978-1259278211 Case 4 Solution Manual Part 3

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OPTIONAL EXPANDED DISCUSSION: Assess the effectiveness of Southwest

Airlines’ leadership, and the use of strategic controls.

Southwest is a great case to use to demonstrate the importance of strategic leadership,

and how decisions about how to “control” operational elements can make a great

difference in the success of a given strategy. Although not every point is covered in the

Referencing Chapter 11: Strategic Leadership: Creating a Learning Organization

and an Ethical Organization

In the case of Southwest, as with most companies, implementation issues such as

strategic leadership and strategic controls are important for organizational effectiveness.

See the concept of leadership, the process of transforming organizations from what they

are to what the leader would have them become. This involves:

●Setting a direction

Southwest Airlines had the advantage of strong leadership right from its beginning. The

choice of Lamar Muse, an airline veteran who knew the airline business, laid the initial

foundation. While Muse was shaping the organization’s strategy, Herb Kelleher on the

Setting direction. As outlined in the case, the direction for Southwest was very clear. It

aspired to be a low-cost airline providing point-to-point services. The leadership at

Southwest ensured that the organization did not digress from this core business and kept

Organizational design. Herb Kelleher believed in being accessible to the employees to

not only maintain their morale but also to ensure that the right information and advice

The organization was designed to ensure employee participation at all levels. Employees

were made partners in the progress of the firm, and stock options enabled them to share

Nurturing a culture dedicated to excellence. At Southwest, a culture dedicated to

excellence was nurtured by making “excellence in customer service” an explicit goal and

aligning the reward systems toward that end. Also, the leadership at Southwest was

Another important aspect to be highlighted is that Kelleher took a very proactive

approach toward managing the leadership transition. In 2001, he decided to pass authority

into the hands of Colleen Barrett and James Parker, while he still played a role in the

strategy process of the organization as the Chairman of the Board. This gave time for the

NOTE – ADDITIONAL VIDEO INTERVIEWS WITH BARRETT AND KELLY:

Colleen Barrett, employee at SWA since 1971 and President from 2001 until stepping

down at age 63 in July, 2008, commented on her old boss Herb Kelleher’s collaborative

Would you feel comfortable working for him? If you’re a shareholder or customer, does

his message about the acquisition allay any fears you may have had at the time?

Visit the Southwest Airlines website at http://www.southwest.com/html/southwest-

Then view the video of Southwest CEO Gary Kelly at

http://www.mhhe.com/business/management/videos/DestinationCEO/SouthwestCEO_QT

.html :

Southwest Airlines CEO Gary Kelly is a 6’3″ Texan who wears jeans and cowboy boots

and considers himself “just someone who works in the office.” When he flies, he always

Kelly never had aspirations to become a CEO, but since assuming the position he has

helped Southwest maintain its enviable position as the only airline earning profits every

Southwest continues to focus on its founding principles: Keep costs down through fast

turn-around time at the gate, try to fly all the same planes (737s) so that parts and

Do you think Kelly effectively sustains and models the Southwest culture? What traits

Referencing Chapter 9: Strategic Control and Corporate Governance

Regarding the importance of strategic controls, students could be asked to identify what

difficulties Kelleher and Kelly encountered in balancing rewards, culture and boundaries.

Strategic control involves the process of monitoring and correcting a firm’s strategy and

performance. Students can discuss the differences between a “traditional” and

“contemporary” approach to establishing control systems. In a traditional control system,

top management formulates strategies and sets goals. These strategies are implemented,

Because Southwest’s leadership emphasized employee involvement, Southwest used a

contemporary control system to monitor both internal and external environments. Relying

(Although not in the case, see the blog activity initiated when Southwest CEO Kelly was

wondering what to do about assigned seating: Southwest had several operational

differences from other airlines. As of 2013, SWA still did not charge fees for the first or

Strategic control focuses especially on the roles of informational and behavioral control

in the formulation and implementation of strategies. See Chapter 9, Exhibit 9.2.

The leadership at Southwest is keenly involved in informational control. The focus on

low-cost strategy was so clear that the organization consciously nurtured this by ensuring

that it didn’t diverge from the core business of providing low-cost, point-to-point flight

Chapter 9 emphasizes the importance of aligning both informational and behavioral

control systems with organizational strategy. The information gained from the internal

and external environment is reviewed against the firm’s strategy and goals. If the results

Regarding behavioral controls, Southwest had been lucky, in a way, for having faced a

survival crisis in the initial years. The threat to survival helped forge the “Southwest

spirit” or the underdog warrior mentality. That formed the basis of Southwest’s culture.

