Anjani ManuriEPGDBM-04Roll-D02How does Southwest Airlines get its competitive advantage?There were three keystones to Southwest Airlines’ competitive advantage. The first lied inits employees and how they were managed. Secondly, the firm sought to identify majorthreats and opportunities in their competitors, and assess how Southwest could improve andcapitalize on markets where their competition failed. And the final significant success factorwas the company’s cost structure.Former CEO, Herb Kelleher, was a prime example of how Southwest fostered a healthyinternal environment. He interacted with customers and employees, promoted companyparties and understood that the firm was only as strong as its employees. Employeesatisfaction was crucial. Therefore, the human resources department (“the PeopleDepartment”) encouraged employees to give feedback and to ask questions. Its peoplewere so important, that the firm is very selective in the recruiting process. Since teamworkis critical, the wrong people could ‘spoil the pot’.Southwest remained aware of their ever-changing strengths, weaknesses, opportunities, andthreats. They seized opportunities to expand when other airlines closed their airlineservices to some cities that they deemed unprofitable. They concentrated on flying toairports that were underutilized and close to metropolitan areas. Eliminating central hubscreated efficiency, in which flights had point-to-point routes without connection flights,because delays were often associated with connection flights. Therefore, a Southwestaircraft spent more hours in the air than its competitors, on average.Cost efficiency was a two-front strategy for the firm; it not only reduced the firms spending,but it also allowed them to pass the cost reduction onto the customers through providinglower fares. Southwest found that a swift turn-around of an aircraft created cost advantage.Southwest is profitable because of two factors: its low costs and the loyalty of its customers.Its low costs come from a number of sources. Southwest offers a no-frills approach tocustomer service. No meals are served on board, and there are no first-class seats.Southwest does not subscribe to the big reservation computers used by travel agentsbecause it deems the booking fees too costly. The airline flies only one type of aircraft, thefuel-efficient Boeing 737, which keeps training and maintenance costs down. Last but notleast, the airline has a very productive work force. Southwest employees say that they arewining to work hard because they feel appreciated by the top management. The CEO, Herb
Kelleher, has been known to help flight attendants serve drinks and help maintenanceengineers service planes. As one flight attendant put it, the airline’s employees work hardbecause “you don’t want to let Herb down.” In addition, Southwest operates a generousstock option plan that extends to all employees. As a result about 10 percent of the airline’sstock is owned by its employees, which gives them an additional incentive to work hard.Southwest’s customer loyalty also comes from a number of sources. Due to its low coststructure, Southwest can offer its customers low prices, which builds loyalty. Southwest alsohas a reputation for being the most reliable carrier in the industry. It has the quickestturn-around time in the industry (it takes a Southwest ground crew just fifteen minutes to turnaround an incoming a craft and prepare it for departure), which helps keep flights on time.The company also has a well-earned reputation for listening to its customers. For example,when five Texas medical students who commuted weekly to out-of-state medical schoolcomplained that the flight them to class fifteen minutes late, Southwest moved the departuretime up fifteen minutes. In addition, South west’s focused route structure (it serves justfifteen states, mostly in the South) has helped it build a substantial regional presence andavoid some of the cutthroat competition that the nationwide airlines have to grapple with.Southwest’s employees are incredibly loyal, and they are a key part of the company’s overallstrategy. Having happy employees means a company is more likely to have happycustomers. Southwest knows this and uses it to its advantage. The company knows how touse motivation tactics that work for their employees. In line with Douglas McGregor’s TheoryY employees, workers at Southwest enjoy their jobs and see them as a natural part of theirlives. They don’t need to be coerced with threats or promises. Southwest’s employeesgenuinely enjoy their jobs and want to pass that enjoyment on to their customers. Thisattitude is reflected in Southwest’s employee retention rate of 92.3% (a key indicator thatemployees love Southwest and want to work there). And an employee who loves theircompany will make customers love that company, too.To reach its highly competitive position, Southwest Airlines has focused on four mainstrategies: being low-cost, employee-driven, future-minded, and differentiated.Customers can easily see Southwest’s low-cost, employee-driven strategies, but what theycan’t always see is Southwest’s internal strategy. One of the company’s main focuses is ondifferentiation. This is an interesting strategy choice because differentiation is usually seen inhigh-price and/or unique product companies (such as BMW or Starbucks). Still, this is one ofSouthwest’s key choices, and they are making it work.One of their key differentiation strategies is their Rapid Rewards frequent flyer program.According to their financial statements, Southwest has revamped their system so“...members are able to redeem their points for every available seat, every day, on everyflight, with no blackout dates; and...points do not expire so long as the Rapid RewardsMember has points-earning activity during a 24-month time period.” Many airlines havesimilar, but much more complicated rewards systems, so Southwest’s emphasis on flexibilityseparates them from the rest of the pack. They also make use of their Chase® Visa creditcard to help their customers earn and redeem points. This system brings in new customers,
