Executive Summary
Southwest Airlines was incorporated in 1967, but it did not start operations until 1971 following court battles launched by rival companies to bar its entry. Under the leadership of Rollin King, the firm overcame its rivals in the courts and commenced its operations in 1971. The company has gained customers’ loyalty, and by the end of 2014, it was one of the best companies in the airline industry. Its success is founded on its provision of exceptional travel services at considerably lower prices. The company has expanded its domestic market share gradually by expanding its services to other cities. However, the firm has faced a myriad of challenges, among them being legal proceedings instigated by rivals to oust it from the market. The organization has also endured other setbacks ranging from the high cost of jet fuel to stiff competition from players in the industry.
Strategies and challenges
Since 1973 when Southwest Airlines recorded its first-ever profits, the firm’s net profit has grown gradually as it continues to acquire a sizeable domestic market share. The success may be associated with different strategies that have worked in favor of the company. The company has strategies aimed at ensuring that it retains the best talents in the workforce. Since its incorporation, the company has majored on employee satisfaction as a primary goal. This approach ensures that the company remains innovative and efficient, thus outsmarting its competitors.
Its strategy to charge lower prices as compared to its rivals heightened competition wars in the industry. Its competitors and pressure groups launched regular court battles against the organization to repel attempts by the firm to enter certain markets. A case in point is the attempt by the company to commence operation in small towns of Texas. The company faced opposition from rivals who argued that the Texan market was already saturated and that the entry would only compound the problem of traffic. They argued that the low fees charged by the company would cause an increase in travelers leading to the high cost of traffic control.
Since the 1970s, the organization has operated under the strategy of sustained growth whereby it penetrates the domestic market slowly by introducing more planes to run from Houston to other cities. Moreover, the company strives to offer differential services to gain customer loyalty. The company won various awards for being the best air travel company in terms of customer satisfaction. The awards boosted the company’s reputation among customers, thus giving it a greater competitive advantage over its rivals. The company maintained a culture that favored the strategy of quality services to customers to acquire a bigger market share over competitors.
The challenges that the firm faced in its initial stages presented an opportunity to assess its strengths and weaknesses. Following its endurance of the numerous court battles, a “combative can-do culture” evolved within the company. Under the culture, every stakeholder was convinced that the challenges were seasonal and that the company would prevail. The firm’s CEOs mentioned the lessons that they learned from the battles on various occasions, saying that the setbacks only strengthened the company instead of weakening it as envisaged.
Recommendations
Since the company has already established a good reputation among its customers, and it has indisputable strength compared to its competitors, it needs to focus on innovation to improve the customers’ experience. The company should invite reviews from customers through social media and comment cards to gain insight into the clients’ needs not yet covered in the current services. There is a need to embrace technology while handling customers to replace the paperwork. The use of technology will lead to a decrease in operation costs, thus allowing the company to charge lower prices in line with its policies.
Given that the company’s services have a wide acceptance in the local market, the firm needs to embark on research to find out the possibility of penetrating the international market. The company needs to partner with other reputable international companies for easier entry into the global market. The world market would make the company more profitable in the long-term since it will act as a supplement to the domestic revenue. Moreover, it will act as security for the company against loss in case the domestic market fails in the future. Besides, the company should expand its local market share by increasing the number of regions that it serves. Currently, the company is reluctant to operate in airports considered to have heavy traffic.
Lastly, the company needs to increase the investments that it makes on its employees. The additional investment should be directed to the training of the new and the current employees. The employees’ remuneration should be matched with performance, and new ideas should be rewarded to encourage innovation. Motivated employees will see the company retain its competitive advantage, as they will continue being innovative, thus resulting in improved customer satisfaction.
Industry and Competitive Analysis
Dominant Economic Characteristics
Market size
The company invested heavily in employees to ensure that it retained the best talent in the market. The quality of services that the company offered attracted more and more customers, thus making it one of the most attractive entities in the industry. Moreover, the company was guided by the principle of customer-centered services that ensured that it gained customer loyalty. Due to its exceptional services to customers, it won various awards that boosted the customers’ loyalty further. The policy to maintain sustainable growth advanced its ability to acquire a large market share. The company slowly expanded its areas of operation to cover almost all cities in the US.
