Module 2
Strategic Planning
In this module, we will examine the basics of
management strategy by identifying the ways
that Southwest is able to develop and sustain a
competitive advantage over other airlines. To
do this, we will follow the strategic planning
model outlined here. As we examine each of
these steps, we wil come to understand the
strategic and tactical decisions Southwest has
made that have helped it develop and sustain a
competitive advantage over other airlines.
Sidebar: MODEL of
framework; see attachment
What is a strategic plan?
Strategic plans are company-wide, and concern
the “big picture” issues of the organization.
They are the long-term, general goals the
organization wants to accomplish as it interacts
with its competitive environment. Strategic
plans may be best understood when we
compare them to tactical plans. Tactical plans
are specific and detailed. They indicate exactly
what people, systems, and products a company
will need to accomplish its goals. Strategic
plans are those overarching goals, or the
general direction the company wants to head.
Strategic plans answer the question, “Where are
we going?” On the other hand, tactical plans
handle the question of “How will we get there?”
Both are important to the success of an
organization.
How are strategic plans formulated?
Before a company can decide where it is going,
it needs to figure out where it has been. The
first step in developing a strategic plan is to
identify the company’s current mission and
goals. What does the organization do? What
are its current strategies?
SIDEBAR: You use strategic
and tactical planning in your
everyday life. For example,
you probably have some
general life goals such as
having a good job or living in a
particular style. This is your
strategic plan. Going to
college is a way to achieve
those goals you have set for
yourself. College, then, is part
of your tactical plan because it
is a way to achieve the goals
in your strategic life plan.
Southwest’s Mission and Objectives
Southwest’s Vice President of People Libby
Sartain describes Southwest’s mission this way:
"The truth is that we have no secrets. And it
doesn’t take business consultants or Ph.D’s to
analyze our strategies. They are really quite
simple. Our operation is focused on point-topoint service in short haul markets with
conveniently timed flights. Our average trip
length is 431 miles, or about 80 minutes. We
keep our costs and our fares low by
maintaining the highest asset utilization and
employee productivity of any major U.S.
airline. Since our trips are short, we offer single
class service with open seating and beverageand-peanut-only service on most flights. We
operate only one aircraft type, allowing our
people to specialize in flying and maintaining
only 737s. ... Our planes are scheduled to
minimize time on the ground at the gate, thereby
reducing the number of aircraft and gate
facilities needed. ... We offer low fares, frequent
flights, and a casual everyday atmosphere.”1
Southwest chooses the airports it will fly into
carefully in order to sustain this strategy. The
company moves into smaller airports in
metropolitan areas. At its inception, Southwest
established itself at Dallas’ Love Field, which
was less expensive and less congested than the
Dallas Fort Worth airport. Except for RaleighDurham North Carolina, all airports Southwest
flies into are considered “secondary.” These
include Oakland, CA rather than nearby San
Francisco, and Midway Airport in Chicago as
opposed to the much larger O’Hare Airport.
Though these airports are usually further away
from the city center than their larger
counterparts, people appreciate them because
they are less crowded and there is less air
traffic, so delays are less likely.
1
Sartain, Libby (1998, November). Why and how
Southwest Airlines uses consultants. Journal of
Management Consulting, v. 10, pp. 12-17.
Click on phrase or
sidebar: In other words,
Southwest specializes in
relatively short flights. This
means that they do not serve
meals to passengers, which
significantly reduces the
amount of time it takes them to
clean and load a plane so that
it is ready for another flight.
Airplanes only generate a
profit for an airline when they
are in the air filled with
passengers. Because
Southwest’s planes spend less
time on the ground than those
of other airlines, they generate
more profit for the company.
SIDEBAR: Current map
of Southwest routes
(from SW web site)
Southwest also targets locations where the
winter weather is relatively mild so that their
ground crews have the best possible conditions
in which to service planes quickly. This choice
of airports is a tactical plan that provides the
mechanism for Southwest to fulfill their more
general strategic plan of providing convenient,
low-cost, friendly air travel.
SIDEBAR: Fast Fact: There
are no assigned seats on a
Southwest Airlines flight.
People choose seats as they
board the plane on a “first
come, first served” basis.
Threats and Opportunities in Southwest’s
Environment
Once an organization has defined its current
position, the next step is to analyze its
environment. We can identify both threats and
opportunities facing Southwest in this
environment.
One threat currently facing Southwest comes
from new federal legislation. On October 1,
1998, airlines began paying a “head tax,” a fixed
amount to the government for every customer
that they serve. Because Southwest’s planes fly
more and shorter routes, they carry more
passengers on a daily basis than most airlines.
Consequently, their short-haul strategy means
they were hardest hit by the new tax policy and
earned less profit per passenger than in prior
years.
Another potential threat comes from Southwest’s
competition. Competitively, the airline is
somewhat more vulnerable to smaller carriers
than “giant” well-known airlines. When
Southwest enters a market, it drives down
average fares as competitors try to retain their
customers. Those competitors typically face the
choice of either significantly paring down their
operating costs or leaving the market
altogether.2
SIDEBAR: When Southwest
enters a new airport, it actually
increases the number of
people who fly from there.
