Southwest and Southwest and Revolutionary Revolutionary

StrategiesStrategiesBM499 Strategic ManagementBM499 Strategic Management

David J. BryceDavid J. Bryce

October 8, 2002

COST ADVANTAGE AT SOUTHWESTCOST ADVANTAGE AT SOUTHWEST

“Airlines don’t have revenue problems, they have cost problems.” Southwest.

Conventional Strategy: Meals, pre-assigned seats, membership in airline reservation system, travel agents, and hub & spoke system are key to success.

Southwest Strategy: Lowest cost operations and lowest prices.

Sales/Marketing Operations Human Resource Mgmt.

• Offer direct flights to busy cities of less than 500 miles• No pre-assigned seats• Little reliance on travel agents (saves 5-10%)• Snacks rather than meals• Prices 20-50% lower than the competition

• Fly only Boeing 737s (smallest, most fuel efficient craft)• Train pilots & mechanics only on 737s• Fly to cheaper, less congested airports (i.e. Love Field Dallas; Midway, Chicago)• Don’t transfer baggage to other airlines• Fast turnaround of aircraft (20 minutes vs. 50 minutes for industry)

• Initially non-union, now partially union labor• Cross training, flexible workforce• Employees receive same pay per job hour regardless of location (low turnover overall but accept high turnover in high cost areas; i.e. Calif.)

THE RELATIONSHIP BETWEEN THE RELATIONSHIP BETWEEN PRICE AND COSTPRICE AND COST

EXPERIENCE CURVESEXPERIENCE CURVES(COMPANY PROFITABILITY)(COMPANY PROFITABILITY)

• Different companies within an industry will have similar prices but will have accumulated Different companies within an industry will have similar prices but will have accumulated different amounts of experiencedifferent amounts of experience

Predictable Unit Cost Differences Predictable Unit Cost Differences

Predictable Profitability Differences Predictable Profitability Differences

Cos

t/U

nit (

Con

stan

t Dol

lars

)

Accumulated Experience (units of experience)

IndustryPrice

Cost

A

BC

THE IMPORTANCE OF THE IMPORTANCE OF RELATIVE MARKET SHARERELATIVE MARKET SHARE

• Relative market share may be a good proxy for relative accumulated experience, especially in long-established industries

- of leader relative to next largest follower- of all followers relative to leader

• Therefore, there will be a relationship between RMS and profitability

Pro

fita

bil

ity

Low

High

Low High Relative Accumulated Experience (Relative Market Share)

Relative market share may be an indicator of relative long-term profitability

1992 Profitability and Relative 1992 Profitability and Relative RPM ShareRPM Share

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

0 0.2 0.4 0.6 0.8 1 1.2

Relative Market Share (RPM)

Ope

ratin

g M

argi

n 19

92

Southwest

American

United

Delta

Northwest

Continental

USAir

TWA

Southwest’s Experience CurveSouthwest’s Experience Curve

0.030

0.032

0.034

0.036

0.038

0.040

0.042

0.044

0.046

0.048

0.050

- 40,000 80,000 120,000 160,000 200,000

Cumulative Revenue Passenger Miles (RPM)

Cos

t Per

RPM

($)

Cost per RPM is in constant 1983 dollars using standard CPI index. Figures from 10 year operating expense and RPM history from Exhibit 3 in HBS Case 9-694-023, Southwest Airlines: 1983 (A)