Business Model Canvas of Discount Airline case study Southwest Airlines - Short version

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Business Modeling case Southwest Airlines
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Business Model Canvas

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Business Model Canvas of Discount Airline case study Southwest Airlines - Short version

  1. 1. Business model canvas of Discount Airline Strategy Case Study 1 Image via Flickr user columbuscameraop © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  2. 2. Background of the case: Discount Airline • Case description based on analysis of Southwest Airlines, but the rules of the strategy can be applied to discount airlines in general. • A low-cost airline is also known as a no-frills, discount or budget carrier or airline. It is an airline that generally has lower fares and limited services. • The term originated within the airline industry referring to airlines with a lower operating cost structure than traditional airlines. • Low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares, because they have different business model. 2© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  3. 3. Identify industry recipe: What are norms of your industry? 3© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  4. 4. In 1970 Airline industry was… 4 Hub and spoke airline system More destinations Premium services for high-end customers Glamour atmosphere © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  5. 5. 5 Create your own recipe: Break all the rules and start a different kind of business © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  6. 6. The core idea of the discount airline business “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.” - Herb Kelleher 6© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  7. 7. • Over 40 years ago, Rollin King and Herb Kelleher got together and decided to start a different kind of airline. • Southwest Airlines started operations in 1971 and it was a novel business model innovation that breaks all the rules. 7© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  8. 8. 8 Charge the lowest possible fare with highest possible volume Charge the highest possible fare with premium services ”Norm strategy” in the airline industry in 1970s New strategy for Southwest Airlines © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  9. 9. Key differences: Network vs. Discount Airline Network Airline • Hub-and-spoke route system • Connected and continental & intercontinental flights • Premium passenger services (seating, meals, lounges) Discount Airline • Nonstop point-to-point routes • Short haul • Limited passenger service (no meals, no seating, no lounges) 9 HUB © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  10. 10. Evidence of success: growth • 1971: begins service between Dallas, Houston, and San Antonio. • 1975: Southwest expands to 5 aircraft • 1981: 2,129 Employees and 27 aircraft • 1991: 9,778 Employees and 124 aircraft • 2001: 29,274 Employees and 344 aircraft • 2007: Southwest Airlines flies over 104 million passengers a year to 64 great cities all across the country, and we do it more than 3,400 times a day. • Net income: $645 million • Total operating revenue: $9.9 billion • Making profit since 1975! 10 Source: www.southwest.com © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  11. 11. 11 A mission statement, while touted as necessary for any company, often is not representative of the true meaning of the company. Source: Guy Kawasaki, Stanford 20.10.2004 © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  12. 12. Southwest Airlines’ Mission The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. Source: www.southwest.com 12© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  13. 13. 13 Develop the true meaning of the company - A mantra is shorter 3-4 words and captures the essence of the organization. Source: Guy Kawasaki, Stanford 20.10.2004 © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  14. 14. 14 Frequent FunLow price Simple I’m free to make my own schedule… I know what to buy… I have afford to fly… I can make a choice… © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  15. 15. Southwest Airlines’ Mantra Source: www.southwest.com 15 Frequent Fun Low price Simple © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  16. 16. Low-cost airline’s customers • Frequent flyers are people, mostly business, who frequently travel between destinations that are average ~800 miles (average aircraft trip length is 630 miles) apart. • Frequent flyers such as ales representatives, construction workers, students, city travelers,… 16© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  17. 17. Value Proposition • Low-cost airline allow business travelers, who could not fly in First Class, to enjoy a premium service. • The key issues keep planes in the air the most of the time (flight time/day). • Southwest is named America’s Most Reliable Airline by Forbes. Southwest proves that low fares don’t have to mean poor service. 17© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  18. 18. Value Proposition linked to Key Activities, Partners and Resources 18© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  19. 19. Customer Relationship & Channels • Business model based on direct and friendly customer relationship • SWA not offering “connections” to other airlines and that’s why there is no need for travel agencies and other resellers. 19© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  20. 20. 