The Reasons Behind the Business Success of Southwest Airlines - Case Study Example

Webster Southwest Airlines By Alethea Davis MNGT 5590 Submitted Dr. Harvey C. Hutchison Myrtle Beach, North Carolina Southwest Airlines began as a small, three-city air carrier in Texas and developed into one of the most successful airlines in business today. The company’s innovative approach to air service made it a leader in the low-cost, no-frills market segment. It was able to achieve and sustain profitability through several innovative tactics serving its overall strategy of offering inexpensive flights. Its corporate culture, famously non-traditional, increased employee loyalty and productivity. The influence of that culture on its business model and strategic implementation resulted in a highly successful business. The combination of a low-cost strategy and distinctive culture has allowed Southwest Airlines to position itself as an industry leader while remaining a very popular place to work. Introduction Southwest Airlines is truly unique among the major carriers in America. Started in 1966 by founder Rollin King, the company has moved from being a small shuttle between three cities in Texas to one of Fortune magazines’ most admired airlines in the world. The story of its evolution, from a rocky and difficult beginning fraught with litigation to today’s industry leader in the low-cost, no-frills segment leader is fascinating. The issues relevant to understanding the company and its success are many, but only two will be explored for the purposes of this paper. The first is Southwest’s entrance in, and leadership of, the market segment known as “low-cost, no-frills.” In the years immediately after the company was formed and developing its strategy, the concept of a budget airline was foreign to the industry. While all airlines are focused upon the safety of their passengers first, the primary carriers of that day targeted passenger services through a hub-and-spoke delivery system as their key secondary goal. After airline deregulation, budget airlines began to emerge. “These have a different product and market strategy from the charter carriers...namely to offer low-price services. This business model was successfully developed for domestic services...most notably by Southwest Airlines” (Doganis, 2002). The second major issue contributing to the success of Southwest Airlines is that of corporate culture. Each company has a unique set of values and traditions, as reflected by the dress, conduct, and methods of communication within the organization; hence, its culture. As explored further herein, there could hardly be a more distinctive corporate culture than that of Southwest Airlines. If fact, management at Southwest considers it paramount: “Herb Kelleher and Colleen Barrett, Southwest Airlines CEO and chief operating officer, respectively, credit culture for shaping their unique enterprise: ‘Culture is one of the most precious things a company has, so you must work harder on it than anything else’” (Deal & Kennedy, 2000). The efficient implementation of its budget-sensitive business model has made Southwest Airlines a leader in the market segment. It’s corporate culture, as unique as its former CEO Herb Kelleher, has staffed the organization with happy employees. The combination of these two elements has allowed the airline to weather the recent storms within the industry and position itself to be the primary leader within the low-cost, no-frills market segment. Research Methodology The information for this paper was derived from several sources. The case study itself, Southwest Airlines: Culture, Values, and Operating Practices by Arthur Thompson and John Gamble in Crafting and Executing Strategy, The Quest for Competitive Advantage: Concepts and Cases (2004) provided the foundational framework and specific company information. Further research into the general airline industry and the low-cost, no-frills market segment was found in Rigas Doganis’ book, Flying off Course: The Economics of International Airlines (2002), Regulation of Passenger Fares and Competition among the Airlines (Macavoy & Snow, 1977), An Introduction to Airline Economics (O’Connor, 2001), as well as the 2002 McKinsey Quarterly journal article by Costa, Harned & Lundquist, Rethinking the Aviation Industry: New Strategies Could Help the Business Recover-But Will Also Put More Pressure on Established Players. The insight into the nature of corporate culture, and Southwest’s culture particularly, was gained from Deal and Kennedy’s work, The New Corporate Cultures: Revitalizing the Workplace after Downsizing, Mergers, and Reengineering (2000), Delivering Profitable Value: A Revolutionary Framework to Accelerate Growth, Generate Wealth, and Rediscover the Heart of Business by Michael Lanning (1998), and a 2001 journal article, Tapping the Best That Is Within: Why Corporate Culture Matters by Justin Schulz. The concepts embodied within these sources