1. Anjani Manuri
EPGDBM-04
Roll-D02
How does Southwest Airlines get its competitive advantage?
There were three keystones to Southwest Airlines’ competitive advantage. The first lied in
its employees and how they were managed. Secondly, the firm sought to identify major
threats and opportunities in their competitors, and assess how Southwest could improve and
capitalize on markets where their competition failed. And the final significant success factor
was the company’s cost structure.
Former CEO, Herb Kelleher, was a prime example of how Southwest fostered a healthy
internal environment. He interacted with customers and employees, promoted company
parties and understood that the firm was only as strong as its employees. Employee
satisfaction was crucial. Therefore, the human resources department (“the People
Department”) encouraged employees to give feedback and to ask questions. Its people
were so important, that the firm is very selective in the recruiting process. Since teamwork
is critical, the wrong people could ‘spoil the pot’.
Southwest remained aware of their ever-changing strengths, weaknesses, opportunities, and
threats. They seized opportunities to expand when other airlines closed their airline
services to some cities that they deemed unprofitable. They concentrated on flying to
airports that were underutilized and close to metropolitan areas. Eliminating central hubs
created efficiency, in which flights had point-to-point routes without connection flights,
because delays were often associated with connection flights. Therefore, a Southwest
aircraft 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 providing
lower 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 to
customer 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 agents
because it deems the booking fees too costly. The airline flies only one type of aircraft, the
fuel-efficient Boeing 737, which keeps training and maintenance costs down. Last but not
least, the airline has a very productive work force. Southwest employees say that they are
wining to work hard because they feel appreciated by the top management. The CEO, Herb

2. Kelleher, has been known to help flight attendants serve drinks and help maintenance
engineers service planes. As one flight attendant put it, the airline’s employees work hard
because “you don’t want to let Herb down.” In addition, Southwest operates a gener­ous
stock option plan that extends to all employees. As a result about 10 percent of the airline’s
stock 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 cost
structure, Southwest can offer its customers low prices, which builds loyalty. Southwest also
has a reputation for being the most reliable carrier in the industry. It has the quickest
turn-around time in the industry (it takes a Southwest ground crew just fifteen minutes to turn
around 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 school
complained that the flight them to class fifteen minutes late, Southwest moved the departure
time up fifteen minutes. In addition, South west’s focused route structure (it serves just
fifteen states, mostly in the South) has helped it build a substantial regional presence and
avoid 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 overall
strategy. Having happy employees means a company is more likely to have happy
customers. Southwest knows this and uses it to its advantage. The company knows how to
use motivation tactics that work for their employees. In line with Douglas McGregor’s Theory
Y employees, workers at Southwest enjoy their jobs and see them as a natural part of their
lives. They don’t need to be coerced with threats or promises. Southwest’s employees
genuinely enjoy their jobs and want to pass that enjoyment on to their customers. This
attitude is reflected in Southwest’s employee retention rate of 92.3% (a key indicator that
employees love Southwest and want to work there). And an employee who loves their
company will make customers love that company, too.
To reach its highly competitive position, Southwest Airlines has focused on four main
strategies: being low-cost, employee-driven, future-minded, and differentiated.
Customers can easily see Southwest’s low-cost, employee-driven strategies, but what they
can’t always see is Southwest’s internal strategy. One of the company’s main focuses is on
differentiation. This is an interesting strategy choice because differentiation is usually seen in
high-price and/or unique product companies (such as BMW or Starbucks). Still, this is one of
Southwest’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 every
flight, with no blackout dates; and...points do not expire so long as the Rapid Rewards
Member has points-earning activity during a 24-month time period.” Many airlines have
similar, but much more complicated rewards systems, so Southwest’s emphasis on flexibility
separates them from the rest of the pack. They also make use of their Chase® Visa credit
card to help their customers earn and redeem points. This system brings in new customers,

3. increases business from existing customers, and strengthens Rapid Rewards partnerships
within its various divisions. Southwest has already seen this new rewards plan pay off by
meeting and passing all of their expected growth goals. They’ve increased their overall
business and given customers what they want. This company excels at being attuned to
customer needs - they know that if you give people what they want, they will give you what
you want.
Southwest’s other key differentiation strategy is what they call “aggressive promotion.” They
take their key messages, put them into easy-to-understand commercials, and let the
strategies themselves do the talking.
"Our people are our single greatest strength and most enduring longterm competitive
advantage."
Gary Kelly, CEO Southwest Airlines
How does Southwest Airlines execute its strategy?
About 40 years ago, Rollin King and Herb Kelleher got together and decided to start a
different kind of airline. Southwest Airlines founded in 1971 and it was a novel business
model 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; a
history of continued profitability year after year since 1973.
To reduce operating costs, the company operates a fleet consisting exclusively of Boeing
737's, nothing more or less.
The company has used a "tongue in cheek" approach to attract customers by creating a fun
and 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 Southwest's commercials. Southwest's ability to control costs coupled with an
uncanny and exciting marketing strategy have helped drive its bottom line profitability and
popularity.
Most would consider Southwest's cost cutting strategy to lie chiefly within its airline
operations and ticket pricing, but the company has also made great strides in consolidating
its database system, resulting in greater efficiency and profitability for the airline. The
company operates approximately four-hundred enterprise applications that handle company

