In this report I have tried to analyse and compare two companies belonging to two different industries, with different scopes in business. Southwest airlines, a service related domestic airline company and Philip Morris and well known global company in the tobacco industry. Using the tools of Porters Five Forces and the internal and external industry analyses, this report tries to find out what made these companies stand apart from their competition and what their competitive advantage for success was.
This report also tries to compare and contrast some of the strategical decisions made by both the companies, which may have brought them favorable or unfavorable results. It also specifies on some of the different decisions that both these companies have made and how it has affected them.
Further analyses also try to describe how it is not all rosy for the two companies and some of the strategic directions the companies may decide to take so as to have a competitive edge over their competitors and keep their successful existence intact.
Southwest airlines a major low cost US airline is a short haul, point-to-point carrier. It has gained major domestic market share with its excellent service, quality, customer relations and the innovative and strong leader Herb Kelleher. The companies corporate USP’s have been high frequency, low fares, point to point, short haul flights. With these they have managed to make success in the domestic market of Texas. At this point the company may have reached a point of complacency, which can inhibit further growth. In this report I have tried to identify the industry which southwest is working and the strength and weakness of the company. From all these analyses I have tried to find out what it may take for the company to keep on expanding into other domestic markets and how successful can they be at this venture.
On the other side of the spectrum is a truly global company, Philip Morris. The company is the biggest in the tobacco industry with major share in all its markets. Approximately half the world’s population, who smoke, smoke Philip Morris cigarettes. In the year 1998 when tobacco was deemed as an addictive drug by the general surgeon and the relation between cancer and nicotine was found out, Philip Morris began to go behind a smoke screen. Numerous legal suits and litigations were filed against the company.
Later due to the public’s pressure, the government was also forced to give any support to the tobacco industry. At this juncture, in this report, after analyzing the tobacco industry and the strengths and weakness of the company I have tried to find out how successful the company has bean in diversifying and to what extent it can diversify so as to gain back its credibility and also not lose too much of the market share in the tobacco industry, simply due to the reason that almost 50% of the companies revenue comes from the tobacco industry.
In the final part I have formulated some strategies for both these companies, which may help them in the future, growth of their company.
“Will Southwest still fly high after their expansion and will Phillip Morris move away the smoke screen after its diversification?”
This report details the internal and external environments of both the companies. In the internal and external environment the industry analyses and the Porters Five Forces are detailed for the two companies. Along with that an SWOT analyses is also done on the companies. By studying these facts we may be able to find out and compare and contrast some of the policies made by the two companies.
This report deals with Southwest Airlines (Southwest) and the reason for its success in unattractive industry. Southwest has been very successful with its low fare, short haul strategy. With the airline industry being very competitive Southwest was in an interesting and unique position. Southwest was the only major US airline to earn an operating profit even during the crunch time. With its strong financial position, Southwest was poised to increase its market share and embark on new strategic initiatives.
The Airline Industry competes in a price competition market. The service offered to consumers is reliable and safe air travel. In this market there is usually little distinction between the services offered by major carriers. Southwest Airlines entered the market by identifying needs within a regional area. The success of Southwest Airlines can be attributed to finding a niche, within Industry, and managing its own growth within that niche. In creating a SWOT analysis, we can begin to identify the direction Southwest needs to take in the future.
The tobacco industry is probably one of the oldest industries and Philip Morris is the one of the first and the biggest player in this industry. The company enjoyed a good return on investment because the cost of production was very low (refer to apx page 11, strengths of PM). But later when the ill effects of nicotine (refer to apx page 11, threats of PM) were published, there were a few problems for the company. Now the company had to look into other avenues so as to get back the image of the company and to lessen its dependence of revenue from tobacco (refer to apx page 12, weakness of PM).
This case can be used to illustrate how two firms can be successful in an inherently unattractive industries- Southwest being a part of the highly competitive domestic airlines industry and Philip Morris part of the tobacco industry, which many people deem it as a killer industry. Both these companies have been profitable and expanding for many years and have been able to maintain a low cost position and market shares respectively despite many potential imitators, competitors and litigations. I use this report to review industry structure, generic strategies, and the importance of internal and external consistency in creating a strategy.
Philip Morris is the world’s largest cigarette maker. The company leads the cigarette industry in market share. After a few litigations and legislations in the tobacco industry, Philip Morris was rather forced to diversify at least at home and pursue international business.