Certainly Southwest takes
passengers from other airlines
as well, but they also
encourage people to fly
distances that they otherwise
would have driven.3
2
3
McKenna, James T. (1996, January 22). Carriers in
Florida brace for Southwest. Aviation Week & Space
Technology, v144n4, pp. 44-45.
“The ‘other’ Southwest
effect.” (1998, July). Air
Transport World, v35n7, p. 52.
On the other hand, smaller airlines focus on a
small geographic area, and are often able to
provide short flights within a particular region at
much lower cost to customers. These regional
airlines have some cost advantages over
Southwest because they hire fewer people and
pay less for aircraft maintenance. They tend to
lease, rather than purchase, the airplanes they
need. They can also contract out some services
such as airplane maintenance and pilot training.
This allows them to compete with Southwest’s
low fares and still make a profit.
SIDEBAR: Because of its
strong cash flows, Southwest
has been able to buy the
additional airplanes it needs
without taking out loans since
1996. Though the trend of no
outside financing may not be
able to continue, the company
is committed to keeping its
debts low.
One advantage Southwest has over these
smaller airlines is its outstanding relationship
with managers at the various airports the airline
serves. Over 100 airports around the U.S. have
approached Southwest about adding their
location to the airline’s flight routes. Southwest
can increase customer traffic at an airport by
300-400%, so they are attractive tenants and
typically get the gates, space, and control they
want at the negotiating table.
Sidebar: As Southwest Chief
Financial Officer Gary Kelly
puts it, “We take control over
our destiny, which is why we
use the boutique airports. We
like places where we can be
the big fish.”5
Other external opportunities have contributed to
the company’s profitability. Southwest enjoyed
fourth quarter 1998 earnings that were 36.4%
greater than in 1997. Despite the increased
taxes that went into effect in October, 1998
Southwest’s operating revenue increased
significantly in this period because of lower fuel
prices.4
5
“Southwest Airlines Reports 1998 Earnings Up 36.4
Percent.” Press Release, January 21, 1999.
http://www.iflyswa.com/press/1998earn.html
4
Fisher, Liz (1998, July).
Success in a nutshell.
Accountancy, v. 122 Issue
1259, pp. 28-29+.
Analyzing Southwest’s Strengths and
Weaknesses
Once the opportunities and threats of the
external environment have been considered, a
company needs to look within to identify its own
strengths and weaknesses. Ideally, they will be
able to design a strategy that capitalizes on the
things that they do well while minimizing the
impact of its flaws.
Though Southwest prides itself on being a “low
cost airline,” it does not consider pricing
structures alone to be its most important
competency. Instead, CEO Kelleher says
Southwest’s success is due to its excellent
customer service. He says, “Southwest Airlines
has been focused on customer service from the
beginning. We’ve always tried to provide more
service for less money. In contrast to this
approach, consider People’s Express. People’s
Express was formed by folks who had been with
Texas International in Texas and who planned to
create, in effect, the Southwest Airlines of the
Northeast. That was their objective. But they
took the cost factor, pushed it to the wall, and
wound up with an operation that was absolutely
unlike Southwest Airlines in terms of the
efficiency of its reservation center, the on-time
performance of its airplanes, the adequacy of its
baggage handling, and the approach to
customer complaints.”6
What sets Southwest apart from its competitors
are Southwest's people. As we will see in future
modules, the airline has developed a unique
management philosophy that has created
motivated, creative, and productive employees.
The ability of these individuals to provide
excellent service to customers is, indeed, the
core competency of Southwest Airlines.
6
Kelleher, Herb (1998, May/June). Customer service: It
starts at home. The Secured Lender, v. 54 Issue 3, pp.
68-73.
SIDEBAR: Tom Peters is one
of the most knowledgeable
observers of American
businesses. He says that
Southwest succeeds because
of three “extra special” things:
“1) being crazy enough to
follow an unorthodox vision, 2)
being courageous enough to
allow people to have fun and
be ‘real people’ who love and
care at work, and 3) being
smart enough to recognize
that their most valuable assets
are their people and the
culture they create.
Southwest never forgets it is in
the people business – the
company just happens to
operate an airline.”7
Click on core competency: A
core competency, also known
as a “distinctive competence,”
is the thing that sets one
company apart from all others.
This competency is the unique
element of a service or
product that gives its producer
a competitive edge.
7
Peters, T. (1999, February).
Make work fun. Executive
Excellence, v16n2, pp. 9-10.
However, as we have noted, Southwest’s tactics
are somewhat vulnerable. Without the
cooperation of weather and airport personnel,
their formula for profitability would not be as
effective. So, the company needs to carefully
plan their future to insure that they expand only
into areas that allow them to exploit their current
competitive advantage.
Positioning Southwest for the Future: The
Growth Strategy
Once a company’s strengths and weaknesses
have been identified, it needs to reassess its
mission and objectives and reposition itself for
the future. Here, a company usually considers
three “Grand Strategies” for an organization.
These are the Growth Strategy, the Stability
Strategy, and the Retrenchment Strategy.
