Case analysis southwest airlines

Case Analysis: Southwest Airlines Introduction Southwest Airlines is a major U.S airline that primarily provides short haul, high frequency, point- to point, low fare service Southwest was incorporated in Texas and commenced operations on June 18, 1971 with three Boeing 737 aircraft serving three Texas cities- Dallas, Houston, and San Antonio Today Southwest operates nearly 400 Boeing 737 aircraft to 59 U.S cities Southwest has the lowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest fares Southwest also has one of the best overall customer service records Environmental analysis and diagnosis Environmental analysis is the process by which strategists monitor the environmental sectors to determine opportunities for and threats to their firms It is the process of tracing of an opportunity or threat to a source Strategic management determines where the threats come from and which ones are coming Environmental diagnosis consists of managerial decisions made by assessing the significance of the data (opportunities and threats) of the environmental analysis In effect, diagnosis is an opinion resulting from an analysis of the facts to determine the nature of a problem with a view to acting to take advantage of an opportunity or to effectively manage a threat Analysis of Environment There are a large number of factors which affect the firm in each sector of the environment These factors interact with each other There are many ways to organize the sectors for analysis and diagnosis The categories used in this case are socio-economic, technological, supplier, competitor, governmental, customer, ecological Each sector has been examined to determine the kinds of factors needing analysis and diagnosis Socio-economic sector There are a variety of factors which affect the demand for products and services and the costs of providing them This section explores the economic demographic, geographic and social factors which help or hinder a firm in the attainment of objections a) Economy: The state of the economy at present and in the future can affect the attainment of objectives of a business The specific economic factors to be analyzed are as follows: v The stage of business cycle: The economy can be classified as being in depression, recovery, boom, recession stage v The inflationary or deflationary trend in the prices of goods or services: If inflation is very severe, wages and price controls may be imposed v Monetary policy, interest rates, devaluation, revaluation of the currency in relation to other currencies v Fiscal policies: Tax rates for firms and individuals v Balance of payments, surpluses or deficit in relation to foreign trade Each of the facets of the economy can help or hinder the achievement of a firm’s objectives and leads to success or failure of the strategy Of course, all the factors not affect all the industry the same ways b) Demographic Factors: Factors relating to general population are called demographic factors These factors affect the market for goods and services The most important factors are described below: v Changes in population: As the total population changes, the demand for products or services changes The number of people & its growth rate affects the primary demand v Age shifts in the population: As the total population changes, the age distribution changes If birth rate declines, older people and fewer babies populate an area This will affect the strategy of the baby industry v Income distribution of the population: If income is concentrated in the hands of few, most of the people will have little money and this will affect the volume of business c) Geographic Factors: The effective strategist will also scan the geographic environment to look for opportunities and threats Here the strategists want to determine whether conditions are better elsewhere for achieving corporate or SBU objective He may try to relocate its store or shifts headquarter to another area where he can attain economy d) Social Factors: The last set of socio-economic factors focuses on the values and attitudes of people, customers and employers which can affect strategy The social factors include: Beliefs, Values, Attitudes, Life style, Cultures etc Social forces are dynamic and can change the demand for a product Socio-economic Factor Southwest Airlines 1 Socio-economic sector and fuel price become threats to Southwest Airlines Company Fuel costs in 1978 were averaged 37c per gallon while in 1979 it became 80c It is projected that in 1980 fuel costs exceed $1.00 per gallon This price hike changes the expenditure pattern of the company Operating costs become 40% of the total budget a) Economy: Fuel crisis number of population of Oklahoma, Tulsa and Albuquerque is 3,68,164, 3,30,350 and 2,43,751 respectively in 1970 Total populations of the three destinations are not high enough to expand the business in future The growth rates of the populations are not given here c) Geographic Factors: Geographic locations of the three destinations are favorable for airlines business b) Demographic Factors: The d) Social Factors: Beliefs, Values, Attitudes, Life style, Cultures etc of the people of the three destinations are favorable for airlines business Technological Sector Strategists must also examine the technological sector to examine the impact of changing technology on firm’s