At this point Philip Morris is the world’s largest packaged goods company. They operate in nearly 200 countries. Their diverse lines of business include some of the world’s most successful companies, with total operating revenues over $80 billion. It is the largest cigarette company in the United States, with a 50% market share. Together, Kraft Foods North America and Kraft Foods International, is the world’s second-largest food company. Miller Brewing Company is America’s second-largest brewer.
Even at this stage, half the company’s revenue comes from the tobacco industry (refer apndx, weakness of PM, page 12). Its brewing company is not making profits, so is it still sustainable for the company to hold on to it. How else can it increase its market in the food retail sector in its domestic market and how successful will it be in the international market? Even if is successful internationally, how can it not repeat the mistakes it has made in the domestic market, that it how can it avoid more litigations and legislations from the foreign countries. These are some of the questions this report is trying to analyse and find out.
In 1971 southwest Airlines invented a new concept – the low fare airline and the idea took off. Southwest was ranked as number one among all major US carriers for 1997 based on customer service as well as safety, price, on time performance, and baggage handling.
In a highly competitive airline industry where profits were razor thin and competition was fierce, Southwest Airlines managed to succeed by doing things differently. Southwest’s calling was to provide affordable air travel for those who would not normally fly. Contradictory to the rest of the airline industry, Southwest Airlines maintained a profit while it kept its fares low.
The company keeps costs down with a strategy of frequent flights, fast turnarounds, and point-to-point connections that eliminate the transfer delays common to hub-and spoke systems. It is also one of the most successful airlines at using the Web effectively for ticket sales. As a result, Southwest Airlines’ costs are about 16 percent lower than the competition – less than $0.08 per seat per mile, compared to the industry $0.095.
The result of the company’s inspired ideas for giving customers lower fares has been an impressive success. With a double-digit earning annual growth rate, Southwest Airlines has had consecutive years of profitability.
Now what we have analyse with this company is how long it will be happy to be in the state of Texas before it gets complacent. When will they move out to greener pastures and be successful in that market as much as they are in their local market.
Southwest Airlines, the only major U.S. airline to be profitable in 1992, makes a decision as to which of two new cities to open, or to add a new long-haul route. This report tries to look into Southwest’s strategy and culture and how an airline can simultaneously be low-cost leader, service leader, and profit leader.
Finally, the case drives home the important links between the organizational factors and strategic choices.
Situation for Philip Morris
Why? I believe Philip Morris is using the portfolio diversification as its main strategy (see apndx, page 12, opportunities for PM). The company started this strategy a few years after the 1964 Surgeon General’s Report on the tobacco effects. Since then it acquired Miller Brewing Co., Kraft Foods and General Foods. By making several major diversification efforts, Philip Morris was able to invest a portion of its cash and diversify the risk.
Analysing the consolidated operating results for Philip Morris Companies and Subsidiaries we can question if the company is accomplishing its strategy. From 1995 to 1997 the percentage of the operating revenues from its tobacco operations increased from 48.9% to 55.3%. In the same period of time its beer and food revenues decreased from 6.5% to 5.8% and from 44% to 38.4% respectively1. The company is still very dependent on the revenues from its tobacco operations.
Has the company used the advantages (refer to apndx, page 15, entry barriers for new entrants) of being in an industry where the entry barriers are very high?
Situation for Southwest Airlines
Entry into new markets or expansion in primary market?
The strategic challenge facing the management of Southwest Airlines is what direction to take the company next. To increase profits Southwest must expand its business. But the question is where? There is a saying that goes “Slow and steady wins the race.” Should it wait before making any moves to enter a new market or should it use the first mover advantage to its favour?
Southwest is patience and careful when entering markets that are highly competitive or dominated by couple of legacy carriers.
Southwest is making good profits and there is a need for more expansion in the domestic market. Should it stick on to the existing market or should it also look at other states to start its new operations, or should it start Transcon flights?
Conclusion (strategic directions) for Philip Morris
Philip Morris should focus on leveraging their different operations in order to create further synergies between them. The degree of diversification should depend of current events on the tobacco industry. If the company expects the government to (refer to apndx page 12,governement regulations ad drug abuse, weakness of PM).take a more extremist approach, by for example considering nicotine an illegal substance, it needs to be prepared to react or, even better, to avoid it. To accomplish that the company should focus in two main courses of action.