20 What we need to must- win, if we charge the lowest possible fare with highest possible volume? © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  21. 21. 21 Fact: The average aircraft trip length is 630 miles with an average duration of one hour and 52 minutes. Source: www.southwest.com © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  22. 22. Growth 22 Hub and spoke airline system Nonstop point-to-point routes High utilization rate © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  23. 23. 23 Economically? © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  24. 24. Charge the lowest possible fare with highest possible volume 24 1. Highest utilization rate Per Flight Aircraft / day © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  25. 25. Must-Win Battle #1: Growth • These the key issues keep planes in the air the most of the time (flight time/day). • Southwest is named America’s Most Reliable Airline by Forbes. • Southwest proves that low fares don’t have to mean poor service. 25© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  26. 26. 26 Operationally? © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  27. 27. 27 High utilization rate (flight & aircraft) Reengineering Work: Don’t Automate, Obliterate* * http://hbr.org/1990/07/reengineering-work-dont-automate-obliterate/ar/1 2. Simple structure © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  28. 28. 28 Fact: Southwest aircraft fly an average of 7 flights per day, or 13 hours per day. Source: www.southwest.com © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  29. 29. Economics of scale 29 More destinations Frequent departures Source: www.southwest.com Simple Structures © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  30. 30. Must-Win Battle #2: Efficiency through simple structures 30 • The process perspective based on simplicity of mainly in-house operations directly with customers • Just one type of aircraft (Boeing 737) keeps costs down related to pilots’ training, spare parts, maintenance, etc. • Create lean organization, flexible, engaged and productive personnel © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  31. 31. 31 Resources? © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  32. 32. 32 3. Lean and productive personnel Reengineering Work: Don’t Automate, Obliterate* © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  33. 33. 33 Fact: In a 2008 TIME.com survey of the friendliest and stingiest airlines, Southwest Airlines ranked no.1 for being the Friendliest Airlines. Source: www.southwest.com © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  34. 34. Personnel 34 Glamour atmosphere Fun LUVing attitude © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  35. 35. 35 Fact: The airline adopted the first profit-sharing plan in the U.S. airline industry in 1973. Through this plan and others, Employees own at least eight percent of the Company stock. Source: www.southwest.com © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  36. 36. Must-Win Battle #3: Productive personnel 36 • Own personnel is the 2nd corner stone of productivity • Company Spirit • Union contracts • Multiskilled personnel • Recruitment © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  37. 37. 37 Fact: Southwest’s average passenger airfare was $114.48 (2007) Source: www.southwest.com © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  38. 38. Very low ticket prices 38 Premium service for high-end customers Limited passenger service © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  39. 39. Must-Win Battle #4: Very low ticket prices 39 • Economic business model: • Low margin & high volume • High utilization rate is the key to keep business profitable all the time © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  40. 40. Simple Rules • 1.Decision making rules • Midsized cities & secondary airports • Standardized fleet of Boeing 737 aircraft • Only hire persons fit in profile • 2.Boundary rules • Very low ticket prices • Limited Service: No meals, No seating, No baggage transfer • No connections with other airlines • Short haul flights • 3.Activity rules • Point-to-point service • Frequent departures • 4.Performance rules • 25-minutes gate turnaround • High utilization rate 40 Source: Ala-Mutka 2008 p. 185-188, see also Eisenhardt & Sull 2001 Simple Rules © Jukka Ala-Mutka / jukkaam.com / @jukkaam
  41. 41. The whole BMC Model 41© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  42. 42. Methodology of the Analysis • The structure of the analysis is based on so called Business Model Canvas and strategy as a visual model • The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances[1]. • It assists firms in aligning their activities by illustrating potential trade- offs. The Business Model Canvas was initially proposed by Alexander Osterwalder[2] based on his earlier work on Business Model Ontology.[3] • See more from Wikipedia Business Model Canvas. • See creative commons license from http://www.businessmodelgeneration.com • Used canvas is further modified, but include all building blocks as original. © Cone Advisor 42
  43. 43. Customer-driven approach to business modeling 1.2.3. 4. 5. 6. 7. 8.9. 1. Customers 2. Value Proposition 3. Activities 4. Resources 5. Partners 6. Customer Relationships 7. Channels 8. Revenue Streams 9. Cost Structure 43© Jukka Ala-Mutka / jukkaam.com / @jukkaam
  44. 44. Author @jukkaam © Jukka Ala-Mutka / jukkaam.com / @jukkaam 44 Contact: https://jukkaam.com/businesscard Serial entrepreneur, speaker, scientist and consultant Contact me for assignments: • Consulting & Training • Keynote Speaker • Board Member • Co-Founder

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