the leader in the
industry.
Marketing innovation is an
opportunity for those who
choose to work on it and a
threat to those who do not.
Entry of major
firms
Any new entry in this industry would intensify the
competition. New marketing and promotion
strategies could be used. A firm with strong
financial resources and cost efficiencies would cause
fierce competition.
New entrants with innovative marketing
strategies would alter the business
environment of this industry. New rules of the
competition “game” would change the
business environment.
New entrants with new skills
and strong resources would
send competition in new
directions. Existing firms may
be forced to exit because of
tough competition and
insufficient resources.
Acquisitions of already existing
firms could result making a
larger, stronger organization.
Exit of major
firms
Reducing the number of market leaders would
change the competitive structure in this industry by
causing a rush to capture the exiting firm’s
customers.
The business environment would change when
a major firm exits the market. A highly
competitive environment would result from a
firm exiting the industry.
Intense competition to grab the
market share.
Exit of major firms would be an
opportunity for the existing
industry rivals.
Diffusion of
technical knowhow
The technological know-how of rivals in the
industry can be acquired over time to match the top
performers. This would make competition even
stronger to retain or increase market share. Firms in
this industry can lose their competitive advantage
once a rival learns of their secrets to success.
Competition will become strong when the
technology know-how has been learned throughout
the industry. Rivalry will become very fierce.
A constant watch of technological changes in
the industry is needed to maintain their market
share by staying ahead of the competition.
Diffusion of technological know-how will
create opportunity for rivals in the industry
and threaten the organization that is diffusing.
This results in a change in the business
environment, as new strategies will be needed
to obtain and keep new technology. Hiring
Retention of employees is
needed so that they do not
move to another firm and take
your ideas and know-how with
them.
Lost market share results in
diffused technology.
Erosion of technology based
competitive advantage.
58
Competitors will try to steal knowledgeable
employees from rivals.
away of knowledgeable employees from
competitors to obtain know-how poses a threat
from this factor. Innovation will result as
technology diffuses. Globalization results and
national boarders are crossed.
Continually work towards
improving technology knowhow to stay ahead of
competition.
59
Cost and
efficiency
Cost and efficiency is one of the strengths need to
compete in this industry. The strategy is to always
be prepared for “a rainy day”. This will create a big
competitive advantage when times are tough and the
economic situation takes a downturn as had in the
past. Competition has been very fierce in trying to
compete with lower airfares. The competitive
structure was changed dramatically when lower
prices were offered to the customer. Rivals are
forced to lower air- fares to the customer or market
share will be lost. This is one of the most important
driving forces of change in as it dramatically alters
the state of competition in the industry.
The industry environment has changed with
the strategy for cost efficiency by forcing
prices of airfare to come down. This was an
opportunity to gain market share for rivals and
a threat to rivals of losing market share or
losing profit margin by lowering their prices.
A result of lower airfare is more flying traffic.
Opportunity was actually created for this
industry by inducing more people to fly with a
no frills, low cost, non-stop flight plan. The
efficiencies from this strategy changed the
industry environment. It forced competitors to
lower their prices to the customer, which
increased air traffic.
The risk of having to drop out
of the market is a threat when
key competitors having a cost
and efficiency advantage.
Lost market share from
competitors who have the
competitive advantage of cost
efficiency.
New management may be
needed to motivate employees
to cut costs.
Low profit margins.
Monitor costs and profitability
margins to prevent competitors
from having a competitive
advantage in this area.
Growing buyer
preferences for
differentiated
products instead of
a commodity
product
Changing needs of the consumer for low cost, no
frills, best value, point to point, on-time performance
has changed the competitive structure, by forcing the
industry to meet those needs or risk losing market
share. Southwest was able to fill this need and
changed the industry’s competitive structure. The
contest among rivals to out differentiate one another
began in this industry. Price competition to obtain
differentiated products forces rivals to drive down
their costs to maintain profitability.
New safety and security measures were put into
place after the 911 crises. This put a financial burden
to the airline industry. When organizations are not
meeting the safety standards and security measures,
the customer will not want to fly on that airplane.
The competitive structure is altered by these
changes, as financial resources are needed to make
these changes. The competitive structure of the
industry was greatly changed by these new
regulations and policies. Opening up domestic
market to foreign participants creates competition.
Market forces play a huge part in changing the
business environment. Changing buyer
preferences and needs drive these changes.
Price competition begins when buyers decide
that they do not need all the bells and whistles
and look for budget priced services. This
brings about high rivalry to compete in the
industry and changes the business
environment.
Cost reductions are needed to
be competitive.
Need to create a new image by
advertising and promotion of
these differentiated products.
Research is needed of consumer
demographics and economy.
Financial resources are needed
to conduct research and
advertise.
Deregulation into new
geographic markets.
Regulatory and
government policy
changes
After 911 the whole business environment of
this industry has changed dramatically placing
financial burdens on all, as well as competition
to be the safest airlines to fly with. The added
cost of baggage checks and security measure
and surveillance has put a burden on the
industry as a whole. The business
environment changes as a result of regulatory
and government policy changing factors, as
financial resources are needed and only the
financially strong will sustain these changes.
New competition can result from opening the
Costs to cover these changes
may pose a threat to rivals in a
weak financial position.
Financial resources will be
needed to make these changes.
Strong intellectual capital to
implement changes will be
60
Societal concerns,
attitudes and
lifestyle changes
Reductions in
uncertainty and
risk
door to foreign participants. Deregulation in
this industry is a potent pro-competitive force
in this industry.
Concerns about safety and security became a big
The business environment of this industry
issue after the terrorist attacks. Image and reputation changed drastically. Added costs to meet the
for safety and reliability was a major competitive
safety and security issues placed a burden on
factor. These changes bring about tough
the industry. Competition would be very
competition and changed the structure of
fierce under these conditions. Growth is
competitiveness. Advertising and promotion of the
needed to meet these higher costs. The
changes is needed to create a new image to the
industry environment has changed by having
consumer.
to respond to the concerns of society or exiting
the industry.
necessary.
This would apply to emerging industries that are
willing to take risks. Once the industry proves to be
lucrative the more conservative firms may enter the
market. Once risk and uncertainty appears to be
under control, the competitive structure of the
industry will change. Strong firms looking for
investment and growth will increase competition by
entering the industry.
New entrants may result.
Industry becomes more
attractive.
Build strong reputation and
customer loyalty to prepare for
new entrants.
Use intellectual capital to create
new strategies to defend against
new entrants.
Market share could be lost if
new firms enter the industry.
The industry business environment will
change to high rivalry once uncertainty and
risk is reduced. New entrants will enter the
industry and increase competition. Large,
financially strong firms looking for an
investment could enter and change the
industry environment by forcing existing firms
to compete with their new strategies. New
strategies are needed for existing firms to stay
in the market.
Build your company image and
reputation to counter the
concerns of society.
Monitor the lifestyle changes to
respond quickly to the new
trends and conditions.
Quick responses to these
societal concerns and changes
of attitude and lifestyle of the
consumer, is needed to stay in
the game.
61
4. Which companies are in the strongest/weakest positions?
The close grouping of the rivals in the “Broad/Medium-Low” area of the strategic group map shows fierce competition that resides among those
rivals. Southwest, having the smallest market size of those rivals is in a position where they must rely on low prices to compete with such large
rivals as American, Delta, and United. Although Northwest, Continental, and US Airways have a smaller market than those four competitors in the
lower right hand corner, rivals must be aware of any attempts made, particularly, by Continental or US Airways to lower prices. If Us Airways or
Continental were to lower their prices much, they would become a direct threat to all four of the companies in the lower right hand corner,
especially United (because of their broad market scope and medium price range) and Southwest (because of the fact they have a much smaller
market share than either US Airways or Continental already). Because of small market shares, narrow market scope, and high prices, the
competitors in the upper left hand corner of the map (Alaska, TWA, and America West) pose little threat to the rest of industry.
62
There are two notable clusters of competitors in the Customer Service strategic group map. The group including American, US Airways,
Continental, Delta and United all have mediocre customer service records. Of those five rivals, United is the worst but still poses as a threat to the
others in its grouping. The group located on the narrow end of the market scope (which includes Alaska, TWA, and Northwest) has similar
customer service records to the group on the right side. However, because of the slight difference in market scope, the two groups do not stand as
large threats to one another. There are also two notable loners. Southwest has the highest record for customer service out of all ten competitors.
They stand as a threat to the rest of the industry all by themselves when based on customer service. The other loner is America West. Of all the
rivals, America West is by far the worst in customer service. America West poses no threat towards any of the competitors in the area of customer
service. Southwest’s incredible customer service can be used to their advantage.
63
They are getting
stronger. In
terms of
passengers
carried they are
the 3’rd highest
in Industry.
Their operating
revenues are the
highest in
industry and
growing at a
modest pace.
Their operating
expense per seat
mile is one of
the highest in
industry.
Their
strategic
posture is
offensive
.
Their
competitive
strategy is to
serve a
broad
market.
What does this mean in terms of
their most likely moves?
Their plan is
to grow
market share
through
internal
growth.
What is their competitive strategy
(low cost, differentiation, broad
or narrow, best value)?
Their
strategy is
to move
up a
notch.
What is their strategic posture
(offensive, defensive, both)?
What is their market share
objective (aggressive expansion,
expansion via internal growth,
expand by acquisition, hold
present share, give up share)?
Multicountry
What is their competitive position
(getting stronger, well
entrenched, stuck in the middle,
going after different market
position, losing ground,
retrenching)?
What is their strategic intent
(dominant leader, overtake the
leader, top 5, move up a position,
maintain position, survive)?
United
What is the competitive scope of
each (local, regional, national,
multi-country, or global)?
List the competitors
5. What strategic moves are rivals likely to make next?
You would expect with the number of
passengers they serve, United would be
able to take advantage of economies of
scale, which would reduce their
operating costs. They need to review
their value chain for potential savings to
decrease their operating expense. They
should renegotiate their contracts to
lower their operating costs.
They should review their overall market
strategy to verify it makes financial
sense to serve a broad market. They
should consider serving a limited
segment of the market that provides
better profitability as opposed to serving
a broad market.
They need to investigate why their
revenues are the highest in Industry
despite the fact they carry significantly
less passengers than the leader. This
data could b used to help them
determine future expansion plans.
64
American
Delta
Multicountry
Multicountry
Their
strategic
intent is to
overtake
the leader.
Their
strategic
intent is to
maintain
their
position
(leader).
Their plan is
to grow
market share
through
internal
growth and
acquisitions
(TWA)
Their plan is
expansion
through
internal
growth.
They are getting
stronger. They
are number 2 in
terms of
passengers
carried and
operating
revenues. Their
operating
revenues are
growing at a
high rate. Their
operating
expense per seat
mile is one of
the highest in
industry.
They carry the
highest number
of passengers in
the industry but
rank 3’rd in
terms of
operating
revenues and
have one of the
lowest revenue
growth rates in
industry. Their
operating
expense is lower
than the other
large carriers.
Their
strategic
posture is
offensive
.
Their
competitive
strategy is to
serve a
broad
market.
They should review their operating
procedures to reduce the number of
passenger complaints, which will
improve customer relations.
They should look at their expenses to
determine if savings can be made to
lower the operating cost and improve
growth.
They should study the industry leader’s
methods to determine if changes can be
made which will increase American’s
market share and profitability.
Their
strategic
posture is
defensive
Their
competitive
strategy is to
serve a
broad
market.
Delta should review their operating
plans to find out why they carry the
highest number of customers but do not
generate the revenues, which their
competitors do.
They should consider changes in the
service they offer (drop non-profitable
cities and add profitable ones). Having
one of the lower operating expenses in
industry will allow them to go head to
head with competitors.
They should consider alliances with
other airlines to lower their maintenance
expense and combine flights to improve
profitability.
65
Northwest
Multicountry
Their
strategic
intent is to
maintain
position.
Their
objective is to
grow market
share through
internal
growth.
They are stuck
in the middle.
They have the
highest debt to
capital ratio in
industry. Their
sales revenue is
growing at a
good pace.
Their
strategic
posture is
defensive
.
Their
competitive
strategy is to
serve a
broad
market.
They need to review their value chain
for possible ways to lower their debt.
They should re-evaluate the cities they
serve for profitability. They should
consider reducing the breadth of the
market they serve to concentrate on the
more profitable segments.
Continental
Multicountry
Their
strategic
intent is to
move up a
step.
Their
objective is to
grow market
share through
internal
growth and
strategic
alliances.
They are getting
stronger with
improved
operating
performance.
They are
number two in
terms of revenue
growth. Their
operating
expense per mile
is one of the
highest. Their
debt to total
capital ratio is
one of the
highest.
Their
strategic
posture is
offensive
.
Their
strategy is to
serve a
broad
market They
want to
concentrate
on the more
profitable
segments of
the market
as opposed
to the low
cost
segment.
They should continue seeking more
profitable business by developing routes
which generate higher revenue such as
overseas flights.
They should continue developing
alliances with companies to reduce their
operating costs. If they can reduce their
costs, they should consider expanding
into more competitive markets.
They should change their flight arrival
times to improve their on time
performance
66
US
Airways
TWA
Multicountry
They are
multi
country
Their
strategy is
to move
up a
notch.
Their
strategy is
survival.
Their
objective is to
grow market
share through
internal
growth.
Their
objective is to
grow market
share through
internal
growth.
They are stuck
in the middle.
Their debt to
total capital ratio
is one of the
highest. Their
operating
expenses per
seat mile exceed
all others in
industry by at
least 30%. Their
revenues are
growing at a
moderate rate.
Their
strategy
is both
defensive
and
offensive
They have one
of the worst
customer
performance
records in
industry. Their
operating
revenues are
growing at a
moderate pace.
Their
strategy
is both
offensive
and
defensive
.
Their
strategy is to
be a best
value
provider.
They need to look at their value chain to
determine if changes can be made to
reduce their operating costs. They
should consider consolidating their
services with other airlines to cut costs.
They should consider dropping cities
that are not profitable and adding ones
that are.
They should consider updating their
fleet of planes from Turbo props to
modern commuter jets. This will
improve their appeal to customers.
NA
American Airlines acquired them in
2000.
67
America
West
They
serve the
USA,
Mexico,
Costa
Rica and
limited
travel to
Canada.
Their
strategy is
to survive.
Their
objective is to
grow market
share through
internal
growth.
They have the
second lowest
expenses per
seat mile in
industry. Their
debt to capital
ration is
moderate. Their
operating
revenue growth
rate is low
compared to
their
competitors.
Their customer
satisfaction
record is poor.
Their
strategy
is
defensive
Their
strategy is to
be a low
cost
provider in a
limited
share of the
market.
They have one of the lowest operating
expenses per seat mile in industry. For
this reason, they should consider
competing directly against other low
cost providers for customer share.
They should consider expansion within
the US to take advantage of economy of
scale. Their expansion should be limited
to a specific geographic area as opposed
to nation wide.
They need to make changes to improve
customer satisfaction. They have the
highest number of passenger complaints
in the industry. They need to reduce the
number of seats they book on a flight to
prevent overbooking.
If they can grow their market share,
they will be a threat to the profitability
of the industry due to their low
operating costs.
68
Alaska
They
serve the
USA,
Mexico
and
limited
travel to
Canada.
Their
strategy is
survival.
Their
objective is to
grow market
share through
internal
growth.
They are loosing
ground.
Alaska‘s
revenue growth
rate is the lowest
in industry.
Their operating
expense per
revenue mile is
one of the
highest. They
have a
significant
amount of cash
on hand and a
moderate debt to
capital ratio.
They have one
of the worst
customer
satisfaction
ratings in the
industry.
Their
strategy
is
defensive
.
Their
strategy is to
serve a
limited
share of the
market
They need to reduce their operating
expenses to grow market share and
profitability. They could reduce their
operating cost by partnering with
another airline to share operating
expenses.
They need to make changes to boost
customer satisfaction, which will
increase revenue growth and market
share. They need to change their flight
schedules so more flights arrive and
depart on time. They need to investigate
their baggage handing process so
changes can be made to eliminate lost
luggage.
69
Northwest
What
does this
mean?
Continental
What
does this
mean?
What is their capability for
this factor?
Delta
What
does this
mean?
What is their capability for
this factor?
What is their capability for
this factor?
What is their capability for
this factor?
What is their capability for
this factor?
6. What are the key factors for competitive success (in this industry)?
United
American
You can provide your justification for
What
What
selecting the KSFs underneath the
does this
does this
KSF.
mean?
mean?
Technology related KSFs
Scientific research and expertise
Technical capability to make
innovative improvements in production
processes
Product innovation quality
Expertise in a given technology
Internet expertise
70
Manufacturing (production of the
product or service) related KSFs
Low-cost production efficiency
A combination of bottom-line
performance, low labor costs, and low
operating costs are key in keeping
itself profitable in the vulnerable
Airline Industry.
Fair.
In 2000
per
average
seat mile
Uniteds’
operating
expenses
were
10.60
cents and
the
salaries
&
benefits
were
4.16
cents.
Uniteds’
profits
would
benefit
from
focusing
on lowcost
producti
on
efficienc
y.
Fair.
In 2000
per
average
seat mile
America
ns’
operating
expenses
were
10.49
cents and
the
salaries
&
benefits
were
4.18
cents.
Focusing
on a lowcost
producti
on
efficienc
y
strategy
would
increase
America
ns’
profits.
Good.
In 2000
per
average
seat mile
Deltas’
operating
expenses
were
9.43
cents and
the
salaries
&
benefits
were
3.73
cents.
Delta has
a good
start but
needs to
focus
more on
increasin
g its lowcost
producti
on
efficienc
y.
Good.
In 2000
per
average
seat mile
NWs’
operating
expenses
were
9.96
cents and
the
salaries
&
benefits
were
3.65
cents.
Focusing
more on
decreasin
g NWs’
operating
expenses
will
increase
the lowcost
producti
on
efficienc
y.
Fair.
In 2000
per
average
seat mile
Continen
tals’
operating
expenses
were
10.20
cents and
the
salaries
&
benefits
were
3.30
cents.
Continen
tal has
decrease
d its
labor
costs but
needs to
use more
of a lowcost
producti
on
efficienc
y
strategy
to
decrease
its
operating
expenses
.
Manufacturing quality
High fixed asset utilization
Low cost plant locations
Access to adequate supplies of skilled
labor
High labor productivity
Low cost product (service) design and
engineering
Manufacturing flexibility
71
Distribution related KSFs
(Note: This applies to inbound and
outbound logistics.)
Network strength
Electronic (Internet) tracking
Ample space on retailer's shelves
Company owned retail outlets
Low distribution costs
Speed of distribution
72
Marketing related KSFs
Fast, accurate technical service
Customer service
Rivals needed to use this KSF to “drum
up” more passengers by keeping the
flying experience enjoyable and fun to
the customer. With more passengers on
each plane, competitors would
breakeven on the load factor, which
leads to increased profits.
Not
Good.
United is
given the
lowest
ranking
on
flights
arriving
within
the 15
min.
schedule
d time,
mishandl
ed
baggage,
and 2nd
to lowest
ranking
on
customer
complain
ts.
The
ranking
of
United
indicates
that they
are not
focused
on the
customer
service
aspect of
the
airline
industry.
United
needs to
improve
their
customer
service
to
increase
its
passenge
rs and its
profits.
Fair.
America
n is
ranked
3rd the
arriving
within
15 min.
of
schedule
d time
but rank
low on
mishandl
ed
baggage
and
customer
complain
ts.
America
n has not
balanced
its
abilities
to keep
customer
s service
high. By
not
making
the total
flying
experien
ce
enjoyabl
e,
America
n could
see
decrease
d profits
from
their
overall
customer
service.
Good.
Delta is
concerne
d about
their
customer
complain
ts
because
it ranked
3rd but
their
ranking
of arrival
within
the 15
min of
schedule
d time
and
mishandl
ed
baggage
is in the
middle.
Delta has
not taken
its
customer
complain
ts and
improve
d what
needs to
be fixed.
To
increase
the
experien
ce of
Delta,
they
need to
improve
its arrival
times
and
baggage
handling
to drum
up
passenge
rs and
maximiz
e profits.
Fair.
NW is
keeping
arrival
times
within
the 15
min.
schedule
time,
they are
ranked
2nd.
However
NW has
not
covered
all the
aspects
of their
customer
s’
experien
ce. It
ranked
6th for
customer
complain
ts and 7th
for
mishandl
ed
baggage.
Focusing
on the
whole
experien
ce of
NW,
they
should
realize
that their
customer
complain
ts are a
big part
of this
service
industry.
This
could
improve
the load
factor.
Good.
Continen
tal has
tied 1st in
the
ranking
of
mishandl
ed
baggage.
The
ranking
on the
arriving
15 min.
of
schedule
time and
customer
complain
ts are in
the
middle.
Focusing
on
improvin
g their
customer
complain
ts and
arrival
time
would
increase
their
customer
service.
Accurate buyer order filling
Breadth of product line and selection
Merchandising skills
Attractive styling/packaging
73
Guarantees and warranties
Advertising
Rivals used aggressive ad campaigns to
promote the company’s culture and
values to its employees and customers,
in turn can lead to increased market
share.
Very
Good.
United
spent .20
cents per
average
seat mile
in 2000.
This is
more
than
most
rivals
spent in
2000.
Uniteds’
ad
campaig
ns were
not
discusse
d in the
case;
however
more
promotio
n of their
culture
and
values
would
increase
their
market
share.
Good.
America
n spent
.13 cents
per
average
seat mile
in 2000.
This is
an
average
amount
of
spending
among
the
rivals.
The ad
campaig
ns of
America
n were
not
discusse
d in the
case;
however
a more
aggressiv
e
campaig
n would
benefit
the
market
share of
America
n.
Fair.
Delta
spent .08
cents per
average
seat mile
in 2000.
Delta has
spent
less on
advertisi
ng than
most of
the
rivals.
The ad
campaig
ns of
Delta
were not
discusse
d in the
case;
however
would
benefit
from
improvin
g its
advertisi
ng
strategy.
Good.
NW
spent .13
cents per
average
seat mile
in 2000.
NW has
spent the
average
amount
on its
advertisi
ng
among
the
rivals.
The ad
campaig
ns of
NW
were not
discusse
d in the
case;
however
a more
aggressiv
e
campaig
n would
benefit
the
market
share of
NW.
Not
Good.
Continen
tal spent
.07 cents
per
average
seat mile
in 2000.
Continertial
has spent
the least
on its
advertisi
ng.
The ad
campaig
ns of
Continertial
were not
discusse
d in the
case;
however
they
need to
improve
its
advertisi
ng
spending
to gain
more
market
share
from the
promotio
n of their
culture
and
values.
Skills related KSFs
Workforce talent
Quality control know-how
Design expertise
Expertise in a particular technology
Ability to develop innovative products
and product improvements
Speed of getting new products to
market
74
Organizational capability KSFs
Superior information systems
Ability to respond quickly to shifting
market conditions
Use of the Internet and Enterprise
Information systems
Overall experience
Managerial know-how
Success of any organization begins at
the top. Managerial know-how is
essential to build the foundation for a
successful airline.
Good:
United
has
ranked
towards
the
bottom
of
customer
satisfacti
on since
1996 yet
they
have
managed
to
increase
their
revenues
year to
year.
United
will find
it
difficult
to
improve
their
standing
in the
industry
as long
as their
work
force
continue
s to
perform
less than
the rest
of the
industry.
Very
Good:
America
n ranks
in the
middle
of the
top ten
airlines
in
customer
satisfacti
on in
mishandl
ed bags
and
complain
ts since
1996.
America
n is
taking
their
approach
to
workforc
e talent
seriously
and will
continue
to
improve
steadily.
Very
Good:
Delta,
the
largest
airline of
the top
ten has
ranked in
the top 3
as far as
customer
complain
ts and
revenue.
Delta
will be a
force in
the
airline
industry
and will
make it
difficult
for other
airlines
to
compete.
Very
Good:
Northwe
st’s
workforc
e has
allowed
them to
maintain
a high
rank in
on time
performa
nce
involunta
ry denied
boarding
.
These
factors
prove
that
Northwe
st has
taken a
serious
interest
in their
workforc
e to
make
sure that
they
continue
to
provide a
high
degree of
customer
satisfacti
on.
Excellent
:
Continen
tal has
achieved
high
rankings
in all the
areas of
customer
satisfacti
on.
Continen
tal will
be a
force in
the
airline
industry
as far as
the
mainline
airlines
in the
industry
is
concerne
d.
Other KSFs
75
Image and reputation
When an airline has a good and wellestablished image and reputation they
are more likely to attract customers and
in turn, increase their revenue.
Good:
United
has a
good
reputatio
n among
the
flying
public
and offer
numerou
s
destinati
on both
in the
U.S. and
abroad
Overall low cost
In the airline industry low cost is what
customers will compare first. Air travel
is inherently expensive and an airline
that can offer lower fares will be able
to keep their planes full and increase
revenue.
Very
Good:
United
had total
operating
expense
of
$10.60
cents per
average
seat mile
of which
is about
average
for the
industry
for 2000.
Their
United
has been
able to
maintain
their
position
in the top
ten of the
industry
by
offering
wide
ranging
services
around
the
globe.
Very
Good:
America
n offers
many
destinati
ons
througho
ut the
U.S. and
has been
able to
rank
among
the top in
customer
satisfacti
on
among
the
industry
leaders
Although Very
their
Good:
operating Although
expenses America
are
ns prices
average
have
they
increased
need to
they
bring the have
annual
increased
increases at a
down or slower
they will rate.
have
raise
ticket
prices
will give
America
n will be
able to
attract
customer
s away
from
rivals as
long as
they
continue
to
dominate
in the
industry.
Very
Good:
Delta has
remained
among
the best
in the
industry
for
customer
complain
ts and
has
forged a
good
image
and
reputatio
n for air
travel.
Delta
will be
able to
compete
on the
same
plain as
the other
major
airlines
and
continue
to be
competiti
ve.
Very
Good:
Northwe
st has
develope
da
reputatio
n for on
time
service
and
overbook
ed
flights.
This
serves
Northwe
st well in
that they
are an
industry
leader in
getting
people
on their
airplanes
and
getting
them to
their
destinati
ons on
time.
Excellent
:
Continen
tal has
develope
da
reputatio
n for
excellent
customer
service.
There a
choice of
destinati
ons
around
the globe
has also
afforded
them
well.
Continen
tal has
develope
d into an
industry
leader
among
the top
teen
airlines
in the
U.S. and
will see
continue
d growth
in their
business.
America
n will be
able to
hold
back on
increasin
g ticket
prices to
offset
their
operating
expense
increase.
Very
Good:
Delta has
been able
to
maintain
a lower
operating
expense
at $9.43
with
little
increase
over the
past five
years.
Delta
will be
able to
remain
competiti
ve
against
its rivals
into the
foreseea
ble
future.
Very
Good:
Northwe
st has
been able
to keep
their
expenses
below
$10.00 in
2000
with a
nominal
increase
over the
past five
years.
Northwe
st will be
able to
remain
competiti
ve with
the top
ten
airlines
in ticket
prices.
Good:
Continen
tal has
increased
their
expenses
consider
able
since
1995
from
$8.67 to
$10.20,
which
will have
an effect
on ticket
prices.
Continen
tal will
have to
wow
customer
s with
excellent
customer
satisfacti
on in
order to
keep
them
coming
back
with
increased
ticket
76
operating
expenses
have
increased
every
year
since
1996.
them
higher
ticket
prices.
prices.
Convenient retail locations
Pleasant employees in all customer
contact positions
Access to financial capital
Patent protection
77
America West
What
does this
mean?
What is their capability for
this factor?
TWA
What
does this
mean?
What is their capability for
this factor?
What is their capability for
this factor?
Southwest
What
does this
mean?
What is their capability for
this factor?
US Airways
What
does this
mean?
What is their capability for
this factor?
(Competitors continued >>>)
You can provide your justification for
selecting the KSFs underneath the
KSF.
Alaska
What
does this
mean?
Technology related KSFs
Scientific research and expertise
Technical capability to make
innovative improvements in production
processes
Product innovation quality
Expertise in a given technology
Internet expertise
Manufacturing (production of the
product or service) related KSFs
78
Low-cost production efficiency
A combination of bottom-line
performance, low labor costs, and low
operating costs are key in keeping
itself profitable in the vulnerable
Airline Industry.
Not
Good. In
2000 per
average
seat mile
US
Airways’
operating
expenses
were
13.88
cents and
the
salaries
&
benefits
were
5.35
cents.
Focusing
on a lowcost
producti
on
efficienc
y
strategy
will
benefits
the profit
margins
of US
Airways.
Excellent
.
In 2000
per
average
seat mile
SWs’
operating
expenses
were
7.72
cents and
the
salaries
&
benefits
were
2.99
cents.
Southwe
st has
used a
low-cost
producti
on
strategy
to remain
profitabl
e for
over 25
years.
Fair.
In 2000
per
average
seat mile
TWAs’
operating
expenses
were
10.14
cents and
the
salaries
&
benefits
were
3.72
cents.
Reducin
g its
operating
expenses
and
institutin
g a lowcost
producti
on
efficienc
y
strategy
will
increase
TWAs’
profit
margins.
Very
Good.
In 2000
per
average
seat mile
AWs’
operating
expenses
were
8.57
cents and
the
salaries
&
benefits
were
2.21
cents.
AW is
focusing
on
reducing
its
producti
on costs;
these
figures
give us a
glimpse
of this.
Fair.
In 2000
per
average
seat mile
Alaskas’
operating
expenses
were
10.25
cents and
the
salaries
&
benefits
were
3.53
cents.
Focusing
on a lowcost
producti
on
efficienc
y
strategy
will
benefits
the profit
margins
of
Alaska.
Manufacturing quality
High fixed asset utilization
Low cost plant locations
Access to adequate supplies of skilled
labor
High labor productivity
Low cost product (service) design and
engineering
Manufacturing flexibility
Distribution related KSFs
(Note: This applies to inbound and
outbound logistics.)
Network strength
Electronic (Internet) tracking
Ample space on retailer's shelves
Company owned retail outlets
Low distribution costs
Speed of distribution
79
Marketing related KSFs
Fast, accurate technical service
Customer service
Rivals needed to use this KSF to “drum
up” more passengers by keeping the
flying experience enjoyable and fun to
the customer. With more passengers on
each plane, competitors would
breakeven on the load factor, which
leads to increased profits.
Fair.
US
Airways
is in the
middle
across
the board
for
arriving
within
the 15
min. of
schedule
d times,
mishandl
ing
baggage,
and
customer
complain
ts.
Focusing
on
customer
service,
US
Airways
could
increase
passenge
rs
experien
ce from
just all
right, to
excellent
which in
turn will
increase
their
profits.
Excellent
.
SW is
ranked
1st across
the board
on
arriving
15 min.
of the
schedule
times,
mishandl
ed
baggage,
and
customer
complain
ts. SW is
making
customer
service a
way to
differenti
ate itself
from its
rivals.
By
priding
themselv
es on
their
customer
service,
SW
believes
that it
was a
key to
their
competiti
ve
advantag
e.
Not
Good.
TWA is
not using
customer
service
to
differenti
ate itself.
Overall,
TWA
