978-1259278211 Case 4 Solution Manual Part 2

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Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets

As mentioned, Southwest was known for its human relations. The human resources department

was called the “People Department” to reflect the emphasis placed on its employees, i.e., the

human capital. This case provides ample scope to discuss how Southwest attracts and retains

See the concepts of intellectual capital, human capital and social capital, all of which are

intangible assets that a company such as Southwest needs to have in order to compete

successfully. Intellectual capital is a measure of the value of a firm’s intangible assets, its

Human capital is the foundation of intellectual capital. Intellectual capital is developed through

Southwest was one of those organizations that recognized the importance of both intellectual and

human capital for organizational success. The importance it placed on its human capital was

Southwest had been successful in attracting and retaining human capital. Its recruitment

philosophy was to “hire for attitudes, and train for skills”. The organization did not compromise

on this philosophy even if it meant interviewing several applicants for a low-level job in the

organization. The fun culture, reward systems and “no furlough” policy helped retain employees.

Southwest’s success in retaining its human capital could also be attributed to the nurturing of the

“social ties” or social capital. There was great emphasis on teamwork. Employees recognized the

Through development of social capital; attracting, developing and retaining human capital,

(Not in the case: Although past history had been positive regarding unionization and

relationships with the various unions Southwest employees joined, as of 2013 contract talks with

ground crew workers (ramp and ground operations employees) had stalled: “The Transport

Workers Union Local 555 has been in talks with Southwest since July 2011 but the two sides

1. What are the key forces in the general and industry environments that affect

Southwest’s choice of strategy?

Referencing Chapter 2: Analyzing the External Environment of the Firm

Organizational leaders must become aware of factors in the overall environment that might affect

their ability to create a competitive advantage. So how do managers become environmentally

Environmental scanning involves surveillance of a firm’s external environment to predict

environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint

Environmental monitoring is a firm’s analysis of the external environment that tracks the

evolution of environmental trends, sequences of events, or streams of activities. Leaders need to

monitor the trends that have the potential to change the competitive landscape – what do you

What factors or trends might be most important to Southwest? To assess how the external

environment might affect Southwest’s strategy, it’s necessary to take a look at the factors in the

Political-Legal: Under the legal factors, the deregulation of the airline industry in 1978 provided

an opportunity to several players to enter the market. It allowed new market segments such as

that of the low cost, point-to-point services to emerge. It thus changed the industry landscape.

Economic: The airline industry is susceptible to upturns and downturns with the trends in the

economy. A growing economy and booming business mean greater demand for air travel, and a

slow-down in the economy means reduced demand, consequent unutilized capacity and

Sociocultural: The airline industry is highly susceptible to the extreme events such as the

September 11, 2001 attacks on the World Trade Center, and publicity surrounding any air

Technological: The emergence of Internet technology and other breakthroughs have had an

impact on the way the airlines conduct their businesses. For example, the Internet reduced the

dependence on ticketing agents. Most of the low-fare airlines sell tickets through their websites.

It’s also necessary to assess the segments of the external competitive environment that include

competitors, customers, and suppliers, substitutes and new entrants. Porter’s five-forces model

Help students apply Porter’s Five Forces of Competition to the airline industry by drawing a

diagram on the board similar to the following, and having students fill in the details:

Based on the external environmental factor analysis, the airline industry has many competitors

trying to carve out a piece of the “profit” pie. Here are some details:

Rivalry

Substitutes

Threat

Buyers’

Suppliers’

Power

High

Suggested: there

are numerous

not concentrated; there

are only two major

Suggested: the

threat of substitutes

such as car, limo,

New

especially for the low-cost

Threat of new entrants: The extent of threat due to new entrants is determined by how high or

Economies of scale. This did not work out well for the players in the airline industry. The hub-

and-spoke model developed by the major players, led to more of diseconomies of scale than

Product differentiation. Airlines try to create strong brand identification and customer loyalty by

using the frequent flyer programs. When there is strong brand identification, it forces the new

entrants to spend heavily on weaning away customers from the existing players, thus

discouraging their entry. However, in the airline industry the brand identification has not proved

Switching costs. There are virtually no switching costs for customers. The frequent flier

programs attempt to create switching costs. However, when the customers are presented with

Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment.

