External Environment Analysis Term Paper

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Business - Management

External Environment Analysis

Southwest Airlines is the nation's low fair, high customer satisfaction airline. It mainly serves short haul cities, offering single class air transportation, which aims for the business commuter as well as leisure travelers. The North American Industry Classification System (NAICS) classifies Southwest Airlines as Scheduled Passenger Air Transportation - 481111 (North American Industry Classification System, 2011).

When conducting an external analysis it is important to look at Porter's five forces to determine the competitive strength and therefore magnetism of a market. Porter's five forces comprise five forces from horizontal competition and vertical competition. These forces are: threat of substitute products, the threat of established rivals, and the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers (Porter's Five Forces a Model for Industry Analysis, 2010).

The first threat is that of the threat of new entrants into the market. This is a moderate threat. Profitable markets that yield high returns will draw in new businesses. The threat of new entrants presents the likelihood that new companies will enter the industry and reduce industry returns by passing along value to buyers in the shape of lower prices and elevating the expense of competition. Factors that establish the threat of entry include capital necessities, economies of degree, switching expenses, and brand value. In the airline industry, access to capital is abundant. Banks extend credit to airline carriers, and the debt and equity markets provide options for raising money. For the reason that it's relatively easy for weaker airlines to get credit, the industry has become flooded. Brand identity is vital in the airline industry, and benefits bigger airlines. Major carriers allot substantial resources to marketing efforts. Frequent flier programs and other inducements have been victorious in tempting travelers to fly with certain carriers. The frequent flyer inducement can frequently be strong enough to cause a purchaser to choose one carrier over another, even when the other carrier offers a lower fare. Obstructions to entry are also heightened by the hub system in the airline industry. Carriers can present travelers more choices while tying up less capital through their hubs. As a consequence, the hub system generates market power for big carriers (Del Vecchio, 2000).

The second force is that of the threat of substitute products or goods. This threat is high. The existence of products exterior of the area of the common product limitations augments the tendency of customers to switch to alternatives. The comparative price of substitutes and the buyer tendency to substitute have effects on the industry. Likely substitutes for airline travel include automobiles and trains. A less rushed traveler may take a train and enjoy the relaxation and scenery that train travel offers. However, airline travel can save time and money for longer distance trips. As a consequence, buyers may be more disposed to choose air travel to reach their destination. The threat of substitutes has to do with time, money, personal inclination, and handiness in the air travel industry (Wensveen, 2010).

The next force is that of established rivals. This is also a high threat. For most industries, the strength of competitive rivalry is the main determinant of the competitiveness of the industry. Strongly competitive industries usually earn low returns since the cost of competition is high or buyers are getting the benefits of lesser prices. Factors that affect competitive rivalry include industry expansion, fixed expenses, brand identity, and barriers to exit. The airline industry is severely competitive. Industry growth is modest, and carriers are under pressure to take away share from each other. Barriers to exit are considerable in the airline industry. Grounded planes do not earn any returns and getting rid of these assets is hard. Frequently, because of bankruptcy laws, companies in financial anguish can remain competitors for a very long time (The Industry Handbook: The Airline Industry, 2011).

The next force is that of the bargaining power of suppliers. This is a low threat. Factors relating to the bargaining power of suppliers comprise the threat of forward incorporation and the attention of suppliers in the industry. Suppliers are strong within the airline industry. Boeing and Airbus provide the majority of commercial fixed-wing air carriers. Supplier concentration makes it hard for competitors to put into practice leverage over the supplier and get lower prices or play one supplier against another. The threat of forward integration is also low. It is improbable that Boeing, for example, would staff flight attendants, pilots, and a maintenance crew, and operate flights around the country. Supplier power further reduces the capability of competitors to earn high income (The Freedom to Buy and Supply: Procurement at Southwest Airlines Co, 2011).

The last force is that of the bargaining power of customers. This is a moderate threat. If substantial buyer power is present, industry returns can accumulate to buyers in the appearance of lower prices. Buyer power is determined by switching expenses, the relative quantity of purchases, the consistency of the product, elasticity of demand, brand identity, and superiority of service. Buyers are offered many choices when picking an airline carrier. Because of the Internet, pricing information is less disjointed and easier to evaluate. Frequently, a traveler can find price inconsistencies for the same exact flight. One seat is not any better than the next since everyone gets to their destination at the same time. Vacation travelers will also search out the best deals. Airline travel is not low-priced, and can be the most costly part of a family vacation. Therefore, for some buyers, demand is very elastic, meaning that as the price drops, demand increases (Del Vecchio, 2000).

An external analysis would not be complete unless a PEST analysis was done. An examination of the external macro-environment in which a company operates can be expressed in terms of the following factors:

Political

Economic

Social

Technological (PEST Analysis, 2010).

The first factor is that of the political arena. Political factors include government regulations and legal matters and define both formal and informal rules under which the company must operate. The 1978 Airline Deregulation Act partially moved control over air travel from the political arena to the market sphere. The inflexible fares of the regulatory era have given way to today's competitive price market. Nowadays, the airlines create highly intricate pricing models that include the service quality and price sensitivity of various air travelers and offer differential fare and service quality packages designed for each (Smith, 2008).

Deregulation has not been without its issues though. As a shape of regulation, antitrust laws inhibit post-deregulation restructuring labors, making it harder to bring salaries and work rules into line with the realism of a competitive marketplace. The antitrust regulatory laws hold back the restructuring of corporations and blocks needed consolidation; the antitrust authorities often view with suspicion any efforts to retain higher prices (Smith, 2008). This has not been good for the airline industry.

The next factor is that of economic matters. Economic factors affect the buying power of possible customers and the companies' cost of capital. The aviation industry is predominantly vulnerable to external economic factors because it affects and depends on a considerable number of industries. Also, because the industry entails operating between borders, then economic factors from other parts of the world other than the domestic market also influence it. The aviation industry is affected by financial and fiscal policies in that government decisions to tax airlines eats into their operating expenses. Also investments in infrastructure have a big role to play. Closely linked to fiscal and monetary policy is the issue of wage disparity (How Economic Factors Affect the Aviation Industry, 2011).

The next factor is that of social matters. Social factors comprise the demographic and cultural features of the external macro-environment. These factors affect consumer needs and the…[continue]

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