has
ranked
relatively
low
across
the board
on
arriving
within
the 15
min. of
schedule
d times,
mishandl
ing
baggage,
and
customer
service
complain
ts.
TWA
should
focus on
improvin
g its
overall
low
rating
customer
experien
ce.
Improvin
g the
experien
ce will
have
customer
s coming
back and
filling
their
planes
and
increasin
g profits.
Fair.
AW has
ranked
the
lowest in
customer
complain
ts. Its
flights
arriving
within
the 15
min.
schedule
d time
and
mishandl
ed
baggage
are
ranked
4th and
3rd.
Improvin
g on its
customer
complain
ts will
improve
the
overall
experien
ce of
AW,
which
will in
turn
improve
profits.
Fair.
Alaska is
ranked
2nd in
customer
complain
ts but
ranked
low on
arriving
within
15 min.
of the
schedule
d times
and
mishandl
ed
baggage.
Alaska
has listen
to its
passenge
rs but not
followed
through
on
making
the
experien
ce a “fun
and
enjoyabl
e one.”
Different
iating the
experien
ce of
flying
Alaska
would
improve
its
profits.
Accurate buyer order filling
Breadth of product line and selection
Merchandising skills
Attractive styling/packaging
Guarantees and warranties
80
Advertising
Rivals used aggressive ad campaigns to
promote the company’s culture and
values to its employees and customers,
in turn can lead to increased market
share.
Fair.
US
Airways
spent .08
cents per
average
seat mile
in 2000.
US
Airways
has spent
less on
advertisi
ng than
most of
the
rivals.
US
Airways’
ad
campaig
ns were
not
discusse
d in the
case;
however
more
promotio
n of their
culture
and
values
would
increase
their
market
share.
Excellent
.
SW
spent .26
cents per
average
seat mile
in 2000.
SW is
one of
the
highest
spending
rivals in
Airline
Industry.
“The
message
in ads
were
tightly
matched
to the
company
’s
strategy
and were
usually
worked
in a
manner
calculate
d to
intrigue
and
entertain
the
audience
and to
persuade
air
travelers
that what
Southwe
st offered
was of
value.”
Good.
TWA
spent .11
cents per
average
seat mile
in 2000.
This is
an
average
amount
of
spending
among
the
rivals.
The ad
campaig
ns of
TWA
were not
discusse
d in the
case;
however
a more
aggressiv
e
campaig
n would
benefit
the
market
share of
TWA.
Fair.
AW
spent .09
cents per
average
seat mile
in 2000.
AW has
spent
less on
advertisi
ng than
most of
the
rivals.
The ad
campaig
ns of
AW
were not
discusse
d in the
case;
however
would
benefit
from
improvin
g its
advertisi
ng
strategy.
Excellent
.
Alaska
spent .38
cents per
average
seat mile
in 2000.
Alaska is
the
highest
spending
rival in
the
Airline
Industry.
Although
not
discusse
d in this
case,
Alaska
should
be
benefitin
g from
advertisi
ng
spending
with
increased
market
share.
Skills related KSFs
Workforce talent
Quality control know-how
Design expertise
Expertise in a particular technology
Ability to develop innovative products
and product improvements
Speed of getting new products to
81
market
Organizational capability KSFs
Superior information systems
Ability to respond quickly to shifting
market conditions
Use of the Internet and Enterprise
Information systems
Overall experience
Managerial know-how
Success of any organization begins at
the top. Managerial know-how is
essential to build the foundation for a
successful airline.
Very
Good:
Us
Airways
is ranked
in the
middle
as far as
customer
satisfacti
on is
concerne
d.
Their
workforc
e has
performe
d
adequate
ly in
order to
keep Us
Airways
competiti
ve
among
the top
ten
airlines.
Excellent
:
Southwe
st has
ranked
number
1 in
customer
satisfacti
on since
1996.
Southwe
st has
carefully
assemble
d
workforc
es that is
conscient
ious
about
their
work and
are
concerne
d for the
well
being of
its
passenge
rs.
Good:
TWA
ranks
toward
the
bottom
for
customer
satisfacti
on.
TWA
needs to
make
their
workforc
ea
priority
in order
to
increase
their
status in
the eyes
of the
consume
rs.
Good:
America
West
ranked
last in
customer
complain
ts among
the top
ten in the
airlines.
America
West
needs to
beef up
their
workforc
e talent
in order
to give a
better
impressi
on to
their
customer
s that
they are
a
customer
friendly
airline.
Good:
Alaska
ranks
last in
categorie
s such as
mishandl
e
baggage,
schedule
flight
arrival
times
and
overbook
ed
flights.
They
rank
number
2 in
customer
complain
ts.
Alaska
has been
able to
employ a
workforc
e that
keeps its
customer
s happy
even
though
their
performa
nce
categorie
s may
not be
the best
in the
industry.
Other KSFs
82
Image and reputation
When an airline has a good and wellestablished image and reputation they
are more likely to attract customers and
in turn, increase their revenue.
Good:
US
Airways
is in the
middle
of the
pack for
reputatio
n and
image.
They are
an
average
airline in
service.
US
Airways
will be
hard
pressed
to
continue
to
compete
against
strong
airlines
that have
positione
d
themselv
es ahead
of US
Airways.
Excellent
:
Southwe
st has
consisten
tly been
number
one in
customer
satisfacti
on and
low
fares.
Southwe
st has
establish
ed an
excellent
reputatio
n that
will
allow
them to
continue
to build
on their
past
success.
Overall low cost
In the airline industry low cost is what
customers will compare first. Air travel
is inherently expensive and an airline
that can offer lower fares will be able
to keep their planes full and increase
revenue.
Poor: US
Airways
has by
far the
highest
operating
expenses
in the
industry,
with
average
service.
Higher
ticket
prices
will help
offset
such
high
US
Airways
will need
to
control
their
expenses
in order
not to get
beaten
out in
any fare
wars.
Passenge
rs will
choose
airlines
with
lower
Excellent
:
Southwe
st is able
to keep
their
operating
expenses
under
$7.50,
which
allows
them to
charge
much
less for
ticket
prices.
Southwe
st will
always
be able
to
maintain
full
planes at
lower
prices
due to
them
being
able to
control
expenses
.
Good:
TWA
ranks in
the lower
tier as far
as image
and
reputatio
n are
concerne
d. They
also have
a limited
amount
of
destinati
ons
around
the U.S.
and
globe.
Poor:
TWA
has
increased
their
operating
expenses
consider
able
since
1995
from
$8.56 to
$10.14,
which is
passed
onto
consume
rs.
TWA
will find
it
difficult
to
compete
with the
stronger
airlines
and will
not be
able to
maintain
a large
customer
base.
Very
Good:
America
West
does not
have a
very
good
reputatio
n for
customer
service
among
passenge
rs.
This will
keep
America
West
behind
others in
the
industry
and
make it
difficult
for them
to
operate
their
aircraft
at full
capacity.
Very
Good:
Alaska
ranks
among
the top in
customer
satisfacti
on even
though
there
operation
s have
ranked
last.
Alaska
has
maintain
ed a
good
image
for
customer
satisfacti
on that
will
allow
them to
compete
among
the larger
airlines
in the
industry.
TWA
will find
it
difficult
to
compete
with the
rest of
the
industry
unless it
is able to
control
its
expenses
.
Very
Good:
America
West has
operating
expenses
, which
are at
$8.57,
and is
able to
operate
as a low
cost
carrier.
This will
allow
them to
compete
against
the lowend
operators
such as
Southwe
st and
Alaska.
Very
Good:
Alaska
has been
able to
keep
their
expenses
low and
is able to
compete
directly
with low
cost
carriers
Southwe
st and
America
West.
Alaska
will be
able to
offer
competiti
ve fares
against
the other
airlines
and will
be able
to
capture
much of
the low
cost
market.
83
expenses
.
ticket
prices.
Convenient retail locations
Pleasant employees in all customer
contact positions
Access to financial capital
Patent protection
84
7. Is this industry attractive and what are its prospects for above-average profitability?
Criteria
Industry growth potential
Facts
The industry growth potential for the
airline industry is low due to the industry
being in a mature state. New entries will
need strong capital resources to compete
against existing airlines.
What does it mean?
Industry growth potential makes the industry
unattractive poses a threat for new entries
because they do not have the resources to
compete with the existing airlines. For existing
companies this unattractiveness of the industry
is an opportunity, which will allow existing
companies to keep their current market share.
Does competition permit adequate profit
potential?
Competition does not permit adequate
profit potential.
This makes the industry unattractive.
The strong competition in the industry makes it
hard for a new entry to be profitable and is a
threat to the industry.
Does competition lead to stronger or weaker
forces?
Competition leads to stronger forces.
Companies taking advantage of the driving
forces will lead to increased competition
among rivals and will pose as a threat to rivals
in the industry.
Will the prevailing driving forces positively
or negatively impact profit potential?
For the most part, the prevailing driving
forces will have a negative impact on
profit potential.
Internet and new e-commerce opportunities
can affect a company’s profit potential. An
existing company’s profit margin will be lower
because consumers can use the internet to gain
easy access to information and purchases. The
use of video conferencing can take the place of
business trips which also leads to lower profit
margins.
Regulatory and government policy changes
and Long term industry growth rate can have a
negative impact for profit potential due to the
terrorist attacks.
What is the company's relative competitive
potential in this industry?
Southwest’s relative competitive potential
is good in this industry.
Southwest has a strong and highly skilled
management team that can effectively react to
rivals competitive moves. This is an
opportunity.
85
What is the company's ability to capitalize on
its competitor's weaknesses?
The company’s ability to capitalize on its
competitor’s weakness is strong.
By using the point-to-point system of
scheduling flights instead of the hub-and-spoke
system used by its rivals, Southwest is able to
keep its costs low.
Can the company defend against or is it
insulated from the factors that make this
industry unattractive?
Southwest can defend against the factors
that make this industry unattractive by
their use of the point-to-point scheduling
system, ‘cattle call’ passenger boarding,
online ticket purchasing, using on kind of
aircraft for their fleet and keeping clear of
congested airports.
By using these operating strategies and many
others, the management of Southwest is able to
keep their operating costs below those of their
rivals.
How well do the company's capabilities
match the industry's KSFs?
Southwest’s KSF’s exceed those of the
industry. Their management team,
employees, low cost operations and
customer service put them well ahead of
their rivals.
The threat of more possible terrorist
attacks poses an uncertain future for this
industry. Any future terrorist attacks and
the requirements of compliance of
companies to meet new safety regulations
will pose a risk of lost profits to
companies in the industry.
Southwest capitalizes on their strengths to
maintain their number one position against
their rivals. The ability of management to
operate Southwest efficiently will keep them
well ahead of the competition.
Possible future terrorist attacks can lead to a
decrease in air travel by consumers. People
will not want to travel by air if there is a
possible threat to their safety. Terrorist attacks
will pose a threat to the industry. The cost of
meeting new safety regulations add to
increased operating costs and can lead to future
revenues being lower for the industry.
What is the severity of the issue(s) or
problem(s) facing this industry?
Terrorist attacks are a severe issue for this
industry. Future terrorist attacks can lead
to new safety regulations and new security
measures. Mandatory compliance of
these new standards by companies in the
industry will have an effect on their
ability to remain profitable and is a direct
threat to the industry.
The cost of meeting new safety regulations add
to increased operating costs and can lead to
future revenues being lower for the industry.
If a corporation, will continue participation in
this industry positively or negatively impact
its ability to compete in other industries?
N/A
N/A
What are the future uncertainties and risks
for this industry?
86
8. Summary matrix
External analysis section
Macro-environment
The economy at large
Legislative, regulatory and
political environments
Opportunity
The huge economic boom in the late 1990s
encouraged many businesses to increase spending,
renovate and purchase new assets. The companies in
the airline industry were taking advantage of the
good market by expanding to more cities, buying
more aircraft, and setting up new administration
offices. Consumers’ wallets were growing as well, or
at the very least, the contents were sustaining and
reliable during this time. Therefore, these consumers
were flying more frequently for both leisure and
business and should be considered an opportunity for
the airline industry.
Threat
The poor economy at this time is definite threat to
the airline industry. Post 9/11 the economy for the
airline industry was under stress due to nervous
passengers.
The mandatory three-day shutdown “threw major
airlines into a financial crunch of huge proportions.”
The stricter security measures caused the ground
times of flights to increase. This added meant that
not as many trips could be made in one day causing
breakeven load factors to increase.
The stricter security measures also meant that
passengers would need to arrive at their departure
airport earlier to allow for lengthy screening
procedures and long lines. This deterred potential
consumers from even making any ticket purchases at
all.
The no-furlough clauses in union contracts forced
many airlines to avoid making layoffs, which caused
those airlines to try to find other ways to cut
expenses. Many of these “other ways” were already
being taxed.
The delicacy of the political environments caused
87
damage to international airlines and their flights.
People were frightened to travel outside of their own
countries. Governments advised consumers to not
make certain international trips.
All of the legislative, regulatory, and political
environments were a threat to the industry.
Population demographics
The age span of consumers with the most purchasing
potential in this industry is very wide. The group
would be making purchases for themselves, as well
as purchasing seats for children. For example,
chances are good that those people may also be
purchasing tickets for their elderly family members,
who are willing to fly but, perhaps, cannot afford to.
Age is an opportunity for the airlines.
Societal values and lifestyles
Ethnographics and
psychographics provide the
following categories: personality,
values, and lifestyle.
Although business travelers (and their employers)
must be more conscious of costs, locations, and
frequency of trips, they must satisfy their traveling
needs somehow. Airlines must work hard in order to
make traveling safe and cost efficient in order to take
advantage of the business travelers’ sustained need
to travel. Attempting to capitalize on this need will
be difficult, but success is possible. The occupation
of the population is an opportunity.
Because of the lay offs and fear of losing jobs,
people were much more meticulous about budgeting
what money they had. Their budgeting was unlikely
to include trips and vacations for leisure. Businesses
would be more strict and apprehensive about trips
that their employees would have previously taken.
Ticket prices would have to be deeply discounted
just to get most people to even consider booking a
flight. The income of the population is a threat.
Simply put, if people are more willing to fly both
short and long distances that they have in the past,
then those societal values and lifestyles pose as an
opportunity for the airline industry.
Technology
Although the Internet and technology, in general, can
cut the costs of using a middleman (in this case a
travel agency) and decrease the cost of producing
tickets, it can be bad for the industry as well. The
independence and information that the Internet
provides to consumers allows them to find the best
deal. This increases competitiveness in the industry
and is, therefore, a threat.
88
Industry’s dominant economic
traits
Market size
Scope of the competitive rivalry
(The competitive scope criteria
addresses geographic scope
(Global, National, Regional,
Local), product scope, market
scope and so on.)
Market growth rate and position
in the business cycle
(development, growth, maturity,
decline)
Opportunity
The rapid growth rate is an opportunity for new
competitors to enter the market and existing rivals to
grow their share. Growth will be maintained as long
as the cost and convenience of air travel remains
competitive with other forms of transportation.
The market is large but has several sizeable rivals
competing for market share. Their fierce rivalry is a
threat to the profitability of the industry because it
has driven prices down.
The scope of competitive rivalry is a threat to the
airline industry. The rivalry continues to depress
pricing which drives down profits. This is turn deters
others from entering the industry.
The rapid growth rate is an opportunity for new
competitors to enter the market and existing rivals to
grow their share. Growth will be maintained as long
as the cost and convenience of air travel remains
competitive with other forms of transportation.
Number of rivals and their
relative size
Number of buyers and their
relative size
(Address the number of buyers
in each market and market
segment. Buyer size refers to the
buyer’s volume of sales for the
industry.)
Extent of rivals’ vertical
integration
Threat
There are a significant number of individual buyers,
which is an opportunity for the airlines to take
advantage of providing the buyers go direct to them.
The size and number of the rivals reduce the threat
of new entrants to the market. Smaller companies
will not be able to benefit from the economy of
scale, which the larger rivals enjoy.
Travel companies and consolidators are a significant
threat to the industry due to their buying power.
All forms of third party sales are a threat because
they can influence consumers choice in airlines
Vertical integration is an opportunity because it
resulted in a direct savings to the airline.
89
Extent of rivals’ horizontal
integration
Horizontal integration is an opportunity for the
industry because it is difficult for competitors to
enter the market. It is a threat to existing rivals
because it is difficult for them to expand into other
segments of the market.
Types of distribution channels
rivals use to access customers.
(Do the channel types vary by
customer segment?)
Consolidators and travel agents who purchase in
bulk pose the greatest threat to the airlines because
they can shop for the best price.
The internet is a threat because data is readily
available showing airline performance and it allows
consumers to shop for the best price.
Pace of technological innovation
in production process innovation
The pace at which technology is being implemented
will deter others from entering the market and
require those in the market to invest in the
technology or face declining profits.
Its purpose is to improve efficiency and reduce cost.
Improvements in video conferencing are viewed as a
threat to the industry because it will reduce the
necessity of air travel.
Pace of technological innovation
in product introduction
Airlines who can take advantage of differentiation
have an opportunity to grow market share. Airlines,
which fulfill customer specific needs, will see both
market share and profits rise. Frequently customers
have specific needs relating to destination,
availability of on board meals, and take off/departure
times. Customers who choose their flights based
upon meeting these needs often will pay a premium
for them. Cost conscious customers will give up
these benefits for less expensive flights.
Rivals who are successful at differentiating
themselves are a threat to the balance of the industry.
Airlines that reward frequent flyers are a threat to
others. For others to successfully compete against
them, they have to offer similar program, which in
turn reduce the profitability of the industry.
90
Extent to which rivals use
economies of scale in:
Purchasing
Manufacturing
Services
Transportation (logistics)
Marketing
Advertising
General and Administration
Other steps in the value chain
(Refer to chapter 4 for the
description of the value chain.)
The ability to use economy of scale is limited except
in the areas of purchasing and shared terminal
services.
Extent to which the key industry
participants are clustered in one
geographic location
The clustering of the airlines in every region in the
U.S. is a threat to the industry. With more
competition come lower prices for consumers and
less profitability for the rival airlines. With more
options for passengers airlines will not be able to fill
their airplanes and will incur losses. With fewer
costumers airlines will find it necessary to
discontinue service in some areas and will lose
revenue, which will threaten their existence.
Extent to which certain industry
activities result from learning
and experience curve effects
Capacity surplus or shortage in
the industry
Rivals who have found ways to take advantage of
economy of scale are a threat to the industry because
they can gain market share in an industry that has
limited profitability.
Rivals using economy of scale will deter new
competitors from entering the market due to its
profitability.
With so many airlines operating there is an
opportunity for rivals to learn from each other’s
experiences and take advantage of learning and
experience curve effects. The airline industry is full
of examples of successes and failures and the airlines
themselves have a wealth of knowledge and
information in order to make their company
successful.
Capacity is a threat to the industry. Rival airlines are
competing at a high level in order to maintain their
share of passengers. With fierce competition comes
more costs to the airlines and therefore will result in
less profitability for the airlines.
91
Capital requirements and the
ease of entry into or exit from
the industry
The cost of which it takes to start an airline is an
opportunity for the industry. With fewer entries into
the market the less competition there is. Since it is
difficult to operate an airline profitably there are
more chances that existing airlines will fold and free
up routes for surviving airlines and allow them to
increase revenue. With airlines folding there is also a
decrease in the amount of competition.
Industry profitability
(The annual net profit margin
for the industry.)
Low profitability is a threat to the airline industry.
Not only does it make it difficult for airlines to
operate and keep out of bankruptcy, but also it
increases competition between rivals. Airlines that
are operated at close or above profitability are able to
market themselves better and can result in taking
away customers from those airlines that are
grappling with financial difficulties.
Degree of alliances
The degree to which these alliances have taken place
is an opportunity to the airline industry. Not only can
they share costs of operating, marketing and
advertising, it can increase revenue for all the parties
involved. By creating alliances the airline industry
can share the burden of the overwhelming
competition that exists in the airline industry.
Extent to which the key industry
participants are clustered in one
geographic location
The clustering of the airlines in every region in the
U.S. is a threat to the industry. With more
competition come lower prices for consumers and
less profitability for the rival airlines. With more
options for passengers airlines will not be able to fill
their airplanes and will incur losses. With less
costumers airlines will find it necessary to
discontinue service in some areas and will lose
revenue which will threaten their existence
92
Five forces
RIVALRY
How many competitors are there
in this industry?
Opportunity
Threat
The number of competitors makes rivalry strong in
the Airline Industry. The rivalry is intense which a
threat to the industry is. Competitors have to
continually advertise, provide quality services,
provide convenience and improve their reputation to
stay competitive.
What is the relative size (market
share based on their percentage
of industry sales) of each
competitor?
The relative size is weak for the Airline Industry.
The competition is fierce in the Airline Industry due
to the large size of competitors and the number of
rivals. The relative size of the Airline Industry is a
threat. Competitors have to continually keep a close
eye on their competitors’ fares to provide the “most
value for less money” for their customers.
What is the industry
concentration ratio (C4)?
 Top 4 company’s sales
Industry sales
With 63.2% of the market share being held by the
top four companies, there is fierce rivalry due to the
tight market share available. Therefore is a threat to
the Airline Industry
What is the product or service
demand growth rate?
Are rivals using price cuts or
other competitive weapons to
boost unit volume?
Are the customer's switching
costs low?
The growth rate for the Airline Industry is strong.
With the airline being in a growth stage there are
opportunities for rivals to increase their market share
by decreasing the cost but increasing the
convenience of flying for new customers
Rivals using price cuts to increase unit volume is a
moderate force in the Airline Industry. The
competition between rivals is a threat for the Airline
Industry due to rivals introducing new ways to
increase profit margins without passing it on to the
customer.
The rivalry in the Airline Industry is strong due to
the low switching cost.
These low switching costs are a threat for the Airline
Industry as the rivalry among competitors is fierce.
Competitors differentiate their service constantly to
keep customers and market share that can cut into
their profit margins.
93
Are rivals launching moves to
change their market share or
industry position at the expense
of other industry participants?
The moves rivals are making are moderate for the
Airline Industry. The rivalry among competitors is
so intense that it is a threat to the Airline Industry.
Rivals are using their size to compete against smaller
more innovative competitors
What are the payoffs for
strategic moves?
The fierce rivalry between competitors is a threat for
the Airline Industry. The rivals have to be fierce and
improve the daily operations and using new
technology to make the industry more convenient.
By improving the operations it increases the
operation expenses and decrease the profit margin
Does it cost more to exit the
industry than to continue
participation?
The cost of exiting is a strong force for the industry.
The high exiting cost increases the threat for the
Airline Industry. The industry is “noted for its
vulnerability to economic cycles and big swings in
bottom-line performance”; the losses incurred from
exiting keep competition fierce among the rivals.
How consistent are rivals
strategic visions, strategic
intents, objectives, strategies,
resources and origins?
The consistency of rivals strategic visions, strategic
intents, objectives, strategies, resources and origins
is a strong force. The Airline Industry has a threat
with rivals using different strategies and objectives
to increase profits and market shares. The Airline
Industry is benefiting from the innovative and outof-the-box thinking some of the rivals is using to
compete.
N/A
The greater the consistency, the
more likely there is increased
rivalry.
Are strong new entrants
acquiring weaker rivals and
launching well-funded,
aggressive moves?
N/A
94
THREAT OF ENTRY
What economies of scale exist in
each of the following areas:
 Production
 Purchasing
 Inbound and outbound
logistics
 Advertising
 Financing
 Customer service
 Raw materials
 R&D
 Other steps in the value
chain?
Cost and resource disadvantages
independent of size
Opportunity
The high economies of scale will provide an
entry barrier to new entries. New entries will
unlikely have the volume, purchasing power,
variety, recognition, and cash flow, needed to use
the economies of scale. The economies of scale
pose an opportunity for the existing firms in the
airline industry.
What are the learning curve and
experience effects to enter the
industry?
Inability to match the technology
and specialized know-how of
firms already in the industry.
How accessible is the industry's
technology?
This is an opportunity for existing firms who have
the knowledge.
The learning curve would pose a threat to new
entries who lack the knowledge and experience.
The lack of know-how by new entries leads to an
opportunity for existing firms who have these
skills can take advantage of the technology.
The inability to match the technology and
specialized know-how of firms already in the
industry poses a threat to new entries that are
unable to match the specialized skills needed to
access and operate this technology.
Brand preferences and customer
loyalty
Brand preferences pose an opportunity to the
existing airlines. New entries are unlikely to
overcome this entry barrier.
The high capital is an entry barrier for new entries.
New entries are unlikely to have the high capital it
needs to pay for good landing positions at high
traffic airports. The capital requirements pose an
opportunity to the existing airlines
The entry barrier is being lowered by new entries
with quality and low priced service, which threatens
the existing airlines
What are the capital
requirements to enter?
Threat
Cost and resource disadvantages independent of
size are an opportunity for existing airlines. The
entry barrier is high for new entries and they will
need to have the cash flow for the costs required
to gain good landing positions at high traffic
airports.
95
What other resource
requirements are necessary to
enter?
The entry barrier of financing will likely deter new
entries into the airline industry. Financing poses an
opportunity to the existing airlines.
What is the access to distribution
channels?
Access to distribution channels are an
opportunity for new entries.
Access to distribution channels is a threat to
existing firms because companies in the airline
industry all use the same distribution channels.
What regulatory policies apply?
Regulatory policies pose as an opportunity for new
entries into the airline industry to gain market share
Regulatory policies pose as a threat to existing
airlines to loose their current market share.
What tariffs and trade
restrictions apply?
N/A
N/A
SUBSTITUTES (pages 87-88)
What is the availability of
attractively priced substitutes?
Is the substitute of better, worse,
or equal quality?
Opportunity
Threat
The availability of substitutes that are attractively
priced can only be considered a threat to the airline
industry. They take business away from the airline
industry. Bus transportation runs through most if not
more cities then major airlines can serve. Train
tickets are attractively priced and although are
slower then flights, they do serve many major cities.
Transportation by boat is also slow and is not used as
widespread as it once was but is considered a threat
as some vacationers will use major cruise lines as
means to getting to their vacation spots rather then
flying. Personal automobiles are not attractively
priced to begin with but their overall value can be
judged over time.
The substitutes to the airline industry all have their
own level of quality. Bus transportation quality can
be considered of equal or worse quality. Train
transportation can be considered of equal quality.
Transportation by boat, especially cruise liners
should be considered of higher quality. The quality
of substitute products should be considered a threat
to the airline industry.
96
Is the substitute of better, worse
or equal performance?
Can buyers easily switch to the
substitutes?
SUPPLIERS (pages 88-90)
Is the item or service a
commodity available on the open
market from many suppliers
who are capable of filling the
order?
The performance provided by the airline industry
cannot be rivaled by any other substitute industry
and can be considered an opportunity.
The pricing of substitute products makes it easy for
consumers to switch but the performance of the
airline industry outweighs the price for most
travelers. Speed rules in the travel industry and is an
opportunity for the airline industry.
Opportunity
Are there good substitutes for
the product or service to which
the buyers can easily switch?
Although the alternative airports may not provide the
largest cities with traffic they are considered an
opportunity as some airlines have proven.
Is the company a major buyer?
Southwest usually turns out to be the major airline at
the smaller airport markets where they serve areas
relatively near major metropolis’, which would make
them a major buyer and can be perceived as an
opportunity
Threat
The amount of aircraft manufactures capable of
filling orders is small which creates a threat to the
airline industry. The small amount suppliers forces
the airline companies to be accurate in their
predictions of the direction of the industry and the
amount airplanes they are going to need in the
coming years, and forces them to place orders years
in advance. This requires solid management within
the airline industry manufactures.
The amount of fuel suppliers is small which is also a
threat. This forces the airline industry to be
innovative in ways to conserve fuel to lessen their
reliance on fuel.
Since there are no feasible substitutes (i.e. other
airplane manufacturers or gas companies) for the
products supplied to the industry, the lack thereof is
a threat to the industry.
Southwest is considered a major buyer of new 737
airplanes through Boeing. Southwest has cut costs
by only using one type of aircraft. Even though
Southwest was able to receive their airplanes at
favorable prices, using only one aircraft puts
Southwest in a threatening position as Boeing can
dictate pricing any way they choose. Having a good
strong relationship with Boeing is a must for
Southwest.
Southwest is a major buyer of jet fuel which is
supplied by a small amount of companies. The price
of fuel is a threat to the industry since prices cannot
97
Does the supplier dominate the
industry? (The supplier
provides the industry with an
item that accounts for a sizable
fraction of the costs of an
industry's product (or service), is
crucial to the industry, or
significantly affects product
quality.)
There is an opportunity for the major airlines to
choose whom they are going to give their business to
so they can use economies of scale to try to dictate
the price.
Does an outside supplier provide
a cost advantage over vertical
integration?
What types of working
relationships exist? Start by
listing the types of working
relationships that exist. Then,
focus on the strategic importance
of relationships with suppliers in
this industry. Are these
relationships of strategic value
for the competitors in the
industry? If so, why and how do
the relationships impact the
competitive structure and
environment of the industry?
be controlled through economies of scale.
Since no one aircraft manufacturer dominates the
