Southwest Case Write up INDIVIDUAL SUBMISSION

Raman Chadha (ID# 61210557) Section A

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LSCM Section B INDIVIDUAL CASE WRITEUP - SOUTHWEST

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Submitted by: RAMAN CHADHA (Student name or group name)

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PG ID 61210557

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Southwest Case Write up INDIVIDUAL SUBMISSION

Raman Chadha (ID# 61210557) Section A

LaGuardia Decision Summary In my judgment, Southwest should go ahead and bid for the time-slots at LaGuardia airport. The main rationale behind this decision is entry and access into the business heavy New York segment. New York is a major financial hub and majority of travel into New York is for business travelers1, a segment that Southwest has traditionally focused on2. Further, it will allow Southwest to test the robustness of its value-chain to expand to newer markets. With the changing dynamics in the airline industry, entering into newer markets is an imperative and cannot be avoided. With customers demanding great reach and connectivity, tapping into the North-East corridor bodes strong potential revenues and business growth for Southwest. Southwest Business Model / Operation Strategy / Enterprise Structure Business Model Overall, the airline industry dynamics is not attractive (Exhibit 1). There is cutthroat competition within the industry and low differentiation possibility. Amidst such a competitive landscape, Southwest has been able to pillar its business model on set of aligned and reinforcing activities (Exhibit 2). These activities have allowed Southwest to create a sustainable competitive advantage for itself. It took a contrarian approach and succeeded tremendously in it. Southwest based its business model on the underlying strategy of being a low-cost, no frills, point-to-point airline, and perceived itself as competing against the road / rail transportation instead of other airlines. It created its differentiating position by being a cost-leader and relying heavily on exceptional customer service. Operation Strategy Being a cost-leader meant that Southwest had to keep its costs as low as possible to sustain profits (Exhibit 4). It achieved so by formulating a set of financial and operational initiatives Financial Initiatives 1. Hedging of fuel prices this allowed Southwest to save on input costs and pass on the benefits to its customers. Further, it streamlined its cash flows. 2. Gate costs and landing fees by choosing to operate out of non-congested smaller airports, Southwest saved on its landing and ground operation costs. Further, increased air traffic at small airports because of Southwest, allowed it to bargain heavily with the airport authorities for favorable terms. 3. Same type of planes by using all similar planes (Boeing 737s), it kept the maintenances and training costs (for its ground staff) low. Further, they negotiated heavily with Boeing and got favorable financing terms. Operational Initiatives 1. Simplicity of its network by not forging baggage transfer and code-sharing agreements with other airlines, Southwest kept its network simple and easier to manage. 2. No meals by providing no meals on its short-haul flights, Southwest saved on logistics and maintenance costs
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http://www.ustravel.org/news/press-kit/travel-facts-and-statistics Case insight (page 3) 2

Southwest Case Write up INDIVIDUAL SUBMISSION

Raman Chadha (ID# 61210557) Section A

3. Quick-turnaround Significant contributor to the overall strategy of being low cost. Faster turnarounds meant higher aircraft utilization, implying higher asset usage efficiency. Southwests value chain design was simple (by utilizing the above-mentioned factors). It allowed it to focus exclusively on its underlying differentiating position of low-cost coupled with excellent customer service. Enterprise Structure One of the biggest contributors to Southwests success was the people working there. It truly emphasizes the fact that people synergies are critical to the success and implementation of any strategy. Most strategies fail not because of scientific reasons, but because of people reasons3, and Southwest had mastered the art of developing an excellent organization with underlying norms of exceptional customer service. Disruptive Nature of Southwests Business Southwests approach to airline market can be classified as a new-market disruption strategy4 where Southwest is targeting customers who otherwise would not travel by air. The basic premise is to reach out to non-consumers using a simple, convenient, and affordable product. Sustaining innovations in airline industry has moved air-travel up the value chain and in the process has alienated the potential low-end customers who still aspire to travel by air. These potential customers are not served at all by incumbents. Southwests incumbents are strongly positioned (well distributed reach, highly networked, good service, etc), so competing just on the grounds of sustaining innovation (bringing better products to existing consumer in existing markets) would not have been sufficient! Southwest had to create a new-market disruption and bring new benefits to the non-served consumers (road travellers). Such a strategy lead to stratospheric growth because the affordability enabled an entirely new group of customers to tap into and use air-travel. Southwest provided them with a choice of choosing between road transport and air travel. One premise of disruptive innovation is that its initial quality has to be lower than the incumbents quality. This is clearly the case, as Southwest did not offer meals, it had low connectivity, there was no inter-airline transfer possibility, and no code sharing was permitted. Southwest created a totally new segment of first time (potentially) air-travellers and achieved great success. Incumbents were more motivated to serve their most profitable segments (existing flyers) and were not too concerned with low-margin segment of first-time flyers. This enabled Southwest to create a foothold segment. Southwests Evolution Southwest has expanded its airport base over the last decade but has done that at a very cautious and controlled pace. Its underlying theme in expansion was whether it will be able to maintain its culture of enthusiastic, fun-loving, Customer-oriented employees. Such insight and managed growth lead to exceptional returns over the last decade (Exhibit 3). This clearly shows that
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Innovation without Walls: Alliance Management at Eli Lilly and Co. (Harvard Business Review) Solving the Dilemmas of Growth Clayton M. Christensen and Scott D. Anthony (Harvard Business Review) 3

