Module 3 Discussion Southwest Airlines

Please read the attached case “Southwest Airlines” and answer the following questions. You are encouraged to comment on others’ answers.Describe the business model used by Southwest Airlines. (5 points)Identify Southwest’s internal strengths and weaknesses. (5 points)How sustainable is the airline’s competitive advantage? (5 points)


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Chapter 3 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Pro?tability
Southwest Airlines
Southwest Airlines has long been one of the standout performers in the U.S. airline industry. It is
famous for its low fares, which are often some 30%
lower than those of its major rivals. These are balanced by an even lower cost structure, enabling it
to record superior profitability even in bad years
such as 2002, when the industry faced slumping
demand in the wake of the September 11 terrorist attacks. Indeed, from 2001 to 2005, quite possibly the worst four years in the history of the airline
industry, while every other major airline lost money,
Southwest made money every year and earned an
ROIC of 5.8%. Even in 2008, an awful year for
most airlines, Southwest made a profit and earned
an ROIC of 4%.
Southwest operates somewhat differently from
many of its competitors. While operators like American Airlines and United Airlines route passengers
through hubs, Southwest Airlines flies point-topoint, often through smaller airports. By competing
in a way that other airlines do not, Southwest has
found that it can capture enough demand to keep
its planes full. Moreover, because it avoids many
hubs, Southwest has experienced fewer delays. In the
first eight months of 2008, Southwest planes arrived
on schedule 80% of the time, compared to 76% at
United and 74% at Continental.
Southwest flies only one type of plane, the Boeing
737. This reduces training costs, maintenance costs,
and inventory costs while increasing efficiency in
crew and flight scheduling. The operation is nearly
ticketless, with no seat assignments, which reduces
cost and back-office accounting functions. There are
no meals or movies in flight, and the airline will not
transfer baggage to other airlines, reducing the need
for baggage handlers.
Southwest also has high employee productivity.
One-way airlines measure employee productivity
is by the ratio of employees to passengers carried.
According to figures from company 10-K statements,
in 2008 Southwest had an employee-to-passenger
ratio of 1 to 2,400, the best in the industry. By comparison, the ratio at United Airlines was 1 to 1,175
and, at Continental, it was 1 to 1,125.
Southwest devotes enormous attention to the people it hires. On average, the company hires only 3%
of those interviewed in a year. When hiring, it emphasizes teamwork and a positive attitude. Southwest
rationalizes that skills can be taught, but a positive
attitude and a willingness to pitch in cannot. Southwest also creates incentives for its employees to work
hard. All employees are covered by a profit-sharing
plan, and at least 25% of an employee?s share of the
profit-sharing plan has to be invested in Southwest
Airlines stock. This gives rise to a simple formula:
the harder employees work, the more profitable
Southwest becomes, and the richer the employees
get. The results are clear. At other airlines, one would
never see a pilot helping to check passengers onto
the plane. At Southwest, pilots and flight attendants
have been known to help clean the aircraft and check
in passengers at the gate. They do this to turn around
an aircraft as quickly as possible and get it into the
air again because an aircraft does not make money
while it is on the ground. This flexible and motivated
workforce leads to higher productivity and reduces
the company?s need for more employees.
Because Southwest flies point-to-point rather
than through congested airport hubs, there is no
need for dozens of gates and thousands of employees to handle banks of flights that come in and then
disperse within a two-hour window, leaving the hub
empty until the next flights a few hours later. The
result: Southwest can operate with far fewer employees than airlines that fly through hubs.38
Case Discussion Questions
1. How would you characterize the business model
of Southwest Airlines? How does this differ from
the business model used at many other airlines,
such as United and American Airlines?
2. Identify the resources, capabilities, and distinctive competencies of Southwest Airlines.
3. How do Southwest?s resources, capabilities, and
distinctive competencies translate into superior
