Using Human Resources for a Competitive Advantage - Case Study Example

Southwest Airlines: Using Human Resources for a Competitive Advantage Human Resource Management and Business Strategy September 30, 2007 Number Word Count Background The U.S. airline market was deregulated in 1978. The virtues of the move, though long debated, had become more than self-evident by the mid-1990s: With the government no longer dictating ticket prices and in-flight menus, airfares dropped 40 percent in real terms between 1978 and 1997, saving travelers an estimated $20 billion a year and more than doubling the total number of passengers. (Accident rates, meanwhile, were cut in half.) Hundreds of new entrants flooded the market, and though most eventually failed (or were bought out), one folksy little Texas operation called Southwest Airlines became emblematic of the deregulation era. Redefining business rules - Southwest Airlines Southwest Airlines was founded to serve a unique market within the airline industry. Herb Kelleher and Rollin King, Southwest's founders, wanted to provide frequent, low-cost service in busy markets of less than 500 miles. Instead of considering other airlines such as United and Continental as competition, Southwest considered the automobile and bus service as major competition. Southwest's flights were typically point-to-point - nonstop from originating airport to destination airport, although connections were available for customers who wanted them. By the late 1990s, Southwest was the world's richest and most profitable major airline, while other players like United, Continental suffered heavy losses in an industry that had grown mature and highly saturated. Southwest's growth was driven by growing demand for the product that Southwest delivered so well: reliable low cost travel. Consumer behavior shifted towards greater price sensitivity in the early 1990s, motivated by a downturn in the business cycle and made possible by increasing corporate control over business travel. The shift appeared to affect business travelers as well as leisure travels, partly through corporate directives to cut down travel costs. While other airlines were wondering what to do, Southwest Airlines was well positioned to benefit from the increasingly price-savvy customer that it had helped to create. The purpose of this case study is to study how this competitive advantage was created by Southwest Airlines by leveraging its human resources. The structure that the report will follow will comprise of answers to two questions which deal with identifying how human resources can become a source of sustainable competitive advantage and how to deal with problems as the company becomes bigger and older. Question No. 1 How did Southwest use Human Resource Management practices to ensure the success of their business model Business Model According to Langdon (2003), the "business model," is a comprehensive description of business as an integrated system functioning in an intimate relationship with the broader market. In this concept, the individual components of an organization do not matter as much as the way they work together to enable the organization to create value and deliver it to customers. A business model is therefore a description of a whole system, a combination of products and services delivered to the market in a particular way, or ways, supported by an organization, positioned according to a particular branding that, most importantly, yields a particular set of strong relationships with present and future customers. Further, a business model describes how the experiences of creating and delivering value may evolve along with the changing needs and preferences of customers. The Business model of Southwest is simply: "If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline." The main elements of Southwest's business model as stated above are: 1) Customers -who are they a) Short haul business travelers who want to get there when they want. In other words offer several flight time choices between cities in close proximity. b) Families who decided to take a short flight rather than driving their car the same distance. 2) Low Cost a) Average one-way fare is $83 and it supplies 90% of all discount fares b) Concerned with keeping cost low to increase profitability rather than increase market share. Understand specific market niche. c) Rapid turnaround time and no-frills service. d) Maintaining a fleet of a single of aircraft. 3) Fly Short Distances a) Southwest does not use a hub-and-spoke system, but rather flies point to point. b) Average flight last just over an hour. 4) Have Fun!! a) Typical flight attendant spiel: "Please pay attention to the flight attendant at the front of the cabin. She's either going to be Miss America 2000 or a very bitter runner up." This business model has become a success mainly because of the human resources practice that the organization follows religiously and has worked hard to keep them alive over the many decades of its existence. Success Factors - HRM Practices at Southwest Airlines Southwest is a miracle of efficiency, boasting the best on-time performance, the fewest customer complaints and the best baggage handling in each of the past five years, according to U.S. Department of Transportation statistics (2000). This remarkable performance is attributed to its distinctive organizational competency of building and sustaining relationships characterized by shared goals, shared knowledge, and mutual respect. Its intense focus on the quality of its relationships, and in its willingness to forego quick solutions to invest long-term in the maintenance of relationships among managers, employees, and business partners is the reason behind the success of Southwest. It is believed that the way internal customers (employees) feel in the organization is reflected in the way external customers (passengers) feel towards the organization. The quality of service is the main factor determining success in the airline industry and this quality depends on satisfaction levels of employees. While this is a established and proven fact in the airline industry, it is only Southwest Airlines that has truly adopted this philosophy and worked towards achieving this in the organization at all levels. 1) Leadership Leadership is the process of influencing people to work towards a common goal that is mutually beneficial for all concerned parties. Leadership at Southwest is not only relevant at the top of the organization. This process can take place at any level of the organization. At Southwest organizational values are not just preached by top management they are practiced religiously. From the CEO to the ramp agent to employees at all levels, the organizational values of customer service, equality, hard work, fun and cost consciousness are reflected in practices of all. Take for example; the CEO of Southwest Airlines was rated as the lowest paid CEO in America, with no fringe benefits such as country club membership etc. This practice reflects the overall cost conscious attitude of the top management. 