The first is R&D. Philip Morris needs to invest in other alternatives to the current cigarette. This is not a simple task since the cigarette has been practically the same for decades. How can they eliminate the negative effect to the consumers’ health? How can they diminish or eliminate the second hand smoke?
The second is to expand diversification. The company should look for attractive companies that complement its actual products in the areas of packaged food and beer. The company should also continue to work on its image (refer to apndx page 11, brand image, strengths of PM). It should disassociate itself from all the negative publicity resultant from the tobacco lawsuits.
A company success is something very volatile. Nowadays in such a competitive economy a company cannot rest in present or past results. The company may need to evaluate success by looking at the future. If a company has a very positive outlook at the moment but their future strategy is weak or non-existent, does this mean that the company is successful? I don’t believe so. Success should be evaluated as a balance between past, present and future actions of a company. In Philip Morris’ case that would be the strategy the company may look into to follow. Measuring success by looking just at the net earnings may be very deceiving. For example, a large increase in the food earnings area may be due to overall market or economic conditions and not to actions
resulting from specifically designed strategies
After the evaluation of the situation the company may need to look into to use the following action plan.
Compare present results to overall industry environment. If the overall industry market increased 15% but Philip Morris just increased 5%, then the company may try to understand why. Are they spending too much of resources on the food sector or still with the tobacco sector. Do those reasons make sense?
Compare performance with the closest competitor. I would compare Philip Morris performance with RJR Nabisco. Try to understand what are the strengths and weaknesses of both companies and determine who was more potential in the future. In order to understand a company potential is very important to understand its major competitors.
Identify the company’s previous main tobacco litigations and understand how the company is dealing with those. The tobacco industry is very profitable but also very risky. Government and individuals are increasingly demanding the definition of thigh rules to govern the industry.
The acquisition of General Foods and Kraft Foods makes sense. I believe that the tobacco industry will experience greater regulations and taxes. The profits will decrease due to the shift from high-end brands like Marlboro, to low-end brands like Mayfair. The company may not do any good to its shareholders by staying in an industry were future perspectives are not very rosy. It may need to continue to increase its presence in the packaged food and beer services. These industries are related with each other, which allow leveraging many of the existing knowledge, contacts and infrastructures.
Philip Morris seems to hold many good opportunities for the future. Certainly the acquisition of Nabisco by Kraft will improve long run profits. Nabisco brings with it a greater market share and new products and innovation. The food industry as whole offers a lot of opportunity for growth. With the risk of all the pending litigation in the tobacco industry, it may be hard to enter into this market. In my opinion, the government needs the tobacco industry. The states rely on the money given to them by tobacco companies. The government knows that without this industry their spending would be decreased significantly.
The company is in a “defensive” industry. It earns stable growth, even with an
uncertain or declining economy. One thing that needs to be looked out for in the future is the beer industry. The profits have been declining and I think will continue to decline in the future. Miller Brewing Company does not bring in nearly as much sales as Kraft Foods and Philip Morris Companies. It would not be surprising if the company eventually decides to sell Miller.
Conclusion (strategic directions) for Southwest Airlines
If Southwest Airlines is to grow they must remain faithful to the process, which gave them success.
Southwest should continue to promote its culture, as it has become one of the most recognizable in the industry (refer to apndx page 18, strengths of SW). What has brought Southwest to the position it now enjoys, is the low cost of airfare due to its financially acute a creative internal policy (refer to apndx page 18, cost cutting strengths of SW). . The company started with a policy of entering new markets only where they can offer 10 to 12 fights per day. To achieve this without growing too rapidly, Southwest should identify markets, which can be reached from existing airports within their definition of a short-haul flight. That is, a new market should be serviced by the planes, which already operate in an existing market. There will be a need for more planes; however these planes can reduce the burden on a current airport. Continue to grow only expanding as they are linked to other markets.
The opportunity to enter the international market is evident, but expansion should be avoided. There are plenty more domestic cities to enter. The costs associated with an international plan could divert attention away form the current mission of offering the lowest domestic prices. Although the proximity of nearby countries like Mexico could lend itself to exploration, the costs and international regulations would most likely increase overhead more dramatically than continuing to conquer domestic markets.
