ASSIGNMENT-1 SOUTHWEST AIRLINES CASE STUDY
QUESTIONS 1. How does Southwest Airlines get its competitive advantage? 2. How does Southwest Airlines execute its strategy?
1. How does Southwest Airlines get its competitive advantage? Southwest Airlines uses a Cost Leadership Strategy, however most pricing strategists would agree that having a low price does not, in itself, constitute a competitive advantage. In fact, thinking that low prices are always a good strategy for competition is deeply misguided. However, at times, targeting low prices can lead to a strategic focus which delivers tremendous results. Modern competitive strategy will often examine firms from a resource-based view. According to this lens, competitive advantage derives from leveraging an inimitable resource to deliver value at a lower cost than the competitors. Price is a completely imitable resource. Any company can match the prices of its competitor if it so chooses. Hence, arguing that a low price is a strategic resource, or that it leads to a competitive advantage in and of itself, is illogical. Southwest Airlines has used the target pricing and utilized a marketing orientation since its infancy in 1971, even though these concepts were not fully defined back then. First, starting with the customers and the value they sought, Southwest Airlines initial target was customers traveling between cities in Texas, specifically between Dallas and Houston, Dallas and San Antonio, San Antonio and Houston. While Texas is larger than many countries, it isn’t so large that people can’t drive from city to city. Hence initially, the most comparable alternative to Southwest, and therefore its prime competition, wasn’t other airlines. Instead, it was the car. In uncovering the car as the competing alternative, Southwest was able to also identify the target price of its offering. Second, to compete with the car, Southwest Airlines had to price their service relatively similar to the cost of car travel. With this target in mind, they chose $20. While $20 is lower than the government allowable tax deduction for travel, it is also significantly higher than the price of gas alone to drive between these cities. Thus, at this $20 price, Southwest Airlines could be confident that it would capture many of the travelers that would have driven and convert them into short-hop air travelers. Third, the product was redefined to serve customers at this low price profitably. Consider what was removed from air travel and what was included instead. The table below enumerates the key points
Removed Reduced reservations flexibility: Reservations primarily made directly Southwest Airlines as they eschewed working with travel agents. No connections between airlines: Southwest Airlines would not transfer baggage between flights.
Included or Added Simplicity in Pricing: Flat rate of $20 per leg of the journey. Also reduced the cost of price management, as no yield management system was needed initially. Higher convenience in terms of on-time arrivals: With a simplified fight route between lesser used airports, Southwest was able to operate more reliably. Higher convenience in flight frequency: With point to point flights, Southwest could offer service between Houston and Dallas with the same plane roughly every 2.5 hours.
No long-haul flights: Southwest Airlines customers could only take Southwest between a city-pair, not across the country or even across state lines initially. This greatly reduced cost of compliance with CAB rulings, as Southwest’s operations were not subject to interstate commerce rulings.
No in-flight meals: Southwest Airlines only offered peanuts and beverages.
Fun: Friendly flight attendants provided jokes, costumes, and made flying comfortable with warm and caring service. Faster boarding times leading to faster flight turnarounds. More seats: With one class of service,...