Southwest Case Write up INDIVIDUAL SUBMISSION

Raman Chadha (ID# 61210557) Section A

Southwests management was insightful in knowing that expansion is necessary in thawing the competition but expansion had to tie-in with Southwests governing strategy of being a no-frills, low-cost airline with exception customer service. Marginal gains accrued by expansion will not be sustained if the perception about Southwest was diluted (i.e. expansion affects Southwests brand image). Further, Southwest was very careful not to go head-on with the incumbent in any market it enters. This allowed Southwest to obtain a foothold segment5 and offer more choices to its existing customers. Further, Southwest was quick to leverage the network of other airlines (ATA). This not only allowed Southwest to book handsome profits but also to test the waters before committing its resources to the new location. In addition, by expanding in a controlled manner, Southwest was able to leverage its existing routes to create synergies.

LaGuardia Decision The decision to expand into LaGuardia is appropriate and Southwest should go ahead with it. The potential upside is high while the potential downsides are relatively low. Further, it ties into Southwests existing philosophy of expanding Northeastwards. Potential benefits / risks are outlined below Benefits: 1. Business travel segments New York is the financial hub and has a health mix of business and tourist travelers. By gaining access to LaGuardia, Southwest can further leverage its already strong position with business travelers. 2. Slot trading possibility Southwest has the option of trading its un-utilized slots to other airline. So in case of low demand the losses are minimized 3. Network Synergies Connecting with New York will allow Southwest to leverage its existing flight routes and provide more choices to its existing customers (same side network effects) Risks: 1. Cultural Dilution Southwest is concerned about diluting its immense focus on customers by expanding into LaGuardia. Mitigation: Already proven expertise with expansion into Baltimore. Replication of Southwest culture is Northeast is doable. Besides, Southwests long-termers were willing to work at LaGuardia and establish Southwests culture). 2. Turnaround Delays LaGuardia is a congested airport and has above average percentage for flight delays. This can affect Southwests operational efficiencies. Mitigation: Southwest can phase its expansion into LaGuardia by starting with one or two flights. This will enable it to minimize operational delays and get firsthand experience at operational inefficiencies at LaGuardia. Therefore, LaGuardia has high potential upside and downside, which can be mitigated.

Eager Sellers and Stony Buyers Harvard Business Review 4

Southwest Case Write up INDIVIDUAL SUBMISSION

Raman Chadha (ID# 61210557) Section A

Exhibit 1 Airline Industry Analysis (Source: Case assessment) Bargaining power of suppliers (HIGH)
Oil Companies - rising fuel costs, no negotiation Aircraft Makers - high concentration, low choices Airports - some choice

Bargaining power of buyers (HIGH)

Low switchng costs Full information on pricing by competitors Fewer big buyers

Competition (HIGH)
No differentation Perennial overcapacity High fixed cost Rivalry on prices and features

Threat of new entrants (MEDIUM)

Govt Regulations Access to parking slots Capital Intensive in Long Run Poor industry performance

Threat of substitue products (MODERATE)

No substitute for long-haul Rail and road for short haul Price / performance is key

Exhibit 2 Southwests Aligned + Reinforcing Activities (Source: Industry Report)

Southwest Case Write up INDIVIDUAL SUBMISSION

Raman Chadha (ID# 61210557) Section A

Exhibit 3 Stock Performance of Southwest and Dow Index (Source: Capital IQ)

Exhibit 4 Comparison of Global Airlines (Source: Allan Afuah (2009) Strategic Innovation)