operation Changing technology may offer opportunities for objective achievement Technology also helps firms • • • • • • Avoid obsolescence Promote innovation Invent new products Improvement in existing products Improvement in manufacturing techniques Improvement in marketing techniques Strategists must be aware of: a) existing technology, b) probable future advances Strategist should foresee advancement of technology and asses its impact on firm’s operations Southwest Airlines: Technological Factor Southwest airlines running their service with update Boeing 737-200 air craft Avoiding technological obsolesce they are offering innovating service to the customers From the survey of “Texas Business” it is revealed that they are occupying 1st position in ticketing, luggage handling, hospitality and overall performance except offering meals to the passengers So, we can say that they are adjusting with situation maintaining continuous changes Supplier Sector Effective strategist must also consider the supplier changes in the environment The main point of concern is cost and availability of the factors of production Supplier can raise the price of his raw material or products if he is a monopolist The suppliers supply raw materials, energy money and labor The strategist should search the environment to see where those raw materials, energy money and labor are available at low cost Southwest Airlines: Supplier Factor As in the written case no information is available regarding raw material, energy, money and HR supply, we can assume that they are getting low cost supply from different market Their profit performance justifies this thing Suppliers include those who provide service/products necessary for Southwest Airlines to their business function For Southwest Airlines, suppliers include mechanics (and other maintenance people), providers of fuel, food (the snacks that are offered) The suppliers not have much bargaining power Competitor Sector Besides looking at the primary demand and supply factors, the strategists try to determine the degree of competition the firm must face Three factors need to be examined regarding competition: (a) Entry and exit of major competitors: If the current competitors leave the business then the remaining business firms can attain the objectives easily But those remaining firms may also be charged for doing monopoly business Entry of new competitors makes tougher the attainment of objectives The entry depends on the existence of entry barriers like scarcity of raw materials, structural barriers such as economies of scale, product differentiation, absolute cost advantage, access to marketing channels and likely reaction of current firms (b) Availability of substitutes: The success of a business firm depends in part on the availability of quality and less costly substitutes for the firm’s products The successful strategist must also consider the loss of the business to the substitutes (c) Major strategic changes of current competitors : The strategist must also have close watch on the significant strategic change of current competitors Competition may be on the basis of price, quality and service and this can provide a significant opportunity or threat to the firm For example, if an electric company offers a guarantee of two years for bulbs then its competing firms must react to it Assessing competitive position helps a business firm to formulate a strategy efficiently Development of competitor profile enables firms to more accurately forecast short-term and long-term growth and profit potentials Though there are no exact criteria for assessing the competitive position, the followings are used: Competitor Profile Key Success Factors Weight Market Share Price Competitions Facilities Location Raw Material Costs Caliber of Personnel Rating 0.30 0.20 0.20 0.10 0.20 weighted Score 1.20 0.60 1.00 0.30 0.20 3.30 Once the appropriate criteria have been selected, they are weighted to reflect their importance to a firm’s success Then the competitor being evaluated is rated on the criteria, the ratings are multiplied by the weight, and the weighted scores are summed to yield a numerical profile of the competitor Rating is assigned using a point scale Very Strong then rating is point Strong then rating is point Average then rating is point Weak then rating is point Very weak then rating is point Limitation of the Competitor profile: 1) The criteria are selected subjectively 2) The weighting and the evaluation approach are also subjective In spite of all these the profile is of considerable help for developing perception about its competitive position The strategist then compare this profile with that of the competitors This helps the CEOs to identify weak factors of competitors Southwest Airlines: Competitor Factor There are some other air line companies also working in the same market They are American airlines, Delta airlines, Continental airlines Braniff airlines, Eastern airlines and Texas International airlines as per survey of “Texas Business” It has seen that continental airlines occupying 1st position in offering meals to the passengers In all other categories Southwest Airline occupied 1st position In this situation if southwest starts to offer meal to the passengers like other competitors they can be market leader for long time Government Sector Government sector is also an