Southwest Airlines - Strategic Business Model of the Organization

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in America.

Southwest had a strong balance sheet and therefore ample of financial resources as compare to its rivals. Based on the case information the company had been profitable every year since 1973. Therefore, following September 11 in 2001, Southwest continued with its normal operations instead of cutting back. While the financial picture that was grim at rival airlines, Southwest airline exploited new opportunities such as entering and serving new market that were not being served before (i.e. adding 21 daily non-stop flights that were on long distance routes). To Southwest airline the aftermath of September 11 in 2001 meant growth opportunities conservatively.

1.4 Cost structure

Southwest airline had to have a lowest cost structure than its rival airlines and this was mainly due to company generic business strategy of being a low-fare / low-cost airline. To achieve the lowest cost structure, Southwest airline focused on lowering its operating costs by instituting the following practices:

 The company operated with only one aircraft – Boeing 737s.

 Encourage customers to use online reservations and selling tickets on company website instead of using travel agents.

 The company tried to steer clear of congested airports instead serving airports near major metropolitan areas.

 Southwest used point-to-point scheduling of flights that was more cost efficient than hub-and-spoke systems used by rival airlines.

 The company economised on the amount of time it took terminal personnel to check passengers in and to simply the whole task of making reservations.

 Southwest didn’t have first class section and no meals were served on flights even long ones.

Therefore, with all the above operating practices Southwest operating costs were consistently the lowest in the industry.

1.5 Revenue streams

Southwest revenue streams were generated from providing their customers a low fare air travel. The company also used the concept of price elasticity, proving in one market after another that the revenue gains from increased ticket sales and the volume of passenger traffic would more than compensate for the revenue erosion from reduced fares. Southwest airline had success in stimulating higher passenger traffic at airports across the United States via low fares and frequent flights.

1.6 Profitability and sustainability

Based on the case information Southwest airline had sustainable profitability; reported profits every year since 1973, especially when considering that the airline industry has been noted to be vulnerable to economic cycles. In 2002 Southwest Airline reported its 29th consecutive year profitability with annual net income of $511.1 million. This shows that the company had a good business model in support of its business strategy.

2. The current key strategic issues

Southwest Airline key strategic issues included the following:

 How to sustain company present rate of growth in light of the recovery process following September 11 of 2001?

 How to continue to bring low fares and affordable travel to more people with more convenient flights?

 What to do about the high labour costs in the industry?

 How to continue improve labour productivity?

 How to better handle Union’s related matters (i.e. contentious negotiations)?

3. Strategic Internal and external analysis

Porter’s five forces model is an analysis tool that has been chosen and deemed appropriate to be used in this scenario because Southwest Airline was operating in an airline industry in the United States. Therefore, the use five forces in this instance is to determine the profitability of an industry and shape a firm’s competitive strategy.

Force Evaluation Impact

1. Bargaining power of Buyers  Number of buyers: Many (i.e. Travel Agents, Business Travellers, Leisure Travellers).

 Switching Cost: Low

 Buyers can postpone purchases until later if they don’t like present deal.

 Buyers are price sensitive.

 Buyers do not threaten backward integration. Strong

2. Bargaining power of Suppliers  Number of suppliers: Fewer or not so many.

(aircraft manufactures, leasing companies)

 Suppliers do not pose a threat of forward integration.

 Supplier size: Most of them are large. Strong

3. Competitive rivalry  There is moderate number of competitors in the industry.

 Exit barriers are high.

 Competitors are more or less of equal size.

 Even though products are differentiated but can easily be substituted.

 There is low customer loyalty. Strong

4. Threats of new entry  Large amount of capital required.

 High retaliation from existing companies.

 Few legal barriers to protect the existing companies.

 Potential entrants may be Foreign Carriers, Weak

5. Threats of substitute products  Many substitutes (i.e. Fast underground trains, Private transportation, Technology such as Video Conferencing), etc.

Weak

Collective strength Strong

Based on the strong collective strength in the airline industry in the United States, there is lower combined profitability of the industry participants.

4. Current strategies and competitive advantages

Southwest Airline generic business strategy was a low-cost provider strategy – striving to achieve lower overall cost than rivals and appealing to broad spectrum of customers.

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