increases business from existing customers, and strengthens Rapid Rewards partnershipswithin its various divisions. Southwest has already seen this new rewards plan pay off bymeeting and passing all of their expected growth goals. They’ve increased their overallbusiness and given customers what they want. This company excels at being attuned tocustomer needs - they know that if you give people what they want, they will give you whatyou want.Southwest’s other key differentiation strategy is what they call “aggressive promotion.” Theytake their key messages, put them into easy-to-understand commercials, and let thestrategies themselves do the talking."Our people are our single greatest strength and most enduring longterm competitiveadvantage."Gary Kelly, CEO Southwest AirlinesHow does Southwest Airlines execute its strategy?About 40 years ago, Rollin King and Herb Kelleher got together and decided to start adifferent kind of airline. Southwest Airlines founded in 1971 and it was a novel businessmodel innovation that breaks all the rules.They began with one simple notion:If you get your passengers to their destinations when they want to get there, on time,at the lowest possible fares, and make darn sure they have a good time doing it,people will fly your airline.The airline has surmounted incredible challenges that no other airline has yet achieved; ahistory of continued profitability year after year since 1973.To reduce operating costs, the company operates a fleet consisting exclusively of Boeing737s, nothing more or less.The company has used a "tongue in cheek" approach to attract customers by creating a funand inviting atmosphere both for its employees and customers.Most people are familiar with the familiar ding and "You are free to move about the country"tagline on Southwests commercials. Southwests ability to control costs coupled with anuncanny and exciting marketing strategy have helped drive its bottom line profitability andpopularity.Most would consider Southwests cost cutting strategy to lie chiefly within its airlineoperations and ticket pricing, but the company has also made great strides in consolidatingits database system, resulting in greater efficiency and profitability for the airline. Thecompany operates approximately four-hundred enterprise applications that handle company
functions ranging from aircraft maintenance reservation systems to reservations andticketing. Southwest migrated all of its applications that utilize Oracle software to one versionfor simplicity and ease in applying system-wide updates. This strategy representsSouthwests ability to identify an opportunity for cost savings and greater system reliabilityand act on it to realize these benefits.Wiseth (2004) explains that Southwest took a proactive approach to the consolidation effortby involving not only the technical experts responsible for the changeover but also thestakeholders using the system. The companys willingness to enlist the expertise of industryexperts alongside system users demonstrates the companys ability to articulate a vision andmake it function seamlessly. Southwest also ensured that it educated the stakeholders aboutthe benefits associated with using a unified Oracle platform, while also laying out theresponsibilities various work teams would have to ensure programs throughout the companywere ready for the Oracle transformation. Southwest demonstrated a knowledgeableapproach throughout the entire transformation process by getting input from employeesthroughout the company, utilizing knowledgeable experts, and planning ahead for thetransformation to the unified Oracle platform; a clear indication that the company performedthe necessary research before the changeover.Southwests airline operations have varied dramatically from other airlines and helpedcontribute to the companys success. Inkpen (2005) reports that Southwest is the only majorairline that doesnt have a "hub and spoke" system. Brelis (2000) reports that Southwestsprimary aim has never been to capture market share like the other major airlines, but insteadthe continued pursuit of maintaining low operating costs which in turn provides passengerswith cheaper ticket prices.Southwests history of profitability and general success has recently been termed as the"Southwest effect," based on the airlines ability to enter markets with rates that maintainprofitability yet centred around cost conscious operations and high aircraft use. Theunderlying notion of the Southwest effect is that markets will vastly change when a low farecarrier enters them, resulting in historically large surges of market activity. In this instance,Southwests strategy revolving around simplicity created a name for the company that hasacted as a business concept in the airline industry which many other airlines would love toemulate. However, as Southwests president and COO Colleen Barrett explains, "They dontget it. What we do is very simple, but its not simplistic. We really do everything with passion.We scream at each other and we hug each other".Southwest has certainly conducted in-depth research but in a different manner by setting thestandards for the airline industry instead of following them.Southwest has also demonstrated expertise in handling its most important asset, theemployee base that makes the company tick day in and out. Herb Kelleher, the companysco-founder, takes little credit himself for the success of the company, stating "I am not allthat special. It is not like we have some formula here like E equals MC squared. It is atremendous mosaic made up of thousands of people".The company asserts that "employees come first, customers second".