4. functions ranging from aircraft maintenance reservation systems to reservations and
ticketing. Southwest migrated all of its applications that utilize Oracle software to one version
for simplicity and ease in applying system-wide updates. This strategy represents
Southwest's ability to identify an opportunity for cost savings and greater system reliability
and act on it to realize these benefits.
Wiseth (2004) explains that Southwest took a proactive approach to the consolidation effort
by involving not only the technical experts responsible for the changeover but also the
stakeholders using the system. The company's willingness to enlist the expertise of industry
experts alongside system users demonstrates the company's ability to articulate a vision and
make it function seamlessly. Southwest also ensured that it educated the stakeholders about
the benefits associated with using a unified Oracle platform, while also laying out the
responsibilities various work teams would have to ensure programs throughout the company
were ready for the Oracle transformation. Southwest demonstrated a knowledgeable
approach throughout the entire transformation process by getting input from employees
throughout the company, utilizing knowledgeable experts, and planning ahead for the
transformation to the unified Oracle platform; a clear indication that the company performed
the necessary research before the changeover.
Southwest's airline operations have varied dramatically from other airlines and helped
contribute to the company's success. Inkpen (2005) reports that Southwest is the only major
airline that doesn't have a "hub and spoke" system. Brelis (2000) reports that Southwest's
primary aim has never been to capture market share like the other major airlines, but instead
the continued pursuit of maintaining low operating costs which in turn provides passengers
with cheaper ticket prices.
Southwest's history of profitability and general success has recently been termed as the
"Southwest effect," based on the airline's ability to enter markets with rates that maintain
profitability yet centred around cost conscious operations and high aircraft use. The
underlying notion of the Southwest effect is that markets will vastly change when a low fare
carrier enters them, resulting in historically large surges of market activity. In this instance,
Southwest's strategy revolving around simplicity created a name for the company that has
acted as a business concept in the airline industry which many other airlines would love to
emulate. However, as Southwest's president and COO Colleen Barrett explains, "They don't
get it. What we do is very simple, but it's 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 the
standards for the airline industry instead of following them.
Southwest has also demonstrated expertise in handling its most important asset, the
employee base that makes the company tick day in and out. Herb Kelleher, the company's
co-founder, takes little credit himself for the success of the company, stating "I am not all
that special. It is not like we have some formula here like 'E equals MC squared.' It is a
tremendous mosaic made up of thousands of people".
The company asserts that "employees come first, customers second".

5. Southwest's ability to capitalize on its employee resources by maintaining a fun work
environment demonstrates the company understands the link between employee morale and
productivity. The company also shatters the standard hierarchical framework used by many
companies today, allowing employees to go around supervisors for answers if necessary.
Southwest's approach to "keep it simple" has been a major contributor to the company's
success.
Another way that Southwest Airlines manages their business in a “simpler” style is by not
bothering with elaborate in-flight service options. Instead of serving meals, Southwest serves
a simple soda and bag of pretzels. Going with a “no frills” approach helps Southwest Airlines
keep costs down and the customers know what they’re getting – you don’t fly Southwest if
you want a fancy in-flight meal. Instead, you’re getting a cheap plane ticket that gets you
where you want to go.
How can you do more to clarify your customers’ expectations for your business? How can
you let people know what kind of experience they can expect, without any disappointment or
confusion?
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 the
plane 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 pay
hundreds of dollars extra per seat, Southwest focused on the experience of the vast majority
of 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 that
Southwest wants to project: that they’re not like the other airlines, that they won’t nickel and
dime their customers with annoying fees, that they stick up for “the little guy” in an industry
that often disappoints.
Perhaps some of the biggest management strategy lessons from Southwest Airlines is the
idea that your business can stand for something bigger than making money and still be
massively profitable.
Although Southwest maintains simplicity, the company is a complex operation. However,
Southwest's 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 hasn't skipped a beat in ensuring the necessary research and
feedback has been completed in the past. The convergence of Southwest's various software
platforms to a universal Oracle program illustrates the company's ability to discover cost-
savings opportunities and devise a means to achieve a goal. Furthermore, Southwest has
created an atmosphere that is fun and exciting for its employees by placing them first. Many
companies stress the importance of their employees but the employees feel as if they're the
secondhand cog in the wheel. Not so at Southwest, who readily asserts employees come
first. The simple understanding that happy employees equates to a happy and productive
workforce 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

6. infuse it with new activity. The company should continue to pursue cost-savings
opportunities and do things differently than the competition. These are key attributes that
have allowed Southwest to stand out from its competition in the past and continual pursuit of
new opportunities that are closely scrutinized and researched will allow Southwest to
continue on its steadfast path of profitability.