Degree of Product Differentiation
The company’s operations were guided by the principle of employee satisfaction that, in turn, translated into customer satisfaction. In the early years, the firm provided customers with free alcoholic drinks during daytime travels. Besides, the company ensured that the travelers’ luggage was secured maximally to avoid customer complaints. The company won various awards for the best customer service and minimal complaints from clients. The timing of the flights was also convenient.
Product Innovation
The firm ensured that it recruited the best employees and paid them competitive salaries to avoid staff turnover. The company operated under a strategy of not laying off workers and promoting from within the company. The mentioned incentives led to motivation among the workforce, not to mention that it sparked innovation. The company encouraged its employees to attempt new things to make it different from its rivals. In its initial years, the company embarked on the following innovative endeavors:
- The recruitment of young hostesses and requiring them to wear hot panties
- The provision of free drinks to passengers during day flights
- Adopting slogans based on its route of operation such as “love birds” for planes operating in the Dallas love field
- Employing enough off-loaders to maximize the number of daily flights
- Matching the flight fee with the nature of customers and time of travel
- Operating from the most convenient airports to increase ease of customer access
Most recent innovations by the company include:
- Installation of blended wings to cut down the operation costs without hiking the fees charged to clients.
- Minimizing engine idle speed for planes while on the ground
- Using auto-throttle and vertical navigation to increase speed
- Allowing online ticket acquisition and seat preservation
Vertical integration
The company was entirely vertically integrated as it encouraged its employees to remain innovative to offer differential services. Besides, the firm discouraged outsourcing and adopted a strategy of inclusivity of all expenses in the set prices.
PESTEL Analysis
Political Condition
Politics has played a great role in influencing the business of the firm through the enactment of laws that limit the company’s operation. The Wright Amendment Act of 1979 limited airline operations from Dallas Love Field to only Texas, Louisiana, Arkansas, Oklahoma, and New Mexico. The Act cut short the dreams of Southwest Airlines to expand its market share by limiting its expansion to other cities and states. The Act was prompted by vigorous lobbying by pressure groups that influenced policymakers to amend the Airline Deregulation Act of 1978. Southwest Airlines had made an application for a license to operate from Houston to New Orleans, and this move attracted the mentioned amendment. The amendment is indicative of the political environment ‘s influence on the company.
Economic Condition
The company had to adjust its operations during the various seasons, with its operations peaking at the boom seasons. The high cost of jet fuel highly affected the company’s strategies in its endeavor to maintain quality services at a regulated cost. For example, the firm engaged all types of employees in cleaning the plane after landing to facilitate the next flight. Rivals employed select employees to clean their planes. The additional employees increased the overall operation costs, and they had to adopt a similar strategy to that of Southwest Airlines.
Social Condition
The exceptional services offered to customers and the minimal customer complaints influenced the peoples’ perception regarding air travel. Moreover, the friendly approach to customers encouraged them to embrace air transport.
Technological Condition
Southwest Airlines adopted the use of technology in customer service and other operations to achieve customer satisfaction. For example, customers would acquire travel tickets from the company’s website as opposed to over the counter purchases.
Environmental Condition
The company south to preserve the environment by maintaining friendly business practices. The company collected all the wastes dumped by its customers in the plane and in the airports in which it operated. Every employee, including the cabin crews, would assist in preserving the environment by ensuring that all the wastes were disposed of in the right manner.
Legal Condition
The company operated in different cities, and it had to comply with the respective rules imposed by municipal councils of the various regions. The legislation governing the domestic airlines kept changing, and thus, the company had to be flexible to keep up with the changes.
Five Forces Analysis
Competition from Rivals: Moderate
Competition in the industry was high since some big companies operated in both the domestic and the international markets. Some of the competitors had penetrated the industry long before Southwest Airline, and thus, they had established a huge market share. Braniff and Texas International were the most notable rivals of the company, and they used their public influence to alter policies. However, despite the stiff rivalry, Southwest Airlines was a market leader due to its exceptional services to customers. The company invested heavily in its employees to motivate them to satisfy the customers.
The company benefited from economies of scale in its purchasing of planes and spare parts for the jets. Moreover, there were numerous suppliers of planes and maintenance services; hence the company would select the cheapest option.
Buyers bargaining power: High
Inasmuch as the company had acquired a bigger market share as compared to its competitors, customers were likely to shift to other airline services’ providers in case of dissatisfaction. Thus, the company’s decisions were likely to be affected by the clients.
