Monday, April 30, 2012

In Conclusion...

Southwest stood out to us as a company with "positive deviance." It has a reputation for providing a better flying experience at a lower cost, and its been profitable every year since 1973. (Something no other airline can say.) Over the past several weeks, we have analyzed several aspects of Southwest as a company. Our initial research allowed us to develop the hypothesis restated below:

Southwest is a fun place to work that provides a great service at a lower cost because of the branding, internal culture, innovative ideas, and their competitive advantages. These things stem off the internal culture of the company. We propose that Southwest Airlines has a strong focus on internal culture and a want for customers to experience the same positive culture that their employees get to experience. We believe that this focus on internal cultural helps the employees offer great customer service.

Further research has allowed us to validate the hypothesis.

There are several takeaways from our findings. First, we recognize the company started out as a solution to a problem of flights being too expensive. From the beginning, they protected their employees and gave them a voice in company operations. This is a practice that still stands today.
The leader of the company has developed such a strong culture that emphasizes that the employees come first. Having happy employees, makes them work harder, and in the end, makes Southwest successful. Southwest has a mixture of external strategies through employees and internal strategies focusing on the future of the company and service differentiation.
Southwest brands itself to employees, customers, and investors. They all play off of each other with the fundamental philosophy that employees come first and customers come respectfully second.
In conclusion, our hypothesis proves to be correct. However, we have thought of some ways that Southwest can continue to improve itself. We ran a survey of college students, and from it found some interesting recommendations. People want more locations and destinations, assigned seats, a stronger focus on efficiency, and updated planes. Also, we think it could be beneficial to link up with third-party vendors such as Kayak, Travelocity, etc. However, they would need to run a cost-benefit analysis.

We aren't the only people who were curious what makes Southwest such a successful company. Here's a CBS broadcast that sums up our hypothesis, research, and conclusions.

Student Survey Results

Link to Survey

It is important to note that students surveyed likely approached the questions solely from the attitude of a customer, not a potential employee.

Sources Used throughout the Entire Blog:

What's in a Brand?

One of the most important things a company can do to market itself is creating a "brand".  A brand is a promise from the company to its customers to deliver value consistently over time.  In the case of Southwest, the company brands itself to a host of parties including: employees, customers, and investors.  Southwest's success depends on its ability to successfully brand itself to these three parties, all of which are necessary to keep it running.  Because their executives are aware of this, they spend a significant amount of capital making sure that they are being branded as positively and efficiently as possible.

We know that Southwest has become synonymous with happy employees.  It has already been noted that Southwest accepts fewer than 3% of its applicants for jobs.  It has become one of the most highly sought after organizations for workers.  The reason for this is that the foundation of Southwest's corporate message is that employees always come first within the company.  This is a very unique message that is neither practiced nor preached by many other organizations.  Instead, the majority of businesses understandably put the customers' desires above all else.  Southwest's belief is that this focus on the satisfaction of its employees has a trickle down effect throughout the company.  By prioritizing employees, Southwest also empowers them to further help the company in unconventional ways.  Most of the time, this is reflected in customer service that is characterized as above and beyond, but it also extends to innovation, as well.

Even though the company line is that employees always come first within the company, the end game is really that the customers come first.  Southwest is purely going through an extra step to get there.  Accompanying every promise made to Southwest employees that their needs will be put first, is a return promise that employees will deliver "positively outrageous service" in a manner consistent with the "Southwest spirit".  Those terms embody what employees are expected to deliver and how they're expected to deliver it.  In other words, Southwest wanted its employees to be branded to customers as the best and friendliest in the business.  However, the "how" means nothing without a "what".  Southwest's offering (and the backbone of their brand) is a pledge to provide safe, affordable, reliable, timely, courteous, and efficient air transportation.  As has been previously discussed, they are most often separated from other airlines on the basis of affordability.  This pledge, in conjunction with the value added by the helpfulness of employees creates the brand that Southwest markets to its customers.

Finally, the brand image that Southwest wishes to convey to its shareholders is one of growth and superior financial strength.  Despite being in an industry that has taken it on the chin for the last decade or so, Southwest has continued to look for growth opportunities.  In 2011, the company acquired AirTran Airways effectively increasing their fleet of planes by 20%.  Southwest also made a purchase of 150 new state of the art planes in 2011, signaling their ambition to grow in a market that has seen stagnant growth and margins turn negative.  The reason Southwest is able to grow in this climate for airlines is because of their uniquely profitable operations.  CEO Gary Kelly notes in his 2011 letter to shareholders that while "many U.S. airlines succumbed to the challenges by either ceasing operations or reorganizing through bankruptcy, Southwest Airlines, in stark contrast, prevailed."  The ability to turn a profit while so many competitors are merely struggling to survive is something that a company can hang its hat on.  Its also a great way for a company to brand itself to potential investors.

