Southwest Airlines Internal Analysis of the Southwest

Southwest Airlines

Internal Analysis of the Southwest Airlines RBV Framework

Southwest Airlines (NYSE:LUV) has a market cap as of September 12, 2011 of $6.3B, the most profitable and valuable American-based airlines there is today. This is a direct result of the company's ability to consistently take a resource-based view (RBV) of its inherent strengths and develop and execute successful strategies on them over time. The RBV of the airline industry illustrates how challenging it is to attain higher levels of Return on Invested Capital (ROIC) on a services-based business that is under continual price competition (Kumar, Johnson, Lai, 2009). Southwest has been able to overcome these challenges by concentrating on fuel edging strategies, greater focus on standardization of aircraft and supplies to drive down operating costs, and a focus on delivering an exceptional customer experience on each flight (Michalisin, Karau, Tangpong, 2004). Using an RBV-based analysis of the company, this report provides background and recommendations for future strategies going forward.

Introduction

Southwest Airlines has successfully differentiated itself for its many competitors by taking an RBV-based approach to quantifying the contributions of its culture and employees to profitability. The foundation and catalyst of this unique aspect of the Southwest Airlines culture is predicated on the thirteen cultures the founders put into place when launching the company (Freiberg, Freiberg, 1996). Based on these thirteen values, a culture of trust permeates the company today. Given the high level of trust within and between departments, there is also a high level of creativity and flexibility in completing tasks and responsibilities, all centered on the customer experience above all else (Rhoades, 2006). It is noteworthy that Southwest is the only airline to generate a positive Return on Investment (ROI), Return on Assets (ROA), and Return on Equity (ROE) during the last recession, far outdistancing its competitors on these critical financial metrics. The greater the level of trust and an egalitarian mindset in a company, the greater the level of information velocity and corporate performance

(Kochan, 2006). In use the RBV of translating values to profitability, Southwest has successfully turned trust into the most effective accelerator of all. This gives associates the flexibility to meet and exceed any customer expectation within reason while also working to serve their co-workers and help them as well (Krames, 2003). Transformational leaders have the ability to create teams that become autonomous in their ability to attain goals and objectives when there is strong ownership of jobs and long-term learning in place (Rhoades, 2006). These factors are what create the Southwest culture and serve as the foundation of its strengths and weaknesses.

Analysis of the Southwest Airlines Culture Strengths and Weaknesses

The founders chose thirteen values as the foundation for their company's culture, realizing that a services-based business would need to have a solid foundation of trust in order to survive and thrive. This was prescient on their part, as the culture of collaborating and communicating is an integral part of the company's ability to translate an inherently costly business model into consistent profitable performance (Porter, 2008). It also provides insight into how roles, responsibilities, structure of organizational boundaries, definition of departments and divisions, and the development of rewards all have a major impact on the profitability of the company (Rhoades, 2006).

In addition to the thirteen values being a critical component of the company's strengths internally, the ability to consistently set and exceed customer expectations is core to the Southwest business model (Hardage, 2006). Another aspect of this core strength of the company is the ability to create momentum in the company's culture that celebrates service excellence. Using the RBV-based analysis in the airlines industry shows that cultures that lack this commitment to service and continually measuring then exceeding expectations eventually experience severe margin erosion and a loss of customer loyalty (Lopez-Fresno, 2010).

The Southwest Airlines values include seeking out low cost yet high value solutions to customers' challenges and problems, profitability, family, fun, hard work, individuality, ownership, legendary service, egalitarianism, common sense and good judgment in serving customers, simplicity, and altruism. The company's hiring process is well tuned to these values, seeking candidates who exemplify these traits and show potential for learn internal processes and procedures quickly (Hardage, 2006). These values are so critical that the company has embraced 360-degree feedback to ensure they stay consistent and focused throughout each department (Krames, 2003).

While Southwest has many strengths, there are weaknesses that will over time erode profitability and potentially reduce customer satisfaction levels. First, the lack of consistency in maintenance, repair and overhaul (MRO) processes and lack of coordination with the National Transportation Safety Board (NTSB) and Federal Aviation Administration (FAA) was glaringly seen when the top of a jet fuselage broke open in a flight earlier in 2011. This event shows a more systemic problem throughout the company, of not staying vigilant enough to external safety standards for inspection, relying instead of the relationships with NTSB and FAA auditors to quickly move through the evaluation process of a jets' records and audits (Michalisin, Karau, Tangpong, 2004).

Another weakness is the lack of oversight for maintenance, repair and overhaul (MRO) processes and procedures throughout the company today as well. There is no audit oversight function or team to evaluate the overall performance of MRO procedures in terms of their actual value and accuracy over time. Further, the MOR procedures lack analysis from the standpoint of their effectiveness over time. No records are keep of the process or procedure itself; rather the jet engine or part is tracked alone. This is a serious deficiency in how Southwest Airlines manages its MRO procedures for tracking overall effectiveness of each procedure over time.

There is also no traceability of repairs by type of third-party part used as well. Supplier management at Southwest monitors suppliers yet there is no way to track by shipment or lot which spare part came from which supplier factory (Michalisin, Karau, Tangpong, 2004). This has potentially major ramifications to retrofitting jet parts and engines repaired. The lack of traceability of parts however leads to significant risk to the company if there is a random shipment that doesn't exactly meet their criteria. MRO technicians would need to complete a manual audit back to the original factory if a given series of parts were found to be defective.