Southwest Airline Case Study - Paper Example

Executive Summary

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

The airline industry is one of the most advancing sectors of the economy in the Unites States. This paper evaluates the competitive nature of the industry based on Porters Five Forces where the analysis indicates that industry rivalry, entry of new firms, and the bargaining power of customers are the most critical determinants of competition. On the other hand, the value chain analysis of the Southwest Airlines in line with Barneys approach to value chain linkages indicates that key competencies such as efficient customer service, low debt to equity ratio, low prices, and sustainable cost management assisted the firm in overcoming the stiff competition in the sector. Moreover, the paper highlights key culture factors based on the web culture, which depicts how the six dimension was critical to the growth and success of Southwest Airlines. Finally, the paper covers an assessment of the firms acquisition of AirTran Airways as an expansion strategy. The move is associated with benefits and pitfalls, which require strategic implementation of change and integration processes.

1.0 US Airline Industry: Porters Five Forces Approach

The US Airline industry has a rich history that includes the onset of a controlled market to the liberalization of entry strategy. The market is associated with multiple entries and exists based on the competitive nature of the segmented niche. A critical analysis of the literature accounts indicates significant contributing factors to the shaping of the sector in the country. Internal and external factors have affected the nature of competition, which makes it necessary for investors to consider competitive dimensions. Porters Five Forces is used to ascertain the nature of competition in corporate segmentation and position. The powers include the industry rivalry, bargaining power of buyers or customers, threat of new entrants, threat of substitutes, and bargaining capacity of suppliers. An assessment of the US Airline industry indicates that these forces have shaped the sector over the years and define the magnitude of the revenue, market sustainability, and rate of growth for each entity as outlined below.

1.1 Industry Rivalry

Industry rivalry has played a major role in setting the baseline for competition in the US airline industry. The objective of a business enterprise is to establish and implement strategies and changes meant to generate revenue and enhance growth and development. The firms operating in the industry will, therefore, have similar targets with different mechanisms of attaining the anticipated performance indicators. The onset of rivalry in the US Airline industry started with the entry of new firms, which generated the sharing of the targeted market (Hitt, Ireland, & Hoskisson, 2016). Key factors that determined the ability of the business to outdo the competitors include the capital of operation, market coverage, legal requirements, and customer base.

The liberalization and deregulation of the airlines in the country allowed new firms to join the business irrespective of their capital of operation. The use of route domination and restricted hub zones enabled the large enterprises to shield the invasions of new companies. On the other hand, a price war was a successful tactic for small firms, which increased their market control. However, external factors such as inflation, economic recession, and legal agreements affected the survival of small businesses. For example, by 2004, over 43 firms closed their operations with some considering takeovers and mergers as the only options available to remain in the firm. Large corporations such as the American used the Yield Management System to maximize the revenue for each trip made, which was critical for small companies to sustain their costs of operation because of their limited capital and routes. The constant rivalry among carriers forms the most crucial characteristic of the competitive environment, which determines how long the firm will remain in operation as well as the magnitude of revenue collected for each financial year.

1.2 Threat of New EntrantsThe stability of the US Airline industry changed when in 1978 President Carter ascended to law the Airline Deregulation Act, which opened the market to private investors. Initially, the market was bound to state control with limited external investments. However, the since 1978, more firms have joined the industry. An increase in the number of business entities in a sector implies that the segmentation of the market will shift in line with the rate of entry and investment. In most cases, the US Airline business has been subjected to instability based on the entry of new firms, which introduce new strategies affecting the normal operability of the sector. For example, between 1999 and 2004, over 66 enterprises joined the industry, which led to a significant change in the market share for the existing companies (Hitt, Ireland, & Hoskisson, 2016).

A critical analysis indicates that the increasing number of corporations resulted in lower yields for each trip traveled, which increased the cost of operation. Worth noting is that after the massive entry between 1999 and 2004, most of the new enterprises could not withstand the economic recession, sustainable cost management, and customer satisfaction, which led to the closure of over 40 firms by 2007. Apparently, the entry of new business organizations in the markets means a reduction in the revenue for each company in the US Airline industry proportionate to the market coverage share. The deregulation of sector resulted to a new competitive environment dimension, which determines the level of growth, development, and sustainability for firms investing in the industry.

1.3 Bargaining Power of Customers

The success, growth, and attractiveness of the US Airline emanate from the increasing number of customers. The steady trend has encouraged the entry of more firms to cater for the high demand of air travel. Worth noting is that in 1974 the total number of travelers was about 200 million, which increased to 700 million by 2007 (Hitt, Ireland, & Hoskisson, 2016). However, the shift has altered the nature of competition in the industry. The effect of inflation and the economic downturn has affected the customers purchasing power calling for low prices for the services offered in the industry. Most firms have been taking advantage of the need for low prices to enhance their market coverage and achieve customer acquisitions targets. Working with attractive prices for the travel banquets is a strategy that most firms have employed; however, the use of such an approach to competing for market advantage has affected most businesses. The approach has caused the recession of most companies because of lack of sustainability especially in cases associated with low yield and poor management strategies.

On the other hand, customer satisfaction has become a critical factor in service delivery in the industry. The tastes and preferences of the customers define the approach to be used in the market to enhance the consumer experience. Firms operating on economies of scale have managed to improve their services through acquisition and mergers, maintenance of the aircraft, and lowering the prices while focusing on yield management and cost efficiency. The bargaining power of the customers increases with a positive change in the number of travelers. The effect of the expectation of the consumers forms the third dimension of the competitive nature of the airline industry in the United States. However, with a projection of a further increase in the number of passengers and stable entry of firms, the sector remains a lucrative investment for the established companies already operating with significant capital.

1.4 Bargaining Power of Suppliers

The effect of the strategic management of the suppliers has been identified as another source of competition in the corporate sector. The evaluation of the competitive environment associated with the US Airline industry indicates the implication of the cost management, debt servicing, and human resource management as major determinants of service delivery (Hitt, Ireland, & Hoskisson, 2016). The acquisition of the aircraft models depends on the capital of operation, targeted revenue, and the market coverage; however, the cost of maintenance and human resource management are critical to such decisions. Although the implication of suppliers is not felt directly, the declining yield factor emanated from the acquisition of large-capacity models and an increasing market entry tendency. Alternatively, the ability of the firm to control the human capital is solely dependent on the strategic balance between the revenue generated and the costs within the company. The key players in supply efficiency and implication are the government and firms associated with economies of scale. Therefore, the effect of bargaining power of suppliers is not a dominant dimension of the competitive environment in the sector.

1.5 Threat of Substitute

The existence of substitutes determines the extent to which the services and brands perform in line with the sales targets and revenue margin. The US Airline sector is associated with an increasing number of the cumulative passenger travels, which indicates that the existence of alternative means of transport has little effect on the performance of firms. However, it is essential to note that the changing tastes and preferences of customers define the approaches that companies require to enhance customer experiences. On the other hand, the level of efficiency and affordability of the services remains as key performance indicators associated with the sector.

1.6 Viability of the US Airline Industry

The analysis of the competitive environment associated with the industry indicates the existence of adverse shifts in the market, which determine the success of the firms. The growing demand for the services also depicts the potential of the industry as a business niche. Moreover, the high level of exit, acquisitions, and mergers picture a stable market in future. The three elements show how the industry is favorable whenever firms operate on economies of scale; however, it is not a viable opportunity for small companies. Historical assessment of the success of small-scale enterprises in the sector indicates how they did not survive the economic downturn, inflation, and stiff competition. On the contrary, large entities continued t...