industry, the competition is increase giving the
airline industry an opportunity to obtain better prices
for airplanes as long as they don’t mind who the
airplane is coming from. Some airline industry
rivals like to use only one style of aircraft to cut
down on costs of operations (spare parts and
training). For those who implement this type of
business strategy the size of the supplier and whether
or they dominate the industry doesn’t matter. The
threat of using only one supplier is real, as all
operations depend on that one supplier.
There is no sense for any company in this industry to
try to vertically integrate backwards to build their
own aircrafts or to build their own fuel refineries.
The cost of undertaking a task such as building a
reliable aircraft would be huge. The suppliers of the
aircraft have the tools, the skilled personal, the
knowledge and years of experience. All of which
are considered essential to building something that
lives will depend on to deliver safety and reliability.
Making agreements to purchase aircraft’s in bulk
will offer airlines a lower price for the purchase of
planes. This relationship can be kept strong and can
be maintained by purchasing in high volume. This is
an opportunity for a company in the airline industry
because they can use this relationship with Aircraft
suppliers to gain a cost advantage. This will cause
intense competition within the airline industry.
Relationships with fuel suppliers can be built strong
by agreeing to purchase large quantities in advance
for future use. By doing this, airline carriers can
build close relationships with suppliers and gain
bargaining power over other competitors in the
industry. This will alter the competitive
environment and the competitive structure of the
airline industry. This close relationship would be an
98
opportunity for a company competing in the airline
industry.
Financial relationships that exist in the airline market
are built based on how profitable a company’s
operations are. Therefore, the better the operations
the more financial help a company will get. This
poses as an opportunity for a company in the airline
industry. This need for financial assistance will
cause intense competition in the airline industry.
The environment will become more competitive and
the relationships with financial suppliers will
become stronger.
Companies build tight relationship with advertising
agencies. These relationships are crucial for a
company. The better the campaign or slogan, the
better the product or service will market. Ultimately,
this is used to gain market share and the more market
share, the more profits. This relationship will cause
intense competition among competitors in the
industry. Each competitor trying to be the best and
gain customers will change the environment in
which the competition exists. This is an opportunity
for advertising suppliers in the industry and
companies can use this opportunity to gain a
competitive advantage and win the industry with
their strong advertising and marketing strategies.
What is the relative quality of
the supplier and his services or
products?
The airline companies build strong relationships with
the airports they use in order to gain terminal space
and receive good landing times, even though they are
paying for both. The amount of airports allowing
major airline business can be seen as an opportunity
that some airlines are willing to take advantage of.
Receiving the highest quality goods from suppliers,
offers opportunities to the industry as a whole. High
quality supplies will produce high quality products
and services to passengers. The competitive
structure among competitors will be strong and close
99
BUYERS (pages 90-92)
What is the cost to the buyer of
switching to a competitor or a
substitute?
seeing that all competitors have access to suppliers
that offer superior quality products to enhance their
services.
Opportunity
How many buyers are there in
this industry?
The enormous size of buyers in the airline industry
poses as an opportunity for competitors. With so
many buyers, each competitor has a chance to gain a
fair market share within this industry. With buyer
preferences changing, each airline in the industry has
a chance at gaining a potential customer.
What is the relative size (based
on the amount they purchase) of
each buyer?
Buyers of airline tickets are so large that this is an
opportunity for competitors in the industry. Each
competitor will be able to make a profit from sales
due to the fact that the revenues were in the billions.
No one airline carrier dominates the industry, even
when they offer the lowest prices. The reason being
that buyers want and needs differ with regards to
what type of flight they are looking for.
Increased buyer knowledge will cause intense
competition among the competitors in the airline
industry. Buyers’ knowledge poses as a threat to the
entire industry. Their increased buying power will
raise the standards for all competitors and cause a
strong competitive force for the industry.
What is the buyer's knowledge
level?
Can the buyers threaten the
industry with backward
integration?
Are the industry's products
discretionary purchases?
Threat
The ability for buyers to switch between airline
competitors is a threat to the industry. This ability
for buyers to freely choose what option is best for
them cause’s strong competition among competitors
within the airline industry
N/A
N/A
If buyers are not happy with a particular airline, they
can choose another airline. The buyers’ choice to
buy or not to buy represents a threat to the airline
100
Drivers of change in the industry
Internet and new e-commerce
opportunities
Opportunity
Increasing globalization of the
industry
There are opportunities to expand to other areas of
the world; however, it would make competition
much stronger. Market share would be lost by the
existing organizations in the new areas of expansion.
Price competition would be fierce.
It would be very costly to expand globally as costs
would increase and fares would increase. The best
strategy for this industry is to stay within certain
limits to keep costs down and focus on more flights
at lower pricing.
The potential to lose profits would be a risk of
expanding globally.
Long term industry growth rate
Long-term industry growth rates create opportunity
for increased market share. The concept of cut-rate
fares to grow passenger traffic so significantly that
the revenue erosion wood be more than offset by
revenue gains has increased ticket sales and volume
of traffic. Smaller competitors in this industry may
want to consider merging with a larger more
industry.
The buyers’ preferences determine the fate of the
airline industry. Without buyer preference there
would be no industry.
Threat
Internet and e-commerce is an opportunity in the
airline industry to increase business at a very low
lost by eliminating the travel agent fees. There is no
overhead when you set up your business on the
internet. This strategy of internet use has changed
the travel industry and attracts customers who may
have gone directly to a travel agent. The travel agent
fees are eliminated when you can go directly to the
airline website and book the flight yourself.
However, giving the consumer the opportunity to
comparison shop very easily through the internet is a
threat and can result in sub par profitability or losses,
if strategic low cost strategy is not used to counter
the low air- fares.
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successful organization or risk bankruptcy. Larger
competitors should look into buying the smaller ones
to gain revenue and expansion to new travel routes.
Who buys the product and how
do they use it
Product innovation
Industry rivals will need to find ways to cut their
costs in order to compete with the low fares and
special promotions. This will threaten their profit
margin without the low costs strategy that Southwest
has been able to pride themselves on.
Rivalry will increase with product innovation since
market share will be lost.
Technological change
Technological changes pose a threat to the industry
because of the capital investment that is required.
New security measures since 911 have been very
costly by extending the ground times to check
baggage and the greater attention needed for safety.
This will lower the profit margins and threaten some
competitors who will not be able to sustain these
changes. New technology is always a threat because
of the cost factors involved in making these changes.
The financially weak organizations may not survive
or may have to merge with a competitor.
Marketing innovation
Being an aggressive risk taker is needed to compete.
Using clever ads to intrigue and entertain the
audience. Southwest uses fierce rivalry to gain
market share. Marketing strategy to spark the
buyer’s interest will widen the demand. By
monitoring the marketing strategies of rivals, you
can try to quickly match or exceed them. Being
aggressive and taking risks should be part of the
strategy to market your product. Seek to be the
leader in the industry. Marketing innovation is an
opportunity for those who choose to work on it.
102
It would be difficult for a new airline to enter this
industry because of the tough competition in the
industry and capital that is needed to start. It is
already tough for the businesses in this industry to
compete with the low costs and low fares of some of
their rivals. A new entry would have to be entering
by an acquisition of an already existing company in
the industry. Entry of major firms is difficult but
would be a threat.
Entry of major firms
Exit of major firms
Diffusion of technical know-how
If an airline were to exit the industry, there would be
competition to grab the market share. Try to move to
a stronger position by building your image or
reputation as a long standing firm in the business
that will be around for a long time. Exit of major
firms would be an opportunity to gain market share
for the existing industry rivals.
Constant improvements to technology should be the
strategy of any business in any industry if they wish
to continue in the market. Never let your
competitors catch up to your levels of know-how.
You need to stay one step ahead of the competition
to be the leader.
Try to retain your employees so that they do not
move to another firm and take your ideas and knowhow with them. By treating employees as your
number one asset will help to keep know-how within
the firm and not lose them to a competitor. Keeping
up with technology is a threat to the industry.
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Cost and efficiency
A strategic plan for lowering costs is needed for
rivals in this industry or they run the risk of having
to drop out of the market.
The industry needs to take a look at the more
successful firms and try to copy their strategy.
Get employees involved in cost and efficiency and
provide them with a work environment that they will
enjoy. New management may be needed to
motivate. Always do whatever you can to retain your
employees and not lose them to a competitor.
Remember that they are an asset to the organization.
Successfully keeping costs down is an opportunity
for the industry.
Growing buyer preferences for
differentiated products instead
of a commodity product
Rivals are forced to reduce costs to maintain their
profitability.
Try to be different and offer what the others do not.
Look to fill the changing needs of the customer by
using research. Growing buyer preferences for
differentiated products is a threat to the industry.
Regulatory and government
policy changes
Try to get government funding to subsidize some of
these added costs by showing how it is a financial
burden to the whole industry.
Look for ways to cut other costs to help with these
changes.
Just to survive after the 911 crises was a challenge
for some in the industry.
These government policy changes and regulatory
changes are a threat to the industry.
Build your company image and reputation to counter
the concerns of society. Monitor the lifestyle
changes to respond quickly to the new trends and
conditions. The terrorist threats have created a threat
to the industry.
Societal concerns, attitudes and
lifestyle changes
Reductions in uncertainty and
risk
The industry business environment will change to
high rivalry once uncertainty and risk is reduced.
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Strategic group map
Price:
The grouping of the major
competitors according to price.
Opportunity
TWA, AW, and AK airlines are not major threats to
other airlines as they try satisfying consumer needs
in smaller sectors as the high price, narrow market.
Customer Service:
The grouping if the major
competitors according to
customer service.
AW has an opportunity to improve their skills in
customer service, as do all other airlines in the
industry.
Threat
The grouping of the major rivals in the airline
industry shows that there is fierce competition
between major airlines in the low price/broad market
sector. Southwest’s major competition comes from
Airline such as American Airlines, Delta, and
United. There is also major competition between
US airlines and Continental in the slightly higher
priced, slightly broad range.
Southwest stands alone as delivering the highest
marks as the serving a broad customer range and the
highest quality in customer service. Southwest is
aware that there is much competition nearby to try
wrestling away these accolades from Southwest such
as Continental, US airways, Delta, and American
Airlines.
105
Key success factors
Low-cost production efficiency:
A combination of bottom-line
performance, low labor costs,
and low operating costs are key
in keeping itself profitable in the
vulnerable Airline Industry.
Opportunity
United
United’ profits would benefit from focusing on lowcost production efficiency.
American
Focusing on a low-cost production efficiency
strategy would increase Americans’ profits.
Threat
Delta
Delta has a good start but needs to focus more on
increasing its low-cost production efficiency.
Northwest
Focusing more on decreasing NWs’ operating
expenses will increase the low-cost production
efficiency.
Continental
Continental has decreased its labor costs but needs to
use more of a low-cost production efficiency strategy
to decrease its operating expenses.
US Airways
Focusing on a low-cost production efficiency
strategy will benefits the profit margins of US
Airways.
Southwest has used a low-cost production strategy to
remain profitable for over 25 years.
Southwest
TWA
Reducing its operating expenses and instituting a
low-cost production efficiency strategy will increase
TWAs’ profit margins.
AW is focusing on reducing its production costs;
these figures give us a glimpse of this.
America West
Alaska
Focusing on a low-cost production efficiency
106
strategy will benefits the profit margins of Alaska.
107
Customer service:
Rivals needed to use this KSF to
“drum up” more passengers by
keeping the customers
experience enjoyable, fun and a
differentiating experience. With
more passengers on each plane,
competitors would breakeven on
the load factor, which leads to
increased profits.
United
American
The ranking of United indicates that they are not
focused on the customer service aspect of the airline
industry. United needs to improve their customer
service to increase its passengers and its profits.
American has not balanced its abilities to keep
customers service high. By not making the total
flying experience enjoyable, American could see
decreased profits from their overall customer service.
Delta has not taken its customer complaints and
improved what needs to be fixed. To increase the
experience of Delta, they need to improve its arrival
times and baggage handling to drum up passengers
and maximize profits.
Delta
Northwest
Focusing on the whole experience of NW, they
should realize that their customer complaints are a
big part of this service industry. This could improve
the load factor.
Focusing on improving their customer complaints
and arrival time would increase their customer
service.
Continental
US Airways
Focusing on customer service, US Airways could
increase passengers experience from just all right, to
excellent which in turn will increase their profits.
108
By priding themselves on their customer service, SW
believes that it was a key to their competitive
advantage.
Southwest
TWA
TWA should focus on improving its overall low
rating customer experience. Improving the
experience will have customers coming back and
filling their planes and increasing profits.
America West
Improving on its customer complaints will improve
the overall experience of AW, which will in turn
improve profits.
Alaska
Alaska has listen to its passengers but not followed
through on making the experience a “fun and
enjoyable one.” Differentiating the experience of
flying Alaska would improve its profits.
109
Advertising:
Rivals used aggressive ad
campaigns to promote the
company’s culture and values to
its employees and customers, in
turn can lead to increased market
share.
Uniteds’ ad campaigns were not discussed in the
case; however more promotion of their culture and
values would increase their market share.
United
The ad campaigns of American were not discussed
in the case; however a more aggressive campaign
would benefit the market share of American.
American
Delta
The ad campaigns of Delta were not discussed in the
case; however would benefit from improving its
advertising strategy.
The ad campaigns of NW were not discussed in the
case; however a more aggressive campaign would
benefit the market share of NW.
Northwest
Continental
The ad campaigns of Continental were not discussed
in the case; however they need to improve its
advertising spending to gain more market share from
the promotion of their culture and values.
US Airways
US Airways’ ad campaigns were not discussed in the
case; however more promotion of their culture and
values would increase their market share.
Southwest
The message in ads were tightly matched to the
company’s strategy and were usually worked in a
manner calculated to intrigue and entertain the
audience and to persuade air travelers that what
110
Southwest offered was of value.”
TWA
America West
Alaska
The ad campaigns of AW were not discussed in the
case; however would benefit from improving its
advertising strategy.
The ad campaigns of TWA were not discussed in the
case; however a more aggressive campaign would
benefit the market share of TWA.
Although not discussed in this case, Alaska should
be benefiting from advertising spending with
increased market share.
111
Managerial know-how:
Success of any organization
begins at the top. Managerial
know-how is essential to build
the foundation for a successful
airline.
United
United will find it difficult to improve their standing
in the industry as long as their work force continues
to perform less than the rest of the industry.
American
American is taking their approach to workforce
talent seriously and will continue to improve
steadily.
Delta
Delta will be a force in the airline industry and will
make it difficult for other airlines to compete.
Northwest
These factors prove that Northwest has taken a
serious interest in their workforce to make sure that
they continue to provide a high degree of customer
satisfaction.
Continental
Continental will be a force in the airline industry as
far as the mainline airlines in the industry is
concerned.
US Airways
Their workforce has performed adequately in order
to keep Us Airways competitive among the top ten
airlines.
Southwest
Southwest has carefully assembled workforces that
is conscientious about their work and are concerned
for the well being of its passengers.
TWA
TWA needs to make their workforce a priority in
order to increase their status in the eyes of the
consumers.
America West
America West needs to beef up their workforce
112
talent in order to give a better impression to their
customers that they are a customer friendly airline.
Alaska
Alaska has been able to employ a workforce that
keeps its customers happy even though their
performance categories may not be the best in the
industry.
113
Image and reputation:
When an airline has a good and
well-established image and
reputation they are more likely to
attract customers and in turn,
increase their revenue.
United
United has been able to maintain their position in the
top ten of the industry by offering wide ranging
services around the globe.
American
American will be able to attract customers away
from rivals as long as they continue to dominate in
the industry.
Delta
Delta will be able to compete on the same plain as
the other major airlines and continue to be
competitive.
Northwest
This serves Northwest well in that they are an
industry leader in getting people on their airplanes
and getting them to their destinations on time.
Continental
Continental has developed into an industry leader
among the top teen airlines in the U.S. and will see
continued growth in their business.
US Airways
US Airways will be hard pressed to continue to
compete against strong airlines that have positioned
themselves ahead of US Airways.
Southwest
Southwest has established an excellent reputation
that will allow them to continue to build on their past
success.
TWA
TWA will find it difficult to compete with the
stronger airlines and will not be able to maintain a
large customer base.
114
America West
This will keep America West behind others in the
industry and make it difficult for them to operate
their aircraft at full capacity.
Alaska
Alaska has maintained a good image for customer
satisfaction that will allow them to compete among
the larger airlines in the industry.
115
Overall low cost:
In the airline industry low cost is
what customers will compare first.
Air travel is inherently expensive
and an airline that can offer lower
fares will be able to keep their
planes full and increase revenue.
United
Although their operating expenses are average they
need to bring the annual increases down or they will
have raise ticket prices will give them higher ticket
prices.
American
American will be able to hold back on increasing
ticket prices to offset their operating expense
increase.
Delta
Delta will be able to remain competitive against its
rivals into the foreseeable future.
Northwest
Northwest will be able to remain competitive with
the top ten airlines in ticket prices.
Continental
Continental will have to wow customers with
excellent customer satisfaction in order to keep them
coming back with increased ticket prices.
US Airways
US Airways will need to control their expenses in
order not to get beaten out in any fare wars.
Passengers will choose airlines with lower ticket
prices.
Southwest
TWA
Southwest will always be able to maintain full planes
at lower prices due to them being able to control
expenses.
TWA will find it difficult to compete with the rest of
the industry unless it is able to control its expenses.
116
America West has operating expenses, which are at
$8.57, and is able to operate as a low cost carrier.
This will allow them to compete against the low-end
operators such as Southwest and Alaska.
America West
Alaska
Industry profitability
Industry growth potential
Opportunity
For existing companies this unattractiveness of the
industry is an opportunity, which allows them to
grow and expand their market share.
Alaska will be able to offer competitive fares against
the other airlines and will be able to capture much of
the low cost market.
Threat
This makes the industry unattractive to new entries
and poses a threat for them because they do not have
the resources to compete with the existing airlines.
Does competition permit adequate
profit potential?
The strong competition in the industry makes it hard
for a new entry to be profitable and is a threat to the
industry.
Does competition lead to stronger
or weaker forces?
Companies taking advantage of the driving forces
will lead to increased competition among rivals and
will pose as a threat to rivals in the industry.
Will the prevailing driving forces
positively or negatively impact
profit potential?
Internet and new e-commerce opportunities, global
expansion, product innovation, technological
change, entry and exiting of major firms, marketing
innovation, and good cost and efficiency strategies
will provide potential profits.
What is the company's relative
competitive potential in this
industry?
Southwest has a strong and highly skilled
management team that can effectively react to rivals
competitive moves. This is an opportunity.
What is the company's ability to
capitalize on its competitor's
weaknesses?
By using the point-to-point system of scheduling
flights instead of the hub-and-spoke system used by
its rivals, Southwest is able to keep its costs low.
Can the company defend against or
is it insulated from the factors that
The management of Southwest has put into effect a
number of operating strategies that allow them to
117
make this industry unattractive?
keep their operating costs below those of their rivals.
How well do the company's
capabilities match the industry's
KSFs?
Southwest’s KSF’s exceed those of the industry.
Their management team, employees, low cost
operations and customer service put them well ahead
of their rivals.
What are the future uncertainties
and risks for this industry?
Possible future terrorist attacks can lead to a
decrease in air travel by consumers. People will not
want to travel by air if there is a possible threat to
their safety. Terrorist attacks will pose as a threat to
the industry.
What is the severity of the issue(s)
or problem(s) facing this industry?
Changes in FAA rules and new security measures
have an effect on companies being able to remain
profitable and are a direct threat to the industry.
If a corporation, will continue
participation in this industry
positively or negatively impact its
ability to compete in other
industries?
N/A
N/A
118
V. INTERNAL FACTORS
Chapter 4 Worksheet
1.
How well is the current strategy working (page 116)?
In this section you must address the criteria and the 'how well' question simultaneously. For example, if
the company uses a broad differentiation strategy as their present strategy, how well is the differentiation
strategy working for the company? For a broad differentiation strategy, I would expect you to cite
examples of adding value for the customer and other stakeholders. Then I expect you to determine how
well they are implementing the strategy.
Criteria
What are the present
strategies? (Note: This
question applies to the
corporate, business and
functional levels of the
organization. Choose one of
the five generic strategies
discussed in Chapter 5.)
Facts
Southwest’s strategy is to be a
low cost provider.
Their present strategy is
focused on providing low cost/
low frills airfare to
geographical segments of the
market which justify their
investment. They serve both
business and leisure travelers.
Its fares are the lowest in
industry accounting for 90
percent of the low fare
competition with rival US
carriers. They carried 65
percent of the passenger traffic
on its largest city-pair routes.
Despite only covering 40 of
the largest 100 city pair routes
in the US, they carried the
most total passengers.
They will not select a city
unless there is a potential for
at least 8 flights per day. This
provides better utilization of
the ground support personal
resulting in lower costs.
They fly only one model jet
(Boeing 737’s) to keep
maintenance costs down.
Using one model gave them
the capability to negotiate
favorable costs for new planes.
They led the industry
What does this mean?
Southwest has implemented a well
crafted strategy to allow them to be
the leading low cost provider.
They have chosen to participate in
segments of the market which fit their
strategy. This allows them to
maximize their profits with minimum
investment. The management skills
which led them in this direction and
the lowest operating cost in industry
which resulted from these skills are
both strengths.
Market data shows they hold the
largest share of the market in the
segments of industry they participate
in. Their financial statements show
they are in excellent financial shape.
The market share they hold and their
financial performance are both
strengths.
A key aspect of their success is
attributed to the culture which they
created and maintain within their
organization. Their culture keeps the
employees motivated and working in a
collective direction. Their superior
customer satisfaction record is a result
of this culture. Their culture and
customer satisfaction record are
strengths.
119
introducing ticket less travel
through their internet website.
This eliminated the
commission paid to travel
agents and keeps costs down.
Their strategy is to fly
between cities 150 to 700
miles apart. Their flight
patterns are based upon point
to point coverage and they
steer clear of congested
airports to minimize plane
ground time. Staying away
from congested airports
minimize total travel time for
their customers and keeps
costs down.
Their management skill
allowed them to develop and
implement these programs
which resulted in the lowest
operating costs in industry.
Out of the top 10 airlines in
the US, they have the best
customer service record. They
have never had a plane crash.
Assess the company’s relative
performance using the three
tests for a winning strategy.
(Refer to Chapter 2, pages 68
and 69.)
- Goodness of fit
- Competitive advantage
(You must answer question 2
below before analyzing the
company’s competitive
advantages.)
Performance
(You must address the
objectives question and
financial analysis question
below before you analyze the
company’s performance.)
To address GOF, you must
analyze the SWOT. If the
majority of the intersections
Goodness of fit:
The strategy of Southwest to
increase revenue, market share
and profitability, and keeping
operating cost lower than
rivals in the industry, gives
them a tight fit in the industry.
It has been tough for rivals to
compete with their low costs
fairs because of the efficiency
in keeping their operating
costs down.
Southwest has been innovative
in their services to the
customer.
Their gradual expansion into
new geographic markets
enabled them to saturate the
market for daily flights to the
cities and airports that it was
currently serving. They
Southwest has proven that they have a
winning strategy relative to the
industry with their competitive
capabilities. Their winning strategies
have made Southwest superior to
rivals with their many internal
strengths:
 Low operating cost:
They have chosen to participate in
segments of the market which fit
their strategy. Point-to-point, no
frills, low fares allows them to
maximize their profits by keeping
costs down with minimum
investment.
 Service innovation:
Short-hop, low-fare, point-to-point
120
are in the S-O quadrant, the
company has a good fit. For
the CA test, you must first
complete question 2 in
Chapter 4. Your responses to
the four tests of competitive
value determine whether or
not the company passes the
CA test. For the performance
test, you must examine the
company’s actual
performance. Look at their
financial ratios and their
relative performance. When
you have the facts, it is much
easier to conduct your
analysis.
increased the number of
flights into and out of
locations where rivals were
cutting back. Southwest added
additional long, nonstop
flights.
Technology know-how of
Southwest is a good fit in the
industry. They have used their
website for customers to
purchase tickets which
reduced the number of
personnel needed to staff their
reservation center. Software to
improve on-time performance
was introduced in 2001.
Southwest has used fierce
advertising and promotions to
attract the customer and take
the market share from their
competitors. They have used
unconventional, attention
getting ads which caught the
attention of the customer.
Southwest has built their
intellectual capital by being
very selective in their hiring
process. They go to
considerable lengths to hire
the best and are so selective
that only about 3% of
candidates interviewed are
offered jobs.
Southwest projects an image
of a high spirited, and funloving, atmosphere and high
levels of customer service.
Southwest is financially strong
which reflects upon the strong
management skills, and their
team strategy. Their financial
ratios have improved each
year since 1991 through 2001.
They were able to sustain hard
times without suffering loss or
insolvency.
All employees have been
treated as their number one
asset, which has created a
superior culture relative to
service. Southwest has chosen a
single class of service to meet the
needs of the frequent traveler and
to make traveling more affordable
to a wider segment of the U.S.
population. This strategy has
enabled them to increase market
share.
 Technology know how:
A point-to-point system to
schedule flights. New software
that significantly decreased the
time required to generate optimal
crew schedules and improve ontime performance. Southwest has
effectively used their technology
know-how to compete in the
industry.
 Advertising & Promotion:
Using clever and unique attention
getting ads to attract customers.
Incentives for reduced flights
when purchased through
Southwest.com. These strategies
have given them a good fit in the
industry.
 Intellectual capital:
By being very selective to look for
the right personality and attitude
and then trained for skills,
Southwest has built a strong team.
Their fit in the industry is superior
in this area.
 Image:
Southwest has built an image of
customer satisfaction and was
ranked number one among U.S.
major airlines for ten consecutive
years from 1991-2000. They have
a good fit in this category.
 Financial position:
Increased market share and
maintaining profitability for over
28 years, while some of their
rivals had showed net losses. They
121
others in the industry. They
were given the power to make
decisions and give their input
on necessary changes. The
employees are kept happy and
in turn keep the customers
happy.
Southwest meets and in some
areas exceeds the requirements
for high quality customer
service, service innovation,
advertising and promotion,
culture, intellectual capital,
image and financial strength.
This strategy has given
Southwest a good fit in the
airline industry and has
enabled them to be
competitive with rivals.
are very financially strong and
have a good fit in the industry.
 Culture:
The people management of
treating employees as their
number one asset, and coming
first and customers second, has
kept employees happy. This
strategy contributed greatly to
their success and gives them a
great fit in the industry.
This strategy has enabled Southwest to
defend themselves from the external
threats of the industry as well as to
pursue the opportunities available in
the industry and gives them a tight fit
in the industry.
With their proactive approach to
keeping low operating costs, as well as
being a trend setter and first mover in
the industry, has given Southwest the
strength to be competitive in the
industry.
There were many external threats in
this industry that Southwest was able
to defend themselves from such as:







