Southwest airlines threat of new entrants

Nucor Case Analysis

An Analysis of Southwest Airlines and the Airline Industry

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Date: March 15, 2018

Table of Contents

Executive Summary

Industry and Competitive Analysis

Defining the Industry…………………………………………………………………………………………………………………5

General (Macro) Environment Analysis……………………………………………………………………………………..5

Porter’s Competitive Forces Analysis…………………………………………………………………………………………6

Driving Forces……………………………………………………………………………………………………………………………6

Key Success Factors……………………………………………………………………………………………………………….....7

Strategies of Major Players………………………………………………………………………………………………………..8

Industry Prospects and Overall Attractiveness…………………………………………………………………………..8

Company Analysis

Mission, Objectives, and Strategies……………………………………………………………………………………………8

Financial Analysis……………………………………………………………………………………………………………………….9

Resourced Based View Analysis………………………………………………………………………………………………….9

SWOT Analysis………………………………………………………………………………………………………………………...10

Competitive Strength Assessment…………………………………………………………………………………………...11

Developing a New Strategy

Present Mission……………………………………………………………………………………………………………………….11

Present Strategy………………………………………………………………………………………………………………………12

Strategic Issues………………………………………………………………………………………………………………………..12

Implementation

Process for improving………………………………………………………………………………………………………………13

Process for making a profit (SWA)……………………………………………………………………………………………13

Appendix A

PESTEL Model…………………………………………………………………………………………………………………………15

Appendix B

Porters Five Forces Model………………………………………………………………………………………………………16

Appendix C

Driving Forces Model………………………………………………………………………………………………………………17

Appendix D

Strategic Group Mapping Model………………………………………………………………………………………………18

Appendix E

Financial Analysis……………………………………………………………………………………………………………………..19

Appendix F

VRIN Model……………………………………………………………………………………………………………………………..21

Appendix G

SWOT Analysis…………………………………………………………………………………………………………………………21

Appendix H

Comparative Strength Assessment…………………………………………………………………………………………..22

References

Strategic Management, 21e, Thompson, et., al., University of West Florida, Management

Southwest Airlines in 2016: Culture, Values, and Operating Practices C-311

Executive Summary

Southwest Airlines has been able to climb their way to the top of the domestic market for the last 43 years. As the years went on, Southwest Airlines faced many different challenges from their rivals, while focusing on a strong culture and a Low-cost provider strategy. As the domestic market leader, Southwest Airlines has built their brand name exceptionally well. Now that they have decided to move in to the international market, strategies need to be in place to organize a new structure. This may be challenging when implementing the Low-cost provider strategy and having to curtail their strong culture.

Throughout the case, many different factors were analyzed. Understanding the industry through General Macro Analysis, Porter’s Five Forces Model, Driving Forces Analysis, and Attractiveness are just a few of the factors when evaluating Southwest Airlines in the industry. Analyzing Southwest Airlines specifically was completed through Financial Analysis, Resourced Based View Analysis, SWOT, and Competitive Strength Assessment. Using all the information provided in the case study, I have determined implementations needed to ensure the company is successful in their goal to enter the international market.

Implementing new strategies can be difficult when changing such a successful model. At this time Southwest Airlines has only captured 3% of the international market. To build on their current strategy, they will need to focus on buying new assets for their international line of planes. Technology will be a must when attracting customers to their brand. Customers will expect leg room along with free WIFI or tasteful meals. Southwest Airlines will also need to structure their culture when dealing with new foreign markets. They must become attractive to terminals in other countries to build on their destination availability. Finally, they must think green when implementing the new structure. With the amount of pollution that the airline industry produces, Southwest Airlines needs to be at the forefront when implementing environmental strategies.

Industry and Competitive Analysis

Defining the Industry

Ever since the Wright brothers successfully completed their flight at Kitty Hawk, North Carolina on 17 December 1903, planes have evolved at a rapid pace. From single engine planes to fighter jets to passenger planes, the industry has been moving at an astounding rate. Now the skies are the roads to anywhere. In the last four decades Southwest Airlines has become one of the four dominating companies in the industry, which includes American Airlines, Delta Airlines, and United Airlines. Delta Airlines in industry terms can be seen as the industry leader when it comes to most passengers. In 2015 they had over 180 million passengers, including joint and regional venture partners. However, Southwest Airlines took the industry lead when it came to domestic flights.

