The 10 major domestic bearers in the United States reported gross of 145. 3 billion dollars in 2012. harmonizing to informations gathered by Airlines for America ( 2012 ) . The combine market capitalisation of the 12 largest and publically traded air hoses stood at 48 billion dollars as of April 2012 merely four billion greater than the value of Starbucks and manner below other companies like Facebook and eBay ( Airlines for America. 2012 ) . Our research will give a item analysis of the two theories developed by Harvard Business School Professor Michael Porter.
Porter posited that in order for concerns to vie an in-depth analysis should be done non merely of your direct rivals but besides external forces that can assist a concern public presentation ; Porter labelled this as the Five Forces of Competitive Strategy. Another construct developed by Porter was the Value Chain. the Value Chain breaks the concern procedure into two groups. Porter argues that concern should analyze the countries of the Value Chain to see where betterments can be made to heighten public presentation. Our study will demo how Southwest Airlines uses Information system in Porters theories and construct to derive competitory advantage
Introduction to Southwest Airlines Harmonizing to information received from Southwest. com ( 2013 ) . Southwest Airline was incorporated in 1971 by co-founders Rollin King and Herb Kelleher as Air Southwest Company. The company is based in Dallas. Texas and has a staff capacity of over 46. 000 individuals. The bearer was formed has a low cost domestic bearer originally merely winging in the province of Texas before ramifying out to other US provinces. From origin Southwest policy concern scheme was to offer low menu and handily times flights on short draw paths ( Ross & A ; Beath. 2007 ) .
Today Southwest Airlines flies domestic in the United States to 79 metropoliss. Southwest Airlines is the largest air hose in the universe by riders carried. in 2012 over 100 million individuals was transported by the air hose to different metropoliss in the USA. The air hose has being a innovator in the industry and is credited for puting the foundation for the rise of other low cost bearers across the universe like Ryan Air and Easyjet. In an industry where net income borders are really low and different bearers registering for bankruptcy of all time so frequently Southwest has managed to remain above the disturbance.
In about 40 old ages of service the air hose has systematically turned a net income while other air hoses have struggled and has remained one of the world’s most profitable air hoses. The airline’s consistent profitableness was due to its ain ability of low cost on a set per mile footing due to its usage of a individual aircraft theoretical account the Boeing 737 and its fuel hedge plan that protect the company from lifting fuel monetary values ( Ross & A ; Beath. 2007 ) . Southwest Airlines commands a market capitalisation of over nine billion dollars doing it one of the most valuable air hoses in the universe.
Southwest credited its success for constructing a doctrine of simpleness. the company offering of low cost menus kept pulling riders while its high touch client service kept them coming back ( Ross & A ; Beath. 2007 ) . As the air hose grew and its concern procedures became more complex and with other air hoses puting to a great extent in engineering in order to last Southwest’s CEO at the clip realised that a solid IT substructure would be indispensable for the company to accomplish its strategic ends and could take down the air hose cost without compromising on client service ( Ross & A ; Beath. 2007 ) . Porters Five Force Model for Competitive Strategy
Porter’s Five Force Model was developed by Michael Porter. Professor at the Harvard Business School in 1979. Harmonizing to Porter ( 1979 ) the Five Forces is a holistic attack of looking and analyzing any industry to understand the structural underlining drivers of profitableness and competition. Porter believes that industry participants take excessively much of a narrow expression in measuring competition by believing that direct rivals in an industry are the lone 1s that are of import. He uses the five forces theoretical account to demo how concern are engaged in a broader signifier of competition that can impact their profitableness.
These broader forces of competition include clients and providers who can hold certain bargaining powers. new entrants that can emerge in the industry and impact your market portion. replacement merchandises or services that can be used and can hold a direct consequence on your profitableness or growing and direct industry competition and competition within the industry. Harmonizing to Hills & A ; Jones ( 2008 ) a business’s ability to gain great net incomes are dependent on the strength of Porters Five Forces. the contrary is besides true that a weak competitory force allows for a greater chance to do net incomes.
For illustration. a company that controls a monopoly in a certain geographical country will see greater chances for net income. because being a monopoly will extinguish the menace of new entrants. no internal competition and low bargaining power of consumers. The greatest issue most concerns will hold is to place alterations in the five forces and cognizing how to explicate schemes from the chances and menaces that may originate from the alteration ( Hill & A ; Jones. 2008 ) . The image below illustrates Porter’s Five Force Model. Fig. 1 Beginning: ( Porter. 1979 ) Threats of Entry in the Airline Industry
The domestic air hose industry in the United States has intense competition between its rivals. Over 10 air hoses fight for market portion with the competition wholly driven on monetary value. Southwest Airline faces some its greatest competition from chap low cost air hoses such as Spirit air and JetBlue all three compete against each other on direct paths seeking to offer the lowest monetary values and the best service to riders with really low net income borders. Passenger figures stand at about 450 million riders going domestic yearly in the United States ( International Air Transport Association. 2012 ) .
However. Southwest Airlines remained the dominant domestic bearer with a rider burden of over 100 million 2012 ( Southwest Airlines. 2012 ) . The competitory nature of the domestic market in the United States has led to the amalgamation of some of its bearers in order to consolidate costs. The most recent amalgamation being that of American Airlines and US Airways and before that it was Continental and United Airlines who joined forces. Barriers to Entry in the Airline Industry Prior to 1978 the air hose industry in America was to a great extent regulated by the United States authorities and was driven by high monetary values and empty air hoses.
Government ordinance non merely prevented competition among industry participants but besides created an entry barrier for new air hoses. as authorities regulated paths presented a monopoly for established bearers ( Bloomberg Business Week. 2011 ) . In the United States the province of Texas was the lone province which ne’er had authorities ordinance in the industry. The deregulating in Texas gave Southwest Airlines an chance to come in the market offering its service in the major metropoliss of Texas merely ( Southwest Airlines. 2012 ) .