The economy at large
Technology
Legislature and regulatory
Number of rivals
Industry profitability
Alliances between competitors
Diminishing pool of potential
employees
By using their strengths to defend
against these threats and taking
advantage of opportunities available,
Southwest has shown that their
strategy passes the Goodness of Fit
test.
Competitive Advantage:
The Southwest strategies have
enabled them to have a
competitive advantage. They
122
have built powerful and
effective strategies that give
them the edge in the industry.
Product innovation a strength
for Southwest. Their idea for
a no frills, low cost, non-stop
flight, was a winning strategy.
It was hard for rivals to
compete with this idea, since
they did not have the cost
efficiency that Southwest had.
Product innovation has made
Southwest more powerful in the
industry by meeting the growing
demands of the customer with
differentiated product/service. This
gave them a competitive edge against
rivals who were unable to compete
with their innovative strategy.
The Southwest low-cost
strategy of keeping operating
costs below industry levels has
made them superior to rivals
and gives them a competitive
advantage. Employees played
an active part in cost cutting
and were given incentives to
look for ways to decrease
operating expenses.
Low operating costs have been very
hard to copy. Southwest was the only
airlines to show a profit for over 28
years. They had the lowest operating
expenses compared to rivals. This
shows that it was very hard to beat
their cost efficiency, which makes
them superior to rivals and strengthens
their position in the industry.
Superior intellectual capital of
Southwest has made them
superior and strong relative to
rivals. They hire only the
people with the best attitude
and believe that the skills can
be trained. This is a proven
strategy for Southwest and has
contributed greatly to their
success in the industry.
Management of Southwest shows their
superior intellectual capital by using
clever and unique ways to promote
and advertise Southwest. They have
also focused on customer satisfaction.
The successful strategies of Southwest
are all accredited to their superior
intellectual capital, which makes them
a very strong competitor in this
industry.
The financial position of
Southwest makes them
superior in the industry. Their
financial ratios have been
stronger than rivals for many
years. Strong financial
management has made
Southwest a leader in the
industry.
The financial position of Southwest
has been superior to rivals and has
enabled them to grow and show a
profit for the past 28 years. This
strength has been difficult for rivals to
compete with.
Better product/service is a
strength for Southwest. They
have focused on superior
customer service. This was
done by building a strong
Rivals have not been able to match the
product/service levels of Southwest,
because they have not created the
corporate culture that is needed to
keep the employees happy and to
123
corporate culture with the
principle that the employees
come first. This strategy is
superior to rivals since many
put the customer as first and
employees second.
convey that attitude to the customer.
This strategy is a strength for
Southwest.
Culture at Southwest is
superior to rivals. They have
hired employees with good
attitudes and trained them to
learn the skills later. They
provide a nurturing and
supportive work environment
to give the employee the
freedom to make a positive
difference.
Culture at Southwest is a competitive
advantage. The culture is what makes
Southwest so successful in many
ways, such as superior customer
service, and cost efficiency, which in
turn gives the customer a low fare
flight.
The image of Southwest to be
a safe, low cost, service
provider with superior
customer service, has made
them competitively strong.
Reputation for being safe, and
customer friendly, has made
their brand name, Southwest a
strength and has made them
superior to rivals.
Image is hard to compete with. Once
you have built a reputation for safe,
good quality, low cost flights, it is
hard for a competitor to take that
away. Because of this image, their
brand name is strong and well
respected in the industry.
Cost advantages of Southwest
have been very hard to beat.
They are superior in their
strategy for low costs. Their
strategy to keep the costs
down in good times and in bad
has proven to be successful.
The market position of
Southwest has created strong
rivalry from competitors who
are not satisfied with their own
market position. The
competitive strategy of
Southwest has strengthened
their market position and
makes them superior to rivals.
Their strategy to concentrate
on specific segments of the
market and to be a low cost
provider has made them
strong.
This strategy has put Southwest in a
strong position in the industry.
The cost advantages of Southwest
make them more powerful and
effective relative to rivals. They have
a sustainable competitive advantage in
this area.
Their market position as a low-cost
provider has made Southwest an
industry leader and has given them a
competitive advantage in the industry.
They have achieved their cost
advantage by making it difficult for
rivals to copy or match.
By providing superior customer
service, they have gained the loyalty
of their customers. This strategy
makes them strong and gives them a
competitive advantage over rivals
The strong performance ratios of
Southwest show they are
competitively strong and will be able
to sustain a long-term market position.
Management’s strategy to keep
operating costs down has proven to be
124
Southwest has developed an
attractive customer base by
providing excellent customer
service. Their customers are
loyal and that is what makes
them strong in the industry.
their claim to fame. No rival has been
able to compete with this strategy.
Management has reached their
strategic objectives by using clever
advertising and promotion to attract
market share. Their people
management and culture strategy has
been a strength for Southwest by
having loyal employees who give
Performance:
Southwest has shown gains in superior customer service. Their
profitability as well as gains in overall management style, of
competitive strength and long- observation, listening to employees,
term market position.
and being responsive to employee
Southwest has been able to
concerns, have made them strong in
show a profit for the last 28
the industry by giving employees the
years. Their 1991 operating
opportunity to express their ideas and
profit margin was .05 and
help to grow the company. These
increased to .18 in 2000.
strategies contributed to Southwest’s
Long-term solvency ratios
very low labor costs and fostered high
show that they will be able to
labor productivity.
sustain without having to
Southwest’s performance relative to
liquidate during tough times.
their rivals has been superior. This
In 1991 the ratio was .49 and
shows excellent management of a well
decreased to .18 in 2000. Their crafted and well executed strategic
debt to equity ratio shows their performance.
strength to meet long term
Southwest has passed the performance
obligations without suffering
test with flying colors.
losses or insolvency. This ratio
was 1.92 in 1991 and went
down to .93 in 2000. In 2001
Southwest reported net profits
of $121 million, while Delta,
United, American, and US
Air, reported losses.
Southwest’s operating costs as
a percentage of its revenues
were consistently the lowest in
the industry.
Employees took pride in doing
their part to achieve good ontime performance and giving
superior customer service.
The management culture
contributed to their excellent
performance by enabling
employees to be a part of the
team. This strategy to create a
superior culture was a
contributing factor to company
growth and excellent
125
performance.
What is the company’s
competitive scope
 stages of the industry's
production-distribution
chain it operates,
 geographic market
coverage, and
 Size and composition of
the customer base?
 Please add other facets of
competitive scope as
necessary.
You are supposed to examine
the company’s competitive
scope from the perspective of
how the competitive scope is a
competitive capability within
the overall framework of how
well is the current strategy
working. From your analysis,
identify the particular
strengths or weaknesses
associated with the
competitive scope strategy.
Stages of the industry’s
production-distribution chain
it operates
Southwest uses travel agents
to distribute the product (or
rather the vouchers for
purchase of service) as other
airlines do. However,
Southwest does not solely rely
on the travel agents and
agencies. They rely mostly on
electronic ticketing and
printing.
Geographic market coverage
Southwest flies to 56 airports
located within thirty
contiguous U.S. states. These
airports are located in the
following states: Alabama,
Arizona, Arkansas, California,
Connecticut, Florida, Idaho,
Indiana, Kentucky, Louisiana,
Maryland, Mississippi,
Missouri, Nebraska, New
Hampshire, New Mexico,
Michigan, New York, Nevada,
North Carolina, Ohio,
Oklahoma, Oregon, Rhode
Island, Tennessee, Texas,
Utah, Virginia, and
Washington.
Stages of the industry’s productiondistribution chain it operates
Because Southwest does not heavily
rely on travel agents to distribute their
product, the savings of cutting out a
middleman can be used to keep ticket
prices low. Also, since Southwest
encourages customers to use electronic
ticketing, less workforce is required to
distribute the product/services. This
cuts Southwest’s operating costs and
helps to keep ticket costs low for
travelers.
Of those states, Texas,
California, and Florida have
five to eleven airports each
that are served by Southwest.
At this time, Southwest does not travel
to any non-contiguous state in the U.S.
There are also 18 contiguous states
that Southwest does not service.
Although this limits their geographic
market somewhat, it allows Southwest
to maintain focus on growing in the
areas that are served. Southwest’s
steady and successful progression to
the point of flying in and out of 30
states suggests that it is only a matter
of time before Southwest begins
expanding further into those currently
non-serviced areas.
There is also one airport
outside of the United States,
located in Ontario, Canada.
Southwest does not fly to any
non-contiguous U.S. states.
Southwest does, however, fly
out of many smaller airports
that are located in less
congested areas. Flights were
also offered in areas where
Geographic market coverage
Southwest’s nationwide flight
coverage allows them the opportunity
to try to capture various markets.
Many of their biggest competitors
offer nationwide service; however
those rivals cannot match the
“directness” and convenience of
Southwest’s point-to-point system.
Because Southwest services multiple
airports in heavy traffic areas like
Florida, California, and Texas, they
are able to capitalize on business and
leisure travelers by giving them an
alternative to short-haul, instate
ground travel.
Large rivals may feel forced to cut
back on service to areas that are not
126
rivals were cutting back
service.
heavily frequented. This is because
higher ticket prices cause them to
struggle to make serving those areas
worth it. However, this is where
Southwest, with their low fares and
excellent cost efficiency, can use
rivals’ service cutbacks to their
advantage.
Southwest’s broad geographic
coverage of the United States is a
strength.
Size and composition of the
customer base
In 2000, Southwest had
approximately 64 million
passengers. Each year between
1991 and 2000, Southwest’s
number of passengers
increased. These passengers
are made up of both [timesensitive business travelers
who want weekday flights at
times suitable for conducting
business] and [price-sensitive
leisure travelers who want low
fares and have more flexibility
about when to fly.]
Size and composition of the
customer base
Because Southwest’s customer base is
composed of both leisure travelers and
business travelers, they are able to
service the travel needs of both
markets while building lasting
business relationships with both
markets, as well. These two markets
overlap which gives Southwest the
opportunity to gain life-long
customers.
Also, because Southwest’s fares are so
low and their flights are convenient for
business travelers, companies are
more likely to have their employees’
book business trips with Southwest.
Leisure travelers allow Southwest to
utilize their employees, planes, and
facilities at off-peak times.
Southwest’s commitment to customer
satisfaction and fun-loving approach
to service creates masses of loyal,
return customers.
The size and composition of
Southwest’s customer base is a
strength.
127
What are the functional
strategies
 Production,
 Marketing.
 Finance,
 Human resources,
 R&D,
 Etc.?
Start by listing the functional
areas; then provide the facts
associated with each of the
areas. Finally, conduct your
analysis and determine how
well the functional areas are
working and the associated
strengths and weaknesses.
Production
One of Southwest’s most
important strategies is keeping
their costs low and moving
customers in above-average
times. In an effort to move
customers along quickly,
Southwest tries to steer clear
of congested airports.
Southwest also encourages
passengers to make
reservations and ticket
purchases through their
website, which translates into
ticket less travel.
Southwest also chooses to use
a system of point-to-point
routes as opposed to the huband-spoke routes of most other
airlines.
Assigned seating is not used.
Instead, passengers are seated
in groups according to color
allowing passengers to sit in
whatever seat is open.
From 1992 to 2001, Southwest
had also received 5
consecutive Triple Crown
awards, which recognizes the
airline with the best on-time
record, best baggage handling,
and fewest customer service
complaints.
Production
By serving airports relatively near
major metropolitan areas and in
medium-sized cities, Southwest is able
to produce better-than-average ontime performance, as well as reducing
fuel costs of idle planes waiting for
clearance to land. Serving smaller
airports also lowered the landing fees
and terminal gate costs. Also,
customers spent less time driving to
the airport, parking, ticketing, and
boarding. This strategy has proved to
be working very well as it has kept
their costs down and their customers
happy. This strategy has strengthened
their position competitively.
When reservations and purchases are
made on Southwest’s website, it
involves fewer costs and less human
resources. This also makes purchasing
very easy and convenient for
customers, which cuts down on the
time they need to complete
transactions. Also, ticket less travel
reduces costs for Southwest
dramatically, which adds to their
strength of low cost strategy.
Southwest’s point-to-point system is
more cost efficient. It also minimizes
the time that planes are parked at the
gate because there is no waiting for
passengers from different incoming
flights to land, unload, and connect.
Their evenly spaced flight schedule
also minimizes the number of gates
that they need for operations.
“Southwest’s point-to-point route
system results in higher utilization of
aircraft and terminal facilities,
reducing both the number of aircraft
and terminal gates needed to support
flight operations”, as well as
minimized the amount of time needed
in the production of getting passengers
on board, wait length, flight length,
and getting passengers off of the
planes. This increases customer
128
satisfaction as well as lowers costs for
Southwest, and strengthens their
competitive position.
The “cattle call” system of seating
reduces the amount of time required to
check passengers in which is normally
associated with traditional assigned
seating. This further simplifies the
process of making reservations for the
customer and adds to the strength of
high customer service quality levels.
Southwest’s production processes and
systems are strengths.
Marketing
Southwest is a low-cost
provider. They pride
themselves on cost
efficiencies, which enable
them to offer good service at
lower prices to the customer
than their competitors. Their
marketing was to convey the
message that what they had to
offer was of value.
Southwest markets themselves
as the only major short-hop,
low-fare, point-to-point carrier
in the U.S. airline industry.
Their marketing style is
known for being
unconventional, unique,
unpredictable, and attentiongetting in order to create and
reinforce the company’s
maverick and fun loving,
combative image.
They continually looked for
ways their distinctive persona
can come alive and strike a
spark in the minds of the
consumer.
Marketing
Southwest’s marketing strategy adds
strength to their competitive strategy
to gain market share. Their ads do not
focus on spreading the routine details
of their company and its offerings as
other rivals may tend to do. Instead,
Southwest chooses to make their ads
comical and fun-loving in a deliberate
effort to impress their corporate
culture and company sense of humor
to their market. Their light-hearted,
unconventional marketing strategy
really creates an intimate and “familyoriented” connection between the
airline, its employees, and the
customers.
Finance
In the year 2000, Southwest
reported its 28th consecutive
year of profitability as well as
its ninth consecutive year of
increased profits. In many
Finance
The Southwest financial strategy is
hard for rivals to compete with.
Southwest works to increase market
share and keep costs down in order to
sustain profitability.
129
years, Southwest was
reporting profits while many
other airlines (and at times, all
other airlines) were reporting
losses.
Southwest does an incredible
job of keeping costs low
enough to profit from low
fares. Their continual effort to
cut costs and increase cost
efficiencies has, in no way,
lessened the quality of service
that they provide to
passengers.
Southwest is constantly
growing, gaining more market,
and increasing revenues. Even
though the economy had
begun to fall, Southwest’s
growth rate was the same in
2000 as it was in 1996 (19%).
Southwest is able to maintain
and increase their profit
margins by keeping their costs
low, being highly efficient,
and creatively cutting other
costs any way they can. And
even though many of their
competitors are very large in
size, Southwest is able to
“hold their own” among those
competitors while still keeping
the ticket prices to the
customer exceptionally low.
Low operating costs have
been Southwest’s claim to
fame. Southwest has steadily
risen in profit margins from
1991 with a ratio of .05
through 2000 with a ratio of
.18.
By keeping their long-term solvency
ratio’s low, they have been able to
withstand adverse business conditions.
Southwest’s financial strategy is a
proven strength.
Southwest’s operating profit margin
ratios show management’s superior
ability to monitor and control
expenses on resources committed to
the business.
Southwest uses their intellectual
capital to be competitive and remain
strong financially.
The efficiency of Southwest is
superior to competitors. This ratio
is steadily rising and keeps
Southwest ahead of the competition
in this area. Southwest is
continually monitoring its costs
even when times are good so that
they can sustain when times are
bad.
Southwest continually increase their
operating revenues. This shows that
their cost efficiency strategy is
working.
Southwest is continually strengthening
their financial position in the industry.
This strategy has helped them through
sour business conditions and the
adverse effects of September 11th,
2001.
Southwest’s financial strategy is a
strength.
Southwest’s return on sales
ratio is above the industry
average of 2.9%.
Southwest’s operating
130
revenue’s have continually
increased from 1991 at
$1,379,286 to 5,467,965 in
2000.
In 2000 their operating
revenue increased from 1999
by 17% and their operating
expenses increased by 15%,
which shows that operating
revenue increased by 2% more
than their costs.
After the terrorist attacks in
2001, Southwest was forced to
tap $1.5 billion dollars of a
$475 million line of credit.
Because of the weak air travel
conditions, aggressive fare
discounting spawned causing
Southwest to expect lower
average fares for the
foreseeable future.
Human Resources
Southwest’s operative
principle is “employees come
first and customers come
second.”
Southwest’s exceptionally
enthusiastic and caring
employees are a direct product
of the company’s culture.
Southwest employees are
“hired for attitude and trained
for skill.” The company’s
thought is that it can train
people to do the tasks and hold
the skills that are required, but
a person’s attitude is not
something that can be
changed, and therefore making
attitude a new hire’s first
criteria is most important.
Southwest keeps their
customers happy by keeping
their employees happy. The
employees at the company are
considered to be their greatest
asset.
The hiring process involves on
Human Resources
The strategy of treating their
employees as number one is working.
You can see the effects of this strategy
in their superior customer service that
they provide to their customers.
Southwest empowers their employees
to feel free to make decisions and
encourages and listens to their ideas
and suggestions. Southwest makes
sure that their employees know that
they are genuinely concerned for their
well-being and committed to
providing them with job security. A
nurturing and supportive work
environment is provided to give the
employees the freedom to be creative,
have fun, and make a positive
difference. Competitive
compensations packages are offered to
employees. Management coaches and
encourages rather than supervises and
enforces. Southwest promotes from
within for 80 to 90% of supervisory
positions. Pay scales are kept at levels
close to the industry average, and
benefits are good relative to the
industry.
131
an interviewing approach
called “Target Selection”,
which aimed at matching
people’s traits to the traits (or
target dimensions) for
performing a specific job
successfully. Southwest, being
named numerous times as one
of Fortune’s highest ranking
companies on their “best to
work for” list gets volumes of
resumes. Yet they can only
take a small percentage of
those applicants. For example,
in 2000, Southwest reviewed
216,000 resumes and only
hired 5,134 new employees.
Southwest puts great care into
choosing, breeding, and
molding its human resources.
Their hiring process allows
personnel to field candidates
with a good fit in the right
direction and allows them to,
at the same time; weed out
those hires that may not fit
quite as well.
This strategy provides Southwest
employees to enjoy substantial
authority and decision-making power.
Happy customers prove that this
strategy is working.
Also employees are confident in and
trusting of their employing company
with the understanding that employees
needn’t worry about being laid off.
This strategy increases the
productivity, attitude, and efficiency
of all employees.
Southwest’s human resource is,
without a doubt, a strength to the
company.
Also, in 1989, the company
had changed the personnel
department’s name to the
“People Department”.
New hires are trained at
Southwest University for
People. Managers trained in
this program take leadership
courses that emphasize a
management style based on
coaching and encouraging
rather than supervising or
enforcing rules and
regulations.
Southwest’s employees
genuinely believe that
customers are important and
deserve to be treated kindly,
politely, and with much
respect.
The company also has the
132
lowest employee turnover rate
in the industry, which may be
partly due to the fact that 80 to
90% of supervisory positions
are filled internally.
Southwest’s pay is close to
that of the industry average;
however their benefits
packages are above those of
rivals. They provide 12
different stock options and a
401(K) including a profitsharing plan. By 2000,
employees owned 12% of
Southwest’s outstanding
shares. Approximately 200
employees were millionaires
by the end of that same year.
Nearly 85% of employees
belong to a union. All of the
contracts allow any qualified
employee to perform any
function.
Southwest also has maintained
a no-layoff policy through the
years.
Company executives are very
approachable and exercise this
quality with their “open-door
policy.” There are only four
levels between frontline
supervisors and the CEO.
Has the company achieved its
financial objectives?
Determine if they achieved
their short and long-term
objectives and provide the
R&D
No information in this case
really pertains to research and
development.
Financial Objectives
Just before that point,
Southwest had a very
successful run. However,
when the attacks on the World
R&D
No information in this case really
pertains to research and development.
Financial Objectives
The information given in the case
follows Southwest until nearly the end
of October 2001.
133
supporting analysis why they
did or did not achieve the
objective. Then you are in a
position to determine the
associated strengths or
weaknesses.
Trade Center happened in
September 2001, the airline
industry was sent into a
“tailspin”. Despite the tragedy,
Southwest was able to survive,
recover, maintain, and grow
more easily than any of its
large rivals. Southwest had
purchased 132 Boeing jets
prior to the attacks to aid in
expansion and growth. Even
though the industry had been
hit hard financially, Southwest
only had to defer 26 of those
132 jets.
In the third quarter of 2001,
which ended September 30,
Southwest reported a net
earnings of $151 million,
pretax gain of $169 million
from a federal grant, and a
pretax charge of $58 million
that included deferral fees paid
to Boeing. Excluding these
special gains and charges,
their net income for that
quarter was $82.8 million.
They incurred operating losses
of $95 million in September
following the terrorist attacks
due to a decrease in traffic and
sales.
Increase revenue passenger
miles by 6% by year 2001.
Southwest’s short term and long term
financial objectives to increase market
share and profitability each year has
been met. Their objective to obtain
financial strength in order to sustain
adverse market conditions has been
met and this was proven in 2001 as
they were the only airline to have no
lay-offs. Their cash on hand in the
aftermath of September 11th was $1.5
billion and was only beat by Delta at
$1.51 billion. Their debt to capital
ratio was the lowest of the major U.S.
airlines at that time also. These
statistics prove their financial strength
in the industry.
Many of their objective deadlines are
still in the future. Although they have
not been met as of yet, and Southwest
needs only time to complete them.
Also, the unfortunate happenings of
September 11th caused most forward
progress to cease. Of course, financial
objectives in this industry after this
horrible event would be difficult to
obtain. Southwest’s strong recovery
proves that they did not fail to meet
their financial objectives for lack of
ability, but because of a great obstacle.
Given more time, Southwest would
more than likely prove to meet their
objectives successfully. Southwest has
been strong, thus far.
Operating revenue growth to
increase by 20% each year for
the next two years.
Options to purchase rights of
396 aircraft for 2004 through
2012 to allow for expansion
and growth.
Spike corporate travel by 70%.
Decrease hedging from 80%
to 76% of anticipated fuel
expense to plan for falling fuel
134
prices in 2002.
To increase daily nonstop
departures by 15 by year 2004.
To increase diluted earnings
per share to .15 cents by 2001.
To increase diluted earnings
per share to $1.00 by 2004.
To increase diluted earnings
per share to $3.00 by 2008.
Decrease unit costs by 2%
each year for next two years to
account for higher insurance
premiums, security fees, and
other cost challenges to
increase profit margins.
To increase profit margin by
3% each year from 2001 2004.
To increase profit margin by
5% each year from 2004 –
2010.
To obtain revolving credit line
of $575 million by year end
2002.
To defer delivery of seven
aircraft to November 2001.
To defer delivery of 12 aircraft
to April 2002.
Lower costs of agency
commissions over next year.
To increase ROI by 5 % in the
next 3 years.
To increase ROI by 12% from
2004 – 2010.
Increase ROE by 2% each
year through 2004.
135
Increase ROE by 3% each
year from 2005 – 2010.
To have $2 million in cash on
hand by 2002.
To increase cash flow by 5%
each year from 2001 – 2002.
To increase cash flow by 7%
each year from 2003 – 2010.
To lower debt to capital ratio
by 5% by 2002.
To lower debt to capital ratio
by 2% year through 2010.
To cut costs by 2% by year
2001.
To cut costs by 1.5% each
year through 2010.
To show net profit each year
and increase each year by 2%
through 2004.
To increase net profit each
year by 3% through 2010.
Has the company achieved its
strategic objectives?
Determine if they achieved
their short and long-term
objectives and provide the
supporting analysis why they
did or did not achieve the
objective. Then you are in a
position to determine the
associated strengths or
weaknesses.
Strategic Objectives
The company began flying its
full schedule of 2,772 flights
within a week of the attacks.
New service began in Norfolk,
Virginia on October 7, 2001.
In the four weeks after the
attacks, Southwest’s load
factors increased from 38.5
percent to 67.0 percent. This is
still nearly 8% less than the
load factor prior to September
11th. However, considering the
circumstances and comparing
this progress to the rest of the
industry, the recovery over
those four weeks is
remarkable.
Strategic Objectives
Southwest had many strategic
objectives to meet over the short and
long term. They have not met all of
their strategic objectives yet.
Regardless, they have been able to
push forward through difficult times
and were able to maintain their ability
to function. Most of the time frames of
their objectives have not yet met
maturity. Southwest has done a good
job proving their ability to sustain
even in hard times
136
Southwest continued its “no
layoff” policy throughout the
entire period following the
incident, although it put a
freeze on any new hiring until
January 2002.
In order to limit its financial
damage, Southwest did its best
to defer any nonessential
capital spending and
nonessential operating costs?
They also revised the delivery
schedule of 132 Boeing jets.
In this, they negotiated that 7
of the jets would be delivered
at a later date in November,
and 19 other jets would be
delivered in the years 2003
and 2004 (as opposed to their
scheduled delivery of 2002
To increase market share by
5% within the next 2 years.
Increase Southwest’s 65%
share of passengers traffic in
its biggest 100 cities by 10%
over the next 5-10 years.
Southwest will decrease its
downtime for repair of planes
by 2% in 3 years.
Over the next 10 years,
improve their quicker design
to market time by 5%,
Continue to increase state of
the art equipment by 5% over
the next 5 years.
Increase state of the art
equipment and technology by
10% over the next 10 years
Increase purchase of planes by
3% over the next 2 years.
Increase aircraft utilization by
3% over the next 2 years.
137
Decrease their operating costs
by 5% over the next 10 years.
Add one or two new cities to
each route system in any one
year.
Continue to invent new
attractive product lines by 5%
by 5 years.
Over the next 10 years,
Increase attractive product line
by 7%.
To keep improving their
Internet capabilities and ecommerce by 5% over 5 years.
Increase capabilities that are
better than rivals by 3% in 2
years.
To increase website sales to
90% within the next 10 years.
Work on improving their ontime performance by 5%
within one year.
To decrease their flight times
by 3% over the next 5-10
years.
Continue to be the most
admired airline in America for
the next three consecutive
years.
To still be the most admired
airline in America in the year
2010.
Work on becoming the top
ranking airline for having the
lowest involuntary denied
boarding within the next 2
years.
Over the next 5-10 years,
138
decrease the number of
complaints per 100,000
passengers by 2%.
Increase their technological
know-how by 5% within the
next 3 years.
Introduce new systems to
decrease time required to
create optimal crew schedules
by 5% within the next 5-10
years.
Introduce new innovative
products or services by 5%
over the next 3 years.
Increase their products or
services by 10% over the next
5-10 years.
Increase the number of cities
introduced to their route each
year to 4 cities with in the next
3 years.
Increase the number of jets in
their fleet by 5% over the next
7-10 years.
Continue to rank #1 for the
next 5 years in customer
satisfaction.
Decrease customer complaints
by 2% over the next 5-10
years.
139
What is the company's
position relative to EACH of
its competitors?
 Market share
 Profit margin
 Net profits
 ROI
 EVA (page 9)
 MVA (page 10)
 Financial strength
 Sales growth
 Image
 Reputation
 Industry position
 Please add other facets
of relative position as
necessary.