Southwest Airlines was able to climb their way up in the industry by doubling their customer base in just five years. During this time the industry faced many different negative factors. Jet fuel was a major issue for all companies due to rising prices and lack of hedging the price. There was also the impact of terrorist that had people worried. It seemed like every time you turned on the television, a plane was being held for ransom. This was a major concern for the industry as they tried to figure out how to combat these tough problems. Southwest Airlines was able to get over these hurdles and gain record breaking profits of $2.2 billion in 2015. Indicators that Southwest Airlines had become the domestic leader is the astounding passenger count of 142,408,000. The closest competitor at the time was Delta Airlines with only 114,408,000. (Gamble & Thompson, 2016).

As the decades have gone by the industry has learned to adapt to the customer’s needs and wants. The industry has to be sensitive to how the customer perceives their practices and policies. With the world at their hands, the industry must maintain good relations with their customers while moving forward with technological advancements and new innovations. The Airline industry currently strives to be more efficient by controlling turnover times to guarantee fast and prompt service while getting the customer to their destination on time.

General (Macro) Environment Analysis

Macro environmental factors are commonly found in the airline industry just as you would find them in any other industry. Using the PESTEL model we can evaluate the industry strategically and competitively while using well-validated concepts and analytical tools. Beginning in Political the industry is regulated by policies governed through the Federal Aviation Administration. They provide the industry with the safety and controls that all companies must abide by. These policies are in place to ensure that companies are up to code and standards to ensure planes do not fall from the sky. Economic conditions affect the airline industry in a major way. Prices are controlled through this factor when decisions are made on how much to charge a passenger for a flight. Gas prices, inflation, stock prices, and economic growth rates are just some of the factors that push the industry to make smart decisions.

Sociocultural forces can be seen as one of the most important forces in the industry. Learning and listening to what the consumer wants is what makes a company great. Understanding the customers values, attitudes, and lifestyles helps the industry to curtail their customer service to the customers’ needs and wants. Sociocultural forces will begin to push the market towards how a customer feels they will represent themselves in a new culture while learning about a new culture directly. Technological factors are an ever-changing force in the industry. Keeping up with new advancements and innovations allows for better and safer planes flying through the air. Technology has become such a force that some planes can almost fly themselves. Environmental forces impact the airline industry in negative ways. If there is too much wind, too much rain, or too much snow, planes can be grounded causing delays and loss of revenue. The airline industry is taking strides to incorporate meteorological instruments for predicting weather along with building strong relationships with current weather stations to keep the information as up to date as possible. Finally, we come to Legal and Regulatory factors. These factors are the governing body of the industry. Laws are put in to place to ensure that customers and airline companies are given a fair chance at getting what they deserve. These laws level the playing field for every company and guarantee that companies are transparent with the customer. An example of the PESTEL model can be found in the Appendix (fig 1).

Porter’s Competitive Forces Analysis

Using the competitive forces model the industry can gage how to move forward with decisions on how to grow their company. The analysis is broken up in to five points to address how to operate in an industry. Competition of rivals can be seen as the pressures from other companies in the industry. In the airline industry we see some of these pressures in the form of increased fees for baggage, seat selection charges, and points for free flights and extra services. Southwest airline was able to ignore most of these allowing them to compete in this area at a higher level. Competition of new entrants can be seen through mergers and acquisitions. Examples of this would be United Airlines owning Silver Airways or Southwest Airlines acquiring AirTran.

Competition from producers of substitute products is addressed by looking outside of the industry. Driving is a substitute that almost everyone has available all the time. If a customer thinks they can get to their destination for a cheaper price, sometimes time isn’t a factor. Customers can also take a train to their destination. This is much faster than a car but doesn’t allow for the customer to get directly to their desired location. Lastly, customers can take a ship if they are in no rush at all. Taking vacations are one of the pressures that the airline industry must compete with. Supplier bargaining power can be good and bad for the airline industry. Hedging fuel prices helps the industry to calculate and control the prices of tickets over an extended period of time. However, the oil industry has more power than the airline industry since it is a necessity.