Keep the employees motivated and satisfied. It is one thing for a company to talk about getting input from your employees, (refer to apndx page 18, high quality and loyal workforce, strengths of SW). it’s to have the culture, which promotes dialogue. Southwest Airlines promotes a team atmosphere, where every employee is a stakeholder. Managers and employees should be forever trying to make the Airline run more efficiently. This will keep a focus on the things Southwest does best. Just because Southwest currently has the best policies, does not mean they will always have the best policies.
Make fewer mangers and more Leaders. (refer to apndx page 18, strong leader, strengths of SW). Herb Kelleher is like a mythical father figure to them. This is evident from how the employees are influenced by his innovative and down to earth practices to motivate both employees as well as customers. The culture of Southwest always puts their employees first to customers. So the point here is after the time of Kelleher will the main motivation factor go down? At this point there has to be another leader for the company who will guide the company into the future, with innovative and influencing ideas, like Kelleher.
SWOT for Philip Morris
* Brand image and strength – One of Philip Morris clear strategic resource is its brand names. That is clearly demonstrated by the success of the ‘Marlboro Man’. Brand names definitely influence customer demand. Customers like to use brands that everyone knows. That choice is intimately related with the image that the company creates for its brands.
Substitutability is very low in brand names; there is no replacement for brands like Marlboro or Maxwell House.
Appropriability is very high in brand names, most of the time it’s the brand of a product and the image associated with him that makes the biggest difference to the consumer
Imitability of a brand is very low. Creating a successful brand name differentiates products from the competition even if they are very similar. It is very difficult to imitate brands like Marlboro. How much need the competition spend to reach the image level that Marlboro cigarettes are associated with? Even if they spend million, like they are, it will be very hard to surpass the image and status already established with Marlboro cigarettes or the image Philip Morris has created through the Marlboro brand.
* Core Competency – the company’s core competency is the tobacco industry. Approximately 50% of its revenues comes from this industry. Even though it may be argued that the company depends on this sector, at least it can be said that the company has a core competency and it knows what it has to concentrate on.
* No research, capital or advertising costs – the tobacco industry is highly profitable. It enjoys almost no capital, research and advertising costs. Nicotine as an addiction and social consciousness of the people can reduce the advertising costs.
* High ROE – due to the above stated reason the company will have a high return on its expenses.
* Financially bigger and much better of than its rivals – PM is the world’s largest cigarette maker. The company also leads the industry in market share. Marlboros account for a third of all cigarettes sales in the U.S alone.
* Public sentiment – the public were getting more conscious on the ill effects of nicotine on the body and nicotine’s addictive character.
* Legal cases – A lot of time and money is wasted on legal suits filed by individuals and states1. All pending legal proceedings are health care cost recovery cases.
* Increasing legislations – as public sentiments on the issue increases, there has been a proportional increase in the litigations on the industry by the state and the national government.
* Nicotine ‘drug’ abuse – in a report by the general surgeon in 19982, nicotine was declared as an addictive drug and able to induce dependence.
* Social consciousness level – it was at this point that the public realized the harmful effects of smoking and the states tried to increase the consciousness of the people on the ill effects of smoking.
* Too much dependence on sales and marketing – Philip Morris became more dependent on its advertising campaigns. Most of the company’s success can be attributed to its expertise in sales and marketing.3
* Product bad for health – it was during the year 1998 that the nicotine was found out to have ill effects on health. Numbers of deaths were linked to the addiction of nicotine and its cancer causing side effects.
* Government regulations – following these reports the President declared nicotine a drug and placed it under the jurisdiction of the Federal Drug Administration.
* Diversion of resources to litigations – by the year 1994, a total of 39 states filed suits seeking compensation for health care costs. Further to that another 140 cases were filed were 37 were filed by states, 70 by unions, 5 by federal and state taxpayers4 and so on. Due to this it is unpredictable of the outcomes of these litigations and unable to estimate potential loses that may result from an unfavorable outcome.
* High level of dependence on revenue from tobacco – even though with all these high pressures from litigations and new legislations, the tobacco business segment provides a substantial portion of the company’s revenues especially in the international market. By the end of the year 1998, domestic tobacco sales of $7.011 billion represented 32.9%of tobacco revenues, while international tobacco sales $14.325 billion represented 67.1 percent of tobacco revenues.
* Social/Cultural Acceptance – the company is fast losing its credibility in the domestic market.
* International expansion – there is a big market out there for PM tobacco industry. PM was only concentrating on the domestic market where they already hold a substantial market share. Due to the above mentioned litigations and legislations, it is more reason for PM to look into international expansion.
