In the United States and neighboring regions, Southwest Airlines is a major passenger airline company offering low-cost flights across the country and around the world. To enhance sales, the company uses a pricing leadership strategy that entails charging higher prices. An assessment of the firm’s financial health reveals that it is not doing well except for inventory turnover and profitability. Because of this, the company must increase its profit margin by adopting an appropriate alternative strategy. Product development, market penetration, and the company’s ability to enter new markets are all options. According to the report, Southwest Airlines should consider employing the market penetration approach as a crucial alternative strategy to improve revenue and ensure the company’s long-term viability.
Strategic Alternative Assessment
The SWOT analysis of Southwest Airlines shows that the company has a great deal of growth potential and a solid business strategy. Point-to-point services and quick turnaround are two other significant advantages of the business. The corporation can produce a healthy profit as a result of its benefits. The competitive edge and strategic positioning of Southwest Airlines are both suffering. Due to its concentration on domestic air transportation, it has a small global market share. The airline has the opportunity to expand its service areas into new markets like Latin America, where demand for air travel has grown substantially. Southwest Airlines (Southwest Airlines, 2016).
The corporation may employ internet advertising to enhance its market share. External forces are pushing against Southwest Airlines’ success, though, and they endanger its efforts. The severe competition between huge airline companies like American Airlines and JetBlue Airways is crucial for this business (Southwest Airlines, 2016). In addition, the cost of jet fuel affects the profitability and operations of Southwest Airlines.
Strategic Alternatives for Southwest Airlines
Product development, market development, penetration, and geographical expansion are all options available to Southwest Airlines. To generate market-competitive products and services, companies must begin with product development and invest. Prestige-building, emotional overtones, and personality traits can all be part of the process. Customers are more likely to interact with a company’s products when it offers them new possibilities for product development. On the other hand, Southwest Airlines has made a significant financial investment to accommodate this business decision. A second need for success is that the business adopts a market strategy and becomes a corporation focused on the market. Having a solid plan aids a company in understanding and meeting the demands of its consumers.
Competition may mimic the process to obtain a competitive edge, while market expansion is a significant internal growth strategy. Finally, Southwest Airlines may elect to attempt market penetration as a third development strategy to grow. When it comes to market share, Graham (2016) suggests that the corporation should expand its market share in lucrative international markets, notably in Asia. Increasing its market share and overall financial performance are two goals that Southwest Airlines, according to the author, may achieve by expanding its services across the world. Because of this, the business will be forced to put more attention on internalization than on current market prospects, which is problematic.
Determining the Best Strategic Alternative
A decision matrix can be used by Southwest Airlines to assess the effects of various growth plans on the overall performance and profitability of the firm. Organizations considering alternative techniques must understand that their success is tied to how customers view the brand. Consumers may not enjoy a freshly designed product, which might lead to substantial losses for Southwest Airlines (Ansoff et al., 2018).
A significant portion of the company’s budget goes on product development, which has a mixed track record of increasing sales. As market knowledge alone may not lead to a long-term increase in market share, Southwest Airlines may also face obstacles in the growth process of the market. This means that Southwest Airlines has no choice but to rely on market penetration to increase revenue and earn a significant share of the airline market. Voigt and colleagues (2017) have seen an increase in Latin America’s demand for air transportation services. This will raise the company’s market share and boost its financial results. It allows the company to focus on markets where it already has competence, and as a consequence, it is more sustainable in the long run.
Information Gaps in Formulating Strategic Alternatives
Strategic decisions include things like market penetration, product development, and diversification. According to Southwest Airlines’ plans, the first three methods will help the airline figure out its course. Formulating strategic alternatives involves information to aid management in determining the most effective methods to maximize a company’s chances of success.
Risk is a critical aspect that the business must consider while developing strategic choices. According to this analysis, market penetration is the least hazardous strategic option since it ensures a sustained rise in market share due to a lack of information on market and product development. Additionally, the study lacked an acceptable method for assessing the choice of the best alternative since it relied on a risk matrix that assumed no unanticipated dangers other than those now apparent.
Southwest Airlines’ strategy decisions were also hampered by a lack of knowledge about acceptable ties that may be advantageous. As a result, Southwest Airlines relies on the domestic market for the great majority of its business. If the company had a better grasp of partnerships, it might have formed and provided potential value-enhancing activities. Some of these elements may influence how Southwest Airlines interprets the current situation.
Creating strategic partnerships is a typical strategy for companies looking to expand into new markets beyond their home country. However, the company might have used the knowledge it had gathered via its contacts to carefully study market penetration risks instead of going with the less risky plan. This means that the team might have utilized enough information to examine and manage any risks associated with the options presented instead of only relying on the risk matrix.