was synthesized and applied to the specific information regarding Southwest Airlines; how the implementation of its low-cost, no-frills strategy combined with its unique corporate culture to produce the successful company that Southwest Airlines has become. Literature Review The history of Southwest Airlines is replete with interesting characters, innovative strategies, and a willingness to discard conventional wisdom in implementing those ideas (Doganis, 2002). Within the framework of the two issues defined for treatment in this paper, the company has demonstrated a focused consistency. “From day one, Southwest had pursued a low-cost/low-price/no-frills strategy” (Thompson & Gamble, 2003). Southwest Airlines was not interested in providing perks like a first-class cabin or high-end executive lounges in airports (Macavoy & Snow, 1977). It was determined to serve its customers with safe, convenient, inexpensive transportation; and it accomplished that goal (Costa, et. al., 2002). To do so, however, required that management directly address certain assumptions present in the industry, violate convention, and demonstrate that it could provide reliable transportation while maintaining organizational viability and profitable operations (Costa, et al., 2002). The company focused upon using a single type of aircraft, the Boeing 737, so that mechanical service and pilot training could be minimized (O’Connor, 2001). It rejected the hub-and-spoke business model and implemented a point-to-point delivery strategy (Doganis, 2002). It foreswore the traditional seating assignments and employed an open-seating plan (Thompson & Gamble, 2003). All of these strategies, and more beside, allowed the company to keep its costs low—and with lower costs came lower fare prices. As Southwest successfully employed this newer cost model (Doganis, 2002), it also exhibited a very unique corporate culture. The corporate culture of Southwest Airlines is truly unique (Thompson & Gamble, 2003). In fact, the importance that Southwest places upon the happiness of their employees is considered to be a mistake by some within the industry (Lanning, 1998). It is a fact, nevertheless, that the successful implementation and maintenance of a positive corporate culture gives any organization a distinct advantage over its competitors (Schulz, 2001). In Southwest’s case, the company’s remarkable growth and success is largely attributed to the way it treats its employees (Deal & Kennedy, 2000). Management believes that employee empowerment results in superior service based on the premise that if the employees are happy, they will keep the customers happy (Thompson & Gamble, 2003). In combining these two issues, i.e., a low-cost, no-frills business model and positive corporate culture, Southwest Airlines has found a way to meet customer demand and maintain profitability even during the worst of times for the industry. Findings and Discussion An analysis of the company using the Five Forces Model of Competition provides key insights into the company’s success. While it is not reasonable to thoroughly integrate a discussion of all the forces within the space of this paper, there are elements of the model wherein Southwest has clearly distinguished itself. It is notable that Southwest Airlines experienced significant barriers to its entry into the market. There are two points in the company’s development where they were directly opposed by competitors and governmental agencies, and protracted litigation ensued. The first of these two was at the company’s inception. The organization’s founder, Rollin King, actually incorporated Southwest Airlines in 1967 but it took four years of “legal and regulatory proceedings” to get the job done, including “two appeals to the Texas Supreme Court and a favorable ruling from the U.S. Supreme Court” (Thompson & Gamble, 2003). Much of this opposition was from direct competitors, Texas International and Braniff, who perceived that the intrastate operations of the company between Dallas, Houston, and San Antonio would hurt their businesses to the point that they wanted the company to be prevented from even beginning operations (Macavoy & Snow, 1977). In spite of these barriers, the company began operations in 1971. The second set of litigation commenced when Southwest sought to remain at Dallas Love Field in spite of the new Dallas Fort Worth Regional Airport (DFW). One of Southwest’s key strategies was to provide passenger delivery close to major cities so that its business and recreational flyers could have easy access to the urban area without driving long distances (Thompson & Gamble, 2003). DFW officials had been counting on airport fees from Southwest to service their bond debt (Thompson & Gamble, 2003), and Southwest was forced to go to court to protect its strategy. Ultimately, after another fight over service to smaller markets in Texas, Southwest managed to get the two competitors indicted for conspiracy