978-1259278211 Case 4 Solution Manual Part 1

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Teaching Note: Case 4 – Southwest: Is LUV Soaring?

Case Objectives

1. To discuss the choice of competitive strategy, and options for growth.

2. To examine how external and internal forces affect competitive strategy.

See the table below to determine where to use this case:

NOTE: There are both PRIMARY and Secondary chapters that can be used for this case. The

Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the

instructor wants to use the case to illustrate concepts from the optional Secondary chapters.

Chapter Use Key Concepts Additional Reading and/or

Exercises

PRIMARY CONCEPT

Competitive strategy;

See optional advanced reading,

SECONDARY

Industry competition

3: Internal Analysis Value-chain analysis;

4: Intellectual Assets Intellectual and human

See optional advanced reading,

NOTE: At the end of this Teaching Note is an additional OPTIONAL discussion question that

Case Synopsis

Southwest Airlines was the pioneer of “low-cost, no-frills” strategy. From its beginnings in 1971,

the company had become one of the world’s most profitable major airlines (44 straight years of

profitability as of January 2015). The company was known for its unique cost-conscious yet fun-

Southwest had established itself based on its low-cost operations and unique corporate culture,

and had flourished with organic growth, but as opportunities for this kind of growth had

disappeared in recent years, Southwest had been forced to rethink this strategy. In September of

In addition, as Southwest grew, so did the operational costs: fuel and maintenance on now two

different types of aircraft. This plus the challenges of merging employees from two different

cultures into a smoothly functioning crew scheduling system had caused recent problems. Was

Teaching Plan

The Southwest case is a good example of what a firm has to do to sustain a competitive strategy.

It also provides an opportunity to discuss how competitive and growth strategies are chosen, and

how options are dependent on resources available. Therefore, this case can be positioned in the

The instructor can also position this case discussion with a sole PRIMARY focus on Chapter 5:

Business-Level Strategy, contrasting Southwest to the JetBlue and Emirates cases – in

discussing choice of competitive strategy, students are encouraged to choose between low-cost

For advanced students, the instructor may wish to assign Michael Porter’s 1996 article “What is

Strategy?” (Harvard Business Review, November–December, pp. 60-79) as companion reading to

the case. Southwest is used as an example in this article of how tight linkages across its value

ICEBREAKER

Since Southwest is well-known for its “fun” activities, even while flying, ask students if they’ve

ever flown Southwest, and whether they had a “fun” experience.

Have any of you ever flown Southwest? If so, what was the experience like? Was it fun?

How did this differ from other flight experiences you’ve had?

Based on this, would you fly Southwest?

Many Southwest customers, and maybe some students, are loyal fans of the airline, not so much

because of its low-cost, but because of the customer service experience. It might be interesting to

students that Southwest does NOT base its competitive strategy on creating this unique customer

It’s also good to reflect back on this discussion when answering the case question about choice of

competitive strategy, and the need for Southwest to achieve parity in differentiation. If it can’t

As an optional exercise, regarding Southwest culture as portrayed by founder Herb Kelleher,

And this short video clip shows one of the newer “specialty” themed planes, Penguin One, a

Boeing 737-700 co-branded/painted with images of penguins to celebrate 25 years of partnership

And, as an example of how Southwest employees are valued by management, see the 3 minute

“GAAP Rap” video by Las Vegas employee David Holmes, introduced at the 2009 Shareholder’s

Ask students if the playful sprit of the “sack” ad, the distinctive look of the airplanes, and the

obvious appreciation and enjoyment of at least one Southwest employee might make them more

or less likely to fly on Southwest Airlines? Why?

Some students may also want to talk about horrific airline experiences, and perhaps the July

2009 problem with a Southwest plane (a hole in the fuselage that opened up during flight – see

http://www.msnbc.msn.com/id/31902513/), and the fuselage hole that appeared in April 2011

(see http://www.bloomberg.com/news/2011-04-25/southwest-jet-with-hole-in-fuselage-had-

NOTE: To get up-to-date news and information about Southwest and various other air carriers,

Finish up the icebreaker exercise by focusing student attention on the issue of operational

Before engaging in discussion, you might want to test student’s basic knowledge regarding the

Southwest uses the following operational model:

a. Short-hauling

b. Point-to-point

c. Hub-and-spoke

d. Base of operations

ANSWER: b Yes, these are mostly short-haul flights, but the correct designation is “point-to-

You can use Southwest to fly into Dallas-Fort Worth (DFW).

a. Yes

b. No

ANSWER: b Southwest only flies into Love Field in Dallas. Why? It’s cheaper and closer to

Summary of Discussion Questions

Here is a list of the suggested discussion questions. You can decide which questions to assign,

and also which additional readings or exercises to include to augment each discussion. Refer

1. PRIMARY QUESTION: Discuss the basis of Southwest’s competitive advantage and the

2. SECONDARY QUESTIONS: What internal resources and assets does Southwest have

that may give it a competitive advantage?

3. What are key forces in the general and industry environments that affect Southwest’s

choice of strategy?

