SouthWest Airline - Research Paper Example

AN ANALYSIS OF CONTROLLERSHIP ISSUES: AN ANALYSIS OF SOUTHWEST AIRLINES, USA Introduction Controllership issues are the major issues in businesses around the world. Who controls and how the business is controlled is very important because of three reasons (Grant 7). First of all, it sets the tone for management and governance at all levels of the organization. Secondly, controllership determines to long-term growth and survival of the company. Thirdly, controllership provides the background for a company to provide the best services to all the people concerned with its operations and existence. This paper examines controllership in SouthWest Airlines, a major airline service in the United States of America. It tries to analyze and evaluate the problems in the strategic planning structures, management control, internal and external reporting system in the business. These three areas are selected because it gives a deep insight into the managerial accounting systems and practices in the organization. The Strategic Systems of SouthWest Airlines SouthWest Airlines is an American airline based in Dallas, Texas and it is the largest airline in the USA (SouthWest Airlines Website, About us). SouthWest Airlines is ran by a Board of Directors and a team of Managers who handle the routine activities of the airline. The Board of Directors is headed by a Chairman and the Management team is headed by a Chief Executive Officer (CEO). According to the airline’s website, the chairman of the board of directors is the same as the chief executive officer currently. From the formation to 2004, Herb Kellerher was in this position until Gary Kelly took over in 2004 (O’Connor 256).The Board plays a regulatory and supervisory role over the management team, which is charged with the day-to-day running of the company. According to Grant (7) a business begins by using its mission or primary focus as a yardstick for the creation of a corporate strategy. He goes further to state that corporate strategy includes vision, objectives and plans that are initiated from top level management for the long-term maximization of resources in the business environment. SouthWest Airlines’ mission stated on its website is “dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride and company spirit”. This mission is customer focused. According to Buller & Schuler (78), SouthWest Airlines used this mission to create their basic strategy that they use to operate to this day. SouthWest Airlines from its inception as a local Texan flight company focused on a careful study of the customers’ needs. The used their knowledge to provide fast, safe, convenient and cost effective flights for people within the state. The SouthWest Airline took years to survey and find out more about other states and trends in their airline industry. They used a slow growth strategy called ‘go slow’ approach to carefully study and understand the markets in these select southern states (Robbins & Judge, 256). They therefore became an interstate flier. Gradually, they studied all other states nationwide and made careful selection. In the process, there were cities that sought to pay SouthWest Airlines to fly to them but the company rejected some of these offers and only expanded to other states if and only if the management and staff thought it was wise and profitable to do so (Buller & Schuler, 78). With a gradualist approach, they became a national airline company and flew all over the United States by 2000. Aside having a customer-oriented strategy, SouthWest Airlines has a very strong profit oriented motive that it seeks to honor through providing job security for its employees and growth in market share (SoutWest Airlines Website, About Us Page). The company seeks to enhance employee loyalty and motivation by providing an enabling culture for business to thrive successfully and also tie the remuneration of staff members to the profits of the company (Robbins & Judge 257). For growth in market share, SouthWest Airlines does so by using quality management techniques to ensure that they have an understanding of what customers want at every point in time and work to provide them. Controllership at SouthWest Airlines Controllership involves the provision of support services to managers and management to ensure that the organization meets its strategic objectives (Bragg 9). Controllers are usually managerial accountants who seek to look into the future by examining the present performance of the business and then getting cost figures and estimates to alert managers on how to take action to ensure that strategic plans and objectives are met (Hanson 19). To examine the case of SouthWest Airlines carefully, we look at the strategic planning framework and then the managerial control systems as well as internal and external reporting methods to find the problems and limitations of the systems. This way, the paper will point out major controllership issues in the company. Strategic Planning in SouthWest Airlines According to Williamson et al (7), strategic planning entails the use of techniques in forecasting, planning and monitoring to ensure that a business is providing optimum results for stakeholders and is competitive in the markets it operates in. They also state that strategic planning entails sustaining and improving a business’ position and the acquisition of appropriate resources to consolidate a business’ position in the market. Strategic planning is handled by a special team in SouthWest Airlines. Currently, the same individual acts as the Chairman of the Board of Directors and the CEO. Although O’Connor (256) states that the company has an independent strategic planning team that