Finally, we come to Customer buying power for which the industry has most of the power. Competition is based on the industry and not the customer. Airline industries are aware that customers will pay for the convenience of fast access to their destination. Most of the time prices only change if flights are short of passengers or the price of fuel drops. An example of the Five Forces Model can be found in the Appendix (fig 2).

Driving Forces

Driving forces are developments that can affect an industry enough that the change is pressured in to action. These forces have the ability to reshape the industry and alter competitive conditions. In this study we will look at a few of the driving forces that affect the industry. A more detailed example of the driving forces can be found in the Appendix (fig 3). Increasing globalization is a driving force that everyone wants to have a positive effect. Even though the industry is usually based in a specific country, the industry is always looking for a way to get their brand around the world. Moving into new markets allows for an airline industry to offer new and better products to the customer. Shifts in buyer demographics is how the industry impresses the customer while in flight. Using items such as televisions to show movies is one of them. Accessibility to phones while on a plane is one of the biggest shifts to date. There are other shifts such as in-flight meals and alcohol that also affects how they are seen in the customers eyes.

Diffusion of technical know-how across companies and countries is of great importance in the airline industry. When you can land in any airport in the world, you should expect the same service no matter the language. This includes how the plane does turnover and how mechanics prepare the plane for the next flight. Changes in cost and efficiency fall into the category of fuel and innovation. Most flight prices are controlled by the price of fuel. However, innovations and new technology can also factor in the price especially when it is new. Newer and faster planes cost a lot of money and prices can be set to cover the costs of upgrading the planes. Changing societal concerns, attitudes, and lifestyles is where the industry can advertise how they are better than the competition. If you have a product that everyone wants you can tell them how it is in their benefit to get it through your company. Whether it be a cheaper flight, more leg room, or free WIFI, there is always something that a demographic will want.

Key Success Factors

Key success factors are the competitive factors that affect the industry the most. This can either hinder or allow for the ability to survive or prosper in the marketplace. Key success factors are exceptionally important when competing that all companies pay attention to them. Otherwise they risk failing and losing the competition to another company. In the airline industry some of the factors that they follow are superior product differentiation, superior firm size and branding capabilities, superior price control, and superior customer service.

Beginning with superior product differentiation, airline companies do their best to find a niche to show how they are different. Everyone is aware that they fly from A to B, but how you get there is the key. Comfort can be seen when companies offer more leg room or better meals in flight. This factor has a huge impact on travelers that are taking long flights. Next, superior firm size and branding capabilities can be seen as how they get the message to the consumer. When you see an advertisement for United Airlines, you know exactly what the plane looks like in your mind. Branding helps to ensure the consumer knows exactly what they will get before they even board the plane.

Superior price control is a measure of how well the company can accomplish their mission and still turn a profit. Hedging fuel, filling full flights, and controlling operating costs is just a few ways the industry can help the consumer stretch their dollar. Airline companies do their best to find every cut that they can make to fill a flight. Unfortunately, this isn’t always a great option if they aren’t doing it correctly. Finally, we come to superior customer service. This is where the industry shows they customers how much they appreciate their business. Customer service is a make or break factor when it comes down to whether a customer will use that product again. Flight attendants know that once they close the doors and the plane takes off, it is their duty to make sure the customer enjoys all facets of the flight. This gives the customer a reason to remember where they had the best experience and why.

Strategic Group Mapping

A strategic group map can be revealing in its own right. Knowing which industry members considered close rivals and which are distant rivals is paramount when they are close on the map. This tells the company that if they are closely related in position they will need to find other ways to be more attractive. Looking at the map in Appendix (fig 4), you can see how Southwest Airlines is extremely attractive in the domestic market but falls short in the international market with great distance. Delta Airlines and American Airlines are positioned in the middle giving them advantage to both markets. This allows them to be efficient with both markets and helps with globalized branding as well as domestic. United Airlines pushes well in to the international market making them the industry leader in that position. Even though they don’t make as many domestic flights, their international flights are longer and require more money for the customer to pay which controls their operating costs.