The deregulating attempt that was led by democratic senator Ted Kennedy and signed into jurisprudence by former President Jimmy Carter saw a dismantlement of menu and path controls in 1978 ( Bloomberg Business Week. 2011 ) . This deregulating made it progressively easy for new air hoses to come in market and compete. With authorities control no longer a barrier air hoses were able to come in the market one time they were able to entree the capital that was required and run into the safety criterions that were required by the Federal Aviation Authority ( FAA ) .
However. Michael Porter ( 2008 ) in an interview with Harvard Business School described the air hose industry as one of the easiest enter with low barriers to entry he pointed out there is a changeless watercourse of new air hoses that enter the market on a regular basis despite low net incomes. Dickering Power of Suppliers and Customers in the Airline Industry Harmonizing to Porter ( 2008 ) the limited figure of providers in the air hose industry gave a considerable sum of power to the 1s that existed. Porter argues that air hose providers made considerable more net incomes than air hoses themselves.
Aircraft fabrication is dominated by merely two major participants. ’ American company Boeing and Gallic company Airbus. In 2011 both industries controlled over 90 per cent of new air trade orders with Airbus ruling at 64 per centum ( The Guardian. 2012 ) . An air hose endurance in the industry is besides tied well to the monetary value of oil which is nucleus to operation. Southwest Airlines use a method of fudging to vie on the monetary value of oil which allows the air hose to lock in to contracts at cheaper monetary values in expectancy of future rises in the universe market monetary values ( CNBC. 2012 ) .
Other provider cost that affects public presentation includes security cost. airdrome Gatess and terminal fees and rewards to staff. The greater the competition among industry participants the more volatile clients will go. Customers in the air hose industry have enormous bargaining power and are really monetary value medium. The fast gait nature of the industry can let a client to exchange air hoses at any clip. Customers were the cardinal donees from the deregulating of the industry. before the remotion of monetary value construction and other ordinance. authorities policy ensured that air hoses competed on service and non monetary value ( Bloomberg Business Week. 2011 ) .
This shifted dramatically with deregulating has new entrants to the markets like Southwest and JetBlue built their concern theoretical account on low monetary values which has caused older established companies to take down their ain borders. Substitutes Products for Airlines There are a figure of replacement services available in the domestic air hose industry in America. Substitute merchandises include rail service. H2O. managers. private auto transit or declining to go. These replacements provide clients with other options other than winging and are strong competitory forces to the industry.
Airlines are hence forced to demo the economical convenience of air travel as oppose to utilizing other agencies. For illustration a individual going on concern who places great value on clip could happen it more efficient to wing alternatively of utilizing replacements. Airfares offered by low cost air hoses like Southwest are besides competitory with other replacement merchandises. The Value Chain Analysis Along with the Five Forces Michael Porter besides developed the Generic Value Chain as a agency of understanding fight in the concern industry.
The Value Chain is aimed at assisting us understand how goods and services move through an organisation and how value is added to them. Harmonizing to Porter the Value Chain represents a concern procedure that comes along with a merchandise ( Porter. 1985 ) . The chief purpose has articulated by Porter ( 1985 ) is to happen beginnings for a company’s competitory advantage by spliting the company into several activities in the concern procedure which are all strategically relevant to the goods or services provided.
The concern procedure is divided into primary and secondary countries. Primary activities include countries straight related to acquiring the merchandise to the consumer. Inbound logistics is the acquisition of the natural stuffs that are necessary to supply the merchandise or service. Southwest inbound logistics include countries such as path choice. flight and crew programming. fuelling. geting aircrafts and ticket direction systems. Operation by and large refers to the physical actions that are required to bring forth the service one time all the natural stuffs are acquired.
Southwest Airlines operations include a assortment of actions to supply its service. It covers the air hoses client attention services. gate operations. air trade operations and care and luggage handling. Outbound logistics involves traveling goods into stock list and topographic points where they can make clients. Southwest Airlines outbound logistics includes web site for booking tickets. linking riders on flights. offering. luggage aggregation systems and other gate services. Other countries Primary agents of the value concatenation include selling and gross revenues and services.
Selling and gross revenues involves the induction of purchasing the merchandise by using advertisement. promoting and monitoring gross revenues ( Porter. 1985 ) . Therefore any advertisement. promotional activity or trades and inducements offered by the air hose will fall under selling and gross revenues activities. While service involves managing of client dealingss once the merchandise or service is in the manus of the consumer these include managing client ailments. managing particular petition from clients such as disablement petitions or covering with elements such as flight holds and cancellations.
The secondary activities are of import in making a merchandise or service but are non straight involved in its creative activity. Procurement is responsible for purchasing the natural stuffs for the company it can include computing machines furnisher and other hole assets which are indispensable to the value concatenation. the act of procurance harmonizing to Porter is usually carried out by direction or the gross revenues section ( Porter. 1985 ) .
Technology support activity includes research and development that could take to merchandise development for the primary countries of the value concatenation. human resources function provides the company with indispensable staff to transport out maps while substructure involves the procedures and processs needed to put to death the concern procedure for illustration paysheet and history ( Porter. 1985 ) . The intent of this procedure is to analyze all the facets of the Value Chain and find if betterments can be made to increase the profitableness and public presentation of the concern.
For illustration. Southwest Airlines could look at a value concatenation and find if they could cut down the velocity at which it check in riders to flights to cut down turnaround clip or increasing the velocity of operating processs such as care and refuelling. Value Chain is a structured manner to look at bettering the concern procedure and information systems can play a cardinal function in this attempt.