* People’s addiction – this can work out as both, an opportunity to the company and an evil to the society. After nicotine was deemed an addictive drug, Philip Morris could use this addiction as leverage for growing their business. It is a matter of balancing the ethical and the business side of the issue.
* Diversification opportunities – with the size, image, revenues and most importantly the distribution channels of the company, Philip Morris can go into diversification. This can be done in the already saturated domestic market while they can still go on with the international expansion of the tobacco industry.
* Developing countries – tobacco consumption is rising rapidly in developing countries5. This is partly due to the ignorance of the ignorance of the ill effects of the working class, which is predominant in developing countries.
* Female and teenage smokers – while the awareness campaigns have reduced the smoking in males, there has been a trend in the rise of smoking among women and teenagers.
* Image – there has always been an image of being “cool” when people smoke or it’s “what men do” sort of thing. This may be an important reason for the increase in smoking among teenagers.
PEST Analyses for Philip Morris
* Government not supportive – due to the ill effects of the drug nicotine, the government will be forced to take a stand for the public and will not openly give any kind of support to the tobacco industry. At the same time due to the revenues the government gets through the tobacco industry, it cannot totally ignore this industry or completely ban it from the economy.
* Pressure from tobacco industries – as a flow off from the above point, the tobacco industries were also putting pressure on the government as to help them with the new legislations. This can be inferred to the reason that a lot of election funding might be coming from companies in this industry.
* The government plays a major role in the advertising and marketing of the tobacco companies. This is positive for companies such as Philip Morris because its brands are established in the market and therefore they save money on advertising expenses. Also, the government sets a minimum price at which the tobacco farmers can sell their tobacco to the companies. There is a chance of more governmental legislation in the near future. The Department of Agriculture suggests that there will be a 30% decline in tobacco output over the next decade if the new legislation is approved. The effects seem to be slim over the short-term outlook.6 There are other future risks with current payments to the states and potential payments to pending cases such as Engle. So far the tobacco companies are remaining profitable despite these legal matters.
* Diversification – there is a good scope for diversification for all the companies in this industry. Most of the companies have their own brand names that are popular and have access to distribution channels, which will help them if the company decides to go in for diversification especially in the food or retail industry.
* Health concerns – as mentioned in may of the points above there is a growing concern for the health issues related to the habit of smoking.
* Changes in the social set-up – more people are becoming educated and their awareness about the ill effects of smoking increases.
* Minor’s issue – this is a major issue, especially after the finding that the number of women and at the same time teenage smoking has been on the rise.
* Loads of litigations- the tobacco industry had not only litigations from the United States but also form other countries.
* Legal suits – the legal suits are basically of three kinds, individual smoking and health cases, class action smoking, and health care cost recovery cases6. After the Florida state passed a law making it legal to file suits against tobacco companies, there has been a rush of legal cases pending against the company.
Porters Five Forces
The tobacco industry is distinguished by its degree of concentration, its high profitability, and the high barriers to entry. Most companies supplying these products have either joined with competitors to produce or failed to be profitable. Because of the current and potential high legal costs associated with producing tobacco, many cannot reach the level of sales to compensate for this financial burden, especially newcomers in the market. Also, the capacity and capital needed for these businesses are substantially high. All of these costs and limitations of advertising make it hard to find success within this industry.
1. The threat of entry by new competitors.
The potential of entrants to the tobacco industry is very low because of barriers to entry such as, earning sufficient profit margins and meeting capacity needs. There are several entry barriers in the tobacco industry.
Economies of scale7 are very important because companies can leverage their fixed costs with a bigger market share, which enables a company to be able to decrease its prices if necessary. As described in the case, the market share for less expensive cigarettes has been increasing in the last years due to government taxes and regulations. As the markets become more sensitive to the price factor, economies of scale will play an even more important role as an entry barrier to the tobacco industry.
Product differentiation may not exactly be a high entry barrier but is still to be considered under specific circumstances. The biggest difference between all the different cigarette brands is not the product itself but the brand and image it transmits. If a company can develop a smokeless cigarette or a non-harmful, non-addictive substitute to nicotine, the product differentiation factor would be much higher.
Capital requirements present a high entry barrier. The costs associated with producing and marketing cigarettes are quite considerable. A company in this industry has to gather capital for physical facilities, marketing activities and liabilities, between others.