important sector to consider by the strategists because governments influence how businesses operate The govt can increase a business’s opportunity or threat Governments provide opportunities in the following way: • • • • • • • • Govt is large purchasers of good, and services Govt subsidizes firms and industries and thus helps them survive and prosper Govt product home producers against unfair foreign competition Govt policy changes can lead to increase in opportunities and new business for firms Govt can pass antitrust laws which limit mergers Govt regulations may affect the strategic options of firms (to increase price) Govt may compete with private firm [BTRC vs private ] Govt can influence other forces of the environment Southwest Airlines: Government Sector In the year 1978, Southwest air lines served eleven major Texas cities as an intrastate carrier subject to the economic regulation of the Texas aeronautics commission In December 1978 Southwest received their certificate of public convenience and necessity from the civil aeronautics board So, the govt Sector worked positively to expand the new market Customer Sector Customers are also important sector to consider by the strategists They can affect the attainment of objectives because: (a) They can force down prices (b) They can demand quality products (c) They can demand more service (d) They can demand more warranty (e) They can play competitors off against each other So, the strategists should try to produce goods according to customers’ demand and consider the aforesaid factors duly Southwest Airlines: Customer Sector From a research project conducted on 7,900 passengers, it seemed that 98.61% of the respondents give importance on time departure Respondents also asked to indicate their particular likes and dislikes concerning Southwest air lines, low farce was the highest ranked position attributes So, we see that the passengers are conscious and they are continuously pressuring the organization to maintain a certain limit of positive attributes Ecological Sector: Ecology is also an important factor to consider The relationship among human beings and other living things and the air, soil and water that support them is called ecology Ecological balance is destroyed by pollution A threat to our life supporting ecology caused principally by human activities in an industrial area is called pollution The consequence of pollution is: Ozone depletion – Heat on earth Increase in sea –water level Extinction of habitats Southwest Airlines: Ecological Sector An Airlines Company can pollute the environment by its heavy sound and burn much fuel in its operation Southwest should take proper measures to reduce this pollution From the above discussion, we can summarize some opportunities and threats for the Southwest Airlines as follows: Opportunities National and 2.Growth of Research 4.Vertical 5.New technology opens the 6.Longer Growth of business and leisure travel international older and door for new markets generation development integration products/services flights Threats Decline of leisure travel due to economy and terrorism 2.Competing online ticket reservation systems New government regulations that make operations costlier Fuel price fluctuations General economic downturn Increased annual airline security costs Strategic Advantage Analysis and Diagnosis Strategic advantage analysis and diagnosis is the process by which the strategists examine the firm’s marketing and distribution, research and development, production and operations, corporate resources and finance and accounting factors to determine where the firm has significant competencies so it can most effectively exploit the opportunities and meet the threats the environment is presenting No firm is equally strong in all its functions Procter and Gamble is known for its superb marketing Maytag is known for its outstanding production and product design American Telephone and Telegraph is known for its outstanding service and personnel policies Yet each of these firms is not strong “across the board.” Within a company, each division has varying strengths and weaknesses General Electric was strong in jet engines and weak in computers a few years age General Motors is stronger in market control in automobiles than it was when it was in appliances So a firm must determine what its distinctive competencies are- what makes it unique to the competitive arena –so that it can make decisions about how to use these abilities now and in the future Unless the executives are fully aware of their strategic advantages, they may not choose the one opportunity of the many opportunities available at the time that is likely to lead to the greatest success Unless they regularly analyze their weaknesses, they will be unable to face the environmental threats effectively In effect, these assessments must be combined with environmental analysis so that decisions can be made about how to use or add strengths and minimize weaknesses 1 A MARKETING AND DISTRIBUTION FACTORS The strategist is looking to see if the firm is substantially and strategically stronger in marketing and distribution than its competitors Some firms are strong in the market, and this provides them with a strategic advantage in launching new products and services and in defending and increasing their market share on present products and services • Competitive structure and market share: To what extent has the firm established a strong market share in the total market or its key submarkets? • Efficient and effective market research system • The product-service mix: quality of products and services • Product-service Line: Completeness of product- service line and product-service mix; phase of life cycle the main products and service are in • Strong new-product and new-service leadership • Patent protection (or equivalent legal protection for services) • Positive feelings about the firm and its products and services on the part of the ultimate consumer • Efficient and effective packaging of products (or the equivalent for services) • Effective pricing strategy for products and service • Efficient and effective sales force: close ties with key customers How vulnerable are we in terms of concentrating on sales to a few customers? • Effective advertising: Has it established the company’s product or brand image to develop loyal customer? • Efficient and effective marketing promotion activities other than advertising • Efficient and effective service after purchase • Efficient and effective channels of distribution and geographic coverage, including internal efforts Southwest Airlines: Marketing and Distribution Southwest Airlines’ Marketing and Distribution channel is strong enough to expand service in new three markets Oklahoma, Tulsa, Albuquerque from their Dallas headquarter B Research and Development & Engineering Factors The research and development and engineering function can be a strategic advantage for two prime reasons: (1) it can lead to new or improved products for marketing, and (2) it can lead the development of improved manufacturing or materials processes to gain cost advantages through efficiency which could help to improve pricing policies or margins Factors which might be analyzed in the R&D and engineering are Basic research capabilities within the firm Work environment suited to creativity and innovation Development capability for product engineering Excellence in product design Well equipped lab and testing facilities Ability of unit to perform effective technological forecasting Southwest Airlines: Research and Development & Engineering Southwest Airlines conducted research for new route development Therefore, Southwest Airlines is also efficient in Research and Development & Engineering C PRODUCTION AND OPERATIONS MANAGEMENT FACTORS The development of careful production planning and control systems, productivity improvements, programs, and plant capacity and location decision can lead to important competitive advantages for a firm If a firm can produce at a lower cost, has the capacity to handle business when others can’t or can get raw materials at favorable prices Lower total cost of operations compared with competitors total costs Capacity to meet market demands Efficient an effective facilities Raw materials and subassemblies costs Adequate availability of raw materials and subassemblies Efficient and effective equipment and machinery Efficient and effective offices Strategic location of facilities and offices Efficient and effective inventory control systems 10 Efficient and effective procedures: design, scheduling, quality control 11 Efficient and effective maintenance policies 12 Effective vertical integration Southwest Airlines: Production and Operations Management Some information regarding production and operations are mentions in the table below which indicate high performance of Southwest in production and operations 1980 1979 No of flights 18,833 15,934 Passenger Carried 11,89,745 10,38,657 Load factor 63.9% 67.9% D CORPORATE RESOURCES AND PERSONNEL FACTORS A list of corporate resources and personnel factors which can provide strategic advantages for a firm is mentioned below Each of the factors can add to the ability of a firm to achieve its objectives Some firms are well known for these factors General Electric, for example, has advantages with regard to most of them Some firms have attracted and held high-quality, highly productive, and loyal employees and managers IBM, Texas Instruments and other firms are known for this Since these people make the decisions for all functions, this can be a crucial advantage Many firms have purchased other firms just to get their top-quality managerial, professional, and other employees • • • • • • • • • • • • • Corporate image and prestige Effective organization structure and climate Company size in relation to the industry (barrier to entry) Strategic management system Enterprise’s record for reaching objectives: How consistent has it been? How well does it compared with similar enterprises? Influence with regulatory and governmental bodies Effective corporate-staff support systems Effective management information and computer systems High-quality employees Balanced functional experience and track record of top management: Are replacements trained and ready to take over? Do the top managers work well together as a team? Effective relations with trade unions Efficient and effective personnel relations policies: staffing, appraisal and promotion, training and development, and compensation and benefits Lower costs of labor (as measured by compensation, turnover, and absenteeism) Southwest Airlines: Corporate Resources and Personnel Southwest airline’s financial position is