Southwest Airlines: Analysis of Environment - Essay Example

? Module 2 Case Study Southwest Airlines: Analysis of External Environment of the of the Southwest Airlines: Analysis ofExternal Environment Executive Summary Any firm within a given industry operates under ever changing circumstances. Factors internal to a company are called its strengths and weaknesses, while external factors providing opportunities and threats to all firms have to be considered as well while framing or changing strategy. Making a detailed study of PEST factors and using the Porter Five Force Model to determine the state of competition and rivalry between existing firms in the airline industry, we see that economic, socio-cultural and technological factors are the main ones impacting the airline industry as a whole and Southwest Airlines in particular. Introduction ` Any company worth its name will undoubtedly have its own strengths and weaknesses. Strength is considered that element or measure that gives it an advantage over its competitors. For example, a well trained and experienced sales team may be considered as strength(Anonymous, 2007). In the same manner a weakness of the company may be inconsistency in its strategy or planning, lack of finances due to already high volumes of debt of weak credit policies. Both strengths and weaknesses are internal to a company. Alternatively opportunities are those external elements that are bound to affect all the firms within an industry in a positive manner. Threats are external elements that will likely affect all the firms in a negative way. A lowering of tax or tariff structure for a particular industry sector may be regarded as an opportunity, while an increase in import duties of raw materials will be regarded as a threat to all the firms (Anonymous, 2009). Opportunities and threats though external, will affect firms in different degrees depending on their individual strategies, pro-activity or even a reaction to the impending factors that enable a firm to reduce or mitigate its effect. This paper will look at the external environment faced by Southwest and the rest of the airline industry in the USA, commenting on the severity of risk factors in the light of a detailed PEST analysis. Porter's Five Forces The five force model of Michael Porter as brought out in his book ‘Competitive Strategy: Techniques for Analyzing Competitors and Industries (Porter, 1980) was a groundbreaking work in that it gave the industry pundits, strategists and planners a basis with which to evaluate the degree of competition and rivalry that existed within a particular industry. We will now discuss the effect and relative strength of each of these factors in the light of the airline industry in general and Southwest Airlines in particular. Barriers to Entry and Exit The airline industry is known for its high investment in equipment and machinery. It has also to meet the high costs of fuel, aircraft purchases, maintenance, security, insurance and technological infrastructure such as booking and registration. These costs are prohibitive for new entrants and the intense competition also acts as a barrier as airlines compete for passengers over the same routes (Crosby, 1992). Loyalty programs such as rewards or discounts given for passenger miles travelled are being used to induce customers to stay with one service provider (Risk Factor: MODERATE). Rivalry among Competitor Firms The degree of competition and rivalry that exists in the airline industry is legendary. This industry is characterized by low profit margins, seasonal demand, high competition among service providers over the same or similar passenger routes and discounted or reduced rates for regular or institutional customers. On the other hand, airlines are using small perks like advance booking and baggage facility, quick processing times and other benefits to encourage travelers to fly with them. (Risk Factor: HIGH). Threat of Substitutes In recent times, the airline industry has been threatened by substitutes like fast bus or train services. Fear of terrorist attacks after 9/11 and the increased security and safety checks have resulted in dwindling clientele which are being wooed back by using technology, comfort and pricing strategies (Peters & Waterman, 1988). All said, travelling by air is still the fastest way between two destinations- a fact known by all. (Risk Factor: LOW) Bargaining Power of Suppliers On the supply side, there are a number of competitors that exist and different standards that govern the operability and reach of domestic versus international flights. Flying to Europe would require meeting different standards than Southwest would face in the North American continent. The same goes for its regional expansion into Mexico and the Caribbean. Technology, comfort and convenience are increasingly being used along with low pricing to bring additional customers aboard flights. (Risk Factor: MODERATE). Bargaining Power of Customers With the increased competition and rivalry being faced within the airline industry, the ultimate benefit goes to the customers (Porter, 2009). Everything from low cost travel and discounted packages to advance booking with hotels or resorts are available so that the customers do not have to do anything else other than agree to the offer and forward their passport details and travel dates. For those who want to rough it or have a truly scenic experience, rent a car services or excursion packages are also available. So the customer has a wide variety of choices with each one having a different cost and experience package. (Risk Factor: HIGH). PEST Political Environment: Competition and rivalry within the airline industry has made the scenario increasingly political (Southwest website, 2012). Some competitors have filed suit against Southwest’s takeover of Air Tran and the regional expansion of its routes into Mexico and the Caribbean (Risk Factor: LOW). Economic Environment: The rising cost of aircraft fuel and other expenses such as labor, aircraft maintenance and insurance are adding to Southwest’s costs and making it increasingly difficult to follow a low cost strategy for this domestic airline. The buyout of Air Tran and the desire to expand regionally will also add to labor, administrative and maintenance costs for the Air Tran fleet. Reduction of duplication would probably lead to layoffs as well (Risk Factor: HIGH). Socio-cultural Environment: Social and cultural factors are also known to affect an industry and the airline sector is no exception. Fear of flying, possibility of terrorist attacks and repeated checks of passenger and luggage has been the reason why people have shunned this sector in recent years (Risk Factor: MODERATE). Technological Environment: The recent changes within the airline industry have all been a result of technological changes such as in-flight movies, Internet and quick booking and confirmation systems. The new and more spacious aircraft like the Boeing 737 Dreamliner and the Airbus 320 compete with each other for luxury and comfort. Quick check-in and check-out are now industry requirements that must be met. Airlines are busy in outlining privileges and advantages to attract clientele (Risk Factor: LOW). Overall Impressions Concerning the Company's External Environment: Taken as a whole, the risk factors that firms in the airline industry face today would pose moderate to low concerns. For a regional and mainly domestic carrier like Southwest Airlines flying within the USA, the relevant risks are lower than those for international carriers. The economic environment- including cost of fuel and aircraft maintenance and integration costs with Air Trans coupled with fear of layoffs are the only high risk factors. However it is getting increasingly hard to compete as a low cost carrier when other airlines are upgrading their services. Investment in comfort, convenience and technological services like automated booking e-tickets and new aircraft like 737 MAX are considered opportunities to attract passengers. Hopefully the clientele coming to Southwest will understand that the perks and frills of some desired amenities will have to be sacrificed in order to fly at a cheaper rate than other airlines (David, 2011). Conclusion We have looked at the external environment faced by the airline industry in general and Southwest Airlines in particular as a competing domestic and regional low cost carrier. A low cost leadership strategy still makes sense in these times of high unemployment and fears of recession. Proper training of its people, respect for the environment and focus on performance are bound to make Southwest Airlines a respected regional and domestic carrier for years to come. References About Southwest (2012). From the Southwest Airlines website at http://www.southwest.com/html/about-southwest/index.html?int=GFOOTER-ABOUT-ABOUT Anonymous (2007). Conducting a PEST analysis. Accessed on 22 August 2012 at http://www.quickmba.com/strategy/pest/ Anonymous (2009). Porter’s Five Forces: Assessing the Balance of Power in a Business Situation. Accessed on 22 August 2012 at from: http://www.mindtools.com/pages/article/newTMC_08.htm Crosby, P (1992). The Eternally Successful Organization. Signet Books. David, Fred R. (2011). Strategic Management: Concepts and Cases, 10th ed. McGraw Hill.  Peters, T. & Waterman, R. (1988). In Search of Excellence: Lessons from America’s Best Run Companies. Grand Central Publishing. Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. Read More