All of this talk about branding can be related to the idea of identity.  When a company is determining what they want their brand to be, the number one question it must ask is what their identity is.  Who are we, what do we do, and how do we do it?  When they have answers to those questions, they have the answer to what their identity is, and when they know that, they aren't far away from creating their brand image.  The hope for every company is that its brand will instill an identification-based trust in its customers.  Identification-based trust is defined as a mutual understanding of each other's intentions and appreciation of the other's wants and desires.  Essentially, this means that a Southwest customer trusts that Southwest will dutifully acknowledge their promise to provide the highest all around quality air transportation in the business.  This trust is directly reliant on the brand that Southwest creates and their ability to maintain it.

Southwest's Competitive Advantage

To reach its highly competitive position, Southwest Airlines has focused on four main strategies: being low-cost, employee-driven, future-minded, and differentiated.

As mentioned previously, Southwest is a low-cost airline that focuses on fast, no-frills service. It has never served meals, does not have advanced seat reservations, and flies only Boeing airplanes. These decisions have helped Southwest be flexible in the face of the recent decreases in airplane passengers caused by the 9/11 terrorist attacks and the world economic crisis. The company did not have to make the drastic changes seen in its competitors’ services because it was already operating as a low-cost carrier. While other airlines cut back costs by reducing their services and firing large portions of their employees, Southwest was able to get by with nothing more than pay-cuts - no employee was fired because of economic issues. Although a company-wide pay-cut is nothing to sneeze at, Southwest employees agreed they would rather have their jobs for less pay than try to find work elsewhere. Through this loyalty, Southwest was able to recover much faster than its competitors and maintain its strong customer base.

In the last entry, we discussed Southwest employees in detail, so I will mention them only briefly here. Southwest’s employees are incredibly loyal, and they are a key part of the company’s overall strategy. Having happy employees means a company is more likely to have happy customers. Southwest knows this and uses it to its advantage. The company knows how to use motivation tactics that work for their employees. In line with Douglas McGregor’s Theory Y employees, workers at Southwest enjoy their jobs and see them as a natural part of their lives. They don’t need to be coerced with threats or promises. Southwest’s employees genuinely enjoy their jobs and want to pass that enjoyment on to their customers. This attitude is reflected in Southwest’s employee retention rate of 92.3% (a key indicator that employees love Southwest and want to work there). And an employee who loves their company will make customers love that company, too.

Customers can easily see Southwest’s low-cost, employee-driven strategies, but what they can’t always see is Southwest’s internal strategy. One of the company’s main focuses is on differentiation. This is an interesting strategy choice because differentiation is usually seen in high-price and/or unique product companies (such as BMW or Starbucks). Still, this is one of Southwest’s key choices, and they are making it work.

One of their key differentiation strategies is their Rapid Rewards frequent flyer program. According to their financial statements, Southwest has revamped their system so “...members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and...points do not expire so long as the Rapid Rewards Member has points-earning activity during a 24-month time period.” Many airlines have similar, but much more complicated rewards systems, so Southwest’s emphasis on flexibility separates them from the rest of the pack. They also make use of their Chase® Visa credit card to help their customers earn and redeem points. This system brings in new customers, increases business from existing customers, and strengthens Rapid Rewards partnerships within its various divisions. Southwest has already seen this new rewards plan pay off by meeting and passing all of their expected growth goals. They’ve increased their overall business and given customers what they want. This company excels at being attuned to customer needs - they know that if you give people what they want, they will give you what you want.

Southwest’s other key differentiation strategy is what they call “aggressive promotion.” They take their key messages, put them into easy-to-understand commercials, and let the strategies themselves do the talking.
Here is a commercial from their Bags Fly Free® marketing campaign: 