Government policies are another important entry barrier. The tobacco industry has been increasingly regulated since the sixties. That pattern is expected to get even more intense in the following years.
Restrictions on advertising – there is common belief in the industry that advertising restrictions ‘freeze’ market positions.8
Now as Philip Morris has entered the food industry (with the take over of Kraft and Miller) it will also be worthwhile to know what are, the industry barriers for other companies to compete with Philip Morris in the food industry.
The food industry is very competitive. The industry is constituted by a number of major players and many smaller ones. The threat of entry in the food industry is high. Some of the challenging factors are
Distribution channels – A company can produce the most amazing product but if cannot efficiently use the industry distribution channels it may experience problems reaching customers and gaining market share. Many on the major players control the distribution channels due to the volume of business they generate. A similar situation happens on the supermarket shelves where major companies have the most prominent space.
Brand name – is also another important entry barrier into the food industry. A majority of people is very influenced by the brand of the products they choose. To achieve a good recognition level companies spend millions on marketing campaigns.
Economies of scale – Companies with already established market share can decrease its product prices due to economies of scale.
Internet Potential – Entrants may use the Internet as a tool to create brand name for its products, in a much more economical way. People will feel better if they know that they are able to access information about a product or a company. Another factor that may increase the entry barriers are acquisitions. For example, in Europe, Nestle acquired the major Portuguese companies when they were expanding into the country. That increases the size and negotiation power of some industry players, making entry much more challenging for the reasons mentioned above.
2. The intensity of rivalry among existing competitors.
As mentioned above there seems to be not much rivalry as far as the tobacco industry is concerned. Philip Morris has the image and market share to hold on its own. But the story is different in the food industry. There are other major players like Danone, Nestle, and RJR Nabisco9 are out for more market share. Many of these companies are also going in for acquisitions so as to fight in numbers against the bigger companies.
3. Pressure from substitute products.
There are no exact substitute products to cigarettes, but there are a few products developed by the other companies, which may put pressure on the future market share of Phillip Morris. This being RJR Nabisco’s ‘Eclipse’, UST Inc. smokeless tobacco, Nicotine patches, Snuff etc.
4. The bargaining power of buyers.
Now there are two ways to look at the bargaining power of the buyers or in specific the customers.
The bargaining power of customers (buyers) is relatively low when considering the entire industry. Tobacco companies can implement a higher price on their products within a reasonable range and people will automatically purchase them.
As far as Philip Morris tobacco department is considered there is a lot of importance to the buyer. People have realized on one side, the bad effects of tobacco and at the same time the addictive nature of nicotine. This poses a problem to PM as to sympathize with the people or make use of the addiction as a source of more business. At the same time in the food retail sector, there is tremendous competition and the buyer may buy from a repertoire of brands. Thus ultimately it will depend on whose prices are low for a specific product. Some of the other main reasons for the high bargaining power of buyers are
* They purchase a large portion of the industries output10
* Their switching costs are less or even not existent
* In the tobacco industry, the products are undifferentiated and standardized.
5. The bargaining power of suppliers.
The power of suppliers is reflected in the addictive effect of the tobacco products. The rivalry between existing firms within the industry is relatively high, yet there are few firms that compete at the top and control the majority of the market. Having brand-knowledge is the key to competition. The competitive forces are low when considering new entrants because of the issue of brand establishment and the high barriers to entry.
Not much information is given on the suppliers in the tobacco industry. It may be assumed that there are not many buyers (companies) in the tobacco industry and most of the companies have their own tobacco cultivations. Hence the suppliers will not have much of a choice about raising their prices periodically. The tobacco industry is also a very volatile industry and new litigations can crop up which may put the industry to a halt.
SWOT for Southwest Airlines
* They focused on the short haul traveler – The short haul traveler is the backbone in which Southwest Airlines was built upon. With an average trip length of only 425 miles, Southwest catered to the needs of the business and recreational traveler that would normally have chose ground travel. By avoiding the transcontinental and international markets, allowed Southwest to concentrate on steady growth.
* Used a point-to-point method of flight connections – Southwest did not employ the “hub-and-spoke” approach used by other major airlines, such as United, American, and Delta. Instead, its approach was point-to-point.
