Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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