SIDEBAR: Companies may
also elect to follow a
Combination Strategy, which
combines elements of two or
all three of these grand
strategies.
It is relatively easy to see that Southwest has
not chosen a Retrenchment Strategy.
Companies choosing this strategy are in decline.
They elect to downsize, reducing the number of
people they employ and the amount or types of
service or product they provide. Similarly,
Southwest has not taken on a Stability Strategy.
These companies want to keep “business as
usual.” They avoid significant change, and
maintain their current position without expanding
or growing.
Companies that embrace a Growth Strategy
want to be bigger and do more. This clearly
typifies the philosophy at Southwest Airlines.
Southwest predicted 12% growth for 1999, and
similar rates are planned for subsequent years.
They are actively seeking new routes and want
to bring the airline to more national prominence
in the coming years.
One way that Southwest has chosen to grow in
the past was through acquisition. In 1993,
Southwest was experiencing rapid growth and
desperately needed more airplanes. They
bought a small airline, Morris Air, because
Click on Acquisition:
Acquisition: When a larger
company buys a smaller one
and takes over their
operations. When the
companies are of similar size
and pool their operations and
resources, it is called a
“merger.”
Morris was fundamentally similar to Southwest
in a number of ways. Like Southwest, Morris
flew only 737 airplanes. Their route structure
was also fundamentally similar to Southwest’s:
Morris flew short flights into smaller airports
within their geographic region. In an acquisition,
the larger company must incorporate the
smaller's operations into its own. It made sense
for Southwest to purchase Morris because the
“fit” between the companies was good and their
operations were fundamentally similar. It is
unlikely that Southwest would choose this
expansion tactic again unless the smaller airline
shared most of Morris’ characteristics.
What’s next for Southwest?
Southwest has also tried to grow by expanding
the kind of flights they offer passengers. They
are beginning to fly longer routes, and about
10% of their current trips are longer than 750
miles. For now, Southwest does not plan to
change its tactics to join the medium- to longhaul market. No hot meals will be served, and
ticket prices will continue to be low. Should
Southwest feel pressure to enhance their inflight service with hot meals, it would require
significant retooling of their ground crew
procedures, and many of their planes would
need to be revamped to create kitchen facilities.
It remains to be seen whether customers who
appreciate the Southwest system for shorter
flights will be content with this brand of service
for longer jaunts.
SIDEBAR: Southwest’s Chief
Executive Officer, Herb
Kelleher, says he doesn’t
believe in long range planning,
“Maybe because I don’t have a
long attention span.” He notes
that, “This plan about what
we’re going to do ten years
from now will almost certainly
be invalidated in the next six
months.”8 However, it may be
the case that Kelleher, like
many managers, sees
planning only in terms of a
tactical plan. Because his
grand growth strategy for
Southwest is so strongly
articulated, and because all of
Southwest’s management
team understands that
strategy, they can make daily
tactical decisions that are in
keeping with the company’s
desire for growth.
8
Huey, John & Colvin,
Geoffrey (1999, January 11).
The Jack and Herb show.
Fortune, v139n1, pp. 163-166.
Growth may also provide a challenge to the
unique culture that is in place at Southwest. To
manage its ever-increasing size, the airline has
had to invest in new computer systems to
manage inventory and to implement expensive
mechanisms to integrate its operations. Larger
organizations tend to be bureaucratic.
Maintaining the entrepreneurial spirit among
employees that is the hallmark of Southwest's
excellent customer service could become
difficult if work has to be standardized across
more locations. Because employee commitment
is, as we have noted, an important component of
Southwest’s success, future expansion plans
should be analyzed to determine what impact, if
any, they might have on workers’ experience
with and perception of the airline.
On the positive side, when Southwest sticks to
its core business of short-haul flights, it doesn’t
have much competition to worry about. The
airline correctly considers itself a market leader.
They provide an excellent product, have topnotch workers who are well compensated, and
provide something customers want: relaxed air
travel at a reasonable price. Southwest’s
leaders have effectively positioned the company
to take advantage of its strengths while
minimizing its weaknesses. They have
effectively handled both challenges and
opportunities from external forces, and continue
to increase profits. Much of their success can
be traced to the development of tactics that are
consistent with a simple and yet well thought out
strategic plan.
Sidebar: To respond to
increasing demand from other
companies, the media, and
consultants wanting to know
the secrets of Southwest’s
cultural success, the company
has created four annual
“Culture Days” where anyone
who wants to learn more about
the organization can spend a
day learning their culture.
Though the company has not
formally advertised the
program, there is already a
year-long waiting list.
SIDEBAR: Herb Kelleher has
openly said that he will
aggressively compete with
other airlines that try to
compete with him directly.
Kelleher’s fleet of 737s can fly
1400 miles nonstop, so longer
flights are a distinct possibility
should they be strategically
viable in the airline’s future.
An airline that tries to take on
Southwest on one of their
short routes may find
themselves in a fare war with
Southwest on one of their
longer and more profitmaximizing routes.9
9
Labich, Kenneth (1994, May
2). Is Herb Kelleher America’s
best CEO? Fortune, v129n9,
p. 44+.