Market shareSouthwest rank first in
market share in 80-90
percent of its top 100 citypair routes.
Profit margin

The Market share they hold is
a strength.

Southwest has the highest
profit margin in the industry.
They have been the only airline
which has been profitable in the
years following 9-11.

Net profit, ROI, EVA,
MVA- competitive data
was not available from the
text.


Financial strengthSouthwest has the lowest
debt to total capital ratio
among the top 9 airlines.
While they were tied for
the most cash on hand with
their rival Delta, Delta had
carried twice as many
passengers in 2000.

Their financial record is a
strength. It will be easier for them
to obtain capital when needed and
provide additional stability during
hard times.

Sales growthSouthwest’s sales growth
from 1999 to 2000 was
19.3%. This was the
highest in industry with the
second place follower
12.75%.

Their sales growth record is a
strength. Growth of an
organization boosts moral and
provides additional opportunity
for cost savings through economy
of scale.


Image-Southwest has
built an excellent image
based upon their low cost
structure, customer
satisfaction level, and
frequent flyer program and
safety record. They ranked
the highest in customer
satisfaction and have
received several industry
awards to recognize this
achievement.
The image they developed is a
strength in the segment of the
market they participate in. This
makes it easier to draw in new
customers.

Reputation- The name

NA
Their reputation is a strength
140
Southwest is widely known
through out industry for its
low cost airfares and
customer service.

If the strategy is not working,
is it due to:
 Weak strategy and/or
 Poor implementation
Industry positionThey are number one in the
segment of the industry
they serve in terms of
market share, sales growth,
low cost fares, financial
performance and customer
satisfaction.
Based upon their present
financial position and the
methods implemented to
maintain this position, their
strategy is working.
because it draws in new
customers and makes it difficult
for rivals to steal existing...

Their industry position is a
strength. Being number one
shows you are successful.
NA
141
2.
What are the company's resource strengths and weaknesses?
The purpose of this tool is to assess the competitive values of the company's resources. The four tests of
competitive value (pages 123-124) are:

Is the resource hard to copy?

How long does the resource last?

Is the resource really competitively superior?

Can the resource be trumped by a rival's resources/capabilities?
If you can answer the first three questions in the affirmative and the last question with a no, then decide if
the resource is the basis for a competitive advantage. As a minimum, for each of the resource types listed
below, assess the competitive value of each resource.
To address the resource strengths and weaknesses question, you must answer all four questions for
each of the criteria. For example, answer all four questions for proprietary technology. Then answer all
four questions for advertising and promotion. Continue with the same approach for each of the criteria.
You must also provide solid logic and analysis in your responses. Why are you answering yes or no to
each of the four questions? After completing your analysis, you can determine if the company under
analysis has CAs or strengths.
Please identify all of competitive advantages. All of the CAs are strengths. A company may have a
resource strength that is not a CA. Identify all of the company’s strengths and weaknesses.
Criteria
Facts
What does this mean?
Skills and expertise
 Proprietary technology Southwest flight dispatch system
 Proprietary technology
they use proprietary
in not hard to copy. The resource
software for their dispatch
does not last long because
 advertising and promotion
systems
to
minimize
technology is constantly being
 product innovation
weather
and
operational
improved. It is not competitively
 ability to improve
delays.
superior due to ease of copy.
production processes
Although it is state of the art and
 technological know-how
would be hard to trump, it is
possible. It is a strength because it
helps minimize delays and
weather related issue. It is not a
competitive advantage.

Advertising and
promotion- They rely on
unconventional
advertising and promotion
strategies to get the
customers attention.
Example being slogans,
and their Triple Crown
Awards- all intended to
convey the message
Southwest was offering
value.

Southwest uses unique attention
getting methods but their
advertising and promotion is not
hard to copy. This resource has no
specific life. It is competitively
superior because their ads are
unique in their ability to get the
publics attention. It can be
trumped by rivals resources and
capabilities. It is a strength but not
a competitive advantage.

Product/service
innovation- Their decision
to concentrate on specific

Southwest’s service innovations
are hard to copy. They services
have lasted a significant period of
142
geographical areas and
low cost have provided
them a competitive edge
in terms of market share
and profitability. They
pioneered drastic changes
in the industry by
implementing ticket-less
travel via the internet and
did away with seat
assignments to reduce
boarding time and costs.
They adopted a system to
predict problems flights
could encounter based
upon weather forecasts.
This allowed them to
optimize their flight
patterns and schedules.
time. They are leaders in industry
due to their innovations in this
area. Due to their unique and
constant changing style it is tough
for rivals to compete with this
strength.

Ability to improve
production processesThey have lead the
industry by introducing
new methods to reduce
their costs while making it
simpler for their
customers. Their decision
to eliminate individual
seating assignment in
favor of group boarding is
an example along with the
weather prediction system
which helps reduce flight
delays.

Their ability to improve
production processes is based
upon their management skills and
culture which are both hard to
copy. The fact they are
continuously changing their
process causes it to last a
significant amount of time. It is
competitively superior because
they have lead the industry in
process changes. It is hard for
rivals to trump their low cost
strategy. This is a strength and
competitive advantage.

Technological know howThey have implemented
state of the art flight
support package which
schedules ground and air
personal required to
support a flight. They
have implemented
software which predicts
how the weather patterns
will influence flight
schedules. This allows
them to make adjustments
to their flying patterns and
schedules to reduce delays

The software which generates
flight support crews and improves
on time performance is hard to
copy. Their ability to implement
new technology provides constant
growth. It is competitively
superior because they take
advantage of the latest technology.
It can be trumped because most of
the technology is readily available
on the market providing the rivals
have the funds needed to buy the
technology. It is a strength but not
a competitive advantage
143
and improve customer
satisfaction.
Physical assets
 plant capacity
 plant and equipment age
and technological
capabilities
 plant and retail location
 access to distribution
channels
 wide geographic coverage
 global distribution
capability

Plant/equipment capacitySouthwest does not add
equipment/flights until the
existing flights are
sufficiently utilized. There
was no mention of
capacity utilization in the
case.

The capacity of the equipment can
be copied. Capacity is based upon
demand. The greater the demand,
the shorter the life span. It is not
competitively superior. Their
utilization is similar to their
competitors. It can be trumped by
their rivals. It is neither a strength
nor competitive advantage.

Equipment age and
technological capabilityTo reduce operating costs
they have standardized on
Boeing 737’s which are
available to their rivals as
well. Their improved
profitability allows them
to utilize the latest aircraft
available which improves
down time, reduces
maintenance costs and
appeals to their customers.

Their equipment can be copied
providing a rival has the capital to
pay for it. It has a finite life span.
It is competitively superior
because the age of their airplanes
is less than their rivals. It can be
trumped by their rivals providing
they have the required capital. It is
a strength but not a competitive
advantage.

Retail locations- They use
public airports which are
available to their
competitors as well. They
select the airports based
upon their ability to
generate a profit. Their
track record selecting and
predicting the profitability
of their flights has been
very good.

The airport they use can be
occupied by other rivals. The life
span is infinite. They are
competitively superior based upon
their ability to predict locations
which provide superior
profitability. It can be trumped by
their rivals. It is a strength but not
a competitive advantage.

Access to distribution
channels- they sell tickets
at the airports as well as
through the internet and
travel agents.

Rivals use the same distribution
channels. It has an infinite life
span. It can be trumped by their
rivals. Their use of the internet is a
strength but their distribution
channels do not provide a
competitive advantage.

Wide geographic
coverage- they have
The wide geographic coverage in the
U.S. is a strength for Southwest and
144
chosen to concentrate their
coverage areas based upon
the locations which
produce the desired profit.
They do not fly outside
the United States. With
the new global economy,
considerable growth can
be expected overseas.
enables them to compete with rivals. It
has an infinite life span. It is not
competitively superior. It can be
trumped by their rivals.

Global distribution
capability

NA
Human assets
 Superior intellectual
capital

Superior intellectual
capital- Overcoming the
roadblocks to build a
profitable corporation
from scratch is a
testimony to their superior
management capability.
Southwest has put
considerable effort in
molding employees to fit
their corporate culture. It
takes time to develop an
affective company wide
culture.

Their management skills and
corporate culture are hard to copy.
Their training program gives this
an infinite life span. It is
competitively superior as
demonstrated by their profitability
record. It is hard to trump because
their corporate culture is a unique
product of the people they
employ. It is a strength and
competitive asset.
Organizational asset
 financial position
 patents
 better product quality
 culture
 product line breadth and
depth

Financial position- Their
operating costs are the
lowest in industry. Their
revenue growth is the
highest in industry. This is
a result of their
management skills and
their unique corporate
culture.

Their financial position is hard to
copy. Providing they maintain
their level of management skills,
their financial position will have
an infinite life. It is competitively
superior. Competitors have not
been able to trump it. It is a
strength.


NA
Patents


Better product/service
quality- their corporate
culture allows them to
provide superior customer
service, on time flights
and baggage handling.
They have one of the
worst records in industry
for involuntary denied
boarding’s. Based upon
Since their superior products and
services are a product of their
corporate culture and management
skills, it is difficult for others to
copy and will have an infinite life
span. Their quality is
competitively superior based upon
records kept by the industry. The
lead they have makes it very
difficult for their rivals to trump. It
is a strength.
145
the fact they have the
lowest number of
complaints logged against
them in industry,
customers do not view
their boarding record as a
serious issue.
Intangible asset
 image
 brand name
 reputation for customer
service

Culture- Southwest puts
considerable effort into
molding employees to fit
their corporate culture. It
takes time to develop an
effective company wide
culture. They are known
for the fact they consider
their employees to be
more important than their
customers and treat the
employees with
tremendous respect.

Their culture is hard to copy
because it is a unique product of
their organization. Providing they
continue developing it, their
culture will have an infinite life
span. It is competitively superior
because it is responsible for many
of the advantages Southwest has
over the industry. It cannot be
trumped. It is a strength and
competitive asset.

Product/service breadth
and depth- their success is
built upon the fact they
service a limited
geographical area and
offer one level of service.
This allows them to
reduce their investment
and maximize their
operating profit.

There is nothing unique about the
breadth and depth of their service,
which makes it easy to copy. It
does not have a defined life span.
It is competitively superior
because it has been a key factor in
their profitability. Their service
can be trumped and is a weakness.

Image- Their image is a
product of their corporate
culture, management skills
and public relations
(advertising). They are a
well respected, low cost
service provider. They
have one of the best
customer satisfaction
records in industry. They
are known for the manner
which they treat and
respect their employees.
Example being they have
never laid an employee
off.

Their image is hard to copy. They
continuously strive to be the best
in the industry, which gives their
image an infinite life span. Their
image, which is influenced by
their performance record, is
superior compared to their
competitors. The Southwest
image is a strength.
146
Competitive capabilities
 cost advantages
 sophisticated use of ecommerce

Brand name- The
Southwest name is well
known in industry for their
low cost fares, good
customer service and
safety record.

A brand name is a result of the
image the company develops to
support it which makes it hard to
copy. The life span will continue
as long as they maintain their
competitive edge. It can not be
trumped by their rivals as long as
they continue making
improvements which provide the
competitive edge. It is a strength
and competitive advantage.

Reputation for customer
service- Based upon
surveys taken by airline
industry, Southwest has
the best customer
satisfaction record in
industry with the
exception of denied
boarding’s. The fact
Southwest has the lowest
number of reported
complaints in industry
indicated while denied
boarding’s may be an
inconvenience to
customers, the actions
Southwest takes satisfy
their customers when it
occurs.

Their reputation for customer
service is hard to copy because it
is driven by corporate culture.
Providing they can maintain the
corporate culture it will have an
infinite life span. Their past
records have proven it to be
competitively superior and it is a
strength.

Cost advantage- They
have the lowest operating
cost per seat mile in
industry. They have
developed methods to
unload, prepare and reload
aircrafts in record time.
They have eliminated nonvalue added services such
as paper tickets. They use
technology to maximize
their efficiency.

The systems they put in place
which result in low cost makes it
difficult for others to achieve the
costs Southwest does without
significant changes to their
organization. Their management
strategies give their cost
advantage an infinite life span.
Their expense per revenue mile
makes this competitively superior
to their rivals. Their, competitors
have not been able to trump this. It
is a strength and competitive
advantage

Sophisticated use of e-

It is not hard to copy. The life
147
commerce- They
pioneered the use of the
internet for ticket sales.
This eliminated
commission to travel
agents which improved
their profits.
Market position
 recognized industry leader
 attractive customer base
Alliances or cooperative
ventures
span is infinite. It is not
competitively superior and can be
trumped. It is a strength due to the
amount of sales it generated but it
is not a competitive advantage.

Recognized industry
leader- They have ranked
first in market share in 8090 percent of their citypair routes they serve.
Southwest’s strategy has
been to concentrate on a
specific segment of the
market. They are a
recognized leader in the
short hop, point to point,
low cost, no frills air fare
market which serves
limited geographical area.
They are not a leader in
the overall market.

Their market position is hard to
copy due to the ability of their
managers to select profitable
routes. The life span is indefinite
providing they can maintain their
position. Their continuous
profitability makes them
competitively superior and their
market position as an industry
leader is a strength.

Attractive customer basetheir customer base
consists of the general
public as well as business
travelers.

Their customer base is available to
competitors and is not hard to
copy providing the competitor can
provide the same services
Southwest does. It has no life
span. The loyalty Southwest has
been able to develop makes their
customer base competitively
superior. This is a strength, but not
a competitive advantage.

Southwest has not
formed alliances or
cooperative ventures with
their rivals.