strong enough to run smooth day to day operations and has a dedicated team of personnel who get enough freedom to perform their assigned duties E FINALCE AND ACCOUNTING FACTORS A list of some of the major strategic advantage factors in finance and accounting One objective of the analysis is to determine if the focal firm stronger financially than its competitors can it hold longer or compete more effectively because it has the financial strength to so? • • • • • • • • Total financial resources and strength Low cost of capital in relation to the industry and competitors because of stock price and dividend policy Effective capital structure, allowing flexibility in raising additional capital as needed; financial leverage Amicable relations with owners and stockholders Advantageous tax conditions Efficient and effective financial planning, working capital, and capital budgeting procedures Efficient and effective accounting systems for cost, budget and profit planning, and auditing procedures Inventory valuation policies A ratio is simply one number expressed in terms of another It is simply a relationship between two figures It is used to judge the financial health of a business firm There are four basic groups of financial ratios: a) Liquidity b) Leverage c) Activity Ratio: d) Profitability Liquidity Ratios: Liquidity ratios are used as indicators of a firm’s ability to meet its short-term obligations Liquidity ratios consist of: a) Current Ratio: Current ratio is calculated by the following formula: Current Assets Current Liabilities Southwest in 1980 = = 1.5 Since the inventory is excluded from the current assets, the quick ratio accurately assesses the firm’s liquidity Though the norm is the stable industries may safely operate with a lower ratio Leverage Ratio: Leverage Ratios identify the source of a firm’s capital—owners’ and outside creditors The term ‘leverage’ refers to the fact that using capital with a fixed interest charge will amplify either profits or losses in relation to the equity of holders of common stock A Total Debts to Total Assets: Total Debts to Total Assets is computed by the following formula: Total Debt Total Assets This ratio is a measure of the percentage of total funds provided by debt A Total Debts to Total Assets higher than 0.50 is safe for stable industries B Long-Term Debt to Equity: This ratio of long-term debt to equity is a measure of the extent to which sources of long-term financing are provided by creditors This ratio is computed by the following formula: Long-Term Debt Equity Activity Ratio: Activity Ratios indicate how effectively a firm is using its resources By comparing revenues with the resources used to generate them, it is possible to establish an efficiency of operation Asset Turnover Rate: This ratio is computed by the following formula: Sale Total Assets Southwest in 1980 = 0.208 = 21% = The Asset Turnover ratio indicates how efficiently management is employing total assets Fixed Asset Turnover: This ratio is computed by the following formula: Sale Net Fixed Assets This ratio of sales to fixed assets is a measure of the turnover on plant and equipment It is calculated by dividing the sale by net fixed assets Industry figures for Asset Turnover vary with capital intensive industries Industries requiring higher inventory will have much smaller inventory ratio Inventory Turnover Ratio: Cost of Goods Sold Average Stock Norm for US industries is This ratio depends on what type of stock the firm holds If the stock consists of first moving inexpensive items then the Turnover Ratio will be high Accounts Receivable Turnover: Sale Accounts Receivable Accounts Receivable is a measure of the average collection period on sales A too low ratio would indicate a loss of sales due to restrictive credit policy If the ratio is too high, too much capital is tied up in A/R and the chance of bad debt is high Average Collection Period: 360 A/R Turnover Operating Ratio: This ratio shows how much of the total sales is eaten up by the expenses The formula is: Cost of Sales Sales Southwest in 1980 = = 0.81 = 81% It shows how much of the sales are required covering operating expenses Profitability Ratios: Profitability is the net result of a number of policies and decisions chosen by an organization’s management Profitability ratios indicate how effectively the total firm is being managed The profitability Ratios are: • The Net Profit Margin: It is calculated by dividing net margin by the sales Formula: Net Earnings Sales Southwest in 1980 = = 0.107 = 11% 10% to 15% is considered normal • Return on Investment (ROI): It indicates how much the company has earned on total assets Formula: Net Earnings Total Assets = = 0.022 Southwest in 1980 • = 2% Net Earnings to Net Worth: This ratio is a measure of the rate of return or profitability on the stockholders’ investment The formula of computing the ratio is: Net Earnings Net Worth Southwest in 1980 = = 0.0677 • Earnings per Share: = 7% Net Income No of shareholders outstanding Southwest Net income per share $.95 in 1980 & $.74 in 1979 This ratio indicates how much profit is earned per share What are the strengths and weakness of Southwest Airlines Strengths High capacity usage The best low cost airline leader for several years Diversity in upper management Revenues increase by percent Increase of net income Dominates the short haul