and, after a “no-contest” plea resulted in fines, was finally left alone to compete within the industry. In terms of facing the threat of substitutes to its product, Southwest was simply too efficient for industry competitors. Its price-to-performance was so competitive that the company could compete profitably with all comers. Where Southwest shined, however, was in the maximization of supplier power. The organization’s ability to control costs was unprecedented. The policies and operating practices, some of the key ones listed herein, allowed Southwest to revolutionize the market. First, Southwest decided to use one type of aircraft, the Boeing 737. This strategy was intuitive, due to the “degree of commonality of spare parts, maintenance procedures and flight crews” that kept costs low, and Doganis goes on to note that “low-cost or budget airlines have learned this lesson. Despite having large fleets they tend to fly only one or at most two aircraft types” (2002). Secondly, Southwest pioneered a new point-of-sale strategy by cutting out expensive travel agent bookings and pointing customers to their web site. Doganis further notes that “low-cost, no-frills airlines such as Southwest...were the first to grasp fully the value of the Internet...by cutting out commissions to agents, which can represent between 6 per cent and 10 per cent of total costs.” Such a high percentage of savings was central to the Southwest strategy of keeping operating costs low. Other key policies included a point-to-point scheduling model, which was far less expensive than the traditional hub-and-spoke method used by most major carriers. One of the most radical departures from the standard business practices of the time was Southwest’s idea of open seating. Rather than using a system that assigned seats, the company discovered that the costs of reservations and terminal personnel could be dramatically cut if they boarded passengers in groups and allowed them to choose their own seating (Thompson & Gamble, 2003). The effective employment of these, as well as other, policies and strategies would have significant benefits to Southwest, allowing it to be in a much better financial position. The wisdom of this approach was most dramatically realized in the days after the September 11 terrorist attacks, when its competitors were forced to cut flights, lay off personnel, and borrow funds for operating costs due to the reduction of passenger volume: Southwest did none of the above, as it had $ 1 Billion in cash (Thompson & Gamble, 2003). Southwest Airlines’ ability to keep its costs low addressed the issue of buyer power, a key element of which is price sensitivity. By offering some of the lowest prices in the market, the company kept its customers loyal. Southwest’s emphasis on corporate culture and employee satisfaction, however, played a very significant role in contributing to the success of the company. As previously noted, Southwest is a strong culture company, even though that culture might be considered a little quirky by some. In fact, there are those that would say that “Southwests management just [doesn’t] seem to get it...they have fun” (Lanning, 1998). This is an understatement for a company whose CEO attended a company gathering dressed as Elvis and actually arm-wrestled the executive of a rival company at a public event for the right to use an advertising slogan (Thompson & Gamble, 2003). It is this element of fun, however, that makes the company a very popular place to work. While corporate culture can be the “the hardest part of managing any enterprise...,” we know companies that “know how to develop their cultures effectively enjoy significant advantages in both the productivity of their organizations and the quality of work life for employees” (Schulz, 2001). By all appearances, Southwest has done this very well since “Fortune Magazines poll of January, 1998 found SWA ranked as the best US company for which to work” (Lanning, 1998). As discussed in the next section, the culture of Southwest is one of its most unique and important assets. Conclusions and Recommendations Southwest Airlines is an impressive company; no wonder that it tops Fortune Magazine’s list of most admired airlines. Three reasons for this come readily to mind: Its perception of the low-cost, no-frills market segment and ability to formulate a strategy to fit that segment; its implementation of that strategy with the attendant operational efficiency; and its devotion to developing and maintaining a strong corporate culture that focuses on employee satisfaction. Southwest has crafted an A+ strategy for reaching an important segment of the airline industry. By focusing on providing a safe, reliable, customer-oriented model of operations, the company has also managed to deliver their stellar product at a low cost. I like the fact that this has been accomplished by an innovative—even brash—willingness to try new ideas and stand behind those concepts long