This is a weakness on their
part. Properly handled alliances
can result in shared services,
which would reduce their
operating expenses.
148
3A. Are the company's prices and costs competitive?
Structural cost
drivers
 Scale
economies
 Learning
curve
 Technology
requirements
 Capital
intensity
 Product line
complexity
 Etc.
Inbound
Logistics
Southwest
does their
best to use
economies of
scale to
reduce
expenditures
on supplies.
Southwest
worked with
Boeing to
introduce
their new
aircrafts and
thus received
a discount on
those
aircrafts. The
relationship
with this
supplier
allows
Southwest an
advantage
over the
industry.
Operations
Outbound
Logistics
Southwest’s
Southwest
operating costs has lower
are lower then
cost in the
rivals which
outbound
gives Southwest logistic part
a significant
of the value
advantage in the chain
industry. They specifically
have limited
because they
their product
have done
line complexity so well with
in terms of
the
classes within
operations
the flights, and
portion of
they have very
their value
few styles of
chain. By
aircraft which
limiting the
allows for
complexity
maintenance to of their
be relatively
product line,
easily trained.
this creates
Their hiring
more on
process also
time
allow them to
arrivals, the
easily train their employees
flight staff as
they have
the screening
hired lead to
Southwest on process will
happier
Sales and
Marketing
Southwest
lowers their
marketing
costs by
encouraging
consumers
to order
their tickets
through the
company’s
website.
This
eliminates
the need for
outside
travel
agents who
take
commission
s for their
work.
This is a
cost
advantage
for
Southwest.
Service
Southwest’s
dedication
to cost
cutting
measure in
their
service,
such as not
offering in
flight meals,
and having
the flight
crew attend
to cleaning
up the
planes after
flights give
Southwest a
cost
advantage
over other
airlines in
the industry
that do
implement
these
measures.
Profit
Margin
Fewer
complaints
and more
word of
mouth
traffic
from
happier
consumers
will lead
to higher
profit
margins
which in
turn will
allow
Southwest
to keep
costs
down
through
the use of
economies
of scale.
R&D
HRM
A&G
Southwest
relies on
gradual
expansion
into new
geographic
areas where
they identify
pairs of
cities ‘that
could
generate
substantial
amounts of
business and
leisure
traffic.’ By
using this
strategy
Southwest is
able to
generate
enough
traffic that
they can
achieve
economies
The way
Southwe
st uses
its
human
resource
manage
ment is
an
advanta
ge for
them as
the use a
rigorous
system
to screen
potential
hires to
the point
where
they
know
that the
hire
most
likely
will not
be a
Management
pays special
attention
employees
cost saving
ideas.
Management
has given the
go ahead on
several new
technologies
that have
helped
Southwest
lower costs
concerning
the
assignment of
workers to
scheduling
and used
internet
technology to
streamline
and eliminate
the travel
agents that
149
one occasion
gambled that
gas prices
would spike
in the years
2000 and
2001 and
hedged 80%
of their
anticipated
requirements.
The move
paid off as
the price of
gas went
above the
$22 strike
price they
had set. The
gamble
created a cost
advantage on
this occasion.
They are able
to use their
volume
requirements
to acquire
contracts to
purchase fuel
at set prices.
Southwest is
narrow down
the personality
types of the
staffers they
want. All of
these processes
lead to lower
costs, lower
turnover and an
advantage for
Southwest.
Southwest
implemented
software
technology
which reduced
the time needed
to generate
‘optimal crew
schedules’.
This is another
cost cutting
measure.
consumers
which lead
to lower
costs
overall. The
idea that no
meals are
served on
the planes
also helps
cut costs.
Fewer
complaints
and more
word of
mouth
traffic from
happier
consumers
will lead to
higher profit
margins
which in
turn will
allow
Southwest
to keep costs
down by
scale
economies.
of scale
through cutrate fares
consumer
volume
would
increase and
then raise
prices
enough to
compensate
for initial
losses. This
strategy has
proven to be
an
advantage
for
Southwest
over
industry
rivals.
turnover
statistic
after the
first year
probatio
nary
period.
By
employi
ng the
philosop
hy of
employe
es first,
custome
rs
second;
Southwe
st is able
to keep
the
employe
es they
have and
are less
likely to
have
turnover
, which
can be
costly as
in
training
can also cut
into earnings
by taking
commissions.
Management
has been able
to cut costs is
by offering
less in terms
of their
product
complexity.
Southwest has
been able to
cut costs by
only offering
one class on
all flights
which has
allowed them
to offer fewer
services such
as in air
meals.
These
differences
may seem
small but
looking at the
ratios in
comparison to
150
able to cut
costs in
training
requirements
for
mechanics by
using only
one type of
airplane
which allows
them a cost
advantage
over
competitors
in regards to
the learning
curve.
costs.
Potential
hires
were
recruited
through
several
places
includin
g the
Internet
which is
the least
costly
for the
compan
y.
Concerning
technology
requirements,
Southwest
has taken
steps to
improve the
costs
associated
with
consumers
purchasing
tickets
through their
website,
This is
an area
that
Southwe
st
perceive
s as very
importa
nt.
the industry
averages, but
Southwest’s
costs are
consistently
lower in the
areas of food
and
commissions.
151
bypassing
travel agents
and their
commissions.
Doing so has
created a cost
advantage
over industry
rivals.
152
Executional cost
drivers
 Commit
ment to
continuo
us
improve
ment
 Product
quality
 Process
quality
 Capacity
utilizatio
n
 Internal
business
processes
 Working
with
buyers
and
suppliers
on costs
 Etc.
Inbound
Logistics
Southwest
uses point-topoint service
instead of the
hub and
spoke
system. In
the point-topoint system
aircraft spend
less time
parked at
gates.
Aircraft
therefore are
utilized more
allowing
planes to fly
more
passengers.
With more
utilization
there is less
down time
for ground
crews
throughout
the day
increasing
productivity.
Costs are
Operations
Outbound
Logistics
Southwest uses Southwest
less congested
has no first
airports near
class or
major
reserve
metropolitan
seating on
cities. Doing
their planes.
this reduces
Planes are
landing and
loaded in
gate fees as well groups of
as improves on thirty and
time
this
performance.
considerably
By reducing
speeds up
overall travel
passenger
time per flight
loading
there is a
times.
considerable
Aircraft are
cost advantage, also turned
much greater
around in
than any of their approximate
rivals.
ly twenty
Southwest is
minutes,
constantly
which keeps
looking for new them in the
destinations to
air longer.
compliment
Less wasted
their route
time
system. Smaller increases
less used
cost savings
airports keep
and is
gate and
significantly
Sales and
Marketing
Southwest
uses clever
and
innovative
ad
campaigns
to attract
customers.
They cater
to both
business
and leisure
travelers.
They
promote
buying
tickets
directly
from their
website,
using eticketing
and cutting
out travel
agents.
These
processes
reduce costs
considerabl
y and give
them an
Service
Southwest
uses just
one type of
aircraft, the
Boeing 737,
which
allows
Southwest
to save cost
regarding
the training
of
mechanics.
The speed
and ease of
repairing
aircrafts is
greatly
reduced.
Considering
the above
statements,
this is a
distinct cost
advantage
over their
rivals, who
operate
more than
one aircraft
type. By
Profit
R&D
Margin
By reducing N/A
operating
cost by
operating
one type of
aircraft,
quick
turnarounds
and pointto-point
service,
Southwest is
able to
reduce costs
considerabl
y. Coupled
with their
high load
factors,
Southwest’s
profit
margins are
considerabl
y higher
than their
competitors.
HRM
A&G
Southwest
hires only
those people
that meet
their
specific
criteria. By
providing
staff that
makes
customers
first and are
attentive to
the airline
itself, they
are able to
keep their
productivity
at a high
level. The
more
productivity
cuts wasted
time and
cost and sets
them above
their
competition.
Southwest
continually
brings in
Southwest
has a
superior
managemen
t team that
is able to
develop and
bring
together
courses of
action for
the
company,
that in total,
reduce costs
across the
board.
Southwest
stands
second to
none in
managemen
t skills to
any of their
rivals and
provides
them a
distinct
advantage in
cost
reductions.
153
kept low due
to the high
productivity
and are well
ahead in this
area
compared to
their rivals.
landing fees
lower than
using major
metropolitan
airports.
greater than
that of any
of their
rivals.
edge versus agreeing to
their
be the
competitors. launch
customer for
three types
of the 737
Southwest
was able to
discount
some of
their aircraft
purchases.
employees
that will
expand their
operations
only if they
meet the
criteria set
by their
strong
culture.
154
4. How strong is the company's competitive position (page 140)?
Although I provide only one column for competitors, you should add the number of columns necessary to assess each of the competitors.
Key success
factors (Refer to
Q 6 in the
external analysis,
and pages 141
and 142 for a list
of factors to
assess.)
Low-cost
production
efficiency
Customer
Service
Advertising
Managerial
know-how
Image and
reputation
Overall low cost
Sum of weights
Weighted overall
strength rating:
Weight
United
American
Delta
Northwest
Rating Weighted Rating Weighted Rating
Weighted Rating Weighted
score
score
score
score
Continental
Rating Weighted
score
.20
4
.8
4
.8
5
1.0
5
1.0
4
.8
.15
3
.45
4
.6
5
.75
3
.45
5
.75
.15
7
1.05
5
.75
4
.6
5
.75
3
.45
.10
5
.5
7
.7
7
.7
7
.7
10
1.0
.20
7
1.4
7
1.4
7
1.4
7
1.4
10
2.0
.20
1.00
7
1.4
7
1.4
7
1.4
7
1.4
5
1.0
5.6
5.65
5.85
5.7
6.00
155
Key success
factors (Refer to
Q 6 in the
external analysis,
and pages 141
and 142 for a list
of factors to
assess.)
Low-cost
production
efficiency
Customer
Service
Advertising
Managerial
know-how
Image and
reputation
Overall low cost
Sum of weights
Weighted overall
strength rating:
Weight
US Airways
Southwest
TWA
America
Rating Weighted Rating Weighted Rating
Weighted Rating Weighted
score
score
score
score
Alaska
Rating Weighted
score
.20
3
.6
10
2.0
4
.8
7
1.4
4
.8
.15
4
.6
10
1.5
3
.45
4
.6
4
.6
.15
4
.6
10
1.5
7
1.05
4
.6
10
1.5
.10
7
.7
10
1.0
5
.5
5
.5
5
.5
.20
5
1.0
10
2.0
5
1.0
7
1.4
7
1.4
.20
1.00
3
.6
10
2.0
3
.6
7
1.4
7
1.4
4.1
10.0
4.4
5.9
6.2
If we analyze the overall strength ratings, we can see that Southwest has the highest compared to its competitors. The previous
strong ratings show that Southwest is the strongest competitor in the Airline Industry. These key success factors are very
important to Southwest; it gives them a competitive advantage over most of the rivals.
156
5.
What strategic issues does the company face?
facts
Is the present strategy adequate in
light of driving forces present in
the industry?
To address this question, look at
the SWOT analysis. If most of
the intersections are in the S-O
quadrant, you can conclude that
the company’s strategy is
adequate. If the intersections are
in the other quadrants, your
conclusions should be different.
Consumers’ wallets were
growing as well during this
time. Consumers were flying
more frequently for both
leisure and business.
While some of the rivals
compete in diverse areas of
the market, they all compete
for the business and leisure
travelers.
Rivals using price cuts to
increase unit volume is a
moderate force in the Airline
Industry, rivals introducing
new ways to increase profit
margins without passing it on
to the customer.
Southwest does not offer its
passengers, baggage transfers
services between carriers. It
also only books tickets for its
own flights.
What does this mean?
Southwest’s strategy of providing
low fares has enabled more people
to fly therefore increasing its
market share and customer base.
Their strategy to keep the fares low
has leaded them not only to be
popular airline but a profitable
airline.
Southwest’s strategy to distinguish
the two types of travelers has led to
institute a two-tier pricing that
increased passenger traffic
significantly. This new pricing
strategy has allowed them to serve
their business travelers with more
flights at suitable times and serve
their leisure travelers with lower
fares and flexibility. This strategy
keeps them competitive against the
rivals that are in the more diverse
areas of the market.
Southwest’s strategy of offering
constant low fares has given them a
strong customer base. However
Southwest keeps their customers
loyal by giving their customers #1
customer service. This strategy
defends Southwest against rivals
using price cuts by giving “more
value for less money”.
Southwest’s strategy for alliances
between its competitors is a
weakness. Customers are left to
handle baggage transfers to other
carriers and booking flights by
other means. This can lead to lost
customers. Southwest needs to
improve its alliances with
competitors.
157
Is the company’s present strategy
geared to the industry's future key
success factors?
Please start with the industry
KSFs you identified in the
question 6 of the Chapter 3
worksheet. Use the KSFs as the
starting point for your analysis.
Then determine how well the
company performs each of the
KSFs. If the company has high
performance on each KSF, their
current strategy is geared to the
industry’s future key success
factors.
Low cost production
efficiency.
Southwest is using the pointto-point system. The results
are that they have higher labor
productivity and have lower
labor costs compared to most
rivals.
Customer Service.
Southwest is ranked 1st across
the board on arriving 15 min.
of the schedule times,
mishandled baggage, and
customer complaints.
Southwest is making customer
service a way to differentiate
itself from its rivals.
Advertising.
Southwest is one of the
highest spending rivals in
Airline Industry. “The
message in ads were tightly
matched to the company’s
strategy and were usually
worked in a manner calculated
to intrigue and entertain the
audience and to persuade air
travelers that what Southwest
offered was of value.”
Managerial know-how.
Southwest has carefully
assembled workforces that is
conscientious about their work
and are concerned for the well
being of its passengers.
Image and Reputation.
Southwest has consistently
been number one in customer
satisfaction and low fares.
Southwest has established an
excellent reputation that will
allow them to continue to
build on their past success.
Overall low cost.
Southwest is able to keep their
operating expenses under
$7.50, which allows them to
charge much less for ticket
prices. Southwest will always
be able to maintain full planes
at lower prices due to them
being able to control
expenses.
Southwest has outperformed the
rivals in all of the airline industry’s
KSFs.
Their current strategies are working
for Southwest due to their strategy
of having low-cost, low-price, and
no-frills airline. Southwest has been
able to increase the passenger
traffic and made airline travel more
convenient and affordable to a
wider segment of the U.S.
population, which will increase
future market share potentials.
158
How good a defense does the
present strategy offer to the 5
forces?
Rivals using price cuts to
increase unit volume is a
moderate force in the
Airline Industry.
Southwest has always been
low fare airline that provides
“more value for less money”
to defend against rivals price
cuts. Southwest can keep the
prices low all the time due to
its diligent effort to keep
operating costs low and labor
productivity high.
The entry barrier is being
lowered by new entries with
quality, low priced service.
Southwest uses its high
quality customer service to
defend itself against new
entrants. They pride
themselves on their customer
service.
The availability of
substitutes that are
attractively priced is limited.
Southwest low fares have
given more customers the
“freedom to fly”. With such
low cost, Southwest has
enabled more people to travel
by plane cheaper and/or faster
than traveling by bus or train.
competitors easily.
The price of fuel cannot be
controlled through
economies of scale.
Southwest’s management to
anticipate high fuel costs. In
the past, Southwest hedges
most of its fuel requirements
at the lower prices before its
spikes.
The ability for buyers to
switch between airline
Southwest uses a combination
of high customer service, low
fares, advertising and
promotion to keep customers
loyal to their airline. Their
motto “more value for less
money” appeals to their
buyers.
Southwest strategy offers a great
defense against these 5 forces. By
maintaining their current strategies,
Southwest is able to defend itself
against rivals. Southwest is able to
increase passenger traffic, increase
profit margins, and increase market
shares in the airline industry.
159
Does the present strategy protect
the company against external
threats and internal weaknesses?
Southwest has operating costs
that are lower than most of its
rivals.
This criterion is asking you to
analyze the intersection of the
external threats and the
company’s strengths and
weaknesses in the SWOT matrix.
You have to list the threats and,
strengths and weaknesses as the
starting point for conducting the
analysis.
Southwest offers the lowest
price possible to give
consumers the “freedom to
fly”.
If the majority of the intersections
are in the strengths-threats
portion of the matrix, then the
company’s current strategy
protects them. If the majority of
the intersections are in the
weaknesses-threats portion of the
matrix, then the strategy will not
protect them.
Is the company vulnerable to
competitive attack by one or more
rivals?
Southwest does not offer any
“frills” like most of their
rivals.
Southwest uses its promotions
and advertising to convey the
value of their airline.
Southwest is number one in
customer service.
Northwest is rated 2nd in
arriving within 15 minutes of
the schedule time.
Continental is tied with
Southwest for ranking of the
fewest number of mishandled
bag gages.
The present strategies Southwest is
using have defended them against
competitors. They are able to keep
their low operating costs by
constantly looking at its expenses
and how to control them. This gives
them the ability to offer low prices
during a time when customers are
looking for affordable flights. They
enable more consumers to use air
travel, which increases the
passenger traffic for the overall
industry. Southwest also gives the
customer value in their flight
experience. They offer the highest
quality customer service to
counteract their no-frill approach to
flying. Overall, all these strategies
complement each other to provide
the profitability Southwest has
achieved despite the violate airline
industry.
Southwest is vulnerable to
competitive attack by these two
rivals. Southwest however has tried
to prepare itself against such attacks
by continuing to show their
customers and employees that they
are number one in customer service
and they give “more value for less
money.” Southwest uses advertising
and promotion to remind they’re
loyal customers that although
appealing to switch carriers,
Southwest provides a higher quality
service and a higher value.
160
Does the company have
competitive advantages (Refer to
your responses to question 2
above.) or must it offset the
competition's competitive
advantages?
Southwest has a competitive
advantage in these areas.
 Cost advantages
 Sophisticated use of ecommerce
 Wide geographic
coverage
 Culture
 Brand names
 Ability to improve
production processes
Southwest has used each of these
competitive advantages to offset
their competition. Southwest had
combined all these in a way that has
made them an innovator in reducing
operating costs with using the latest
technology, providing service
across the U.S., being the best
company to work for, know for
being a quality airline. Southwest
has used these advantages to the
highest level to make airline travel
affordable and convenient to a
wider segment of the U.S., while
making itself a profitable company.
What are the strong and weak
parts of the current strategy?
“From its inception,
Southwest has pursued a lowcost/low price/no-frills
strategy that featured offering
passengers a single class of
service at the lowest possible
fares and making air travel
affordable to a wide segment
of the U.S. population”, “The
freedom to fly”.
A strong part of their current
strategy that the personnel at the
U.S. Department of Transportation
have coined it as being the
“Southwest Effect”. This strategy
of Southwest known as the
“Southwest Effect” is offering low
fares and frequent flights has
succeeded in stimulating higher
passenger traffic at airports across
the U.S. Southwest has increased
their market shares and profitability
by creating its own passenger
traffic from its affordability.
Southwest is continually perfecting
its operating strategies to give them
operating costs that are below most
of the rivals operating costs in the
airline industry. This effective
strategy has provided Southwest’s
operating costs, as a percentage of
its revenues, were consistently the
lowest in the airline industry.
The strength of these strategies is
Southwest’s continued effort in
providing customers with the
highest quality service and best
value.
161
What additional moves are
necessary to:
 Improve costs
 Capitalize on emerging
opportunities
 Boost the company's
competitive position
Improve Costs:
 Continuing
controlling operating
costs.
Emerging Opportunities:
 New airport potential.
Emerging Threats:
 Price cuts from rivals.
 Industry profitability.
Boosting Competitive
Position:
Increasing alliances with
rivals.
Southwest should keep a constant
watch over costs due to its bottom
line profitability. Southwest cannot
provide a low price if the operating
costs exceed their breakeven mark.
Without low price Southwest will
lose its “effect”.
Southwest should consider more
airports a year for expanding their
service. With increased passenger
traffic they will increase their
growth and market shares.
Southwest should continue
preparing for the threat of rivals
using price cuts to cut into its
market shares. Southwest needs to
continue conveying their
company’s value.
Being prepared for economic
downturns will help Southwest in
their push for industry profitability.
Southwest has been prepared but
constant watch needs to be kept on
the economy.
Southwest should create alliances a
rival to increase their customer
service and their market share. By
working with a rival, Southwest
would be able to improve its
customer base by receiving referrals
from a rival they have an alliance
with.
162
6. Financial ratio analysis for the company and industry (If applicable, refer to the web page spread sheet.) Specifically state the
strengths and weaknesses that you find through your analysis of the financial ratios.
A. LIQUIDITY RATIOS
Financial Ratios
LIQUIDITY OR SHORT-TERM
SOLVENCY MEASURES
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
Current Ratio
Quick or Acid Test Ratio
Cash Ratio
B. LONG TERM SOLVENCY MEASURES
1. Long – Term Debt to Capital Ratio = (Total long-term debt / (equity + long-term debt)
These ratios have decreased from 1991 through 2000. That is the direction that Southwest should be going to increase their
financial strength. With low debt to capital, they will be able to withstand adverse business conditions without suffering net losses
or insolvency. They can stay competitive in the industry because of this strength.
LONG TERM SOLVENCY MEASURES
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
Long-Term Debt to Capital Ratio
2000 = 761 / (3451.3 + 761) = .18
1999 = 872 / (872 + 2835.8) = .24
1998 = 623.3 / (623.3 + 2397.9) = .21
1997 = 628.1 / (628.1 + 2009) = .24
1996 = 650.2 / (1648.3 + 650.2) = .28
1995 = 661 / (1427.3 + 661) = .32
1994 = 583.1 / (1238.7 +583.1) = .32
1993 = 639.1 / (1054 + 639.1) = .38
1992 = 735.8 / (879.5 + 735.8) = .46
1991 = 617.4 / (635.8 + 617.4) = .49
.18
.24
.21
.24
.28
.32
.32
.38
.46
.49
163
2. Debt to Equity Ratio = (Total debt/total equity)
There is a decreasing trend of this ratio for Southwest from 1991 through 2000. This shows the increasing stability of Southwest Airlines
and the improving ability of the entity to meet long-term obligations without the danger of net losses or insolvency. 1991 ratio was 1.92 %
and decreased through 2000 to a ratio of 93%. This ratio shows strength for Southwest to be competitive in the industry.
Debt to Equity Ratio = (Total debt/total
equity)
2000 – 3218.3 / 3451.3 = .93
1999 – 2817.9 / 2835.8 = .99
1998 – 2318 / 2398 = .97
1997 – 2237.1 / 2009 = 1.11
1996 – 2075.2 / 1648.3 = 1.26
1995 – 1828.3 / 1427.3 = 1.28
1994 – 1044.3 / 1238.7 = .84
1993 – 1522 / 1054 = 1.44
1992 – 1489.4 / 879.5 = 1.69
1991 – 1218.5 / 635.8 = 1.92
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
.93
.99
.97
1.11
1.26
1.26
.84
1.44
1.69
1.92
164
3. Equity Multiplier Ratio = (Total assets/total equity)
The equity multiplier ratio for Southwest has gone done from 1991 of 2.92 to 1.93 in 2000. This shows that their equity in r elation
to their assets has grown. This is a sign of financial strength and good financial management.
Assets to Equity Ratio
2000 – 6669.6 / 3451.3 = 1.93
1999 – 5653.7 / 2835.8 = 1.99
1998 – 4716 / 2398 = 1.97
1997 – 4246.2 / 2009 = 2.11
1996 – 3723.5 / 1648.3 = 2.26
1995 – 3256.1 / 1427.3 = 2.28
1994 – 2283.1 / 1238.7 = 1.84
1993 – 2576.0 / 1054.0 = 2.44
1992 – 2368.9 / 879.5 = 2.69
1991 – 1854.3 / 635.8 = 2.92
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1.93
1.99
1.97
2.11
2.26
2.28
1.84
2.44
2.69
2.92
165
4. Debt to Assets Ratio = (Total debt/Total assets)
This ratio is used to assess the debt levels of Southwest Airlines. In 1991 the ratio was 66%, and it went down to 48% in 20 00,
which shows that the long-term solvency measure as improved. Southwest’s ability to withstand sour business conditions without
suffering net losses or insolvency has improved by 18% since 1991. Their ability to repay long-term creditors has improved which
makes them stronger financially. This financial strength has enabled them to continue to operate, even through the 911 crises.
LONG TERM SOLVENCY MEASURES
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
Debt to Total Assets Ratio
2000 = 6669.6 - 3451.3 = 3218.3 / 6669.6 = .48
1999 = 5653.7 - 2835.8 = 2817.9 / 5653.7 = .50
1998 = 4716 - 2398 = 2318 / 4716 = .49
1997 = 4246.1 - 2009 = 2237.1 / 4246.1 = .53
1996 = 3723.5 - 1648.3 = 2075.2 / 3723.5 = .56
1995 = 3256.1 – 1427.03 = 1828.3 / 3256.1 = .56
1994 = 2283 – 1238.7 = 1044.3 / 2283 = .46
1993 = 2576 – 1054 = 1522 / 2576 = .59
1992 = 2368.9 - 879.5 = 1489.4 / 2368.9 = .63
1991 = 1854.3 - 635.8 = 1218.5 / 1854.3 = .66
.48
.50
.49
.53
.56
.56
.46
.59
.63
.66
166
C. ASSET MANAGEMENT, TURNOVER MEASURES OR ACTIVITY RATIOS
1. Net Working Capital Turnover = (Sales/Net working capital)
Short term liabilities are not available from the text for Southwest therefore; we are unable to calculate this ratio.
2. Fixed Asset Turnover = (Sales/Net fixed assets)
Fixed assets were not available in the text for Southwest.
3. Total Asset turnover = (Sales/Total assets)
Southwest has remained relatively stable in their asset turnover ratio. They are reasonably using their assets to product sales. When the
terrorist attack took place in 2001, their strategy was to postpone the delivery of new aircraft. This was a good strategy that kept this ratio
stable. This shows good financial management at Southwest. Their 1991 ratio was .74 and increased up to .85 in the year 2000.
Total Assets Turnover Ratio
2000 - 5649.9 / 6669.6 = 85%
1999 - 4735.6 / 5653.7 = 84%
1998 - 4164.0 / 4716.0 = 88%
1997 - 3816.8 / 4246.2 = 90%
1996 - 3406.2 / 3723.5 = 91%
1995 - 2767.8 / 3256.1 = 85%
1994 - 2592 / 2283.1 = 1.14%
1993 - 2296.7 / 2576 = 89%
1992 - 1803 / 2368.9 = 76%
1991 - 1379.3 / 1854.3 = 74%
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
.85
.84
.88
.90
.91
.85
1.14
.89
.76
.74
167
D. PROFITABILITY MEASURES
1. Gross Profit Margin = (Sales -cost of goods sold)/Sales)
Cost of goods sold is not available from the text on the Southwest case.
2. Operating Profit Margin = (Profits before interest and taxes/Sales)
This ratio shows the management’s ability to monitor and control expenses on resources committed to the business. Low operating costs have
been Southwest’s claim to fame. Management has been superior in monitoring and cutting costs at Southwest and makes this a strength to
Southwest. The chart shows that they have steadily risen from 1991 through 2000 in this area.
Operating Profit Margin =
Profits before interest and taxes/Sales
2000 – 1021.1 / 5649.6 = .18
1999 – 781.6 / 4735.6 = .17
1998 – 683.6 / 4164 = .16
1997 – 524.2 / 3816.8 = .14
1996 – 350.8 / 3406.2 = .10
1995 – 313.5 / 2872.8 = .11
1994 – 316.7 / 2591.9 = .12
1993 – 292.0 / 2296.7 = .13
1992 – 193.8 / 1803.0 = .11
1991 – 72.6 / 1379.3 = .05
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
.18
.17
.16
.14
.10
.11
.12
.13
.11
.05
168
3. Net Profit Margin/Return on Sales Ratio = (Net Income/Sales)
This ratio also shows that management has been doing a superior job of keeping the costs down. Southwest is above the industry
average of 2.9%. The efficiency of Southwest is superior to competitors. This ratio is steadily rising and keeps Southwest ahead
of the competition in this area. Southwest is continually monitoring its costs even when times are good so that they can sustain
when times are bad.
Return on Sales
2000 = 625.2 / 5649.6 = .11
1999 = 474.4 / 4735.6 = .10
1998 = 433.4 / 4164 = .10
1997 = 317.8 / 3816.8 = .08
1996 = 207.3 / 3406.2 = .06
1995 = 182.6 / 2872.8 = .06
1994 = 179.3 / 2591.9 = .07
1993 = 154.3 / 2296.7 = .07
1992 = 97.4 / 1803 = .05
1991 = 33.1 / 1379.3 = .02
11.07%
10.02%
10.41%
8.33%
6.09%
6.36%
6.92%
6.72%
5.40%
2.40%
2000
11.07
1999
1998
1997
1996
1995
1994
1993
1992
1991
10.02
10.41
8.33
6.09
6.36
6.92
6.72
5.40
2.40
169
4. Return on Assets = (Net Income/Total assets)
These numbers measure the efficiency of Southwest to use their assets to generate a return. This ratio has risen greatly from 1991 through
2000, which shows that management is doing their job very well. This shows growth potential and is a strength to Southwest. Management
is careful and takes precautions, such as postponing delivery of aircraft that they had on order when the 911 crises happened. Southwest
uses the proactive approach rather than a reactive approach.
Return on Assets (Net Income/Total Assets)
2000
2000 – 625.2 / 6669.6 = 9.37%
1999 – 474.4 / 5653.7 = 8.39%
1998 – 433.4 / 4716 = 9.19%
1997 – 317.8 / 4246.2 = 7.48%
1996 – 207.3 / 3723.5 = 5.56%
1995 – 182.6 / 3256.1 = 5.61%
1994 – 179.3 / 2283.0 = 7.85%
1993 – 154.3 / 2576 = 5.99%
1992 – 97.4 / 2368.9 = 4.11%
1991 – 33.1 / 1854.3 = 1.79
9.37
1999
1998
1997
1996
1995
1994
1993
1992
1991
8.39
9.19
7.48
5.56
5.61
7.85
5.99
4.11
1.79
5. Return on Equity = (Net Income/Total equity)
Average Stockholders Equity
This ratio shows the ability of Southwest to monitor and control expenses to earn a profit on resources committed to the business. From 1996
through 2000, they have steadily increased this ability. The effective use of resources provided by the stockholders has been below the
industry median, however, since 1996 has shown significant increase in this area.
Return on Stock Average Stockholders Equity
(given from text)
2000
19.9%
1999
18.1%
1998
19.7%
1997
17.4%
1996
13.5%
1995
13.7%
1994
15.6%
1993
16.%
1992
12.9%
1991
5.3%
170
E. MARKET VALUE MEASURES
1. Earnings per Share = (Net Income/Shares outstanding)
N/A
2. Price to Earnings Ratio = (Price per share/Earnings per share)
N/A
3. Market to Book Ratio = (Market value per share/Book Value per share)
N/A
4. Dividend Payout Ratio = (Annual dividends per share/After tax earnings per share)
N/A
5. Dividend Yield on Common Stock = (Annual dividends per share/current market share per share)
N/A
6. Cash Flow per share = (After tax profits + depreciation) / number of common shares outstanding)
N/A
7. Internal Growth Rate = (Maximum growth rate with no additional equity financing) = (ROA) (b / (1-ROA) (b)) {Where b is the
plowback ratio: b equals addition to retained earnings /net income}
8. Sustainable Growth Rate = (maximum growth rate with no additional equity financing) = (ROA) (b / (1-ROA) (b)) {Where b is the
plowback ratio: b equals addition to retained earnings /net income}
171
7.
Top Management’s values and perspectives (Refer to Chapter 2, page 62 and Chapter 13
pages 430-437)
How are the personal ambitions, business philosophies, and ethical beliefs of managers stamped on
the company's strategy and competitive capabilities? Specifically state the strengths and
weaknesses that you find through your analysis of Top Management’s values and perspectives.
Top management at Southwest airlines is strong. Managers were expected to spend at least
one-third of their time outside of the office, walking around the facilities under their supervision,
observing firsthand what was going on, listening to employees and being responsive to their
concerns. Managers were called by their first names at Southwest, and they have an open door
policy where any employee can be heard at any time. Management at Southwest airlines believes
in doing what ever is necessary in getting the job done and keeping their customers satisfied.
Southwest puts their employees first believing that by delivering superior service to their
employees this would translate into superior service delivered to their customers. Southwest
employees were paid well and had access to profit sharing plans, 401(k) plans and stock options.
The management at Southwest believes that hiring an unskilled person with a positive attitude is
better then hiring a more skilled person with a bad attitude because an unskilled person could be
trained but it is harder to change a person who has a bad attitude. Southwest believes that superior,
hospitable service and a fun-loving spirit flows from employees who liked their jobs and the
company they work for and who are empowered to do their job as they see fit.
Southwest management knew that low fares would mean keeping a sharp eye on operating
costs and keeping them low. To keep operating costs low, Southwest only used Boeing aircraft to
minimize the need for spare parts inventories, to make training personnel easier and to improve
efficiency. Customers were encouraged to purchase their tickets online using Southwest’s web
site. Southwest set up flight service at less congested airports to minimize total travel time for
passengers. Southwest also used the point-to–point system of scheduling flights, which is more
efficient than the hub-and-spoke system used by rival airlines. Southwest used “cattle-call” seating
to economize the amount of time it took terminal personnel to check passengers in and to simplify
making reservations.
Instead of hiring a cleaning crew to clean the planes between flights,
Southwest had their flight attendants clean the cabins between flights, which helped to keep
172
operating costs down and made turn around time more efficient.
This approach would lead
Southwest to become the first airline to win the Triple Crown award, for best on-time record,
fewest reports of mishandled baggage, and fewest complaints per 100,000 passengers for a single
month, in 1988.
Southwest management would not have formal strategic plans in place but had their
managers’ think ahead and have back up plans prepared. Managers at Southwest believe in being
prepared for adversity, economic downturns, and the competitive moves of rivals. It is for these
reasons that Southwest practices fiscal conservatism, low levels of debt and fervent attention to
bottom-line profitability. This would lead Southwest to achieving its 28 th consecutive year of
profitability in 2000.
173
8.
Organization’s culture (Refer to Chapter 2, page 63 and Chapter 13 pages 410-428)
How do the company's values, policies and culture impact the strategy, strategy implementation
and company's competitive capabilities?
Specifically state the strengths and weaknesses that you find through your analysis of the
organization’s culture.
Southwest’s operating principle was that employees come first and customers come second. In
Southwest’s 2000 annual report, an excerpt from Southwest’s Management team stated the following:
“Our people are warm, caring and compassionate and willing to do whatever it takes to bring the Freedom
to Fly to their fellow Americans. They take pride in themselves by doing well for others. They have built
a unique and powerful culture that demonstrates that the only way to accomplish Southwest’s mission
was to keep costs low and the quality of customer satisfaction high.”
Southwest hired people with winning attitudes and once they were hired they were provided with
a nurturing and supportive work environment that gave the Employees the freedom to be creative, have
fun, and make a positive difference. Employees took pride in team accomplishments, and enhanced job
satisfaction which in turn kept Southwest’s Culture and Spirit alive and that is why they continue to
produce winning seasons.
Southwest hired employees for attitude and trained them for skills.
Management believed that superior customer service came from having employees who genuinely
believed that customers were important and that treating them warmly and kind was the right thing to do.
Southwest had the lowest employee turnover rate for the entire airline industry.
According to Kelleher, “We are interested in people who externalize, who focus on other people,
and people who are motivated to help other people. And for this reason, that is why Southwest has had a
competitive advantage over rival airlines. Southwest carefully chose who would work for their airline.
Choosing the most qualified candidates yielded Southwest year after year profits and superior customer
satisfaction. Kelleher hired 80-90% of its supervisory positions from within the company. He felt that
there is no better route to take than that of internal hiring. Kelleher felt that people who had been there
and done that would be more likely to appreciate and understand the demands that people under them
were experiencing and also more likely to enjoy the respect of their peers and higher level managers.
Employees were compensated by pay scales that were very close to the industry average. On a
survey conducted during 1997-1998 the data revealed that airline pilots were being paid 10% above the
174
industry average. Stock options were made available to employees and by the year ending 2000, 200
employees were actually stated to be millionaires. Mainly due to stock options and profit sharing that
were provided to them.
Almost 85% of Southwest’s employees belonged to unions. Southwest airlines were one of the
most highly unionized airlines in the United States. Southwest’s CEO Herb Kelleher believed that lying
off employees did not sustain and nurture the corporate culture that the company held so strongly
together. Kelleher believed that lying off employees was not worth the small amount of money gained in
the short term but rather employees are much more important. He truly felt that not furloughing people
would breed loyalty and trust. This belief is what makes Southwest so unique over the other airlines.
Southwest’s management style was also very eclectic. Kelleher expected managers to spend at
least one-third of their time out with the employees and customers observing the day to day activities of
the airline. Company executives were very approachable and insisted that they be called by their first
names. Managers and executives had an open door policy. This policy openly accepted employees’
concerns, opinions, and comments for reducing costs and improving efficiency. Southwest cherishes their
employees and that is why their customer service scores were the best in the industry for the years of
1996-2000. The better you treat your employees, the better they will treat others. This was the idea that
Kelleher had. Southwest was ranked #1 for the best 100 companies to work for in 1998 by Fortune 500,
ranked second in 1999 and 2000 and in 2001 they ranked fourth.
Southwest had two core values: LUV and fun. Employees were encouraged to have fun at work.
This idea lead employees to enjoy their jobs and ultimately this reflected on the companies profits.
Happy employees lead to happy customers.
In 1990, the culture committee was set up by Colleen Barrett.
This committee promoted
positively outrageous Service. Over the years, this committee has come up with a variety of ways to
nurture its core values and perpetuate its unique culture.
Southwest’s culture and values are a direct result of company growth. Executives believed that
the growth was primarily a function of how quickly Southwest could hire and train people to fit into its
culture and mirror the Southwest spirit.
The culture of Southwest is a highly competitive advantage.
175
Their core values are also a competitive advantage. The employees of Southwest have made it possible to
implement as well as carry out company strategies and goals for the company. Southwest has a superior
strength in the area’s of values and culture and this is why they have been so profitable and successful
every year for the past 30 years. Kelleher is a unique leader and his strong faith and belief in his
employees, has lead Southwest to success.
9.
176
9. Provide a summary of the company’s strengths and weaknesses. Use the summary matrix from the Chapter 3 worksheet as an example
for organizing the strengths and weaknesses.
Internal Analysis section
Skills and expertise
Strengths
Proprietary technology
Advertising and promotion
Product innovation
Ability to improve processes (prod)
Technological know-how
Physical assets
Plant and equipment age
Technological capabilities
Plant capacity N/A
Plant and retail location
Access to distribution channels
Global distribution capability N/A
Wide geographic coverage
Human assets
Superior intellectual capital
Organizational asset
Financial position
Better product/service quality
Culture
Patents N/A
Intangible asset
Image
Brand name
Reputation for customer service
Competitive capabilities
Cost advantages
Sophisticated use of e-commerce
Recognized industry leader
Attractive customer base
Market position
Alliances or cooperative ventures
Weaknesses
Product service breadth and
depth
Alliances
177
WEAKNESSES
STRENGTHS
SWOT MATRIX
Low operating cost
Service innovation
Technological know-how
Advertising and promotion
Product innovation
Age of equipment
Ability to continuously refine service
Intellectual capital
Financial position
No frills service
Image
Safety record
Customer service
Attractive customer base
Culture
Product line breadth and depth
Multi-country coverage
No baggage transfer outside Southwest
Lack of intra-airline services
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Alliances between competitors
Cost of exiting
Fuel costs
Terrorism
Consumer confidence
Diminishing pool of candidates
that Southwest can employ
Industry profitability in relation to
the changing economy
OPPORTUNITIES
Extent which rivals use
economies of scale
Rival distribution channels
Number of rivals and their relative
size
Technology/E-commerce
Legislative and regulatory
Economic downturn
Long-term industry growth rate
Extent of rivals' horizontal
intergration
Vertical intergration
Growth opportunity as a result of
9-11 due to decline in market size
Societal values in the changing
economy
Growth opportunities in relation
to population demographics
10. SWOT Matrix
THREATS
X
X
X
X
X
X
X
X
178
VI. ACTION PLAN
Intersection
Recommended
actions
priority
Implementation
steps
Required resources
Schedule and
sequence
Threat:
 Industry
profitability
in relation to
the changing
economy
To defend against
the industry
profitability in
relation to the
changing
economy in the
wake of the 9/11
incident,
Southwest must
continue to
achieve the
lowest operating
costs in the airline
industry. Use
your intellectual
capital to assess
the state of the
airline today and
focus upon the
areas that need
improvement.
Use incentive
bonuses to help
employees come
up with
innovative ways
to help lower
costs.
Southwest
understands in
the past as well
as now that
industry
profitability is
of the highest
importance.
Being a
profitable
company
touches on
every aspect of
a successful
business from
the
shareholders to
the employees’
job security.
Gaining market
share in
markets will
Southwest an
advantage
going forward.
First, Southwest
must continue to
find innovative
ways to keeps
their operating
costs low. This
is already
strength of
Southwest and
they should use
another strength
intellectual
capital to insure
that innovative
ideas that help
achieve lower
costs are brought
forward. Give
bonuses to those
employees who
come with these
ideas. The
bonuses should
be flat rate as
until
implementation
we cannot judge
the importance
of a particular
suggestion.
-Ability to
improve
production
processes
-Technological
know how
- Superior
intellectual capital
-Cost advantage
- Reputation for
customer service
- Superior
intellectual capital
Researching
into how to find
new ways of
cutting costs
should begin
immediately.
Within six
months
Southwest
should have
ideas for 3-4
new techniques
that should
allow them to
achieve lower
operating costs.
Strengths:
 Low
operating cost
 Advertising
and
promotion
 Product
innovation
 Ability to
continuously
refine service
 Intellectual
capital
 Image
 Customer
Service
The advertising
Focusing the
advertisements
specific to this
markets should
begin by next
month.
Promotions run
should be given
two months
time and then
prices can go
back to original
status.
Internal and
external success
standards (e.g.
benchmarks)
Internal:
-Low cost
efficiency
-Superior
management
and evaluation
-Ability to
improve
production
processes.
External:
-Low customer
switching costs
-Number of
competitors in
the industry
-Cost and
efficiency
- Technological
change (it
would be easier
for consumers
to not travel)
-Marketing
innovation
Measurement
metrics
Southwest
should be able
to come up
with 3-4 new
ideas that will
be able to
lower operating
costs within the
next year.
Compare
Southwest low
costs to
industry rival
to insure that
the
recommendatio
n is working.
Using
advertising in
specific
markets should
be able to gain
2-3% market
share within
the next year.
At one years
end, evaluate
and adjust as
necessary.
179
and promotion
team must
promote the
safety record of
Southwest to gain
the confidence of
flyers in markets
that are the most
profitable to
Southwest. Try
to make gains in
market share in
locations that are
not performing as
well as once
projected.
Contact investors
that are concerned
about the
industry. Use this
to alleviate
concerns and
outline new plans.
The customer
service provided
by Southwest is
the best in the
industry at this
point but this
must continue
going forward in
order to maintain
the customer base
they have and
Using
advertising to
promote
Southwest’s
safety record is
critical in this
new
environment.
The promotion
of these ideas in
more profitable
markets and
markets that are
not achieving the
forecasted
numbers is of
great importance.
Gains can be
made in these
markets at this
time.
The letter to be
mailed to
investors should
happen within
the next month.
The sooner we
can mail this
letter, the more
likely the
investors will
hold onto their
stock.
Contacting the
investors in this
time of turmoil
could prove
beneficial if the
stock does not
fluctuate as
much as
industry rivals.
Think about
using this
strategy again
if results are
good.
The letter to
investors should
be written and
discussed and
ready to go
within the next
two weeks.
Retaining
management
with
performance
based incentives
180
attract more word
of mouth
business.
Retaining the
management that
Southwest has in
place now, the
management that
has propelled
Southwest to its
present position is
a must. The
knowledge that
this management
team has amassed
of the years is an
advantage that
Southwest has
over other airlines
in regards to
innovation and
how to be a low
cost provider
without
sacrificing
service.
Southwest must
maintain its
image of a well
recognized
branded airline
with a perfect no
crash record to
remain profitable
within the
industry.
is critical. Upper
management
should discuss
and decide what
the criteria
should be for
each individual
management title
and have these
incentive plans
ready for
submittal within
a month.
181
Opportunity:
 Growth
opportunities
in population
demographics
Strengths:
 Service
innovation
 Advertising
and
promotion
 Image
Weakness:
 Product
breadth and
depth
It is
recommended
that Southwest
use their
preexisting
strengths and
rework their
weakness to take
advantage of the
opportunities that
lie within the
population’s
demographics.
The age of most
customers in the
industry is
between 15-64
years. There are
nearly 194
million people in
the United States
that lie in that age
group (66.7% of
the entire
population). The
male to female
ratio in that range
is practically 1:1.
The median age
of all of the
population is 35.8
years of age and
the life
expectancy is
77.14 years. The
Medium
Southwest
should use
market research
to discover what
the travel needs,
preferences, and
wants of the
population are.
Following, they
should evaluate
their current
product/service
line breadth and
depth,
advertising and
promotion
campaigns, and
service
innovation
capability in
order to see if
there are any
supplementary
services,
additional
pricing tiers, or
geographic areas
that can be added
without
compromising
their low
operating costs
and wide profit
margin.
The resources
required include:
the use of
marketing team to
research and
strategize;
advertising and
promotion;
intellectual capital.
Southwest
should begin
market research
by the end of
Quarter 1 of
2002.
They should
complete market
research by the
end Quarter 2 of
2002.
Once research is
completed,
evaluation of
current
product/service
line breadth and
depth should be
conducted to
find where
changes or
additions could
be made to
compliment the
research
findings.
Southwest
should aim to
increase their
market share by
2% by
September
2003.
Market share
measurements
can be used to
determine if the
changes have
been
successful.
Customer
satisfaction
surveys can be
conducted to
measure
success of
changes/additio
ns, as well.
By Quarter 1 of
2003, evaluation
should be
complete and
the intentions on
making changes
and/or additions
182
growth rate, itself,
is 0.92%.
These varying age
groups have
different needs
and different
priorities when it
comes to travel,
which poses as an
opportunity for
company’s like
Southwest, to do
whatever they can
to cater to as
many groups as
possible.
The average
annual per capita
income is
$37,000. The
population’s
living expenses
are constantly
rising. However,
their income
increases at a
slower rate.
Because of this,
people are more
apt to move away
from their
families and
friends in order to
live in affordable
They should also
see if there are
any flight
schedule changes
or additions that
can be made that
would allow
Southwest to
cater to a larger
customer base.
They should use
their service
innovation skills
and capabilities
to adapt to and
act on those
realized needs
and wants.
Once those
services/products
are adapted,
Southwest
should devise a
unique,
attention-getting
advertising and
promotion
campaign to
spread the word
about how
they’ve changed
to accommodate
their current
customers and
to their existing
services,
products, or
offerings should
be acted upon at
such time.
Within a month
from
implementation,
a new
advertising and
promotion
campaign
should be
initiated.
the beginning of
Quarter 3 in
2003, an
evaluation of
Southwest’s
efforts should
be conducted to
decide if the
result was
successful
which will
determine if
they should
continue with
their promotion.
183
regions. But they
still want to be
able to see their
friends and family
on occasion,
which may
require taking
flights.
“would-be”
customers.
Many people are
staying single
long and starting
families later
which means they
have more
freedom to travel.
A large number of
consumers are
white collared
business people
(including
executives) whose
occupations
require travel
require travel
regardless of
economic
changes.
Southwest should
consider
widening their
product line
breadth and depth
to satisfy the
184
needs, wants, and
financial abilities
of an everchanging
population. They
should also
consider servicing
more locations.
Southwest should
use their strengths
in service
innovation to
satisfy those same
needs.
Unique
advertising and
promotional
campaigns can
continue to be
used to convey
the image of
value and
superior service
that Southwest
has become well
known for in
order to grab the
customers of
various
demographic
groups. By acting
on these
recommendations,
Southwest should
be able to satisfy
185
the needs and
preferences of
customers from
with different
population
characteristics. In
doing this, they
will increase
market share and
customer base
while continually
keeping those
customers happy.
186
Threat:
 Economy at
Large
Strengths:
 Financial
Position
 Low
Operating
Cost
 Intellectual
Capital
 Image
 Attractive
Customer
Base
 Culture
Southwest must
defend against
the threat of a
declining
economy and
the economic
effects of
September 11th.
Your strengths
have allowed for
continuous
profitability
despite the
temporary loss
of flights and
some
passengers.
Southwest
management
should defer
delivery of new
aircraft and
create a ‘shared
services’:
ground crew
pilot program
with
competitors.
Management
should also
create a
promotional
‘buy one get one
Addressing
this threat is a
priority for
Southwest so
that they will
be able to
continued
being
profitable
despite
declining
economy.
1. Southwest
management
works with
suppliers to
finalize the
deferred
schedule of
delivery for new
aircraft.
2. Management
develops and
finalizes the
details of the
‘shared
services’:
ground crew
pilot program
with
competitors.
3. Southwest
management
develops a
promotional
campaign of
“buy one ticket
get one free”
ticket offer to
keep current
customers and
attract new
customers. This
campaign
Organizational
assets:
Financial
position
Culture
Human assets:
Superior
intellectual
capital
Intangible assets:
Image
Southwest
management
monitors the
scheduling of
deferred
inventory.
Management
schedules
implementation
of the ‘shared
services’
ground crew
pilot program
for the
beginning of
the 1st quarter
of the new
fiscal year.
Management
should schedule
the promotional
campaign of
“buy one ticket
get one free”
ticket offer to
run for a time
period of 2
months during
June and July
of the current
year.
Southwest’s
Management
should set an
internal deadline
for rescheduling of
the delivery
dates for new
aircraft.
Management
should continue
monitoring the
deferred
delivery
schedule in
order to be able
to put the new
aircraft into
Management
service when it
sets deadline
is needed.
for
Southwest
development
management
and
should monitor
implementation the progress of
of ‘shared
the ‘shared
services’
services’
ground crew
program with
pilot program.
competitors to
determine if
Management
the program is
sets internal
successfully
deadline for the maintaining
development
your current
and finalization levels of low
of the new
operating costs
promotional
and/or if the
campaign.
program is
producing a
decrease in
Southwest
your operating
management
costs. If this
should set
program
internal
proves
deadline for the unsuccessful
187
free’ ticket
campaign and
place smaller
advertisements
in print media.
should be
offered on oneway ticket
purchase only
and should be
limited to offpeak flights
4. Southwest
management
works with
their
advertising
agency to
workout a
package deal
for the
placement of
smaller
concentrated
ads in the print
media and
negotiating for
a small
increase in the
discount of 1%
to 2%.
new
advertisements
should being
running the by
the end of the
4th quarter of
the current
fiscal year.
development
and finalization
of new
advertisements.
and your
operating costs
increase
Southwest
management
should reevaluate this
program to
correct any
problems or
discontinue if
the existing
problems
cannot be
resolved.
Southwest
management
should also
track the
progress of the
new campaign
to determine if
it is successful
in maintaining
current
customer levels
and/or
generating an
increase in new
customers or
not. If this
strategy proves
unsuccessful
Southwest
should re-
188
evaluate and/or
adjust the use
of the new
promotional
campaign.
Southwest
management
should track
the progress of
these new
advertisements
to determine if
they are
successfully
maintaining
current
customer levels
and/or
generating an
increase in new
customers or
not. If this
strategy proves
unsuccessful
Southwest
should reevaluate and/or
adjust the use
of the new
advertisements.
189
Threat:
 Diminishing
pool of
candidates for
Southwest
employees
Strength:
 Advertising &
Promotion
 Intellectual
Capital
 Image
 Culture
 Safety
Southwest must
address the
direct threat of
the diminishing
pool of
candidates.
Southwest can
adequately
defended against
this threat using
their current
strengths.
Southwest needs
to keep current
employees as
well as recruit,
hire and retain
new potential
candidates for
hire.
Southwest can
use theirs
strengths in
culture, Image,
Safety record
and Intellectual
capital to keep
their current
employees and
hire future
employees that
will keep the
culture of
Southwest alive.
Southwest
must continue
to retain its
current
employees.
Secondly,
Southwest
must focus on
hiring the
right people,
who can fit,
live and
enhance their
culture and
continue it for
years to come.
These new
hires must be
found,
recruited,
hired, trained
and retained
for the future
of Southwest
to continue to
build and
maintain a
strong culture.
The job pool
is diminishing
due to the fact
To keep current
employees for
the future of
Southwest, they
must construct
continuous
learning
programs that
will continue to
refresh the
minds of
Southwest
employees, as
well as reassure
them that their
environment is a
safe place.
Continuously
building strong
relationships
with employees,
offering
incentives for
performance,
and involving
employees in the
company’s
future plans will
build a future for
employees and
Southwest.
Reducing the
need to recruit
from outside.