* Cost cutting – Southwest Airlines concentrated on internal strengths and efficiencies, such as rapid turnaround time, reusable boarding passes, and single style aircraft, to reduce overhead. The management identifying that they were in a price sensitive market chose to cut out the “frills” in airline travel, reducing costs and thus making it financially feasible to offer the lower cost to consumers. Operating costs per seat mile, or the number of seats times the number of miles flown, were between 15% and 20% lower than the competition. Southwest continued to be the airline with the lowest cost in its markets.
* Low fares – Southwest in holding to their mission was able to gain loyal customers by offering low cost airfares. Low costs and, therefore, low fares are an enormous competitive advantage, when combined with.
* Ticket less travel – To cut costs passengers had the option of selecting their own seats on the airplane. This method of boarding allowed Southwest the opportunity of not printing out tickets. Nearly 60% of all travelers were ticket less on Southwest planes in 1998.
* Time management – Maximizing utilization and minimizing ground time was the key to Southwest’s profitability. Turnaround time was less than half the industries standard in 1998. By choosing the 737 as the airplane for all of Southwest’s flights, the company saved time and resources in training its employees.
* Work culture – A very loyal and unique culture was found at Southwest Airline among its employees. Southwest’s culture of hard work, high-energy, fun, local autonomy, and creativity was reinforced through training at its University of People, encouragement of in-flight contests, and recognition of personal initiative. In maintaining a consistent management, Southwest was able to continue its corporate culture and vision Southwest management provided a workplace that allowed for maximum job gratification.
Employees feel as though they are an important part of a giant family, worker retention and customer service has skyrocketed. The company generated a culture around prioritizing the workers over the customer. Fortune Magazine rated Southwest as the top company to work for in America in 1998.
* High-quality service and a loyal workforce – Employees of Southwest Airlines were loyal to the company. Throughout their growth Southwest maintained a loyalty to their employees, fostering a team spirit. Southwest Airlines welcomes competition against their strategy believing that competition only makes them stronger.
* Strong leader – this is probably one of the main strength for this company and can be assumed as the one reason for the growth of this company. A motivator at southwest CEO Kelleher is respected by his employees and knows several thousand of them by name. In addition, Kelleher’s direct involvement has resulted in many of the company’s successes. Occasionally, he dresses up in costumes and serves food with the flight attendants. He encourages fun because he believes that it stimulates productivity.
* Price cutting policies – Some of Southwest’s were also some of their weaknesses in 1998. Unlike their competitors, southwest did not have first class seats on their planes. This was a conscious choice by management because of the company’s low cost philosophy. Southwest may have lost first class customers to competing airlines.
* No meals on flight – Because flight times are usually less than one hour, Southwest implemented the policy of not providing meals on their flights. This may have again lost some customers that wished for greater pampering on their flights.
* Aircrafts – Relying on a single type of aircraft and manufacturer, Southwest is susceptible to increases in cost or defects in their planes. The age of the planes as well as the high maintenance costs were a weakness for Southwest.
* No expansion – Southwest Airlines has expanded its business to a point in which it must start to enter more markets where the larger carriers operate. Currently the lack of expansion into transcontinental markets and international markets does not allow them to compete with their competition. To compete in international markets Southwest will need to purchase a variety of planes. As the company grows, it will become less able to react to threats of new entries into their market
* Untapped domestic markets – There were many cities that wanted a carrier like Southwest to enter their market area. Local economies saw a boost due to the demand for traveling via Southwest into their areas. The number of travelers would expand if Southwest entered their market and cut prices. Fares were up to three times lower than outside of Southwest’s markets.
* Untapped Transcon market – The financial health of the company suggests that investors would back growth into new ventures. Currently the lack of international and transcontinental markets are untapped by Southwest Airlines. The desire from new markets, for their service, would suggest that entry into these markets would be welcomed. As other carriers focus on international markets.
* Use of its image and culture – Southwest has the ability to enter the markets the larger companies have diverted their focus from. In a time of public consciousness about the workplace environment, Southwest airlines can promote its recognized culture.
* Quantity and quality of the fleet – there were a lot of easy upgrades for the aircraft (737-200) Southwest was currently using at that time. The 737-300 was one of them. The Boeing 737-700 model airplane was the most advanced of its class. They were quieter, more fuel efficient, and easier to maintain than their earlier counterparts. This should allow for the retirement of many of the less efficient and older
* Highly unattractive industry – Southwest belongs to the low cost airlines sector of the industry. Here there is fierce competition, no frills services, extreme cost cutting.
