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Southwest and Revolutionary Strategies

Southwest and Revolutionary Strategies. BM499 Strategic Management David J. Bryce. October 8, 2002. COST ADVANTAGE AT SOUTHWEST. “Airlines don’t have revenue problems, they have cost problems.” Southwest. Conventional Strategy: Meals, pre-assigned seats, membership in airline

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Southwest and Revolutionary Strategies

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  1. Southwest and Revolutionary Strategies BM499 Strategic Management David J. Bryce October 8, 2002

  2. COST 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. Human Resource Mgmt. Sales/Marketing Operations • 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.) • 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

  3. THE RELATIONSHIP BETWEEN PRICE AND COSTEXPERIENCE CURVES(COMPANY PROFITABILITY) Cost/Unit (Constant Dollars) Industry Price A B C Cost Accumulated Experience (units of experience) • Different companies within an industry will have similar prices but will have accumulated different amounts of experience Predictable Unit Cost Differences Predictable Profitability Differences

  4. THE IMPORTANCE OF RELATIVE 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 High Profitability Low Low High Relative Accumulated Experience (Relative Market Share) Relative market share may be an indicator of relative long-term profitability

  5. 1992 Profitability and Relative RPM Share Southwest American Continental United Northwest USAir Delta TWA

  6. Southwest’s Experience Curve 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)

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