The company is based in Dallas, Texas and has a staff capacity of over 46,000 persons. The carrier was formed has a low cost domestic carrier originally only flying in the state of Texas before branching out to other US states. From inception flights on short haul routes (Ross & Beat, 2007). Today Southwest Airlines flies domestic in the United States to 79 cities. Southwest Airlines is the largest airline in the world by passengers carried, in 2012 over 100 million persons was transported by he airline to different cities in the USA.
The airline has being a pioneer in the industry and is credited for setting the foundation for the rise of other low cost carriers across the world like Ryan Air and Asset. In an industry where profit margins are very low and different carriers filing for bankruptcy ever so often Southwest has managed to stay above the fray. In almost 40 years of service the airline has consistently turned a profit while other airlines have struggled and has remained one of the world’s most profitable airlines.
The airline’s consistent reparability was due to its own ability of low cost on a set per mile basis due to its use of a single aircraft model the Boeing 737 and its fuel hedging program that protect the company from rising fuel prices (Ross & death, 2007). Southwest Airlines commands a market capitalization of over nine billion dollars making it one of the most valuable airlines in the world. Southwest credited its success for building a philosophy of simplicity, the company offering of low cost fares kept attracting passengers while its high touch customer service kept them coming back (Ross & death, 2007).
As the airline grew and its business processes became more complex and with other airlines investing heavily in technology in order to survive Southwest’s CEO at the time realized that a solid IT infrastructure would be essential for the company to achieve its strategic goals and could lower the airline cost without compromising on customer service (Ross ; death, 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.
According to Porter (1979) the Five Forces is a holistic approach of looking and analyzing any industry to understand the structural underlining drivers of profitability and competition. Porter believes that industry players take too much of a narrow look in assessing competition by believing that direct competitors in an industry are the only ones that are important. He uses the five forces model to show how business are engaged in a broader form of competition that can affect their profitability.
These broader forces of competition include customers and suppliers who can have certain bargaining powers, new entrants that can emerge in the industry and affect your market share, substitute arduous or services that can be used and can have a direct effect on your profitability or growth and direct industry rivalry and competition within the industry. According to Hills & Jones (2008) a business’s ability to earn great profits are dependent on the strength of Porters Five Forces, the reverse is also true that a weak competitive force allows for a greater opportunity to make profits.
For example, a company that controls a monopoly in a certain geographical area will see greater opportunities for profit, because being a monopoly will eliminate the threat of new entrants, no internal rivalry and low bargaining power of consumers. The greatest how to formulate strategies from the opportunities and threats that may arise from the change (Hill ; Jones, 2008). The image below illustrates Porter’s Five Force Model. Fig. 1 source: (Porter, 1979) Threats of Entry in the Airline Industry The domestic airline industry in the United States has intense rivalry between its competitors.
Over ten airlines fight for market share with the rivalry completely driven on price. Southwest Airline faces some its greatest competition from fellow owe cost airlines such as Spirit air and Getable all three compete against each other on direct routes trying to offer the lowest prices and the best service to passengers with very low profit margins. Passenger figures stand at approximately 450 million passengers traveling domestic annually in the United States (International Air Transport Association, 2012).
However, Southwest Airlines remained the dominant domestic carrier with a passenger load of over 100 million 2012 (Southwest Airlines, 2012). The competitive nature of the domestic market in the United States has led to he merger of some of its carriers in order to consolidate costs. The most recent merger 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 airline industry in America was heavily regulated by the United States government and was driven by high prices and empty airlines.
Government regulation not only prevented competition among industry players but also created an entry barrier for new airlines, as government regulated routes presented a monopoly for established carriers (Bloomberg Business Week, 2011). In the United States the state of Texas was the only state which never had government regulation in the industry. The deregulation in Texas gave Southwest Airlines an opportunity to enter the market offering its service in the major cities of Texas only (Southwest Airlines, 2012).
The deregulation effort that was led by democratic senator Ted Kennedy and signed into law by former President Jimmy Carter saw a dismantling of fare and route controls in 1978 (Bloomberg Business Week, 2011). This deregulation add it increasingly easy for new airlines to enter market and compete. With government control no longer a barrier airlines were able to enter the market once they were able to access the capital that was required and meet the safety standards that were required by the Federal Aviation Authority (FAA).