the CEO and Chairman does not belong to, there are questions of the limits of the power wielded by the strategic planning team. This is because the Chairman and CEO has the tendency to have and use his unfettered power. This is because he controls to board which is supposed to monitor the direction of the company and at the same time heads the functional management team. This means that his power might be unlimited and can potentially lead to governance issues and problems that might affect the growth of the business. The main stakeholders that the strategic planning team of SouthWest Airlines has to deal with are grouped into two by Ricardo & Associates (328) as internal and external. The internal stakeholders include the Board of Directors, Senior Management (both headed by Mr. Gary Kelly) as well as departmental leaders (some of whom are members of the strategic planning team) and airport staff (who are the major operatives). External stakeholders include other airline manufacturers, passengers, ticket vendors, airport authorities, the Federal Aviation Authorities, the Department of Homeland Security, Regulatory Agencies, Airline Manufacturers, Public organizations and local business partners (mainly outsourcing partners). This team of stakeholders have various needs and strengths. However, there is an issue with how well SouthWest Airlines can satisfy all these stakeholder groups. First of all, with its growing financial strength and power, there is a question of how it is going to handle the case of weaker stakeholders like the environmental needs of the unborn who do not have a voice and individuals who take the airline to court. There are over 900 scandals relating to SouthWest Airlines’ relationship with the Federal Aviation Authorities mainly due to lapses from outsourcing partners (Dirt Diggers’ Digest). With a strong financial position, it is not clear that these aggrieved parties can get the right form of justice they need. Secondly, the new arrangements in anti-terrorism protection in the United States, has caused the focus of the airline to shift disproportionately to the satisfaction of security agencies to the neglect of other important stakeholders. There is therefore the need for SouthWest Airlines to have a good system and method for the evaluation and satisfaction of stakeholder needs. However, with a profit orientation at the top of its agenda, it is quite difficult for the company to do this evaluation fairly without influence. . Management Control SouthWest Airliens ensures that it uses systems of control to translate its strategies to the various units of the organization. Garrison (449) identifies that SouthWest Airlines uses the principle of Balance Scorecard to ensure that operations are fully monitored and the people in the organization perform in line with the strategic plans. “Balanced Scorecard is an integrated set of performance measures that are derived from and support the company’s strategy throughout the organization” Kaplan & Norton (76). This way, members of the managerial team of the airline have targets and standards that each line of manager must attain at given periods in time (Gittel 56). There are financial standards that every selling outlet in the airline needs to meet. Marketing have the scope and reach that they need to gain and the human resource management team have targets in hiring people with a sense of humor and loyalty. The supervisors at the check in counters have to ensure that the workers actually perform to promote the customer friendly and convenience that the company shows to clients (Garrison 449). With the support of the balance scorecard, workers of the airline measures and standards are quantified by management with respect to SouthWest’s overall strategy. Supervisors and managers are to ensure that they meet these measurable targets and they provide results that will enable the strategic targets to be met fully from all the units of the organization. However, Kaplan and Norton (60) state that the balance scorecard system uses traditional financial measures and there are little qualitative measures. This is because these qualitative measures are difficult to quantify and measure. SouthWest Airlines might therefore have difficulties trying to measure the extent to which people can honor some customer satisfaction measures. This therefore means that the company cannot measure the ‘sense of humor’ on the part of employees and customer loyalty. This is because they cannot quantify it easily since it is more of a subjective behavioral trend and not something measures can be placed on. Secondly, a strategy is just a set of hypothesis based on cause-and-effect. It is not fixed and a need to modify it drastically may arise in course of operations. This therefore means that the balance scorecard system could be a good approach but it is limited to the sustainability and relevance of the strategy chosen by SouthWest Airlines. Any time there is a major change in the business environment, there will be the need for the company to change its strategy and methods. This therefore means that the balance scorecard is not foolproof and this indicates that there are consistency issues related to the operation and usage of a balance scorecard system at SouthWest Airlines. With a strategy of cutting down training costs (Hill & Jones 105), the amount of money and effort needed to train employees on the detailed strategic targets have been reduced drastically. This therefore means that most casual employees will not be so much in touch with the ends of the targets set by the balance scorecards at SouthWest Airlines. It implies that people will not be so much involved in the process of setting the standards and