financial performance?
4. How secure is Southwest?s competitive advantage? What are the barriers to imitation here?
Chapter 3
The Internal Organization: Resources, Capabilities, Core
Competencies, and Competitive Advantages
So it is said that if you know your enemies and know
yourself, you can win a thousand battles without a
If you only know yourself, but not your opponent,
If you know neither yourself nor your enemy, you
will always endanger yourself.
– Sun Tzu
© RoyaltyFree/ Stockdisc/ Getty Images
Southwest Airlines
? What is Southwest?s business model?
? What is the airlines industry like?
? How does Southwest?s business model help the
airlines achieve strategic competitiveness in this
? What strengths and weaknesses does
Southwest airlines have?
Analyzing the External Environment
and threats
By studying the external environment, firms identify what
they might choose to do.
Analyzing the Internal Organization
Unique resources,
capabilities, and
(required for sustainable
competitive advantage)
By studying the internal environment, firms identify what
they can do.
Resources, Capabilities, and Core
? Resources:
? Tangible
? Intangible
? are the source of a
firm?s capabilities.
? are broad in scope.
? cover a spectrum of
individual, social and
? alone, do not yield a
? Resources
? A firm?s assets,
including people and
the value of its brand
name, that represent
inputs into a firm?s
production process:
capital equipment
skills of employees
brand names
financial resources
talented managers
? Types of Resources
? Tangible resources:
? Intangible resources:
? human
? innovation
? reputation
Resources, Capabilities and Core
? Tangible
? Intangible
? represent the capacity to
deploy resources that have
been purposely integrated
to achieve a desired end
? emerge over time through
complex interactions among
tangible and intangible
Resources, Capabilities and Core
Core Competencies
? Tangible
? Intangible
? Resources and capabilities
that are the sources of a
firm?s competitive advantage
? distinguish a firm
competitively and reflect
its personality.
? emerge over time through
an organizational process
of accumulating and
learning how to deploy
different resources and
Resources, Capabilities and Core
? Tangible
? Intangible
Core Competencies (cont?d):
? activities that a firm
performs especially well
compared to competitors.
? activities through which the
firm adds unique value to its
goods or services over a
long period of time.
Building Core Competencies
Four Criteria of
Costly to imitate
The four criteria of sustainable
competitive advantages:
? valuable capabilities
? rare capabilities
? costly to imitate
? non-substitutable
Superhero Analysis
? Wolverine
? Spider-Man
? Iron Man
? Silver Surfer
Marketing and Sales
Technological Development
Human Resource Management
Firm Infrastructure
The Basic Value Chain
Outbound Logistics
Inbound Logistics
Building Core Competencies:
Criteria and Value Chain Analysis
? Value Chain Analysis
? Primary activities
? Involved with product?s physical creation, sales and
distribution to buyers, and service after the sale
? Service, marketing/sales, outbound/inbound logistics and
? Support activities
? Provide assistance necessary for the primary activities to
take place
? Includes firm infrastructure, HRM, technologies
development and procurement
? Definition: Purchase of a value-creating activity
from an external supplier
? Effective execution includes an increase in flexibility, risk
mitigation and capital investment reduction
? Trend continues at a rapid pace
? Firms must outsource activities where they cannot
create value or are at a substantial disadvantage
compared to competitors
? Can cause concerns
? Usually revolves around innovative ability and loss of
Outsourcing Decisions
Marketing and Sales
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
A firm may outsource all
or only part of one or
more primary and/or
support activities.
Outbound Logistics
Inbound Logistics
Primary Activities
Competencies, Strengths, Weaknesses
and Strategic Decisions
? Firms must identify their strengths and weaknesses
? Appropriate resources and capabilities needed to
develop desired strategy and create value for
customers/other stakeholders
? Tools (I.e., outsourcing) can help a firm focus on core
competencies as the source for CA
? Core competencies have potential to become core
? Competencies emphasized when no longer competitively
relevant can become a weakness
? External environmental conditions and events impact a
firm?s core competencies

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