However, Michael Porter (2008) in an interview with Harvard Business School described the airline industry as one of the easiest enter with low barriers to entry he pointed out there is a constant stream of new airlines that enter the market regularly despite low profits. Bargaining Power of Suppliers and Customers in the Airline Industry gave a considerable amount of power to the ones that existed. Porter argues that airline suppliers made considerable more profits than airlines themselves. Aircraft manufacturing is dominated by only two major players,’ American company Boeing and French company Airbus.
In 2011 both manufactures controlled over 90 per cent of new air craft orders with Airbus dominating at 64 percent (The Guardian, 2012). An airline survival in the industry is also tied considerably to the price of oil which is core to operation. Southwest Airlines use a method of hedging to compete on the price of oil which allows the airline to lock in to contracts at cheaper prices in anticipation of future rises in the world market prices (CNN, 2012). Other supplier cost that affects performance includes security cost, airport gates and terminal fees and wages to staff.
The greater the rivalry among industry players the more fickle customers will become. Customers in the airline industry have tremendous bargaining power and are very price sensitive. The fast pace nature of the industry can allow a customer to switch airlines at any time. Customers were the key beneficiaries from the deregulation of the industry, before the removal of price structure and other regulation, government policy ensured that airlines competed on service and not price (Bloomberg Business Week, 2011).
This shifted dramatically with deregulation has new entrants to the markets like Southwest and Getable built their business model on low prices which has caused older established companies to lower their own margins. Substitutes Products for Airlines There are a number of substitute services available in the domestic airline industry in America. Substitute products include rail service, water, coaches, private car transportation or refusing to travel. These substitutes provide customers with other alternatives other than flying and are strong competitive forces to the industry.
Airlines are therefore forced to show the economical convenience of air travel as oppose to using other means. For example a person traveling on business who places great value on time could find it more efficient to fly instead of using substitutes. Airfares offered by low cost airlines like Southwest are also competitive with other substitute products. The Value Chain Analysis Along with the Five Forces Michael Porter also developed the Generic Value Chain as a means of understanding competitiveness in the business industry.
The Value Chain is aimed at helping us understand how goods and services move through an organization and how value is added to them. According to Porter the Value Chain represents a business process that comes along with a product (Porter, 1985). The main aim has articulated by Porter (1985) is to find sources for a company’s competitive advantage by dividing the company into several activities in the business equines process is divided into primary and secondary areas.
Primary activities include areas directly related to getting the product to the consumer. Inbound logistics is the acquisition of the raw materials that are necessary to provide the product or service. Southwest inbound logistics include areas such as route selection, flight and crew scheduling, fuelling, acquiring aircrafts and ticket management systems. Operation generally refers to the physical actions that are required to produce the service once all the raw materials are acquired.
Southwest Airlines operations include a variety of actions to provide its service. It covers the airlines customer care services, gate operations, air craft operations and maintenance and baggage handling. Outbound logistics involves moving goods into inventory and places where they can reach customers. Southwest Airlines outbound logistics includes website for booking tickets, connecting passengers on flights, offering, baggage collection systems and other gate services. Other areas Primary agents of the value chain include marketing and sales and services.
Marketing and sales involves the initiation of buying the reduce by utilizing advertising, promoting and monitoring sales (Porter, 1985). Therefore any advertising, promotional activity or deals and incentives offered by the airline will fall under marketing and sales activities. While service involves handling of customer relations once the product or service is in the hand of the consumer these include handling customer complaints, handling special request from customers such as disability requests or dealing with elements such as flight delays and cancellations.
The secondary activities are important in creating a product or service but are not directly involved in its creation. Procurement is responsible for buying the raw materials for the company it can include computers furnisher and other fix assets which are essential to the value chain, the act of procurement according to Porter is normally carried out by management or the sales department (Porter, 1985).
Technology support activity includes research and development that could lead to product development for the primary areas of the value chain, human resources role provides the company with essential staff to carry out functions while infrastructure involves the processes and procedures needed to execute the business process for example payroll and account (Porter, 1985). The purpose of this process is to analyses all the aspects of the Value Chain and determine if improvements can be made to increase the profitability and performance of the business.
