Strategic Management - Southwest airlines - Term Paper Example

? Strategic Management – Southwest airlines Inserts his/her Inserts Southwest airlines has demonstrated its sound strategic management and planning by retaining its position as being the soul airline in the U.S industry that managed to rack up profits in the 1990’s while its competitors made huge losses (Heskett, 1993). The company also boats of having very profitable shares which has been maintained through steady growth and profitability figures. The company also won the “tripe three” rating as a measure of superior customer service and satisfaction in the 1990’s (Heskett, 1993). It is, therefore, no surprise that others in the industry have followed the lead of Southwest airline which is looked upon as an excellent model for strategic management in its industry. The company’s success rests on the key pillars of value creation for its customers as well as employees. Of the entire strategic management, Southwest Airline’s key role in strategic human resource management has been an integral part. The company uses the words “LUV” and “FUN” to describe its relationship with employees as well as the deeper culture of the organization (Heskett, 1993). Southwest believes in endowing employees with high respect as well as providing them with an environment that best supports their willingness to work. The company’s low turnover rates and high levels of productivity are indicators of its success. Another significant aspect of the company’s strong strategic position is its management of organization’s capabilities and resources. In this process, part of the value that is created for employees is translated into value addition for the shareholders and customers. Southwest’s source of competitive advantage lies in its delivery of value for money which is a combination of low operational costs and superior levels of customer satisfaction and service. The company, hence, is a model of generation of value through people as suggested by Porter in his studies (Wheelen & Hunger, 2011). Hence, the notion of strategic management at Southwest has been a product of several factors which are best explained as a cycle of events. Firstly, the company succeeds at value creation for its workers which translates to high levels of motivation (Hallowell, 1996). Secondly, the company uses the motivation produced by this in order to implement processes that reduce cost and enhance service (Hallowell, 1996). Third, the company succeeds at capturing value by offering both low cost and high levels of customer service better than its competitors (Hallowell, 1996). The competitors of Southwest have been traditionally associated with hub and spoke networks that enhanced barriers to entry in the 1980’s along with advanced customer relationship management via segmentation and computerized systems (Hallowell, 1996). Research has suggested that mere “contestability” is not a sufficient condition for strategic management of airlines (Bailey, Graham, & Kaplan, 1986). Contestability is basically the failure of an airline to remain competitive at a particular route simply because there are no barriers to entry and its competitors can easily enter the route to capture the profits (Bailey, Graham, & Kaplan, 1986). The case of Southwest demonstrates that clearly the company needed a lot more than mere contestability in order to sustain its strategic advantage over the years. This leads to the premise that the high motivational levels of employees made a crucial role in the strategic management initiatives at Southwest. The company’s core target was to offer airline services at the lowest possible costs, even if that means competition with automobiles. The target customer of Southwest is typically a customer who wants warm, co operative staff as well as superior interaction, response all at a low fare. The aim is, therefore, to offer more for less money rather than less for less money. This has clearly differentiated Southwest from its competitors. This, however, translated to a high need for securing high “turn”- a term that refers to the duration for which the plane stands idle at the gate (Hallowell, 1996). Also it required greater standardization of the equipment used along with strict compliance with the schedules that were laid down by the company as well as carefully thought out recruitment and training process of its employees. Furthermore, the company selectively decided not to target those airports that were labeled as having too high customer traffic. On the other hand, the company’s competitors often do not consider all these factors holistically and insist at pursuing either one or a few of them. Therefore, only Southwest attempts to cash on the power of using all these factors in sync. The company has not forgotten the fact that growth is impossible without trained employees because of which it does not aim at growth levels that transcend its ability to deliver through its employees. The value chain analysis when applied to Southwest airlines indicates that the company has, over time, enhanced its share of the market not just by enhancing customer’s willingness to pay but also driving down costs. The higher wedge results in greater margins. A detailed analysis of these components leads to the premise that the company has been successful at delivering and sustaining value through the years. Southwest has enhanced the customer’s willingness to pay through various tools. Firstly, it offers superior customer service. This means that it offers flights that are mostly on-time, has fewer problems related to loss of baggage and has had fewer complaints by its travelers. Statistics reported by The Department of Transportation have reassured the fact that the company stands ahead of its competitors along all these criteria (Bennett & Craun, 1993). The company has to its credit a high frequency of travelers who frequently travel back and forth various cities and who need convenience more than anything else. The “fun’ culture of Southwest goes beyond its employees- it encompasses the jokes that are played around with customers, trying to make their day full of entertainment and amusing (Hallowell, 1996). However, this is combined with the company’s serious attitude in so far as flight safety is concerned. The company claims to be a “no-frills” carrier which simply means that it does not offer add-ons (Hallowell, 1996). Ideally one would expect this to downplay the willingness to pay. However, the popular perception amongst customers is that the services that are not offered by the company are those that are not highly ranked by customers as necessary or important. Research has discovered that on flights that have duration of 60 minutes or more, meals are not considered to be an important part of flight service (Hallowell, 1996). Similarly the service involving the transfer of luggage between carriers is not considered important because Southwest only allows connections with its own flights. Similarly, the service of allotment of seats is not considered a vital part of airline service for shorter flights. On the whole, this results in enhanced and not reduced willingness to pay. As far as the pricing strategy of Southwest is concerned, it offers a price based on long-term considerations as opposed to short term fares based on segmentation used by its competitors. This enables the company achieve greater consistency as the multiple pricing is done away with, leaving customers less confused and clearer about the fare structure. A consistent consideration in its pricing is offering the best value for money which translates, partially, to lowest fares in the industry. Since the company’s cost structure is significantly lower than its competitors in the airline industry it can manage to drive down costs and lower the price. Owing to the fact that its competitors have a cost higher than that of Southwest, it is not in their interest to offer a fare which beats Southwest because doing so would put them at a loss (Hallowell, 1996). As far as the cost structure is concerned, it is an undoubted fact that the largest chunk of costs of any carrier is its staff and crew. According to the former CEO of American Airlines, this factor of the airline industry is unmatched with any other industry- it is the only industry where staff has the highest weightage in the cost pie (Vietor, 1994). Most of the workers at Southwest are mostly engaged in the transition of customers from the departure to destination; this group consists of the cabin crew, employees at the gate, ramp, baggage belt, and most importantly, the pilots (Hallowell, 1996). It is important to note that these participants have a role in not only forming the cost structure of Southwest but also influencing the willingness to pay through the customer experiences that they create. This is one of the crucial elements behind labor intensive organizations that labor not only accounts for a significant portion of the cost mix but also the revenue pie. As far as the workers are concerned, they are paid at par with industry average. It is important to note that majority of the employees (as high as 85%) are active union members (Heskett, 1993). The company does not compromise on the compensation it pays to its workers either in the form on monetary or non-monetary benefits. In fact, the company boasts of a highly productive workforce which is one of its major strengths. This is partially because these members are paid irrespective of whether or not they are at duty; that is, the pilots are paid a fixed amount regardless of the amount of time they fly in the air. Another area of Southwest’s operational efficiency is its low “turn around” time compared to its competitors; the company boasts of an average of 17 minutes as compared to its competitors’ 45 minutes (Hallowell, 1996). Additionally, the company has a very well thought out strategy when it comes to expanding the horizon of its destinations. As per its policy, Southwest does not take up a new destination unless it is capable of providing the company with at least 8 flights per day (Hallowell, 1996). This further enhances the productivity of employees and reduces idle time. Additionally, this leads to higher utilization rates for the carrier which further brings down cost. According to research, the compounded effect of all these elements led to a $0.0703 cost per seat for Southwest in 1992 which was the lowest level compared to its competitors (Hallowell, 1996). The question now arises: how has Southwest been able to drastically lower the turnaround time from 45 minutes (industry average) to 17 minutes? The answer can best be explained via three major reasons. Firstly, the company has utilized the benefits of standardization as far as its carriers are concerned (Heskett, 1993). Secondly, the company is a no-frills carrier, meaning that the cost associated with meals is done away with. Also, it can “reprovision” itself in a quick manner (Hallowell, 1996). Thirdly, the company has high level of co ordination amongst employees who make possible the rapid boarding activity as well as high levels of cross-functional co ordination that provides rapid results in all procedures (Hallowell, 1996). It boasts of a highly dedicated and committed crew and staff that assists the passengers in every way possible until the customer has checked in. Pilots at times assist in luggage handling in order to facilitate the entire departure process (Hallowell, 1996). This humility of its employees results in work getting done quicker and faster. Hence, Southwest is able to benefit from the promptness and