Threat from New Entrants: Weak
The air transport industry was saturated; hence new entrants would face stiff competition from the already existing travel companies. The companies specializing in the industry had apportioned the domestic market among themselves, thus minimizing the threat of new entrants. Moreover, penetrating the industry would require a huge initial investment with no guaranteed returns.
Threat from Substitutes: Moderate
The rival companies in the sector provided alternative services to customers, thus threatening the firm’s survival. Even though Southwest Airlines offered superior services to its competitors, customers were likely to use other carriers in case of displeasure.
Driving Forces Analysis
Innovations
The mission of the company was to dominate the local market by offering exceptional services to customers. Therefore, to achieve the said objective, the company encouraged innovations through encouraging its workforce to do things differently. Some of the notable innovations include
- Charging varying fees at different times of the day to satisfy all classes of customers
- Airing creative ads
- Charging an all-inclusive fee that included all the expenses such as drinks and baggage fee
- Point to point scheduling of flights
- The installation of blended winglets on all the planes to cut costs
- Minimizing engine idle speed for planes while on the ground
- Using auto-throttle and vertical navigation to increase speed
- Allowing online ticket acquisition and seat preservation
Changing lifestyles
The company analyzed the customers’ economic status and lifestyles before making major decisions. The firm used the strategy of charging low prices to reach customers whose social class limited their capacity to travel via other companies. By charging considerably lower prices as compared to the competitors, low-class individuals were in a position to access the services.
Key Success Factors
Product
The company insisted on service differentiation to guarantee customer satisfaction. The firm recruited employees based on the demands of the particular job that the prospective employees were expected to undertake. Besides, employees were awarded competitive salaries to encourage innovation and customer satisfaction. The company maintained its operating costs as low as possible to facilitate cheap transport fees. Customer satisfaction, coupled with the low prices for services offered, earned the firm unparalleled acceptance among travelers.
Employees
The company believed that the employees were the greatest assets that it had, and thus, it invested heavily in them. Employees were rewarded competitively, and promotions were effected from within the workforce. Moreover, the organization had a nondiscriminatory training program to ensure that all the staff benefited from continuous training. The incentives provided by the company motivated the workforce to work towards achieving the set objective. Teamwork was highly encouraged whereby each employee would perform any unattended tasks irrespective of one’s job description. The company retained the best talents by avoiding layoffs that would increase the operating costs. The top managers and CEOs were friendly to employees, and they even rejected individual addresses such as “Sir.” Kelleher indulged in the personal lives of the employees and associated closely with them to gain insight about their satisfaction levels. All the mentioned factors motivated employees to work towards achieving the set targets.
Resources and Capabilities Analysis (VIRN (E))
Going by the table presented above, Southwest Airlines had advantages in all the aspects in question. Even though the services that it offered were substitutable, they were valuable and rare. Moreover, it had a devoted workforce made up of innovative individuals who put the company ahead of the competitors. The relationship with suppliers was also good, apparently due to its enormous size coupled with a large number of dealers.
SWOT Analysis
Strengths
The company had created a good reputation among customers that boosted its competitive advantage. The prices charged were lower yet competitive compared to those charged by the rivals.
Weaknesses
The company’s strategy of charging low fees ignited battles with competitors leading to a loss in revenue in terms of legal fees paid in defense. Besides, the company overemphasized the local market, whereas the global market would boost its earnings.
Opportunities
The company has gained customer loyalty owing to the excellent services that it offers to the local clients. It should use its current influence to penetrate the global market to maximize its revenues.
Threats
The immediate threat that the company faces is competition from its rivals, who are equally strong and have a great influence on the market. The increasing costs of jet fuel, together with changes in legislation, also pose a significant danger to the company’s survival. The threat of new entrants is minimal since the market is saturated.
Current strategy
The company remains focused on dominating the local market, and it has no plans to penetrate the international market. Its main agenda is to maintain low fees by cutting down the operational costs. The strategies in place to lower the operation costs include
- The installation of blended winglets on all the planes to lower cost
- Minimizing engine idle speed for planes while on the ground
- Using auto-throttle and vertical navigation to increase speed
- Allowing online ticket acquisition and seat preservation
In the past, the company has avoided airports with high traffic to avoid costs associated with delays in the landing. However, in the recent past, the company has exhausted all the airports with low traffic, and it is considering making a partial investment in airports with high traffic to maximize its market share.