The sky is the limit -Off towards newshores.Client: United Airlines
Sabrina Fruehauf – November 2012Table of Contents   1. The Client: United Airlines   2. Statement of purpose          a. S...
Sabrina Fruehauf – November 2012       1. TheClient: United AirlinesUnited Airlinesreached out to the Solutions Group in O...
Sabrina Fruehauf – November 2012  Figure 1: Static positioning model for airline industry, November 2012The model indicate...
Sabrina Fruehauf – November 2012factors like keeping cost low allowed them to attract those customers whose main priority ...
Sabrina Fruehauf – November 2012 move the parent United brand more up-market and to create a new offering “TED” for the co...
Sabrina Fruehauf – November 2012At first glance the map seems very crowded. Most attributes fell along the horizontal axis...
Sabrina Fruehauf – November 2012time arrival. The individual features combined let us calculate a so-called overall featur...
Sabrina Fruehauf – November 2012   Figure 5: Optimal Product for TED, November 2012   Tweaking features that are more impo...
Sabrina Fruehauf – November 2012What becomes evident is that United ranks relatively high on all the features. Southwest i...
Sabrina Fruehauf – November 2012Appendix   1. Output I: Static positioning model for airline industry, November 2012   2. ...
Sabrina Fruehauf – November 2012   3. Output III: Perceptual Mapof airline industry, November 2012
Sabrina Fruehauf – November 2012    4. Output IV: Conjoint Bar Graph for United Airlines, November 2012         x8 = 3 cla...
Sabrina Fruehauf – November 2012   5. Output V: Overall Feature Importance for Airline Industry, November 2012  Percent of...
Sabrina Fruehauf – November 2012   7. Output VII: Value Curve for United, TED and Southwest, November 2012
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Compete with a disruptive innovator

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Strategy for United Airlines to compete with Southwest

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Compete with a disruptive innovator

  1. 1. The sky is the limit -Off towards newshores.Client: United Airlines
  2. 2. Sabrina Fruehauf – November 2012Table of Contents 1. The Client: United Airlines 2. Statement of purpose a. Static and dynamic positioning of United Airlines and Southwest 3. Recommendations a. Perceptual Mapping study b. Conjoint Analysis c. Value Curve (Blue Ocean Strategy) 4. Appendix
  3. 3. Sabrina Fruehauf – November 2012 1. TheClient: United AirlinesUnited Airlinesreached out to the Solutions Group in October 2012 after facingsteady erosion of itsprofitability and market share. Given an increasingly competitive airline industry, in particular theemergence of a once upstart airline Southwest, United Airlines has gradually lost market share over themonths and is now seeing an opportunity to regain share bysplitting the market and targeting theindividual by offering two customized services: - A parent United brand to target the business end of the market - The introduction of “TED” for the consumer segment as a direct competitor of SouthwestThe Solutions Group feels honored to be chosen by United Airlines as the chief consultant on this projectto help revamp United’s brand image and compete more effectively by offering a customized service toboth the consumer and the business segment’s needs. United Airlines is the worlds largest airline in termsof number of destinationswith a net income of US$ 840 MM in 2011.1Ever since its launch, Southwest was able to gain up to four market share points, mostly at the expense ofthe client United Airlines. For the latter, sales had been declining in the past years in particular in theyounger demographic segment such as the ages 23-35. After the latest executive board meeting, anagreement was reached and mission: “Take on Southwest” was initiated. 2. Statement of purpose a. Static and dynamic positioning of United Airlines and SouthwestIn order to make well-grounded recommendations on how to revamp United’s brand image and onwhether it is worth investing in a new model, it is crucial to frame the current industry first byunderstanding static and dynamic positioning. The price-performance curve is an excellent way to showhow the airline industry is shaped and where the individual carriers stand. In every industry thecompeting organizations can be attributed to one of three customer tiers: Operational excellence,customer intimacy and product leadership. The following diagram illustrates United’s static positioningcompared to Southwest’s. It is important to keep in mind that the static positioning model underlies thebasic assumption of there being a positive correlation between price and performance.1 See corporate website of United Airlines, www.united.com
  4. 4. Sabrina Fruehauf – November 2012 Figure 1: Static positioning model for airline industry, November 2012The model indicates that Southwest clearly falls under operational excellence (OE). Theirstrategy is focused on high volume and low margins whereas United concentrate on high marginsand high variety. In order to succeed with an OE strategy, the organization is bound to have acutting-edge Supply Chain, Operations and Service Delivery Management in place. This lowcost structure implies lower costs across the board, ranging from pure monetary costs to usage,maintenance and disposal costs. Lower prices and convenience are what Southwest travelers getat the expense of lower customization and lower level of service. United Airlines customers, onthe other hand can enjoy high performance, more complexity, more functionality and featuresbut they do have to bear higher prices. A natural evolution within every industry is the north-eastmigration. Usually, the competition in the south-west region is so brutal that companies attemptto move up one tier by differentiating themselves from the rest. For the airline industry,Southwest’s strategy is truly disruptive. Prior to them emerging, the industry was shaped by oneairline wanting to be better than the other by offering more features, more destinations, betterservice at a higher cost. Southwest used a different mindset. While the other airlines werebattling each other on higher margins, Southwest stepped in and completely revolutionized theindustry by offering cheaper ticket prices achieved bylower costs and lower traditionalperformance with fewer extras, less perks, only peanuts and no meals, etc. Focusing on some key
