Major resources of Southwest Airlines
The resource base of a company or the assets can be divided into tangible and intangible resources. First, regarding the tangible resources of Southwest Airlines, one can mention the 124 airplanes, the halls, where they are stored, and other assets which amount to 1.837.291 thousand dollars in 1991. The intangible assets are much more interesting. Here one has to differentiate between relational resources and competences. The relational resources of Southwest are all relationships with the environment. The competence side contains knowledge, capabilities, and attitude and is nearly completely represented by Herbert Kelleher. He became the airline's "most visible property". The CEO knows how to run the business and to make it successful. Decision-making is centred on him. Kelleher shaped the whole company with his personal style. He always maintained a good relationship with the union-work force. Because of his motivational style he got backing of his employees who are willing to work hard, putting lots of effort in their work and forming a stable and reliable foothold to the company.
Defining relevant terms: Competitive advantage and sustained competitive advantage
Before we go into the analysis of Southwest Airlines’ competitive advantages, let us clarify what a competitive advantage is and how it becomes sustainable. Whether a firm has a competitive advantage is very closely linked to its business system which is made up of inputs, throughputs, and outputs, meaning it is made up of resources, activities, and product/service offerings respectively. This particular business system must create superior value to customers not simultaneously provided by potential competitors in order to satisfy as a competitive advantage. From this, we can derive the implications for a sustained competitive advantage now, which is reached whenever firms are unable to duplicate the benefits of a value creating strategy. However, this only possible if the competitive advantage is rare (heterogeneous), imperfectly mobile (not imitable), and substitutable by other resources leading to the same results.
Southwest Airlines’ competitive advantages
Southwest is a niche carrier with a focus strategy on costs through which it reaches a competitive advantage on short-haul routes between city pairs. Low fares, high frequency, and no-frills are the philosophy of the company. Furthermore, Southwest was the first carrier introducing lower fares on the weekend and for evening travellers. In order to stick to its industry niche Southwest Airlines makes use of a point-to-point system in contrast to a hub-and-spoke system. This way the company is able to offer a high frequency of flights between two cities. Moreover, Southwest is able to keep costs down and offer cheaper fares than many of its competitors. Major costs savings are achieved through the no-frills service as well as lower labour costs which are always great savings, especially in a service-oriented industry which naturally demands many employees. These are the reasons that contributed to the fact that Southwest has the lowest costs in the industry. In addition, Southwest Airlines developed a strong corporate culture that leads to high productivity, loyalty and good morale of employees, as well as to a different flying experience which ‘is supposed to be fun’. Close connected to this unique corporate culture are the skills of the CEO, Herbert Kelleher, who is able to build up personal relations and has the ability to relate to people. An executive who does not seem to run out ideas. Many of the above mentioned arguments lead to a good reputation and Southwest was able to capture a lot of ‘local fans and sympathy’. The results are a very high overall customer satisfaction, especially with regard to on-time reliability. For visualization the focus strategy on costs, please look at the figure below.
Figure 1:
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Source: http://student.bus.olemiss.edu/files/Womer/mgmt372/CH02.PPT
Southwest Airlines’ sustained competitive advantages
As we know from the discussion above, not each competitive advantage is a sustainable one. Southwest’s niche strategy with the focus on costs is itself not sustainable as it can be imitated by rivals. America West, for example, is one of those competitors following an equivalent strategy. However, Southwest is very successful with lots of experience and strong customer ties. This implies that the cost focus might be sustainable in the short-term, not in the long run though as competitors catch up on knowledge and industry insights. The adoption of a point-to-point system works very well for Southwest. As we can see from many other Airlines, in these days many offer fares in such a way in order to be able to keep the fare frequency at a high rate. Thus, this competitive advantage is not imperfectly mobile and might be even substitutable by other systems if they reach the same fare rate. Moreover, cost savings whether through the no-frills idea or through the reduction of labour costs other companies can achieve as well. Cost reductions might be reached through other cuts in expenses, thus be substituted. It can be easily agreed on though that having the lowest cost structure in the industry is definitely a sustained competitive advantage in the short-term. On the other hand, Southwest is known for its cheap fares and its good on-time reliability which is important especially for one of their most focused on customer groups, the business people. Thus, their established brand name might be a barrier to entry for new competitors and actually turn out to be a sustained competitive advantage in the long run. Further, the corporate culture of the company has to be discussed. A good network established through the relationship ties of the CEO and his ability to relate to people leads to a working morale which is unique in the industry. Such personal relationships as well as a committed workforce are heterogeneous spread throughout the industry, not imitable, and hard to substitute. Thus, the unique corporate culture which is the backbone of the way the company operates is a sustained competitive advantage.
