Industry Analysis Case Study B:
Southwest Airlines Strategy
(Captain Marvel)
The Success of the Southwest Airlines Strategy
Whiteboard
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“How successful has Southwest’s strategy been?”
o Southwest market cap > total of all other airlines
§ By being UNIQUE!
Notes
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Southwest has been the only consistently profitable airline since
deregulation, and it has implemented none of the standard tactics.
If the answer to its success is not the industry, it must be the strategy.
Industry Analysis Case B
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Southwest Generic Strategy
Whiteboard
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“What is Southwest’s strategy?”
Low Cost
Focus
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737 only
No amenities
2nd tier airports
15 min turnaround
§ High productivity
Short haul / point to point
Culture
Underserved markets
Family customers
“Why do people fly Southwest? What is the value proposition from the
customer perspective?”
o Convenience (vs. buses / trains)
o Low price!
Notes
Southwest focuses on underserved markets (ie. a geographic focus) and offers a
low price to customers.
Industry Analysis Case B
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Low Cost vs. Low Price
Whiteboard
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“Is Southwest’s strategy low cost or low price?”
o Need low cost position to enable low prices!
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The generic Southwest strategy is focus, low cost
Notes
Low prices and costs are two sides of the same coin. However, we think
of them as low cost strategies.
Industry Analysis Case B
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Low Cost Position – Activity Alignment
Whiteboard
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“How does Southwest have the low cost position? What choices has it
made that enable it to be low cost?”
Notes
We will analyze the various aspects of Southwest’s configuration of activities in
order to understand how each and every thing it does contributes to its cost
advantage.
Industry Analysis Case B
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One Type of Plane - 737
Whiteboard
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Using only 737s saves on:
o Training
o Maintenance
o Fewer spare planes
Notes
Flying one type of plane – the 737 – gives Southwest considerable cost savings.
Industry Analysis Case B
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HR Policies
Whiteboard
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“Does it make sense for Southwest to pay above average wages?”
o NET NET – YES –
§ Lower turnover
§ Lower hiring costs
§ Lower training costs
Employee ownership is also important to build productivity
o Good labor relationships
o Herb Kelleher influence
Notes
HR practices are consistent with their activity system – it enables improved
productivity and motivation.
Industry Analysis Case B
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Second Tier Airports
Whiteboard
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“What are the cost benefits of flying out of second tier airports?”
o Lower gate costs
o Less competition
o Less congestion
= no wait time!
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“Who has flown out of Newark on Friday evenings? What was the
average ground hold time?”
o About one hour!
“Ironically, Boston’s most convenient airport isn’t even in Boston”
- Southwest Airlines Advertisement
Notes
Southwest’s choice of second tier airports allows it to compete where other
airlines are not.
Industry Analysis Case B
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Point to Point Route Structure
Whiteboard
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“What are the cost benefits of a point to point route structure?”
o No delays
o No ticketing
o No bag transfer
Notes
One of the key differences of Southwest’s strategy is that it flies a point to point
route structure and not a hub and spoke structure.
Industry Analysis Case B
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No Amenities
Whiteboard
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The avoidance of any extras or service fripperies, such as meals,
obviously reduces costs, and allows the 15 minute turnaround
Notes
Industry Analysis Case B
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15 Min Turnaround
Whiteboard
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“Where does Southwest’s cost advantage really come from?”
“How much is a fifteen minute gate turn worth?”
Average Southwest Flight
Turnaround
1 hr
¼ hr
= 1 ¼ hours
Average Major Flight
Turnaround
1 hr
1 hr
= 2 hours
= 40% productivity advantage
•
“How many of you would like to recommend a 40% improvement in
productivity in your business?”
Notes
A 40% productivity advantage is a blockbuster number.
Industry Analysis Case B
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Service Level
Whiteboard
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“If a 15 minute gate turn gives you such a productivity advantage, why are
the majors so stupid that they do not have a fifteen minute turn?”
o They can’t!
Southwest is simplicity in the extreme – what they DON’T do is the
secret to their success
•
“Who is the typical Southwest passenger?”
o Students
o Old people
o Families on vacation
Southwest is a bus that flies!
Notes
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Southwest has a productivity advantage because of all the things it does
not do.
Southwest knows exactly who its customer is and configures the service
level to provide them with exactly what they expect at a very low price.
Industry Analysis Case B
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Strategy Summary
Whiteboard
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Southwest has a beautifully crafted strategy
o Everything fits together to achieve a low cost position
Notes
This strategy evolved over time. The value of strategic thinking is that it can be
used to direct that evolution.
Industry Analysis Case B
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Competing Against SWA
Whiteboard
Southwest enters the Northeast market in early 1990’s:
One Way
Baltimore – Chicago
Baltimore – Cleveland
US Air
$209
$349
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“What should US Air do in response?”
o Cut price close to $89 / $49?
o Out-differentiate them?
o Cut costs?
o Exit?
o Acquire Southwest?
o Imitate / copy?
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“Copying Southwest’s strategy is not easy.”
Southwest
$89
$49
Notes
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It is impossible to copy Southwest’s strategy within the organizational
structure of the major airlines.
In principle, it is possible to copy Southwest’s strategy in a completely
separate entity.
Industry Analysis Case B
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Threats to Southwest
Whiteboard
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“What can go wrong with Southwest, or is this the Energizer Bunny that
keeps going and going and going?”
o Geographic saturation – no growth
o Safety / Security
o Technology – 737 out of date
o Succession
o Go long haul?
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“What could they have done differently to enable further growth?”
o Acquisitions don’t fit with activity system
o Expand internationally?
Notes
There are real risks to extending the strategy to long haul:
• Risk being stuck in the middle
• The strategy might not be replicable long haul
• The basic productivity advantage disappears
Industry Analysis Case B
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Conclusion
Whiteboard
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Good money in a Five Star Crappy Industry:
o Careful alignment of activities
o Choose what to do and what not to do
§ In support of focused low cost competitive advantage
Notes
In a five star crappy industry Southwest is able to make good money by virtue of
the careful alignment of its activities – choices about what is does and what it
does not do – in support of its source of low cost competitive advantage.
Industry Analysis Case B
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