* Highly competitive market – The airline industry was highly competitive, and the chance that big competitors such as United and American airlines would follow Southwest’s lead by providing more short haul flights always looms. The poor financial situation of the competition’s airlines has made it difficult for them to enter Southwest’s niche market.
* Other travel options – as Southwest was concentrating on short-haul travel, the real threat comes from land based travel options, such as bus and train companies. There are many major players in this categories like Greyhound Bus and Amtrak.
* Prices of fuel – One of the major costs in operating aircraft is the fuel. If there was to be an increase in OPEC pricing, this affects the industry as a whole. Jet fuel prices continued to rise over the previous five years. A major fluctuation in the cost of oil may lead to the narrowing of profits for Southwest. With a lot of cost cutting methods, any marginal increase in cost like fuel prices would eat into the profits.
* The risk in growing larger – By entering new markets Southwest Airlines will confront the larger carriers in their markets. While expanding the percentage of overhead cost could grow, opening the market they created to smaller carriers. By expanding into international markets, there will be new focus on international exchange and regulations. With international flights there may not be the ability to locate at no major airports and the culture may be different where foreign customers would expect the frills offered by other carriers.
* Government regulations – Air travel depends on economic factors such as government regulation and the United States economy. If the economy were to be less prosperous, all Airlines would reduce costs, in an effort to attract more customers, making the low cost differentiation of Southwest Airlines less noticeable
Five Forces Analysis on Southwest
1. Threat of new entrants – the threat may be low here, because of the many reasons for a new company to start up. Some of the reasons are
* Economies of scale: Do costs decline the more that planes are added? Looking at the price of the planes and the high competition it is difficult to say if the fleet is bigger the costs will come down. Only advantage can be some price bargaining for large orders.
* Product differentiation – it is very less in the domestic market but it will be much more in the international sectors.
* Capital requirements: planes are expensive (but can be leased). Gates are expensive. Building a hub is expensive
* Switching costs: very low except to the extent that frequent flier programs are effective.
* Access to distribution: difficult to get gates, especially in others hubs and in markets which are dominated by other players.
* Government approval: it can be assumed maybe difficult. The government will also have to keep in interest its own carrier (if any) or an already existing player in the market may influence it.
2. Bargaining power of suppliers – while analyzing this we can ask some main questions and this may be able to self explain what the stand of the suppliers are.
* What are the inputs? Fuel, labor, planes, gates & terminal space and air space
* Are there few suppliers? Yes on aircraft, fuel, terminals
* Are substitutes available? No
* Business important to suppliers? Yes
* Unions – are also an important part of the supply chain. They are pretty strong and can have a say in the running of the company.
3. Bargaining power of buyers
* Who are the buyers? Traveling public
* Large number of buyers? Yes
* Switching costs? Low
* Competitive advantage to increase buyers – low fares, excellent service and on time travel.
4. Threat of substitutes
* What are substitutes? Trains, automobile, buses.
* Other transportation modes? For business travelers, no. For casual travelers, possibly – -depends on destination
* Do customers have low switching costs? Yes, between airlines but probably not between modes.
* Substitute price is lower? Relevant for some, not for others. Issue of traveling for pleasure or on business arises. Also depends on the time factor.
5. Internal rivalry
* Industry growth slow? Not much growth, even though there is opportunity for it.
* High fixed costs? Yes there are a lot if high fixed cost involved.
* Lack of differentiation? Yes
* High strategic stakes? Since most airlines are ‘only airlines’, yes – stakes are high (less diversified companies)
* High exit barriers? Yes – lots of capital to unload
Taking all the analysis into consideration we may be able to conclude that
Barriers to entry – fairly high
Supplier Power – fairly high
Buyer power – low
Substitute power – low
Rivalry – fairly high
1 From the financial summary of Philip Morris, sourced from the case study.
1 taken from the case study provided
2 taken from the case study provided
3 taken from the case study provided
4 taken from the case study provided
5 taken from the case study provided
6 taken from the case study provided
7 Hitt, Ireland, Hoskinsson, p74, Strategic Management, Fourth Edition, South Western College Publishing.
8 taken from the case study provided
9 taken from the case study provided
10 Hitt, Ireland, Hoskinsson, p74, Strategic Management, Fourth Edition, South Western College Publishing.
11 all graphs from the URL http://webpages.marshall.edu viewed on 15 august 2004.