alertness of its employees at work simply because it is providing them with sufficient monetary and non-monetary incentives to boost their motivation levels. Literature has cited evidence of the fact that such high levels of commitment are the direct result of Southwest’s fulfilling its employees’ needs (Bennett & Craun, 1993). At the heart of the company’s relationship with employees lies the “LUV” and “FUN” culture (Heskett, 1993). The former refers to the relationship and treatment of employees. It denotes respecting each other’s individual rights and engaging in warm, caring relationships with one’s fellow workers. In practicality, the term refers to the famous Kantian law of doing unto others as they would have them do unto you. According to one of the managers at Southwest, the company believes in striving for the betterment of the community as a whole, without which it believes it would be unable to achieve success at a personal level (Hallowell, 1996). Yet another manager has quoted that the company puts its employees and passengers at the heart of all its efforts which is one of the reasons behind its astounding success (Hallowell, 1996). However, just as the saying goes “love is not blind”; the acronym “LUV” does not include tolerance for misbehavior or poor performance (Hallowell, 1996). The company does not hesitate in firing employees who do not meet their performance targets on a regular basis. Similarly, customers who cross their limits of behavior are asked by Southwest to approach some other carrier. The other construct, “FUN” denotes the frolic and fun-filled culture encompassing Southwest that not only is inherent in its internal operations but also in its interactions with its customers. It is a commonplace for employees to engage in fun-filled contests with the customers on board in order to entertain them and keep them happy. This family-like atmosphere at Southwest ensures that the customers feel like part of the Southwest family and feel at home, which is one of the fundamental objectives of most airlines. Furthermore, the company organizes many events and parties. Extending along the same lines, it is a commonplace to see the CEO dressed up in different attire to suit the occasion (Hallowell, 1996). With such a culture, unions are more than content and are almost never given a chance to raise complaints about workers’ treatment. Hence, Southwest has managed to be successful at the value creation process simply because of the fact that cost of this process has been less than the gains resulting from it in the form of enhanced productivity and superior customer traffic. Hence, the company is able to capture value because of its efficiency in its operational processes, such as cross-functional teamwork and efficiency along with its most critical resource- its motivated employees. The workers, in turn, show both their willingness and ability to sustain these behavioral norms and culture at Southwest simply because they believe that the company also works hard to deliver value to them (the employees). A study conducted by Roger Hallowell refers to the “virtuous cycle” of value creation at Southwest. At the heart of this cycle is the management’s view of the employees as providing superior customer service. In turn, the management follows strategies and HR practices such that lead to need fulfillment of the employees, ranging from pay to self-actualization. The process of value creation, as mentioned earlier, rests heavily on the fundamentals of “LUV” and “FUN” described earlier. Basically, the company’s low cost leads to its setting a price (lower than its competitors) such that it’s able to rack up higher profits compared to its competitors which results in value creation for both its shareholders and its employees. To conclude, this has several implications in so far as the theory of strategic management is concerned. Firstly, the various elements of the strategy must be internally and structurally in sync with each other (as is demonstrated by Southwest’s positioning and its internal capabilities to deliver value for money). Secondly, the company’s operational processes and its cultures reinforce each other which are crucial to the attainment of what is called a strategic fit. Third, Southwest’s source of competitive advantage is not structural in nature; it has nothing to do with a trademark or high-end research, neither does it have anything to do with an oligopolistic structure (Hallowell, 1996). Its competitive strength lies in its human resources- had it not been for them, the company would have never been able to achieve a valuable relationship with its employees and manage delivering superior service. Most importantly, however, is the fact that the company’s strategic advantage is difficult to replicate; it is inimitable not by virtue of any patent, but simply because, while the other tangible aspects of any organization may be relatively easy to copy, the intangible aspect or superior relationships with employees are difficult to replicate (Hallowell, 1996). References Bailey, E. E., Graham, D. R., & Kaplan, D. P. (1986). Deregulating the airlines. Cambridge: The MIT Press. Bennett, R., & Craun, J. (1993). The airline deregulation evolution continues: The Southwest Effect. U.S. Department of Transportation Office of Aviation Analysis. Hallowell, R. (1996). Southwest Airlines: A Case Study Linking Employee Needs Satisfaction and Organizational Capabilities to Competitive Advantage. Human Resource Management , 513-534. Heskett, J. L. (1993). Southwest Airlines: 1993. Harvard Business School. Harvard Business School Press. Vietor, R. H. (1994). Contrived competition. Cambridge: Belknap Press. Wheelen, T. L., & Hunger, J. D. (2011). Concepts in Stratgic Management and Business Policy. New Delhi: Dorley Kindersley . Read More