Bargaining power of suppliers is high when there are few suppliers in the industry, there are no

easy substitutes to supplier’s products, when the buyer industry is not an important customer of

the supplier group, the supplier’s product is an important input to the buyer’s business, the

Bargaining power of buyers is low as the buyers are not concentrated. While the buyer does not

have any switching costs, and there are several choices available, they still lack concentration.

Internet impacted in increasing the buyer bargaining power because the buyers can compare the

Threat from substitutes is high when the distances traveled are shorter. In such cases, the

customer can choose to travel by land, by car/limo/bus/rail as they might prove to be cheaper

The intensity of rivalry among existing competitors in the airline industry is very high. There are

numerous competitors, and in times of low or moderate industry growth, the competition gets

fiercer as each one tries to nab customers from the other in order to keep their capacity

utilizations at acceptable levels. The exit barriers are high because it is difficult to dispose off

Given such a tough industry environment, Southwest should be admired for its ability to not only

survive, but, unlike almost all other U.S. carriers, to remain profitable throughout its history, for

Instructors can leave students with this question and possibly move on to discuss other airline

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

NOTE: there are no PowerPoint slides to accompany the following.

Referencing Chapter 6: Corporate-Level Strategy

Southwest was facing growth challenges. Back in 2005, then ex-CEO Kelleher said, “I think the

airline business is fundamentally an opportunistic business. . . . We suddenly have some

opportunities materializing that are new to us.” Up to that point, most of Southwest’s growth had

been organic, that is, it occurred by adding more flights on its existing routes, and by adding

See the concept of diversification. Some possibilities include:

●Mergers and acquisitions

●Strategic alliances

Whatever the choice, it should create value for all stakeholders – employees, suppliers,

Companies can achieve synergy through diversification in two ways:

Through related businesses (horizontal relationships)

●Sharing tangible resources

Or through unrelated businesses (hierarchical relationships)

●Value creation derives from corporate office

Core competencies reflect the collective learning in organizations—how to coordinate diverse

production skills, integrate multiple streams of technologies, and market diverse products and

Southwest’s core competency was in its operational activities, including the controls it put in

Sharing activities means that value chain elements are shared across business units, so that two

or more activities are done by one of the businesses. This allows for cost savings, but businesses

need to make sure to keep control over quality and customer perception. Again, Southwest had

Southwest could also choose to focus on well-planned strategic alliances or acquisition.

Southwest’s alliances had included the codeshare agreement with Westjet, for flights into Canada

(subsequently terminated in 2010), and a codeshare with Mexican carrier Volaris to begin in 2011

(Not in the case: Regarding acquisition, in July 2009 Southwest had announced a $113.6 million

bid for bankrupt Frontier Airline, formerly based in Denver. Southwest would operate Frontier as

a wholly-owned subsidiary, and planned to gradually fold Frontier’s resources into Southwest’s

operating assets – Frontier had Airbus airplanes that would be retired and replaced with Boeing

Southwest had established its strategy 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

Although the AirTran acquisition would give Southwest Flight slots at Atlanta, Charlotte, and

Reagan National in the Baltimore-Washington region, as well as additional slots at New York’s

LaGuardia, and access to international destinations, it would also pit Southwest directly against

(Not in the case: By 2013 AirTran still hadn’t been fully integrated into all Southwest

operations. There were still changes being made to flight schedules, and adaptations being made

to service operations at the new destinations – as Gary Kelly said there were “a lot more new

markets under development right now than I think any of us would like. But we want to get this

See the 2013 second quarter earning call transcript at http://seekingalpha.com/article/1573732-

southwest-airlines-co-luv-management-discusses-q2-2013-results-earnings-call-transcript?

part=single

By the second quarter of 2015 the acquisition of AirTran was complete, and Kelly was

announcing a record return on invested capital, with excellent load factors and profit margins,

primarily due to continued cost controls. Regarding expansion, Kelly acknowledged there were

less opportunities in the U.S. now, but the new AirTran routes still offered opportunity for

The changes over the last five years had been the most drastic in Southwest’s history. Although it

is a known fact that most mergers and acquisitions end up destroying value for the acquiring

company’s shareholders, Southwest had taken its time to manage the AirTran acquisition slowly,

Not in the case: For an interesting overview of Southwest’s business model, and how it no

longer seems to fit any of the three models used among its competitors (Southwest is not ultra

low-cost like an Allegiant Air or Spirit, nor is it a hybrid like Alaskan Airlines or Jet Blue, and it

Gary Kelly will have to pay close attention to “shared activities” going forward, especially after