For example, Southwest Airlines could look at a value chain and determine if they could reduce the speed at which it check in passengers to flights to reduce turnaround time or increasing the speed of operating procedures such as maintenance and refueling. Value Chain is a structured way to look at improving the business process and information systems can play a key role in this effort. Management Information System forms an integral part of an organization; it integrates people, procedures with databases and devices and enables management to make better strategic decisions for the organization (Stair & Reynolds, 2011).
In an increasingly competitive market firms are under pressure work smarter and innovate at a much faster rate than their competition. Information System forms a primary resource that companies can utilize in aspects of Porters Five Forces and the Value Chain to gain a competitive advantage. Southwest Airlines uses Information systems to improve the efficiency of its Value Chain. To improve the efficiency of its operation management the airline uses software such Customer Relationship Management (CRM).
This is a tool that is used by businesses to integrate people, process and technology to enhance relationship with customers (Goldenberg, 2008). Customer Relationship Management can have a very positive effect on the business process, it improves customer and business relationship with the business being able to spend more time with customers due to reduce administrative work loads and has the opportunity to troubleshoot customer concerns or any other problems hat may arise (Goldenberg, 2008).
Southwest Airline uses proprietary Customer Relationship Management software to create a database which holds information detailing every transaction carried out by customers in its company, and what payment method was used whether it was credit cards, gift vouchers (Keynoter, 2005). The database also incorporates data exported from an old reservation system that included specific customer information from its frequent flyer program (Keynoter, 2005).
This software allows Southwest to maintain very hands on relationship about TTS customers and helps it to analyses patterns and trends and also assists in marketing efforts. Using its CRM database the Airline is also able to provide added value to customers through efficient service of alerting them of potential delays or changes in their reservations. Citing a poll done by the Wall Street Journal, (Stair & Reynolds, 2011) pointed out that Southwest was giving a very low score for its flight notification service the airline made significant effort to improve its service to passengers.
They develop a service called the “Southwest Way’ were it made special effort to improve Stair ; Reynolds, 2011). Using information from their CRM the airline was able to notify customers by using an automated service to call them and notify them about possible delays or changes to flight. Enterprise Resource Planning was also used to integrate the system to update its staff at gates on possible changes in customer’s itinerary (Stair & Reynolds, 2011).
The Airline also uses Enterprise Resource Planning (ERP) in its operation to enable communication between various departments. Enterprise Resource Planning is a crucial part of creating efficiency within the business process, it gives managers information not only regarding there areas but how their areas influence other parts of the business. It is a crucial strategic tool that enables a business to streamline and advantage in the industry (Sahara, 2004).
Southwest enhanced its operation by using ERP to integrate its maintenance management system. Aircraft technicians where spending up to 30-40 per cent of their time searching for information, Southwest however started to equip their air craft inspectors with tablets that would record data onsite and remit it the information back to a centralize content library. This enabled the airlines to remain efficient in its maintenance practices and getting airplanes back in service as quickly as possible (Keynoter, 2005).
Operations were also enhanced at the airline by revamping their technology by changing their boarding systems with the aim of shortening transaction times at counters by reducing the amount of data entry needed and improving its usability (Keynoter, 2005). Using Java technology, green screen technology which required agents to memorize commands was replaced by graphical APS which will allow agents to trigger certain functions if a passenger is early, this includes easily hanging reservations, check in the passenger, issue a boarding pass and update the back-end passenger information record very quickly (Keynoter, 2005).
In improving its outbound logistics of getting its services into the hands of customers Southwest became a pioneer in commerce. Commerce technology allows businesses to leverage the power of technology and the internet to increase its distribution network. Commerce allows a business to improve access to products and provides the business with vital customer information that can be used in analyzing trends and developing strategies for further use. Southwest Airlines is credited for being the first airline that allowed customers to book tickets using the internet.
The airline saved millions of dollars in enabling online bookings cutting out the need for third parties and travel agents (Keynoter, 2005). Southwest Airlines will continue to be an interesting case study for a very long time. The company’s ability to be innovative will be a driving force in its success for years to come. The company has proven conclusively how technology and bolster a business competitive advantage in an industry where entry barriers are low, profit arising are low and survival is difficult can have a significant impact on its performance.
Cite this essay
Value Chain Analysis Southwest Airlines. (2020, Jun 02). Retrieved from https://studymoose.com/value-chain-analysis-southwest-airlines-essay