Intellectual
Capital (HRM)
University for
People
Career
Development
services
Culture
Committee
Marketing
Image
Reputation for
customer
service
Potential
candidates
Begin by
setting up new
training
programs and
enhance
existing ones.
By doing this,
it will build
current
employees
selfconfidence.
Happy
employees will
display the
company’s
culture, and
excellent
customer
service. This
should be done
during the third
quarter.
Next, the
culture
committee
along with
HRM or
“people
department”
should get
together and
reevaluate the
current
Compare
turnover rates
to competitor’s
turnover rates.
See if there
rates are
higher, lower
or about
average.
Conduct exit
interviews to
find out why
employees left.
Use this data
for future
hiring.
Gather up data
that will give
you the facts
on the number
of new hires
other airlines
hired and their
retention time.
Set deadlines
for the tracking
of this
information.
Measure
turnover rate.
If the rate is
less than 4.5%
then
Southwest is
doing a good
job at
retaining its
current
employees
and should
continue what
they are
doing. If the
turnover rate
rises over
5.0% then
Southwest
must
reevaluate its
current
training
programs and
their
interview
process. If
the turnover
rate increases
then
Southwest is
not retaining
current
employees
and new hires
190
Southwest must
also:
Continue to
involve
employees with
the company’s
goals, strategies,
and Promotion
& Advertising
plans.
By doing this,
Southwest will
ensure the
employees that
they are a very
important part
of Southwest
and their future
plans.
If they can
maintain current
employees then
the need to go
outside to find
new recruits is
greatly
decreased and
therefore the
diminished job
pools will be
less of a threat.
Southwest needs
that people are
afraid of
working for
the airline
industry,
employees no
longer feel
safe at their
job, the right
people are far
and few
between and
rivals are also
fighting for
the same pool
of candidates
to help build
their company
and make it
better for the
future.
Next
Southwest
should devise
top notch
tactics to
attract and
retain
employees.
Develop
interviewing
tactics that
focus more on
hard skill
The culture of
Southwest is
what drives the
company
forward, without
the right people,
and then
Southwest will
lose its
advantage over
rivals.
For hiring new
candidates for
the company,
Southwest needs
to create better
tests, interview
criteria, and
questions that
focus more on
the candidate’s
personality and
ability to solve
difficult
customer
scenarios.
Southwest’s idea
has been to use a
behavioral based
interview
process. This
process weeds
out candidates
interviewing
process and
come up with
better tests,
questions and
criteria to
target the right
employees
from outside.
It the right
employees are
hired the first
time around,
then they can
last for years to
come.
are not
lasting. Find
out the reason
for this
happening.
Advertise and
promote via
their website to
make it known
that Southwest
is looking for
people who
can fit, live and
enhance the
company
culture.
Culture is the
key to SW.
Without
culture then
Southwest
would not be
where it is
today. They
191
to devise tactics
to attract top
notch employees
and retain them
for the long term
future of the
company.
abilities.
Southwest
needs to
formulate
structured
continuous
learning
Southwest needs programs for
to Develop
new hires and
interviewing
existing
tactics that focus employees.
more on hard
These
skill abilities.
programs
should spread
Formulate
the Southwest
structured
spirit, culture,
continuous
and values to
learning
their
programs.
employees.
By doing this,
Southwest needs employees
to perform exit
will continue
interviews so
to provide
that they can
excellent
asses what could customer
have been done service;
differently.
values; and fit,
live and
Formulate data
enhance the
for revising new company
tactics for future culture.
hiring.
Lastly,
Southwest must
with the wrong
criteria. This
idea needs to be
re-evaluated to
ensure that the
right people are
brought in to
live and fit the
Southwest
culture. If the
right people are
brought in the
first time
around, then
there is no need
to go back to
recruit new
hires.
need to
continue to
retain current
employees thus
eliminating the
need to go
outside to hire
from the
diminishing
pool of
potential
employees.
Southwest needs
to use their
strengths in
Advertising and
Promotion to
attract these
potential
candidates. The
use of their
website is a
great place to
start. Using online
communication
to speed up the
identification
192
alleviate current
employees
concerns as well
as future
candidates
concerns on
Terrorism. They
need to be
reassured that
the company is a
safe place to
work
and matching of
available
Candidates will
assist Southwest
in finding the
right match.
Encouraging
slogans, is one
way to alleviate
potential
concerns on
terrorism and to
bring in the
employees that
Southwest is
looking for.
193
Threat:
 Number of rivals
and their relative
size
Strength:
 Advertising and
promotion
 Ability to
continuously
refine service
 Financial Position
 Image
 Culture
Weakness:
 Product Breadth
and Depth
Southwest
airlines needs to
use their clever
and innovative
advertising and
promotions to
draw more
customers to the
airline. Service,
from the time of
check in to the
time of deplaning
needs to be finetuned. This
includes
customer service,
maintenance and
baggage
handling.
Southwest has a
strong financial
position that will
allow them
compete with
their rivals by
wisely spending
in order to
capture market
away from their
rivals. Southwest
needs to take
advantage of the
image it has built
over the years as
a friendly, low
Medium. Since
the rivals will
always be a
factor in the
operation of the
airline the
actions taken
will be an
ongoing
process.
Southwest will
expand their
advertising and
promotional
campaign in
order to pull
more customers
away from their
rivals and bring
them to
Southwest.
Southwest will
have an action
plan developed
to asses the
current status of
their service and
refine those
services to make
them second to
none.
Southwest will
maintain
profitability in
order to expense
for the changes
that will take
place.
Southwest will
use their image
as a fun, low cost
airline to attract
Southwest’s
required
resources will be
that of their
advertising and
marketing team,
financial team
and the resources
of their
intellectual
capital. All of the
employees will be
a required
resource since the
culture is such a
key to the success
of the airline.
By June of
2002 Southwest
will have a new
marketing and
advertising
campaign that
will freshen the
image of the
airline.
By June of
2002 the
turnaround time
for the aircraft
will be reduced
to 15 minutes
from 20
minutes.
By the end of
2002 there will
be an increase
of 2% in the
overall profit
for the airline.
Southwest will
hire an
additional 2000
employees to
supplement the
already existing
airports and
will be used to
man new
Southwest will
have an
increase of 7%
in passenger
market share
by the end of
2002.
Southwest will
increase the
annual profits
by 2% by June
2002.
Southwest will
maintain its
hold on being
the number
one airline in
customer
service
profitability
and on time
service in the
United States.
Even though
they will be
smaller than
their rivals,
Southwest will
be known as
the friendliest
and cheapest
airline to fly in
the United
States, offering
wide
geographic
coverage in the
United States.
194
priced and
professionally
run airline.
Southwest’s
superior culture
has to be the
main focal point
when pitting
their strengths
against the larger
rivals.
Southwest’s
mission as an
airline is to
provide low cost
no frills service
in the continental
U.S. By
continuing to
focus on these
strengths
Southwest will
be able to
compete with the
large number of
rivals no matter
how large they
are. In extending
their product
breadth and
depth, Southwest
can take market
segments away
from rivals by
offering an
expanded range
more leisure
passengers to
leisure
destinations.
Southwest will
hire more
employees to
extend the reach
of their culture to
more
destinations in
the U.S.
Southwest will
reevaluate and
expand their
service, not only
in flight but to
more
destinations.
destinations.
Southwest will
increase their
passenger load
by 7% by the
end of 2002.
Southwest will
need to expand
its service with
new
destinations and
innovative
services. Both
on the ground
and in the air.
195
Threat:
 Consumer
confidence
Strengths:
 Image
 Advertising &
Promotion
 Culture
 Safety Record
of services and
destinations.
Use Southwest’s
already strong
image to include
safety.
Use Southwest’s
strong
advertising and
promotion to
promote an
outstanding
safety records
and customer
service to
increase the
public
confidence in air
travel.
Use their
corporate culture
to instill
confidence.
Use the safety
records of
Southwest to that
it has always
been a safe
airline to travel
with.
Top priority
should be on
the public’s
confidence in
air travel
before more
revenue is lost
to the decrease
in passenger
traffic for the
airline industry
Analysis of
Southwest’s
safety records,
procedures, and
policies need to
start right away.
At the same time
your analyzing,
Southwest needs
to convey to their
employees that
they are a safe
airline to work
for and fly with.
If the employees
gain confidence
then they can
successfully pass
on their
confidence in
Southwest. Also
retrain
employees on
new procedure
and policies so
they are up to
date with current
standards.
Next promote
what you have
found from the
safety reports,
for instance the
fact that there
-Strong
Advertising and
promotion by
increasing the
spending from 26
cents per average
seat mile to 30
cents per average
cent mile.
-Labor, to analyze
the records,
procedures, and
policies.
-Retraining
programs to all
employees.
Analysis of the
safety records,
procedures, and
policies needs
to be done by
the end of the
month.
Retraining
should start
next month and
be completed
by the end of 3
months.
New
advertising and
promotions
promoting the
expanded image
of Southwest
needs to start no
later than 1
month. It
should continue
until the
assurance in
flying is reestablish.
Internal:
-Increased
passenger
traffic.
-Increase in
employee’s
confidence in
Southwest.
External:
-Public trust in
air travel
returns.
-Increased
number of
passengers in
industry.
-Industry
leader in
market shares.
-Satisfied loyal
customers.
-A strong and
positive image.
Breakeven
load factor
reaches the
level of
74.6%. The
level averaged
before the
terrorist
attacks.
Southwest
continues to
initiate service
to 1-2 airports
a year.
Growth rate
increases from
1% to 2%.
The public’s
confidence
needs to be
raised as soon
as possible.
196
has been no
plane crashes.
While promoting
the safety aspect
of Southwest to
increase
customer
confidence, also
promote the
strong customer
service aspect.
By doing so, the
aspect of safety
with the lowcost/lowprice/no-frills
image will
increase the
public’s
confidence in
Southwest’s
overall image.
197