segment of airline industry Fourth largest domestic airline Service innovation Customer service Weakness No international flights No segmented seating Dependent on a single producer (Boeing only) Lack of exposure towards online booking agencies Carry a small amount of freight and cargo Do not use chat communication such as e-mail Strategic Choice There are alternative strategies that a firm can pursue for it These strategies are discussed below: a) Stability strategy A firm pursues stability strategy when: It continues to serve the public the same product, market, function Its main strategic decisions focus on incremental improvement in functional performance Characteristics: a) Concentrate into resources in where it presently exists to develop competitive advantage consistent with its resources b) It leads to defensive moves such as obtaining patent, taking legal action c) It is not a nothing approaches d) You can have the goal of profit growth through improving current operations e) It provides support to other strategy and acts as an element of risk reduction Why companies follow it? The firm is doing well or perceives itself as successful It is less risky It is used by reactionary managers usually It is easier and comfortable to pursue When the environment is perceived to be stable Too much expansion can lead to inefficiency b) Expansion strategy A firm pursues Expansion Strategy when It serves the public in additional product, market, function It focuses on major increases in the pace of activity within its present business definition a) It increases current operations b) It leads to redefinition of the business c) It may lead to short-run inefficiencies Why we follow Expansion Strategy? 1) In volatile industry stability means short-run success, long-run death So, expansion in necessary 2) Expansion means effectiveness 3) Society benefits from expansion 4) Managerial motivation Expansion brings reward Managers who follow the policy of “steady as it goes” are never remembered 5) As a firm expands in size and experience it improves in performance & productivity 6) Belief that growth will yield more monopoly power 7) Pressure from stockholders forces CEOs to expand c) Retrenchment strategy A firm follows Retrenchment Strategy when It sees the desirability of or necessity for reducing its products or service lines, function or markets It focuses its strategic decisions on functional improvement through the reduction of activities in units with negative Cash Flows Characteristics: a) This results in reduction of activities b) This results in divesting products, market, or functions c) This results in lay off d) This results in reduction of Research and Development Why a firm follows retrenchment strategy? 1) The firm is not doing well 2) The firm has not met its objective by following one of the grand strategies 3) The environment is so threatening that internal strength is insufficient to meet problems 4) Better opportunities are perceived elsewhere where strength can be utilized d) Combination Strategy A combination Strategy is a strategy that a firm pursues when: Its main strategic decisions focus on the conscious use of several grand strategies (stability, growth, retrenchment) at the same time (simultaneously) in several SBUs of the company It plans to use several grand strategies at different future times (sequentially) With combination strategies, the decision makers consciously apply several grand strategies to different parts of the firm or to different future periods The logical possibilities for a simultaneous approach are stability in some areas, expansion in others, stability in some areas, retrenchment in others, retrenchment in some areas, expansion in others; and all three grand strategies in different areas of the company Why companies follow a Combination Strategy? When a company faces many environments and these environments are changing at different rates When the company’s products are in different stages of the life cycle This is suitable for a multiple industry firm whose divisions belong to different stages of the business cycle This strategy is suitable for a firm whose products are in different stages of the product life cycle This is the best strategy for a firm whose divisions perform unevenly or not have the same future potential Strategic Choice for Southwest Airlines • Southwest Airlines pursued Growth Strategy after analyzing and diagnosis of the environmental components and strategic advantage Conclusion Southwest Airlines is low cost operator They provide better service at lower cost Therefore, they are growing day by day Even in fuel price hike, they became able to profit while other air operator losses Finally, we can say that Southwest will be able continue its growth  ... competitors Southwest Airlines: Competitor Factor There are some other air line companies also working in the same market They are American airlines, Delta airlines, Continental airlines Braniff airlines, ... technological forecasting Southwest Airlines: Research and Development & Engineering Southwest Airlines conducted research for new route development Therefore, Southwest Airlines is also efficient... Choice for Southwest Airlines • Southwest Airlines pursued Growth Strategy after analyzing and diagnosis of the environmental components and strategic advantage Conclusion Southwest Airlines is