Purchase and delivery options
A purchasing option gives an airline carrier the right to buy a certain quantity of airplanes at a fixed price within a specified period. In the airline industry, acquiring an option enhances value as it is a sensible and wise managerial mean to obtain and retain different positive advantages. First, by getting hands on purchasing options, an airline corporation is able to protect itself from movements of future prices in either direction. Secondly, as airlines traditionally buy purchasing options on double or even triple digit quantities, they receive incredible price discounts of much as 30 to 45% percent in the months after September 11. Lastly and most important, purchasing and delivery options enhance significant value when the aviation industry is in a growing phase or forecasts a promising up-ward trend. Not owning options would disable an airline to profit from the current market situation as they are neither receiving airplanes nor are their placed orders immediately processed. Thus, those airlines are forced to forego revenues being unable to add capacity or offer new flights by new planes.
Southwest’s strategy
In the light of the turbulent year 1991 and the aviation industry being in a slump, but nevertheless being able to make a profit besides United, Southwest should pursue a conservative growth strategy. Expansion within the current route structure should be first priority. As load factor increased, Southwest ought to use new planes to add capacity to the current system or add non-stop flights between the cities previously connected by one-stop service. In addition to the expansion within the current route structure, the airline carrier is also advised to consider in diversifying their flights into other states. Currently only serving the South and Midwest, travellers would also value point-to-point-possibilities to the North or East. In this context however, Southwest is recommended to maintain its original concept – move only into new cities where they exercise high frequencies in order to gain eventually a large market share.
Generally, Southwest should assure that the way they conduct business in a new city should be consistent with the way they conduct business throughout the system and their philosophy - short haul, low-fare, high frequency, point-to-point flights and “luv”. Anything else would deteriorate its reputation.
Current situation
As it can be seen in Figure 2, Southwest Airlines has followed a growth strategy over the past decade and currently serves 58 cities, 59 airports and 30 states (59 cities, 60 airports, and 31 states when Philadelphia is added in May, 2004) from border to border and coast to coast. The airline has grown from a small Texas carrier at the inception in 1971 to the fourth largest airline in the nation in terms of passengers carried. In 31 consecutive profitable years, Southwest remained a niche carrier and retained the short haul, low-fare, high frequency, hub-to-hub flights, and “luv” strategy from the 1970s.
Jim Parker is presently the CEO and Vice Chairman of the Board, and Colleen Barrett is the President, COO and Corporate Secretary. Although resigned as CEO, Herbert D. Kelleher abides Southwest as President of the Board. Southwest has currently more than 34,000 employees, operates 388 Boeing 737 jets allowing for 2800 flights a day and thereby carrying more than 66 million passenger a year. Unalteredly, Southwest has continued to compete on price by not offering different classes, reserved seating or flight meals but served 52.6 million cans of soda, juices, and water, 85 million bags of peanuts, and 31.7 million other snacks in 2003.
Through the years, Southwest has become one of the most admired airlines in the United States being a member of FORTUNE 500 and prevalently awarded for its customer service.
In closing, Southwest remarkably and successfully expanded beyond the southwest.
Figure 2:
Source: http://www.southwest.com
Bibliography
De Wit, B. and Meyer, R. (2004) Strategy – Process, Content, Context (3rd edition). Thomson.
Retrieved March 8, 2004, from the World Wide Web: http://student.bus.olemiss.edu/files/Womer/mgmt372/CH02.PPT
Retrieved March 8, 2004, from the World Wide Web: http://www.atkearney.com/shared_res/pdf/Emerging_Airline_Industry_S.pdf