Southwest recognized the importance of a culture that focused on excellence in customer

The organization used a personal touch to communicate to employees that it cared for

them. This included, among others, sending birthday cards signed by Colleen Barrett,

helping employees cope with any personal crises, and also recognizing their contributions

and honoring them. The emphasis on teams and appreciation of each others’ efforts

Another component of behavioral control is motivating with rewards and incentives. At

Southwest, rewards were directly linked to contribution to bottom-line. By giving

employees a share in the profits, stock option plans etc., Southwest effectively made

The third component is boundaries. At Southwest, there were no elaborate rules and

regulations. The principle of business was to keep it simple. Cost control, focus on core

With the balancing of informational and behavioral controls, the organization succeeded

in exercising effective strategic control. Southwest experienced loyalty of its employees,

This chapter discusses the importance of a strong, positive culture and reward systems

that rely more on achievement of jointly created and internalized goals and objectives

than on constraints imposed by rules and regulations. Behavioral controls involve a

An organization can get into problems when it uses one component of behavioral control

as a substitute for the other. In case of Southwest, some problems with employees existed

because, in the changed circumstances, the employees believed that Southwest was trying

to substitute culture for rewards (we’re such a wonderful place you should be willing to

NOTE – ADDITIONAL READING, VIDEO INTERVIEWS, COMMERCIALS:

The price-earnings ratio (P/E) reflects the cost of a company’s stock relative to its

earnings per share. A lower ratio is thought to reflect more of a bargain. Compare

Southwest’s price-earnings ratio to that of its direct competitors and the industry as a

whole using this link:

http://finance.yahoo.com/q/co?s=LUV

How does Southwest compare to the competitors listed?

Here’s more information on the AirTran acquisition:

http://www.bloomberg.com/news/2010-09-27/southwest-airlines-agrees-to-buy-airtran-

for–1-4-billion-in-cash-shares.html

And a summary of the 3 major challenges facing Southwest: operating a multi-aircraft

On the announcement of a profitable quarter in July of 2013, in this video, CEO Gary

Kelly talked again about how Southwest could remain profitable in the future, and was

asked about whether he would consider adding bag fees to become more competitive –

Southwest is famous for using hedging to try to lock in energy savings.

United/Continental and AMR (American Airlines) have also been successful here. The

industry issue, trying to move revenues along in the face of a difficult economic

Southwest has several operational differences from other airlines. Currently, SWA does

not charge fees for the first or second bag checked, one of the only airlines with no fees.

Another operational difference is the concept of “open seating” where customers are not

assigned seats, but can choose their favorite seating location once on the airplane. In 2006

customers challenged Southwest to improve the way it handled boarding. Here is

Southwest’s response:

http://www.blogsouthwest.com/blog/a-message-from-our–ceo-open-season-on-assigned-

seating By 2013, Southwest had changed this to allow customers to choose their seats by

And announcement of a new service in 2009 to allow pets in the cabin:

CEO Gary Kelly commented that he wished to do two things: improve the Customer

Regarding Southwest culture as portrayed by founder Herb Kelleher, watch this 30

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

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

Would the playful sprit of the “sack” ad, the distinctive look of the airplanes, and the

And one of a series of videos about “a day in the life” of Southwest employees and

operations. This 4 minute one shows how the “Culture Committee” of Southwest

Does this differentiate Southwest in your mind from other airlines?

Read this article about the emergence of another low-cost airline, Independence Air:

and then the further history of Independence Air, including its bankruptcy announcement

in January 2006 after only two years of service:

Another low-cost no-frills airline that HAS been successful is Allegiant Air. This small

airline operates scheduled and chartered flights from small towns to vacation destinations

Since it is fairly easy for an airline to start up, how serious of a threat are newer discount

airlines such as JetBlue to Southwest Airlines? What steps, if any, should Southwest

executives take to combat this threat?

JetBlue, especially, has come under attack for its failure to support customers during the

weather–related events of February 2007. JetBlue published a Customer Bill of Rights,

available here:

Southwest has a Customer Service Commitment, as an extension of their Mission

Statement. Download their full Commitment .pdf document from their website, here, and

In addition, Business Week’s first ever ranking of the 25 companies who provide the best

customer service had Southwest in 13th place (the only airline on the list), and dropped

In July 2009, a scheduled Southwest flight from Nashville to Baltimore had to make an

emergency landing in Charleston, West Virginia after a “football sized” opening in the

airplane’s fuselage caused depressurization of the 737-300’s passenger cabin. This

incident recalled the FAA penalty imposed on Southwest for failure to conduct safety

And then in April 2011, it happened again – a flight from Phoenix to Sacramento had to

turn back after a six-foot-long in-flight fuselage rupture caused rapid decompression at

36,000 feet. Boeing took responsibility for the investigation here. See a story and video:

http://www.avweb.com/avwebflash/news/SouthwestAirlines812_InFlightFuselageRuptur

In 2013 an incident occurred at LaGuardia airport in NY when a Southwest plane’s nose

gear collapsed while landing as a result of pilot error. Only nine people sustained minor

injuries, but the accident seriously damaged the aircraft and delayed traffic at the airport

for hours. The captain, who was 49 years old at the time of the incident and had more

References

Freiberg, K & Freiberg J. 1996. Nuts! Southwest Airlines’ Crazy Recipe for Business and

Personal Success. Austin, TX: Bard Press.

Porter, M.E. 1996. “What is strategy?”, Harvard Business Review, 74(6): 61-78.