Financial Considerations
Southwest Airlines is one of the United States’ premier low-cost carriers. The company has established a reputation for offering the lowest-priced flights on its itineraries. Despite selling low-cost tickets to its customers, Southwest Airlines is profitable and maintains a high standard of service. Southwest Airlines’ PE Ratio 2006-2019 | LUV (2019) indicates that the company’s primary financial ratios, except for profitability, are deficient. For instance, in 2018, the company’s debt-to-equity ratio was 1.6634528, indicating that it could not satisfy the creditor’s demand (Macrotrends, 2019). Southwest Airlines will thus have to declare bankruptcy if its creditors seek repayment of their resources.
Similarly, the firm has a current ratio deficit of about 36%, indicating that it cannot repay short-term debt (Macrotrends, 2019). However, the company is converting inventory at a high pace since being a low-price leader attracts many consumers who raise demand for the company’s products and services. Additionally, the corporation can improve sales by forming strategic collaborations that attract many clients (Chishty-Mujahid, 2017).
On the other hand, Southwest Airlines’ strategic agreements subject it to several dangers, including the loss of profitability. According to Wang et al. (2020), businesses that form strategic alliances are compelled to give significant discounts, resulting in losses. On the other hand, Southwest Airlines has taken the risk of facilitating it to lower its inventory turnover.
Updated Assessment of the Firm Performance and Associated Financial Strategies
Because financial markets fluctuate over time, it’s necessary to assess how these shifts will affect Southwest Airlines in the long term. The firm’s financial performance is critical in determining its long-term strategy. Prior approaches must be evaluated to see if they had any influence on the company’s finances. For example, the company performs poorly on all main financial parameters except for profitability and inventory turnover. When doing the inquiry, keep in mind elements like a high debt-to-credit ratio that contributes to the company’s bad performance.
Since the company may not be able to pay back loans if the creditor comes knocking, the current study should warn management of the organization against taking out loans. While the same advice may still hold if the debt-to-equity ratio improves in the upcoming fiscal year, Alternate methodologies’ impact on the firm’s performance may also be evaluated using the scenario. General financial information collection and analysis are essential for the company to fine-tune its strategy options.
Applicability of a Decision Matrix to Determine Risk
To assess the financial impact on Southwest Airlines of various strategies, I would use a decision matrix. While all strategic solutions involve some degree of risk, the magnitude of that risk varies. The decision matrix will make it simple to examine the impact of each alternative strategy on the business. For example, market penetration entails a variety of hazards, including compliance with regulatory requirements and the danger of new entrants. I’ll utilize the risk matrix to ascertain the magnitude of such obstacles and their influence on the business. However, a decision matrix is ineffective for risk prediction since it presupposes that the risks being evaluated are the only uncertainties facing a company. As a result, management misses potential future difficulties.
Utilizing a Risk Matrix
The most cost-effective alternative approach for Southwest Airlines is to grow its market. The method shown here is the safest alternative for companies.
Several risks come across with market penetration. These risks may include:
- The organization may end up missing some market opportunities.
- Price reduction.
- Price wars from existing companies.
- High competition.
- Reduced profit margins
- Flooded market.
- Lack of timely product adoption.
All ten hazards affect the company’s success, but lower prices and higher manufacturing costs are the most critical roadblocks to market penetration. To attract customers, Southwest Airlines must keep its price structure competitive. As a result of this approach, the company is being pushed to spend more money on advertising to expand its market share and boost profits. Due to these two threats, the company’s profit margins might be eroded, and particular services could be canceled.
References
Ansoff, H. I., Kipley, D., & Lewis, A. O. (2018). Implanting strategic management. Cham, Switzerland: Palgrave Macmillan. Web.
Chishty-Mujahid, N. (2017). Southwest Airlines’ successful economistic, cost-leadership strategy examined in light of Paul Lawrence’s renewed Darwinian theory: An analysis. Journal of Global Business Insights, 2(2), 115–123. Web.
Macrotrends, (2019). Southwest Airlines revenue 2006-2019. Web.
Southwest Airlines. (2020). Southwest Airlines Co. 2020 Annual Report to Shareholders (pp. 1–172). Dallas, Texas: Southwest Airlines.
Voigt, K. I., Buliga, O., & Michl, K. (2017). Pioneer in the Skies: The Case of Southwest Airlines. In Business Model Pioneers (pp. 171-184). Springer, Cham. Web.
Wang, H., & Gao, X. (2020). Oil price dynamics and airline earnings predictability. Journal of Air Transport Management, 87, 101854. Web.