Southwests ability to capitalize on its employee resources by maintaining a fun workenvironment demonstrates the company understands the link between employee morale andproductivity. The company also shatters the standard hierarchical framework used by manycompanies today, allowing employees to go around supervisors for answers if necessary.Southwests approach to "keep it simple" has been a major contributor to the companyssuccess.Another way that Southwest Airlines manages their business in a “simpler” style is by notbothering with elaborate in-flight service options. Instead of serving meals, Southwest servesa simple soda and bag of pretzels. Going with a “no frills” approach helps Southwest Airlineskeep costs down and the customers know what they’re getting – you don’t fly Southwest ifyou want a fancy in-flight meal. Instead, you’re getting a cheap plane ticket that gets youwhere you want to go.How can you do more to clarify your customers’ expectations for your business? How canyou let people know what kind of experience they can expect, without any disappointment orconfusion?Southwest Airlines has a unique boarding procedure – instead of assigning seat numbers,passengers can claim their seats on the plane on a “first come, first serve” basis, without any“first class,” “business class” and “coach” seating distinctions. This style of boarding theplane puts passengers in a more egalitarian setting. Most people can’t afford to fly first class,so instead of trying to extract higher ticket prices out of the few people willing to payhundreds of dollars extra per seat, Southwest focused on the experience of the vast majorityof passengers.Also, unlike most other airlines, Southwest does not charge any fees for checked bags.“Bags Fly Free” is the marketing tagline – and this attitude reinforces the image thatSouthwest wants to project: that they’re not like the other airlines, that they won’t nickel anddime their customers with annoying fees, that they stick up for “the little guy” in an industrythat often disappoints.Perhaps some of the biggest management strategy lessons from Southwest Airlines is theidea that your business can stand for something bigger than making money and still bemassively profitable.Although Southwest maintains simplicity, the company is a complex operation. However,Southwests history of profitability has proven it as a leader in the aviation industry.The simple approach to doing business is imparted throughout the culture at Southwest.However, the company hasnt skipped a beat in ensuring the necessary research andfeedback has been completed in the past. The convergence of Southwests various softwareplatforms to a universal Oracle program illustrates the companys ability to discover cost-savings opportunities and devise a means to achieve a goal. Furthermore, Southwest hascreated an atmosphere that is fun and exciting for its employees by placing them first. Manycompanies stress the importance of their employees but the employees feel as if theyre thesecondhand cog in the wheel. Not so at Southwest, who readily asserts employees comefirst. The simple understanding that happy employees equates to a happy and productiveworkforce are paramount at Southwest. The company also created an industry trend with the"Southwest effect," illustrating how the entrance of a low-cost airline into a new market will
infuse it with new activity. The company should continue to pursue cost-savingsopportunities and do things differently than the competition. These are key attributes thathave allowed Southwest to stand out from its competition in the past and continual pursuit ofnew opportunities that are closely scrutinized and researched will allow Southwest tocontinue on its steadfast path of profitability.