2) Recruiting Because different jobs require different abilities, one of the most important objectives of the hiring process is to find people who best fit the requirements of the job. People are hired at Southwest not so much for their hard skills (cognitive and technical abilities) but more so for their soft skills (attitude towards work, customer orientation and teamwork). The recruitment philosophy can best be summed up as "Hire for attitude and train for skills." Humor is taken very seriously at Southwest. The brand identity of Southwest is a fun-loving, caring companion who will do all sorts of funny things to make you laugh. So in order to select applicants that can reflect such ideology, applicants are also judged on their sense of humor. This is also one of the reasons why the company hires very few MBAs. As reported in the case, in all training there is an emphasis on team work, team building, all in good humor. For instance new hires often do a celebratory skit at the conclusion of their training. 3) Employees Southwest employees are generally well-known for their colorful personalities and friendliness, (for example, one pilot is known to greet passengers while playing the banjo); this is often attributed to a unique "love-based" corporate atmosphere that made chairman and founder Herb Kelleher a celebrity in the business world. Such employee dedication is achieved by encouraging them to assume ownership. As reported in the case, profit-sharing scheme covers all employees who have been with the firm for over a year, and they are required to invest 25 percent of their profit sharing money in Southwest stock in a retirement account. Hence employees perform even better as better performance will not only lead to better profits and hence a larger share, but also because they will be working to improve revenues of their own company. 4) Communication Communication is one of the primary ways that people coordinate their work with others in a wide variety of settings. Southwest employees take pride in the timeliness, frequency and openness of communication that takes place within the organization. Openness in Communication is vital to building trust among employees. This trust is build by sharing information and openly resolving problems and issues that anyone has against the other. This is considered to be vital in preserving the values that brought Southwest to its current position. Employees are given immediate access to critical information and have the power to make adjustments to fix significant problems quickly. Weekly reports on issues such as on-time arrivals, baggage handling, and customer complaints communicated across the board to all those concerned - meaning all the employees in the organization. 5) Relationship: Building family-ties at Southwest The most important theme of Southwest culture is family. Relationships at Southwest - characterized by shared goals, shared knowledge, and mutual respect - are critical for getting work done effectively, yet these relationships extend beyond the work itself, spilling over into friendships and even taking on some characteristics of family ties. The entire workforce is considered to be one big family and for some family is more than just a metaphor. Southwest has 1,133 married couples. In other words, 2,266 Southwest Employees have spouses who also work for the company. This is something encouraged by the company as evident from the fact that Southwest has no nepotism policy (except for officers). In doing so the company achieves powerful benefits by blurring the boundaries between work and non-work aspects of life. Employees can spend more time at work without weakening family relationships and also leads to greater dedication and commitment as the company becomes a second home to the family. Also for other employees who don't have their spouse working in Southwest, the organization works hard to make them feel at home and also provides necessary recreation time with families either by refusing to let them do overtime or by allowing employees to bring companions to company events, which take place often every year. Question No. 2 What answers would you suggest Ann Rhoades gives to the questions in the last paragraph Specifically these questions are: What actions should Southwest's senior management take to counter competitive threats posed by United and Continental How could they avoid the complacent attitude that develops in employees when the company is doing well How would the organization deal with the problem of succession when Herb retires or resigns As discussed in the previous question, Southwest's competitive advantage comes from its human resources. This was clearly the cleverest strategy in the airline industry as everything can be emulated, but culture, organizational values and employee attitude cannot be copied. The real power that has driven the success of Southwest lies in its human resource that strives to live the organizational values of hard work, dedication, customer service, fun and cost consciousness. From the outset, competitors may think that the real advantage that Southwest has, comes from its short-haul flights and rapid turnaround times. So if United launches a service that follows this strategy, they will be able to outwit Southwest. However, they fail to see the other side of the coin. Even when short-haul flights are more costly, Southwest makes profit due to their rapid turnaround times. But to achieve such turnaround and efficiency requires the right employee attitude that is inculcated in Southwest employees from day one of their job. Other organizations may emulate the operational structure but cannot create that organizational climate that Southwest has worked hard to develop over the past three decades. Without the right employee attitude, there is only a remote possibility that the operational efficiency to match that of Southwest can be achieved. Senior management at Southwest should perceive no real threat from United or Continental's airline-within-an-airline strategy. As reported in the case that the organizational cultures of all three differed significantly. While Southwest created its sustainable advantage through effective leadership, trust in employees and excellent customer service, Continental or United has none of these elements in their organization. The only action that senior management has to take is to keep the spirit of Southwest alive in its employees by focusing on the core values even after the original founders are no longer there. Improving on the HRD programs already in place and improving upon them is the best way to deal with the issue of sustainable competitive advantage and also to ensure that the right attitude that was the leading factor in success of the organization stays. By communicating to its employees the importance that their attitude towards other employees, customers and work, Southwest will be able to avoid the complacent attitude that sets in once the organization starts performing well. Succession planning programs must also be developed so that whenever Herb decided to step down, one of his subordinates is ready to take his place. To ensure that the organizational climate of Southwest stays the same for decades to come, it is vital that whoever succeeds Herb is also accustomed to the values of this organization and is internally bred. Hence CEOs must come form within the company and not from outside. References Blanchard, P. & J. Thacker, 2003. Effective training: Systems, strategies and practices (2nd. Edn.). Pearson: New Jersey. Gittell H., (2003). The Southwest Airlines Way. McGraw-Hill Professional: United States. Morris L., (2003). Business Model Warfare. An InnovationLabs White Paper, prepared & published jointly with A-CASA. 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