this can go a long way to affect motivation and performance of the company because low level staff members will just be trying to please their managers and not satisfy the targets as expected. This is preventing SouthWest Airlines from meeting its strategic objectives reasonably. Internal & External Reporting Generally, management have full responsibility for the creation of internal controls to ensure that the employees in the organization comply to the strategies and objectives that the business was set up to uphold (Gibson, 85). Management also have full responsibility for the financial statements that they lay out for periods in which they were in charge of affairs in the organization and they are also responsible for the performance of the organization. First of all, the functional units of SouthWest Airlines need to present interim reports each quarter (Gittell, 177). Secondly, the accounting department needs to present financial accounts each quarter (Needles & Powers 349). The financial position and performance of each department needs to be accurately compiled and made available every three months. This gives senior management an insight into the financial results and this gives them a basis to take an appropriate decision about their spending and how to make changes before things get out of hand. SouthWest Ailines’ controllership unit, the management accounting department is responsible for estimating costs and developing budgets by estimating revenues and manager the interaction (Crosson & Needles 53). The presentation of financial information by the finance department of SouthWest Airlines comes with major issues. First of all, the collection of financial information cannot be seen as perfect method of forecasting the information. This is because no matter how accurate the finance department tries to be, there are many elements of uncertainty and inherent errors that can affect the accuracy of the predictions made by managers of the airline. Although the airline has used strategies to prevent unpleasant surprises like hedging the prices of fuel and insuring other volatile areas of their operations (Blanco et al 2), there are risks that unforeseen activities can render the postulations and statistics submitted by the finance department useless. Secondly, the problem of organizational politics creates tensions for the finance department and their bids to gather information from the various units. Many department like the marketing department sometimes view members of the financial department as a hindrance to innovation, opportunities and prosperity and (Bragg 57). This tension can cause the finance department of SouthWest Airlines to encounter difficulties and hardships in compiling timely, relevant and accurate data. The notes to financial accounts presented by SouthWest Airlines gives interesting insights that bring out explanations about the external reporting systems of the company (Needles et al 286). Financial statements are accounts prepared by a company as required by law for external users of this information (Gibson 7). Financial statements must be prepared according to laid down statutory rules and regulations. In preparing its financial accounts, SouthWest Airlines uses Generally Accepted Accounting Principles (GAAP) to compile the data and process it to financial information. GAAP involves the use of financial and statutory provisions laid down by federal and state laws as well as international convention that are accepted by the Institute of Certified Public Accountants. The use of American GAAP places the management of SouthWest Airlines under a very difficult fiduciary position. This is because they need to report things as accurately as possible and be held responsible for them. The management team therefore needs to spend a lot of money to ensure that an internal audit team operates to support the accounting department. This is quite expensive and leads to extra costs and burdens on the airline carrier. The accounting department is represented on the functional management team and it plays a major role in the strategic planning system of the organization (Gittell, 29). There are sub-units located in the various branches of the organization, responsible for presenting accounts in a way and manner that is consolidated and included in the overall accounts of SouthWest Airlines that gives the overall external reporting figures. Since the airline operates in all states of the United States, it is quite difficult for the accounting team to supervise all branches accurately to ensure consistency and central compliance. This leads to isolated cases of financial reporting cases that have caused delays and other problems for the company. Conclusion The strategy of SouthWest Airlines is customer and employee focused. It is set by the people charged with governance of the organization and sets the framework for over-all corporate direction over a long period of time. Strategic planning enables SouthWest Airlines to learn about its environment and industry and make changes as and how it is necessary. However, this comes with the challenge of undue control by the fact that the CEO and Chairman of the Board is the same person. Also, there are so many challenges with stakeholder matters and evaluation. In the use of balance scorecard as a method of management control, there are quantification problems and the fact that this system uses traditional financial measures. In this process, the internal and external reporting, there are inherent challenges that affect the accuracy of these reports and other challenges from the external environment. Works Cited About Us. SouthWest Airline Website. 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