enough to give them a chance to work. Southwest’s choice to implement open seating, for example, was an unprecedented idea. While they knew it would cut costs, there was no guarantee that the customers would respond well to boarding in three groups and finding their own seat. Southwest took a risk; and it worked. Apparently, assigned seating was not as important as the industry had thought it to be. The tactic worked because the company saved customers so much money on their tickets that business or frequent flyers were willing to line up early if they wanted a premium seat, like emergency row or aisle seats for better legroom, and the occasional or recreational flyers were willing to wait. To save money on the ticket price, these people were willing to take whatever seat was available, even if that meant sitting in the middle of a row between two strangers. The fact that the organization made the gate area a more relaxed, fun place to be worked in conjunction with this concept and the marketplace responded positively. I like the way management has conceived a corporate culture that focuses on employee satisfaction and fun. Their belief that happy employees make happy customers, combined with management’s willingness to participate in the fun, resulted in loyal and dedicated employees. A free-minded and festive culture made the workplace much more positive, more conducive to individuality on the job, and engendered loyalty in the workers. That spirit of loyalty transferred to their customers and proved that a positive corporate culture impacts the market with good result. The combination of happy people working with innovative ideas has obviously proven to be a winning strategy for profitably meeting the needs of budget flyers. Similarly, Southwest earns a high grade for the way it has implemented and executed its ground-breaking corporate strategies. It has taken some very different approaches to cost-cutting, and made them work. For example, the open seating approach, if handled differently, could have been disastrous. Boarding passengers in groups and letting them find their own seats was unthinkable when Southwest introduced it. The culture of the company promoting fun and employee satisfaction, however, meant that those passengers boarded in an environment of hospitality and recreation. This environment, combined with the fact that the passengers had paid far less for their tickets than they would have if using a competitor, demonstrates the effective implementation of the key elements analyzed in this paper. Innovation, combined with a positive culture, is effective and profitable; so much so that there is no specific recommendation here to grow the business other than for management to do what it has been doing all along. The only weakness perceived in this company, and a potentially difficult one at that, is the departure of Herb Kelleher. As the spiritual leader, and particularly the person most responsible for maintaining the culture, his lessening role will need to be handled very delicately. Management will need to work very closely with him to ensure that the foundation of his ethic is faithfully built upon and the employees of the company continue to have input into the operational process. In conclusion, Southwest Airlines is a truly unique organization. It leads the airline industry in the low-cost, no-frills market segment by providing a very good product at a very low price. It accomplishes this feat by combining the elements of innovative and effective strategies with a positive and empowering corporate culture. If Southwest can keep these elements strong and in balance, it will grow: It will remain a profitable company and a fun place to work. BIBLIOGRAPHY Costa, P.R., Harned, D.S., & Lundquist, J.T. (2002). Rethinking the Aviation Industry: New Strategies Could Help the Business Recover—But Will Also Put ore Pressure on Established Players. The McKinsey Quarterly. 89-94. Deal, T.E., Kennedy, A.A. (2000). The New Corporate Cultures: Revitalizing the Workplace after Downsizing, Mergers, and Reengineering. Cambridge, MA: Perseus Publishing. Doganis, R. (2002). Flying off Course: The Economics of International Airlines. London: Routledge. Lanning, M.J. (1998). Delivering Profitable Value: A Revolutionary Framework to Accelerate Growth, Generate Wealth, and Rediscover the Heart of Business. Cambridge, MA: Perseus Publishing. Macavoy, P.W., Snow, J.W. (1977). Regulation of Passenger Fares and Competition among the Airlines. Washington, D.C.: American Enterprise Institute. O’Connor, W.E. (2001). An Introduction to Airline Economics. Westport, CT: Praeger. Shulz, J.W. (2001). Tapping the Best That Is Within: Why Corporate Culture Matters. Management Quarterly. 29-33 Thompson, A.A., Gamble, J.E. (2004). Southwest Airlines: Culture, Values, and Operating Practices. Crafting and Executing Strategy, The Quest for Competitive Advantage: Concepts and Cases. New York: McGraw- Hill/Irwin. Read More