Industry Attractiveness

The airline industry can be seen as really attractive if you just think about how many flights are flown in a day. The airways are full of jets going from city to city on a daily and hourly schedule. Customers are always looking for the fastest path of travel to their destination. With technological advancements and new innovations being put in place in the airline industry, companies have seen growth and profitability rise every year. Technology changes in the manufacturing process has seen an increase in the last few years. Cost efficiency is one of the factors that has helped the airline industry to gain ground without interruption. Streamlined manufacturing has brought costs down allowing airlines to order new airplanes with newer technology in large numbers.

Another factor that has made the airline industry attractive is the amount of disposable cash customers have to spend for going on vacation. Customers want to see the world if not only the other side of the country. They are willing to pay to go places they will never go to again. To enjoy these benefits flying is the way to go since you can arrive quickly and go home just as fast. The international market has grown exponentially since economies have prospered in the last decade. International destinations have advertised how strong they are when appealing to the customer base. This has made an impact on customers and their wants to see other cultures and experience new ideas and places.

Company Analysis

Mission, Objectives, and Strategies

Southwest Airlines mission is a basic understanding of their core values. “Dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and company spirit” (Gamble & Thompson 2016). The objectives are based off of five key elements that they have followed since the beginning. These objectives are: Be the best place to work, Be the safest, most efficient, and most reliable airline in the world, offer customers a convenient flight schedule with lots of flights to lots of places they want to go, offer customers the best overall travel experience, and do all of these things in a way that maintains a low cost structure and the ability to offer low fares. Using their strategy in the domestic market they have found a great foothold. Costs are low, flights are plenty, and turnover is quick and efficient. Using these strategies have help Southwest Airlines to be the market leader to this day.

Southwest will want to implement these objectives in to the international market soon. As they are building on their international flights, they will implement their objectives and strategies while curtailing them to fit other cultural norms. Southwest Airlines is aware that culture isn’t always the same when looking outside the company. Culture adversity is always a two-way road and needs to be addressed respectfully. In doing this it will allow for easy and successful relations with international partners.

Financial Analysis

After analyzing their financial status in Appendix (fig 5), it is shown that Southwest Airlines has a net profit margin of 6.55%. Though this number may seem low, Southwest Airlines net profit margin is slightly greater than the industry average; Southwest Airlines is keeping their costs low while also bringing in more revenue. The ROA for Southwest Airlines is at 0.9, meaning that they are only earning 90 cents worth of revenue per dollar that they own in assets. This ROA rate can be attributed to the fact that the airline industry is asset intensive, causing most participants of the industry to invest a lot of money into assets just to compete with industry demands. The liquidity analysis shows that Southwest Airlines has more current debt obligations than its value in assets and cash, however, the airline industry is a debt intensive industry as a whole. Southwest Airlines annual growth rates are healthy and a sign that they are continuing to be a successful company earning more value every year.

Resourced Based View Analysis

Southwest Airlines can relate many of their competencies to show a competitive advantage, both temporary and sustainable. The main sustainable competitive advantage Southwest Airlines holds on to is their unique ability to control low operating costs. Whether they use price hedging to secure a future price for fuel, keeping maintenance costs low due to easily transferable skills from one plane to another, or keeping their positive culture to set them apart from the other firms in the industry. Their culture can be seen as their most important view since they believe customer awareness has been the main focus since their inception. They also believe that low fares coincide with this focus understanding that finding a low-price product with great customer service is rare in any industry.

To help understand how Southwest Airlines can maintain their sustainable competitive advantage we can use the VRIN test to gage the performance. An example is available in Appendix (fig 6). Following this model there are four basic tests that are evaluated which are Valuable, Rare, Inimitable, and Non-sustainable. Using seven competencies we can evaluate whether or not the competencies can sustain a competitive advantage. The seven competencies are as follows: Brand recognition, customer service, pricing, low operating costs, supplier relations, staffing, and culture. While these are not all of the competencies that Southwest Airlines are the best at, they do stand out when differentiating them from the rest of the industry.