Threat:
E-commerce
/technology
Strength:
 Service /Product
Innovation
 Advertising &
promotion
 Intellectual
capital
Weakness:
 Product breadth
& depth
 Multi-country
coverage
 No baggage
transfer out-side
SW
 Lack of intra
airline services
Southwest needs
to use their
strengths to
defend against
the threat of
competitors
using ecommerce and to
overcome or
strengthen their
weaknesses.
They have been
intellectually
strong and need
to use that
strength to be
innovative in
building up a
defense against
the threat of
rivals by new
product
innovation,
advertising and
promotion. They
need to enhance
their existing or
set up a new web
site that caters
just to the needs
of the business
traveler with
more options
available and
packages that
make it quick
The threat is a
high priority
for Southwest
since the
possibility of
losing market
share to
competitors as
well as ecommerce web
sites high. Ecommerce
enables the
customer to
comparison
shop and
threatens the
market share of
Southwest.
Southwest
needs to
implement a
plan
immediately
before market
share is lost to
competitors.
Review recent
changes in how
competitors are
booking their
flights as well as
checking their
web sites to see
what they are
offering in terms
of hotel
accommodations,
and other
services.
Find out where
travelers are
going and where
they are coming
from, as well as
customer
preferences
regarding, hotels
and car rentals.
Work with the R
& D and the
finance
department, for
their input on
what financial
support will be
needed as well as
the cost involved
and will it be
cost effective to
offer this new
service.
Marketing, R &
D advertising,
technical and
financial support.
We estimate
$200K in
advertising
expense to market
the new service.
We estimate
$50K to cover
development of
initial service via
the internet.
We estimate
$50K for R & D
to check the
competition and
see what they
offer as well as
what the market
is looking for and
review recent
trends.
Funds to support
the project will be
offset by the
gains in revenue
over the next
year. Within one
year the
organization will
Complete
internal
consultation
with necessary
departments for
feasibility by
the fourth
quarter of
current year.
Complete
external study
to avoid the risk
of being
blindsided by
surprise actions
of rivals by the
first quarter of
the next year.
Complete
proposal and
present to
management by
the first quarter.
Obtain
management
approval by the
first quarter.
Service should
be implemented
and tested for
technical errors
by the end of
Time to
Market.
Meet sales and
customer
satisfaction
objectives.
Compare
customer
satisfaction
levels
competitors
offering similar
service.
Compare and
measure
market share
increase to
rivals as well
as to previous
years of
Southwest.
Justification of
continued
existence of the
service by
conducting
research
studies both
internally and
externally.
Initial product
brought to
Market no
later than
second
quarter.
Cost of service
should not
exceed
amount
specified in
project by
more the 3%.
Customer
satisfaction
levels should
be high
relative to
using
competitor’s
service.
Market share
to increase and
exceed past
levels of
Southwest as
well as exceed
levels of
competitors.
Compare cost
increase levels
to market
198
and easy to book.
They need to set
up this web site
so that a
customer can
book their hotel
and rental car as
well as their
flight all in one
shot. They also
need to set up a
link to an
international
airline, that they
must form an
alliance with, so
that they can
offer a service of
booking a
connecting flight
with an
international
airline for the
convenience of
the customer.
This would also
enable them to
keep the
customer on their
own web site and
not have a need
to search the web
site of
competitors. This
would increase
their weakness of
Meet with the
marketing
department to
discuss
advertising and
promotion of this
new service and
what costs are
involved.
gain market
share.
the second
quarter.
share increase
levels.
Check
profitability
ratios.
Consult
technology
management to
see if the
capability exists
to add this
service to their
current web site
or if new
software will be
needed and what
costs are
involved.
Write a proposal
to set up a
strategic plan to
implement the
program and
how it will be
marketed.
Management
should check
their options on
which hotels and
199
product breadth
and depth by
offering the
customer what
they want: ease
and convenience.
Southwest will
make it all
available to them
in one easy step.
Southwest needs
to create this new
web site to deter
the customer
from going to
other web sites
of competitors
and travel
agencies for
booking trips.
Southwest has
always been able
to use unique and
clever
advertising to get
the attention of
the customer,
and they need to
use this strength
to create a new
web site and
promote it. They
should focus
their promotion
of the business
site, as “why
car rental
services to form
alliances with as
well as an
international
airline service
and set up
meetings with
the management
of those
organizations to
discuss their
options and what
they can offer in
terms of
discounts for
using this
service.
Determine
specific,
measurable and
time bound
objectives for the
plan.
Present the
above plan to
upper
management for
approval.
200
settle for the next
best thing, be
there” video
conferencing is
too impersonal.
This is especially
true in the sales
profession,
where face to
face interaction
has a better
impact when
selling. It
increases your
selling power. It
also is better to
conduct business
meetings with
face to face
contact to build
better, more
personalized
relationships.
Southwest needs
to use their
intellectual
capital to work
on researching
various lower
cost hotels and
car rentals so that
they can offer
more to their
customers than
their rivals and to
gain the edge
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over competitors.
They need to
consult with their
employees at all
levels of the
organization for
their input of
these new
services.
Southwest needs
to consider
baggage transfer
to other airlines
as a new service
as well as flight
transfers for
passengers to
other airlines.
This will
strengthen their
weakness of
intra-airline
services. This
will increase
their costs,
however, it will
increase their
market share at
the same time to
cover those
costs. By using
their intellectual
capital in areas
of cost,
advertising and
promotion,
202
research and
development,
and product
innovation, they
will be able to
increase market
share as well as
keep costs down
as they have in
the past.
Southwest
should also form
an alliance with
an international
airline service
that can also be
accessed through
their web site for
out of the
country travelers
who are visiting
their website.
This will enable
them to keep the
customer away
from the travel
agent and rival’s
web sites by
offering this
service.
Although
Southwest does
not offer multicountry service,
by using the
above strategy,
203
Opportunity:
 Growth
opportunity as a
result of 9-11
Strengths:
 Low operating
cost
 Service
Innovation
 Technological
know how
 Advertising and
promotion
 Product
innovation
 Intellectual
capital
 Financial position
 Image
Weaknesses:
 Product Breadth
and Depth
 Multi-country
coverage
they will increase
their market
share within their
current
geographic
service area to
strengthen their
position.
The objective is
to take advantage
of the present
downturn in the
market by
making changes
which will put us
in a better
position to
increase our
market share
and profitability
when the market
rebounds.
Southwest
should base
their
implementation
schedule upon
the ability of
an item to
provide the
quickest return
on investment.
Advertising,
direct sales and
other methods
of promoting
Proposal is to
their business
take advantage of require the
their strength in
least
product
investment and
innovation and
will provide
their financial
the quickest
position- Retrofit payback.
planes and
terminals adding Offering meal
power and
on board
communication
planes requires
ports for laptops. coordination
with outside
Working with
Marketing and
Finance, write a
preliminary
proposal to
justify the
investment.
Present to
management for
approval and to
obtain limited
funding. The
limited funding
would contract
Boeing to
evaluate the
feasibility of
changes to the
airplane. The
money would
also fund the
entire advertising
and direct sales
programs.
If Boeing’s
findings are
Marketing,
advertising, sales,
management,
technical and
flight support
personal.
Funds for capital
improvements.
Funds to
implement this
project will be
raised by
borrowing upon
lines of credit.
We feel
Southwest’s
would not have
problems
borrowing
money. Rational
is their stock
dropped the least
as a result of 911
which shows
investors have
Complete
proposal and
financial
justification in
Q1
Internal
BenchmarksMaintain turn
around times of
planes.
Obtain limited
funding from
management in
Q1.
Start
advertisements
promoting
safety and
customer
satisfaction
record in Q1.
Boeing
completes
feasibility study
of changes to
plane in Q2.
Obtain balance
of funding for
capital
Net operating
profit
increases.
Increase in the
number of
business
related
travelers.
Turn around
times should
be measured
in Q3 and Q6.
They should
not exceed
average time
met when
project was
approved.
Annual net
operating
profit to grow
by 4M above
present plan
during Q6
after project
approval.
Number of
business
travelers to be
15% above
pre-project
level by Q3.
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Taking
advantage of the
strength of their
financial
position- Retrofit
planes increasing
size of overhead
compartments to
add capacity for
carry on luggage.
Taking
advantage of
their strength in
service
innovation- Add
optional meal
service (pay per
meal) for flights
over 2 hours in
length.
Strengthen their
weakness in
product breadth
and depth- the
above proposed
changes provide
frills which will
appeal to the
business class.
Taking
advantage of
their strength in
promotions and
sources and
hiring
additional staff
so this would
be second.
Changes
requiring
investment in
capital
equipment will
take the longest
to implement
and provide a
return on
investment.
For this reason
they are the
last task to
work on.
favorable, submit confidence in
a proposal to
their ability to
management for pull through this.
the balance of
the funds needed.
improvements
from
management in
Q2
Maintain
operating cost
per passenger
mile.
Sign contracts
with food
service
company in Q2.
Initiate food
service in Q3
Complete
capital
improvements
Q6 (6 quarters
after project
initiated).
External
BenchmarksIncrease
market share.
Maintain
customer
satisfaction
record.
Level to
exceed 25%
above preproject level
during Q7.
Operating cost
per passenger
mile shall not
exceed $.0772
plus cost of
living increase
per average
seat mile when
measured
during Q3 and
Q6
Southwest
operating
revenues to
exceed 16%
of total market
revenue by Q7
Southwest
shall maintain
#1 position for
flight arrivals,
mishandled
baggages and
Complaints
205
their low
operating costsInvest heavily in
advertising to
promote business
travel and raise
customer
awareness of
their past
achievements
including their
safety record.
throught entire
project.
Taking
advantage of the
strength of their
intellectual
capitalImplement a
direct sales force
to call on
business
accounts.
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APPENDIX A: STAKEHOLDERS WORKSHEET
stakeholders
Customers
Competitors
specific companies,
Groups, and individuals
 Business travelers
 Fliers looking for
cheaper rates
 Fliers wanting
superior customer
service
 Fliers wanting to
avoid much of the
traffic hassles in
traveling
 Fliers wanting to
get to certain
destinations
 Passengers in
general









United
American
Delta
Northwest
Continental
US Airways
TWA
America West
Alaska
type/nature of the relationship/
what we do for each of them
needs
how we satisfy those needs
Southwest Airlines provides air
travel to customers for cash.
Southwest’s customers are treated
with same type of respect that
Southwest employees would like to
receive. Southwest provides
superior customer service in the
airline industry. Southwest’s
relationship with their customers is a
give and take process, where
suggestion made by customers are
taken seriously and careful
consideration is given to ideas
customers may give to improve their
service. Southwest believes the
stronger their relationship with their
existing customers, the more word of
mouth business they will get through
their superior customer service.
Customers want to get
to where they are
going on time with the
least amount of hassle.
Such as: they don’t
want their baggage
lost, and an on time
arrival. Customers
want to be respected
and most of all,
customers want a
pleasant experience
while traveling.
Southwest has won awards
for their record for their on
time arrivals, the least
amount of baggage
mishandling and the fewest
customer complaints.
Southwest is in a highly competitive
industry where rivals are always
trying to take away market share.
The level of competition is intense.
Southwest needs to
maintain and
strengthen its position
as a leader in the
industry.
Southwest tries to provide a
unique flying experience by
allowing employees to show
their personalities. This
helps Southwest create a
strong employee/customer
relationship.
Southwest listens to customer
suggestions and complaints
to help them react in positive
ways which they see as ways
to improve their customer
service.
Southwest will be able to
maintain and improve its
position by continuing the
innovative strategies that has
got them to where they are
now.
207
Employees







Board of Directors
CEO
Top Managers
Management
Pilots
Maintenance
Flight Attendants
Employee/employer relationship.
The channels of communication are
open within this relationship.
Employees are empowered to make
suggestions and are seriously
considered for company policy. In
return for this respect, competitive
wages are given and employees
display a good outward attitude
towards their job and their
customers. The relationship between
the company management its
employees allow for ‘very high labor
productivity and very low labor
costs’. The company understands
the needs of employees and tries to
allow for empowerment, such as
when Colleen Barrett wrote a memo
that stated ‘no employee will be
punished for using good judgment…
when trying to accommodate a
customer’. Employee/customer
relationship. Southwest was
convinced that displaying its spirit to
customers was the key to
Southwest’s competitive advantage
over other airlines. ‘Employees
take price in doing their part to
achieve good on-time performance.’
Since you have employees taking
pride in their job, it is an attribute
that is reflected by the customers
they serve.
Southwest understands
that their employee’s
needs are competitive
wages, monetary
benefits, health
benefits, training and
respect.
Southwest provides
competitive wages as their
pay scales are close to the
industry average.
Southwest’s ‘benefit
packages were good relative
to other airlines’. Southwest
provides profit sharing to
nearly all of their employees.
The employees’
empowerment to make
suggestions is a sign that they
matter to their company. The
fact that Southwest is willing
to listen to suggestions made
by employees is a sign of
respect. Training is provided
to new hires at Southwest’s
People Department. All
employees attend courses on
the corporate culture to try to
help them think as they want
all Southwest personal to
think. Southwest focuses on
trust, harmony and diversity.
208
Shareholders
 Investors
 Employees
 Consumers
Southwest’s shareholders own the
company. The shareholder’s expect
the company to perform at a high
level to increase their wealth.
Southwest must
provide their
shareholders returns on
their investment. The
Shareholders may be
involved with the
business in terms of
voting privileges on
company goals,
missions, objectives
and strategic plans.
Southwest satisfies the
shareholder’s need by being a
profitable company over the
last 28 years and expanding
into new areas to gain market
share and become an industry
leader. Price per share
coincides with these trends
and increase, making the
company more valuable.
The stock options
granted to employees have
given them reason to try
individually to add value to
the company by performance
measures; not all measures
are based totally in low cost.
209
Community
 Airports and their
staff
 Local
Governments
 Businesses
These groups depend on the
company to continue to produce
stable revenues and attract large
amounts of patrons—both of which
will help to provide steady tax
revenues and residual business to
capitalize on.
Airports and their staff
need cooperative and
successful airlines to
provide them with
stable income and foot
traffic. Local
governments need
stable income from
local businesses to
keep up cash flow for
the communities.
Local businesses need
a lot of consumer
traffic to give them as
much opportunity to
provide their services
and sell their goods.
Southwest satisfies the needs
of the airports by continuing
their business in a stable,
cooperative, and profitable
way. This fulfills the needs of
the local governments as
well. And in the same
manner, Southwest’s success
and ability to attract patrons
increases the opportunity for
local businesses to attract
those customers as well. For
example, customers that are
flying Southwest are
potential customers for the
businesses within the airport,
as well as for businesses in
the general area where
Southwest flights arrive and
depart from.
Financial
Institutions
 Investment
Bankers
 Financial
Institutions
 Banks
 Private Capital
The relationships between Southwest
and these financial institutions, in
general, are of a business nature.
Funds are made available to fulfill
both the needs of the lender and
borrower.
The financial
institutions need to
find lending
opportunities that will
provide interest
revenues. Southwest
needs to find lenders
that are willing to
invest in their business.
Southwest meets the needs of
the financial institutions by
providing an investment
opportunity that is reliable,
without much risk, and will
result in interest revenue.
210
Strategic Alliances
 Vendors
 Washington
Lobbyists
 Boeing
 Airports
 Car Rental
Companies
 Hotels
The collaborative relationship
between Southwest and these
strategic alliances form a
cooperative agreement between both
parties.
The vendors (including
Boeing) need to sell
their product and are
willing to offer
discounts to attract
alliances and loyalty
while Southwest needs
inventory and fixed
assets at the lowest
cost possible.
Washington lobbyists
need funding and
support. Also, these
lobbyists and their
political figures are
constantly in need of a
means of business
travel. Southwest
needs political backing
in some legal and
regulatory matters.
Airports need to
collect fees from
airlines to enhance
cash flow. They also
need consumer traffic
in and out of the
airport to account for
additional funds.
Southwest needs a
place to conduct their
air transportation
The needs of both Southwest
and vendors are satisfied by
the purchase of items from
those vendors at discounted
prices.
By providing loyalty and
support to lobbyists, and
perhaps deep discounts on
travel, Southwest is able to
satisfy the needs of these
lobbyists in exchange for a
voice in the political world.
Bringing in customers in
droves and paying airport
fees, Southwest is fulfilling
the airports’ needs for
various types of revenue.
In an effort to kill two birds
with one stone, Southwest
has allowed hotel and car
rental companies, in the past,
to offer discounts to
Southwest customers in
combined specials. This has
satisfied both needs of
travelers and the lodging and
car rental companies.
211
business.
Car rental companies
and hotels need
customers.
Southwest’s customers
need lodging and
ground transportation.
Govt. and
Environmental
groups
 Texas Aeronautics
Commission
 Federal Aviation
Agency
 U.S. Department
of Transportation
The government and environmental
groups provide structure, regulation,
and oversight of the entire industry.
These groups need to
fulfill their mission of
setting forth rules to
regulate the activities
of the air
transportation
industries and such.
They basic need is to
ensure order is
maintained.
To satisfy the needs of these
groups, Southwest abides by
the rules that are set in place
without objection or creating
complications.
212
APPENDIX B: ANSWER TO PANEL’S QUESTIONS
1. Why do you recommend that Southwest go into vacated markets? Why not take our “go get
‘em” attitude to more profitable markets where we know we can make money?
We understand the concerns of the management at Southwest Airlines for my recommendation to
enter vacated markets. The concept, however, we believe is fairly straightforward. We do not
suggest that Southwest enter any market, even those that would be “obviously” profitable, blind
eyed. We feel that this is an opportunity for Southwest to essentially give a knockout punch, for a
share of the market, to your rivals. Most of your competitors are struggling to keep their heads
above water after the events of 9/11. Many are going to need the bailout loans to function at a
level just above bankruptcy. Although Southwest has lost a considerable amount of revenue to
these circumstances you are still in superior standing to your rivals.
The main point of this segment of our recommendation is that this is an opportunity to saturate
the market with your presence. As we said in the presentation, when people think of flying
domestically, the airline that should immediately come to mind is Southwest Airlines. You are
also aware that there are over 100 cities vying for your services, some of these cities may be ones
that you thought were not profitable because other airlines were already serving these cities. Now
is the time to have your marketing department research which new destinations are right for
Southwest.
In conclusion, our recommendation, that Southwest differentiates or distinguishes itself from its
rivals is just that. Southwest is in a financial position to take chances on new vacated markets that
may have potential. After all, not many industry analysts believed that Southwest could make a
dent in the Texas market flying out of the smaller Houston Hobby or Dallas Love Field. This is
one of Southwest’s biggest strengths. Your ability to make work what many do not think will. We
recommend that you use this strength to your advantage when the time is right. And that time is
now.
2. With a 5% turnover rate, that would be approx. 1500 people. Does your recommendation
for hiring 2000 more people include these 1500? Is it a constraint to have to weed thru
50,000 people?
Yes, the hiring of 2,000 employees would be an addition to the 1,500 that were lost to the 5%
turnover. So a total of 3,500 employees would need to be hired. Having to weed through 50,000
candidates is a time constraint setback but by doing this and interviewing more candidates, the
new selection process will ensure that your company weeds out the right candidates. Although
you may need to interview more people, it would be the best choice. This way you can be sure
that your selections fit the selection process as well as the background checks. Since September
11th, 2001, employee and customer safety is a very high priority therefore; background checks
and stricter security measures must be taken when hiring new employees for the future.
213
3. What are the demographics of the population?
Consumers of the airline industry vary in age. Elderly people are less likely to fly, in general,
because of fear, health, and income. Children and teens through age 18 do not purchase tickets for
flights on their own. This leaves the general age categories of early adulthood to late middle age
and everything in between as the airline industry’s main target age demographic.
The actual population of the United States is increasing every single year. The age of most
customers in the industry is between 15-64 years. There are nearly 194 million people in the
United States that lie in that age group (66.7% of the entire population). The male to female ratio
in that range is practically 1:1. The median age of all of the population is 35.8 years of age and
the life expectancy is 77.14 years. The growth rate, itself, is 0.92%.
Airline customers include all education levels and geographic locations. The occupations of
consumers vary greatly, however white-collar business people, sales people, and executives
account for many repeat and frequent fliers. Many people are staying single long and starting
families later.
The average annual per capita income is $37,000. The population’s living expenses are constantly
rising. However, their income increases at a slower rate. Because of rising living expenses, the
population is moving away from expensive metropolitan areas and into sparsely populated, less
expensive areas of their states and of the U.S. in general.
4. What are the societal values in the changing economy? How does consumer confidence
relate to the societal values?
A misunderstanding of the concept of societal values in this analysis occurred. However we did
reevaluate consumer confidence and found it does not fit into this opportunity of societal values.
Instead it creates a new threat in the external environment that we have readdressed in the
corresponding action plan.
214
5. Is it feasibility from a technical and cost standpoint to retrofit the overhead compartments
so they can accept larger suitcases?
Based upon a study we completed, there is adequate headroom to increase the size of the
overhead compartments to accept a larger size suitcase. We feel this will not affect the overall
weight of the plane because we are redistributing the weight we would have carried in the cargo
department to the overhead compartment.
While we believe it is feasible for the weight to be re-distributed to the upper section of the
fuselage, we will not know for sure until we contract Boeing to evaluate changing the existing
overhead compartment design. As part of this evaluation Boeing will run a Finite Element
Analysis to determine the affect it will have on the structure of the plane.
Our cost “estimate” which will be firmed up after Boeing completes the design proposal is:
$1,000,000 for Boeing to complete the design proposal, and if feasible build the
required tooling to produce the components needed for larger overhead
compartments. Since the laptop power and communication ports would be designed
into the overhead compartment, they are included in this estimate. We feel Boeing
will share in the tooling costs because we will not claim exclusive rights to the tools.
$7,000,000 total cost to retrofit the planes. This is based upon an average cost of
$20,000 per plane times 353 planes. If needed to hold this budget, we could reduce
our cost by using wireless communication and eliminate the power outlets. We feel
we can hold this cost down by having the Southwest maintenance crew under the
direction of Boeing employees retrofit the planes. The Southwest maintenance crew
has a lot of time on their hands due to the depressed market.
We feel by selling the right to run pop up advertisements we can find a partner who will bare the
cost to retrofit the terminals for wireless communication. We would not install power outlets
because we feel cables used by the passengers to access the power would be run in a hazardous
manner. Wireless routers are presently available in many common area’s today and are not
expensive to install or maintain.
215