  5. 5. Sabrina Fruehauf – November 2012factors like keeping cost low allowed them to attract those customers whose main priority wasjust to get from point A to B without any need for extras. Overserved customers Underserved customersFigure 2: Disruptive model of airline industry, November 2012Figure 2 displays the southwest attackers as low-end disruptors. In green you see the demandslowly changing over time and in blue, the individual airline offerings. What becomes evident isthat the disruptive airline model meets the market needs much earlier than the full serviceairlines and hence captures a bigger portion of the industry demand. Satisficing beats optimizing.The reason why Southwest’s model has worked so well is because the company has recognizedthat as technology and features increase, customers soon become overserved. Companies thatoperate in that upper spectrum don’t do themselves any favor, let alone the majority ofcustomers. Most people demand a service that will bring them to their destination at a low costand preferably on time. United was able to satisfy the underserved customers by beatingcompetition with price leadership, functionality and reliability but once the customer’s needswere fulfilled, this strategy is not optimal any more. Once that point is met, competition isoutdone by operational excellence, speed and low cost.United Airlines has been struggling to respond to this new threat, in particular because in thepast, all they were ever used to is grow and move up the market by adding features in order tocompete with other like-minded airlines. Now, the only way for United to survive in the longrun, is to move down the curve. As proposed by senior management, one approach could be to
  6. 6. Sabrina Fruehauf – November 2012 move the parent United brand more up-market and to create a new offering “TED” for the consumer segment to compete against Southwest Airlines.The following section will provide the client United with a detailed explanation on how to best counteract Southwest’s strategy and to develop a sustainable business model that will guarantee a successful thriving of the company in the marketplace. 3. Recommendation The question the Solutions Group is essentially trying to answer is whether there is enough space for both United and TED within one market. A few carefully-selected cutting-edge marketing tools were chosen to help give best class responses to the questions that the client had commissioned us with.In order to unleash the optimal space where United could reposition itself to, a perceptual mapping study was conducted.The perceptualmap as a data-driven consumer insight tool that shows the position of United vs. all relevant competitors’ brandsrevealed the following picture:Figure 3: Perceptual Map of airline industry, November 2012
  7. 7. Sabrina Fruehauf – November 2012At first glance the map seems very crowded. Most attributes fell along the horizontal axis, alongwith the preference vector which makes the horizontal axis the primary vector and the verticalaxis the secondary.United ranks high on preference and features like “legroom”, “Quality of meals”, “Standbyoptions”, etc. The verbal combination of the attributes along the horizontal axis resulted in“Flights with extra delighters”.Southwest on the other hand is associated with low prices and far away from all the “delighters”.They managed to find the white space that was located in the complete opposite direction asevery other brand.Can United find a new position for its new offering TED? The Solutions Group says yes theycan. Judging from the map, there is enough space for United to serve the business traveler on theupper end by offering all the nice perks and options and additionally introducing TED, the newconsumer segment service that has reduced features but focuses on the most important ones.In order to best compete with Southwest, TED doesn’t need extras like “Class Seating Options”,or “Stand by options”. The reduction of features will allow TED to price itself morecompetitively and regain share points from Southwest. To make decisions on which features tofocus on and which on the other hand to neglect, a conjoint analysis was added.In simple words, conjoint analysis has proven a compelling consumer insight tool to many otherFortune 500 companies that, by breaking the product into different utilities, depicts the relativevalue that consumers assign to certain features and levels of a product or service.2Down the vertical axis you find all the different features that were tested by the consumer,ranked in order of importance, with the most important at the bottom.Each bar going along thehorizontal axis represents a level of consumer happiness. The intercept at the bottom (0.58) iscrucial as it portrays the minimum level of consumer happiness that they are willing to accept.The fact that the intercept is not that high implies that the barriers to entry are low, meaning thatUnited has to pay close attention to the competitive players. What can be concluded is thataverage ticket price has the bars with the highest utility values, followed by no layovers and on-2 See output IV in appendix for the Conjoint bar graph customized to United, November 2012