4. OPTIONAL QUESTION: What growth strategies might Southwest pursue?

5. OPTIONAL EXPANDED DISCUSSION: Assess the effectiveness of Southwest Airlines’

Discussion Questions and Responses

1. Discuss the basis of Southwest’s competitive advantage and the potential challenges to

its strategy.

Referencing Chapter 5: Business-Level Strategy

How firms compete with each other and how they attain and sustain competitive advantages go

to the heart of strategic management. In short, the key issue becomes: why do some firms

A business-level strategy is a strategy designed for a firm or a division of the firm that competes

within a single business. Within the firm’s industry environment generic strategies include basic

●Overall cost leadership

oLow-cost-position relative to a firm’s peers

●Differentiation

oCreate products and/or services that are unique and valued

●Focus strategy

oNarrow product lines, buyer segments, or targeted geographic markets

Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The

Both casual observation and research supports the notion that firms that identify with one or

more of the forms of competitive advantage outperform those that do not. The strategy that

As explained in the chapter, competitive parity means a firm’s achievement of similarity or being

“on par” with competitors with respect to low-cost, differentiation, or other strategic product

characteristics. Competitive parity on the basis of differentiation permits the cost leader to

Southwest had been able to offer low-cost services to its customers because it offered no-frills

whatsoever. However, in view of the changing competitive scenario, the emergence of

competitors such as JetBlue or AirTran forced Southwest to achieve some degree of competitive

parity on differentiation. Companies like JetBlue were at an advantage because differentiation

Instructors can ask students if it’s possible to compete on differentiation in the airline industry. In

discussing choice of competitive strategy, students are encouraged to choose between low-cost

leadership and differentiation, but in the airline industry there is really no choice but competition

One operational difference that Southwest had made obvious to customers was the decision that

“bags fly free”. On the surface this might be seen as a differentiated advantage, but it was

actually firmly based in the cost control discipline Southwest had always had: on short-haul

A competitive strategy is linked to the value chain, and supported by intangible assets. Southwest

had great strengths in its operations and its human capital. Tight links among its activities and

2. What internal resources and assets does Southwest have that may give it a competitive

advantage?

Referencing Chapter 3: Assessing the Internal Environment of the Firm

When one firm outperforms others by a wide margin over a long period of time, it’s important to

figure out how this could be. The answer may lie in how that firm arranges its activities and

Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating

activities. Value is the amount that buyers are willing to pay for what a firm provides them and is

Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities.

Based on the relationships between these elements, Southwest can make a choice of how to

proceed to craft a competitive advantage. See the suggestions below:

Value chain activity How does Southwest create value for the customer?

Primary:

Inbound logistics (distribution

systems, warehouse layouts)

Web-based booking gives greater control on managing

Operations (efficient workflow

No assigned seating, no meals served, choice of smaller

Outbound logistics

processing)

Using only one type of aircraft keeps operational costs

Marketing and Sales (motivated

sales people, innovative

Using its own website for ticketing as a distribution

channel. Market segment properly identified i.e.,

customer segments &

distribution channels)

extras.

Service (ability to solicit

Excellent record of communication with customer to

Secondary (or support):

Procurement (win-win

reduced dependence on single

supplier)

Aircraft procurement plan to support growth.

Technology development (state

innovative culture & qualified

personnel)

Investments in technology, website fully integrated into

Human resource management

(effective recruitment, incentive

Excellent relationships with employees, reward systems

such as stock-option plans, profit sharing, innovative

General Administration

(effective planning systems to

relationships with diverse

stakeholders)

CEO Gary Kelly was able to continue strategic vision

started by Kelleher. Top management with expertise in

Primary Activities

In terms of primary activities, the key to Southwest’s ability to successfully compete in the

Support Activities

With regards to support activities, a competitive advantage can be achieved by developing a

strong general administration that is built around visionary leadership and a supportive human

In addition, see the concept of the resource-based view of the firm, and the three key types of

resources: tangible resources, intangible resources, and organizational capabilities. A firm’s

strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a

competitive advantage. The resource-based view of the firm takes the perspective that firms’

An important issue to focus on here is the importance of intangible resources like innovation and

reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that

Tangible Resources:

Financial: Although cost fluctuations in fuel and fees are hard to anticipate, Southwest has

Physical: New orders for Boeing planes, refurbishment of the fleet after the AirTran acquisition

Technological: Doesn’t appear that these resources are any more developed than any other

airline.

Organizational: Historically excellent relationships with the management hierarchy means there

Intangible Resources:

Human: Originally, this was a major strength. Now union troubles, financial and service

Innovation and creativity: Kelleher’s original idea and vision for the airline was innovative and

Reputation: Southwest enjoys a strong reputation for operational efficiency. Winning the “triple

Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to

substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the

VRIN concept, in case of Southwest, an argument may be made that its resources are inimitable.

This is because there was some path dependency, causal ambiguity and social complexity in its

For advanced students, the instructor may wish to assign Michael Porter’s 1996 article “What is

Strategy?” (Harvard Business Review, November–December, pp. 60-79) as companion reading to