Beginning with valuable, we see that all seven of the competencies are important and need to be maintained at all times. The value added by performing these tasks are extremely important in sustaining advantage. Rare is the next test that we focus on in the model. We ask the question of is this something that the rivals lack. In Southwest Airlines case we see that there are a couple of competencies that are not rare to other companies. Brand recognition and supplier relations get a no since the other companies can easily achieve these competencies. Next, we focus on inimitable as a competency that is hard to copy. For the most part, most of these competencies can be copied so Southwest Airlines only has superiority in low operating costs and culture. Finally, we move on to non-substitutable. With this test it falls in correlation with inimitable. Once again Southwest Airlines is only able to control two of the competencies which are low operating costs and culture. In conclusion we can see that these two competencies are placed in the sustainable competitive advantage category.

SWOT Analysis

To evaluate a company’s overall situation, the question becomes whether the company is in a position to further pursue an attractive market opportunity. This also means that the company will need to defend against external threats to its well-being. Using the SWOT analysis we can define the strengths, weaknesses, opportunities, and threats that Southwest Airlines faces every day. A detailed example can be found in the Appendix (fig 7).

Strengths are things that companies are good at doing or an attribute that enhances their competitiveness in the marketplace. Southwest Airlines strong company culture has proven to benefit the employee’s satisfaction along with the customers satisfaction as well. Culture has been the back bone of the company since the beginning and has proven to be their strongest asset. Other strengths can be seen in hedging fuel prices to allow for lower costs. Another strength can be seen in their maintenance program. Using the same planes, they are able to easily transfer skills from one plane to the next.

Weaknesses are considered competitive deficiency’s when a company lacks or does poorly in certain criteria. Southwest internal weakness could include that they are not a large international firm, yet. Although Southwest Airlines has begun expansion, they currently only have about 3% of the market share for international flights. This could be seen as a weakness moving in to the future. Even though the culture of Southwest Airlines is considered a strength, it can also be seen as a weakness. Cultures can be hard to change when merging or acquiring new markets. There is a possibility that Southwest Airlines culture could be hindered when moving in to the international market.

Opportunities can be a big factor when shaping a company’s strategy. Southwest Airlines opportunity to move in to the international market can be a huge opportunity if it is successful. Managers need to figure out how to implement their low-cost strategy when adding longer routes to their schedule. This means they need to focus on fuel costs along with customer service. Longer flights need to be handled with more finesse then short stops from city to city. If Southwest can achieve sustainability regarding resources such as fuel, this would allow for more supplier relations due to high volume purchases.

Threats are considered certain factors of a company’s external environment that pose danger to its profitability and competitive well-being. For Southwest Airlines, cost increases or industry demand for assets is a large concern. Controlling their fleet is smart but also requires new planes in the future. Prices for new innovative and technologically updated planes are fast outpacing the cost of maintaining the older fleet. Once the demand for new planes is forced, Southwest Airlines will need to upgrade. With their older planes the cost for parts and maintenance will become a huge factor in the near future. As these planes get old, they will ultimately come to a point of not being able to be repaired.

Competitive Strength Assessment

The competitive strength assessment is a snapshot of specific measures for companies in the industry. Using these measures gives a company the ability to see where they rank in certain key areas against their rivals. Weights are applied to how the company feels each measure should be viewed and then they are calculated to see which company is providing a better outcome. With so many different measures that a company can measure I have used the following: Culture, price, domestic flights, international flights, manufacturing capabilities, technological skills, and customer service capabilities. These measures ensure that all companies have a fair leverage when presenting the outcomes. An example of the Competitive Strength Assessment Matrix is found in Appendix (fig 8).

After calculating these specific measures Southwest Airlines is able to see that they are the current leaders in this scenario when focusing on the domestic market. The majority of their power comes from culture, price, domestic flights, and customer service. They truly believe that these factors have always played a significant role in their growth as a company. This also allows them to provide guidelines for designing smart offensive and defensive strategies. If one company is stronger in a measure, Southwest Airlines can look at this and implement changes to their structure of the process to see if changes will be fruitful.