  8. 8. Sabrina Fruehauf – November 2012time arrival. The individual features combined let us calculate a so-called overall featureimportance. Percent of In-flight Desired Meal Overall Feature Importance Destinations Service, 2% Available, 2% Flight Class, 2% Flight Frequency, 8% Percent of On-time Average Arrivals, 14% Ticket Price , 47% Number of Layovers, 25%Figure 4: Overall Feature Importance for Airline Industry, November 2012What meets the eye is that 86% of the pie is made up by only three features. These are the so-called hot buttons that United needs to invest in when offering the new service TED to theconsumer segment. “Average ticket price”, “Number of layovers” and “Percent of on-timearrivals” are the three features matter most to the consumer. By concentrating on expandingthese, United will yield the most success with TED. Compare these findings with the perceptualmap and you find that the “direct flights” vector is also very close to the preference vector. Bycontrast, the lowest ranked features are “flight class” and “meal service”, which consequently areless necessary to keep.Taking all these findings together, the optimal product for the new TED brand that United ishighly recommended to offer looks as follows3: The 2.26 is the Total Product Utility(TPU) anddetermines the best possible utility for TED’s customer.3 The data shows a sweet spot for “in flight meals”: hot meal has a lower level of consumer happiness than snack”
  9. 9. Sabrina Fruehauf – November 2012 Figure 5: Optimal Product for TED, November 2012 Tweaking features that are more important to consumers will result in a higher TPU and eventually lead to a higher market share. What is the advised form that TED should adopt and where does the differentiation from Southwest lie? This is where the value curve (also known as Blue Ocean Strategy) comes in. It depicts the three different brands ranked according to their relative performance among numerous factors of competition.Figure 6: Value Curve for United, TED and Southwest, November 2012
  10. 10. Sabrina Fruehauf – November 2012What becomes evident is that United ranks relatively high on all the features. Southwest isknown for a high on-time arrival rate, a low price and little to no extras. TED will also beoffering high on-time arrival, low price but the delighter (and the main distinction to Southwest)is the no-layover factor. Southwest does offer many direct flight options but not enough. TEDcan leverage parent brand United’s 78 domestic hubs4 which are usually located moreconveniently than Southwest’s. With a lower price, but the United name over its shoulder, TEDwill start attracting more customers and pull more of Southwest’s travelers onto their side.This leads us to the final recommendation: United will be most successful going forward bycontinuing to use United as the main service targeted towards business travelers and TED as thelow-cost consumer-traveler centric carrier under its belt. The perceptual map demonstrated thatUnited itself is a well-perceived brand since it ranked high on all the main vectors, mostimportantly the “brand I prefer” vector. There is no real reason to change this position. However,the problem lies in the fact that the average consumer is easily drawn to a low-cost carrier thatflies them to their destination for a low price. This describes a need that Southwest tookadvantage of. In order to regain market share from Southwest, the client is recommended tointroduce TED as a second offering but targeted solely towards the average consumer: a servicethat revolves around the three key features: low price, no layovers and high on-time arrival.4 See United’s corporate website, www.united.com
  11. 11. Sabrina Fruehauf – November 2012Appendix 1. Output I: Static positioning model for airline industry, November 2012 2. Output II: Disruptive model of airline industry, November 2012
  12. 12. Sabrina Fruehauf – November 2012 3. Output III: Perceptual Mapof airline industry, November 2012
  13. 13. Sabrina Fruehauf – November 2012 4. Output IV: Conjoint Bar Graph for United Airlines, November 2012 x8 = 3 classes - first, business, and coach 0.00 x7 = 2 classes - business and coach 0.02 missing level = 1 class - only coach 0.05 x6 = hot meal during flight 0.02 x5 = cold meal during flight 0.03 missing level = snack during flight 0.05 missing level = desired destination available 70% 0.05 x10 = desired destination available 80% 0.06 x9 = desired destination available 90% 0.09 missing level = flight frequency every 6 hours 0.05 x12 = flight frequency every 3 hours 0.19 x11 = flight frequency hourly 0.20 missing level = on-time arrival 60% 0.05 x4 = on-time arrival 70% 0.17 x3 = on-time arrival 80% 0.33 missing level = 2 layovers during flight 0.05 x14 = 1 layover during flight 0.27 x13 = no layover during flight 0.54 missing level $900 ticket price 0.05 x2 = $600 ticket price 0.55 x1 = $300 ticket price 1.00 Intercept 0.58 0.00 0.20 0.40 0.60 0.80 1.00 1.20
  14. 14. Sabrina Fruehauf – November 2012 5. Output V: Overall Feature Importance for Airline Industry, November 2012 Percent of In-flight Desired Meal Overall Feature Importance DestinationsService, 2% Available, 2% Flight Class, 2% Flight Frequency, 8% Percent of On-time Average Arrivals, 14% Ticket Price 47% Number of Layovers, 25% 6. Output VI: Optimal Product for TED, November 2012
  15. 15. Sabrina Fruehauf – November 2012 7. Output VII: Value Curve for United, TED and Southwest, November 2012

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