Southwest Airlines - External Environment Analysis - Essay Example

Southwest Airlines: External Environment Analysis Introduction Business is never conducted in a vacuum. Conditions are always changing, things are always on the move, and today’s advantage can be wiped out tomorrow if a company is not alert and proactive. Company strategy is always created with the competition in mind and in the light of internal strengths and weaknesses coupled with the forces in the external environment that affect all firms in terms of providing opportunities or serving as threats for the business. This paper will look at the Five Force Model affecting degree of competition as developed by Michael Porter, and discuss the effect of each factor on the airline industry. We will also conduct a PEST analysis for Southwest Airlines as part of the airline industry. The Porter Five-Force Model Michael Porter put forth his Five Force Model in his groundbreaking work ‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’ back in 1980. In the decades that followed, he has further explored the global business arena in terms of competition, the value chain, the competitive advantage of nations and even how to create and sustain superior performance in business. Porter maintains that the five forces that affect the level of competition among firms in an industry are (1) barriers to entry and exit; (2) threat of substitutes; (3) bargaining power of buyers; (4) power of suppliers and (5) existing rivalry between firms. In the same work, Porter has also analyzed industries as falling into one of the following five groups: (a) Fragmented; (b) Emerging; (c) Mature; (d) Declining and (e) Global (Porter, 1980). In fact Porter’s analysis serves as a good theoretical tool to supplement a firm’s PEST analysis, which we shall now conduct for the airline industry in general and Southwest Airlines in particular. Conducting a PEST Analysis for the Airline Industry PEST stands for Political, Economic, Social and Technological factors affecting an industry or the firms comprising the industry. These four external factors have been found to have the most impact on the competitive conditions affecting firms in a particular industry and the airline industry is no exception. (1) Sources-barriers to entry and exit: The high cost of entry and exit in the airline industry globally include investment in equipment, infrastructure, buildings and facilities, an experienced workforce and aircraft maintenance and inspection, insurance, safety and security features. The high cost of aircraft and fuel is also affecting airline sustainability and the bottom line (Southwest website, 2012). (2) Sources-threat of substitutes: Alternative choices for air passengers would include fast trains, buses, automobiles and even ferry services. However nothing beats the convenience of an airplane. Terrorist threats, luggage restrictions and safety and security checks can also scare passenger away (Porter, 1980). (3) Sources-bargaining power of buyers: With the Passenger Protection Act in place to safeguard customers against price hikes, and insurance, safety and security measures that must be maintained at all times, and discount prices that are eagerly picked up by bargaining customers, this puts the buyers in the driving seat on many counts (David, 2011). Club memberships and frequent flyer miles may be offered to regular passengers to help retain their loyalty, and there are often possibilities of an upgrade to a higher class if seating is available. (4) Sources-power of suppliers: McDonnell Douglas and Airbus Industries are two of the most well recognized aircraft manufacturing firms having a global recognition and reputation. Both of these firms take most of the world’s orders but there are also a number of smaller firms that make smaller and lighter aircraft for other purposes. In fact both aircraft manufacturers have been set back by financing, supply chain management and operational problems in recent times. While some airlines have booked with just one supplier, others have firm orders with both so they have an option if one of the manufacturers fails to meet delivery schedules (McFarland, 2008). (5) Sources-existing rivalry between firms: The extent of rivalry between firms would depend on the nature and age of the industry, the availability of substitutes, the bargaining power of suppliers and buyers, the state of technology or investment needed to maintain a presence and the consistency and volume of profit that is being earned. The airline industry is notorious for its low and seasonal returns, high investment and intense competition (Porter, 1998). Conclusion We can see that social, technological and economic factors are the ones that are mainly affecting the airline industry (Business Balls website, 2012). Southwest is also dealing with the integration of Air Trans into its fleet, operations and culture. I found that the Southwest Airlines website was itself a good source of information on the problems being faced by both the airline industry in general and Southwest in particular. Business Balls website gave a good summary of what PEST analysis was about, and Michael Porter’s books and the Five Forces Model helped round off the discussion in the best way possible. References About Southwest (2012). From the Southwest Airlines website at http://www.southwest.com/html/about-southwest/index.html?int=GFOOTER-ABOUT-ABOUT David, F. (2011). Strategic Management: Concepts & Cases, 10th ed. Pearson Education. Business Balls.com (2012). PEST Analysis Marketing Tool. Accessed on 12 August 2012 at http://www.businessballs.com/pestanalysisfreetemplate.htm McFarland, K. (2008). The Breakthrough Company: How Everyday Companies Achieve Outstanding Results. Random House. Porter, M.(1980). Competitive Strategy: Techniques for Analyzing Industries & Competitors. The Free Press. Porter, M. (1998). On Competition. Harvard Business Press. Read More