Southwest sets up all of its strategies in that commercial. It shows its low costs (bags fly free!), emphasis on employees, and its differentiation (even going so far as to call out other airlines for charging baggage fees). This sort of campaign sets the company apart from competitors and makes potential customers aware of Southwest’s unique policies.
The fourth key strategy is Southwest’s focus on its future. Everything it does progresses the company, and every decision is made with long-term benefits in mind. Their recent acquisition of AirTran shows how Southwest is thinking of ways to expand its services and grow its market share. In their Annual Report, Southwest listed the strengths of this integration. “It allows...more low-fare destinations by and diversifying into new markets....” It also “...increases Company’s share of current domestic market share capacity (as measured by available seat miles or passengers.” And “it provides access to near-international leisure markets in the Caribbean and Mexico...and provides firsthand and meaningful insight expansion opportunities.” Essentially, Southwest is working to expand its services, steadily increase its market share, absorb prior competition, and prepare for future growth. These steps will help the company be successful both now and in the future. In the current economy, companies must be more flexible and prepared than ever before, so plans like Southwest’s are essential.
In line with their future-minded goals, Southwest is updating its aircraft fleet to lower costs and increase customer capacities. The company purchased new Boeing 737-800s in the first quarter of 2012. These planes have increased their customer capacity - and more customers of course means access to more profits. Although adding customers means more money, it can also mean more costs. Southwest has prepared for this; 737-800s have better fuel efficiencies than previous models and can reduce unit costs. The planes are also larger, so Southwest can add seats without adding flights. This increased efficiency will help cover fuel costs and contribute to the company’s operating margins. In the 2011 Annual Report, Southwest said these new planes “...will enable Southwest to profitably expand to new destinations and potentially fly to more distant markets such as Hawaii, Alaska, Canada, Mexico, and the Caribbean.”
In addition to these new planes, Southwest has made a deal with Boeing to purchase 150 of their newly designed 737 MAX planes. These new models are more fuel efficient and environmentally friendly. These benefits factor into both Southwest’s low-cost and customer-minded strategies. Fuel efficiencies cut costs, and environmental considerations are essential to stay on the public’s good side. A green company is much more respected than its less environmental competitors.
According to the company, these new planes will allow for replacing “...certain Boeing 737 and/or Boeing 717 aircraft.” Southwest is planning for the inevitable time when their current fleet becmes outdated. By being the first customers for this new aircraft, the company is taking a risk, but it is necessary to stay innovative. They claim that the “...717 aircraft does not fit within [Southwest’s] long-term overall fleet plans,” so they must replace these models with ones that better serve the company’s needs. In spite of these changes, Southwest is maintaining its strategy of having one type of airplane. They keep strictly to their promise of flying only Boeing models. This both serves the company by lowering costs and by showing a consistent face to their customers. Those who fly with Southwest could become disillusioned if the company suddenly changed its aircraft fleet. Customer loyalty is essential in volatile markets, and Southwest won’t risk alienating anyone.
Southwest is a people-oriented company and uses that orientation to leverage its advantages. It cuts costs by having employees who work for a company they love, instead of for a simple paycheck at the end of the week. The company also plans for the future and is not afraid to take the risks necessary to stay ahead of the competition. As seen with their integration of AirTran and the new Boeing planes, Southwest is focused on expanding its services and increasing its market share. They plan far ahead and make sure their plans are sustainable for current and future competitive advantages.

For more information about the 737 MAX purchase, check out this Financial News Network clip: 

And watch this video for a look at the new plane:

Thursday, April 19, 2012

It All Comes From Within

Over the years, Southwest Airlines has been successful in an industry characterized by failures and bankruptcy.  Many may attribute this success to Southwest’s brilliant business plan of identifying the customers you are most capable of serving as well as constantly striving to be the leading low cost option for flying. As previously mentioned, Southwest originally focused its business on providing short point-to-point flights to those who usually drive. However, in-order to persuade these customers from driving, Southwest had to provide a service that was cheap and also reliable. These flights had to be cheap enough that drivers would be willing to spend the extra money; and they needed to be reliable and fast, so commuters could quickly travel without spending the whole day at the airport waiting during long turn-around times. Wanting to have these characteristics is very different than actually having these characteristics. Every airline would want to be cheap, reliable, and fast; however, only Southwest has been able to. So what is it that separates Southwest from the rest? Why is Southwest so successful while everyone else is struggling?

The answer is culture. CULTURE. CULTURE. CULTURE. The greatest competitive advantage any  company can have, is one that can not be copied or stolen. A company may have an elaborate and complex inventory management system that leads to great profitability, but this system can eventually be copied or improved upon and then that company has lost its advantage. Southwest Airlines has a competitive advantage that can not be copied no matter how hard their competitors have tried and will continue to try in the future. As previously mentioned, this success stems from founder Herb Kelleher; and his actions and efforts have ingrained in Southwest a culture that emphasizes the importance of the employee. At Southwest, employees are seen as the airlines “first customers” and passengers as the second. There are many accounts of Herb Kelleher personifying Southwest’s concept of employees come first, such as the time when he learned that mechanics on the graveyard shift could not participate in company picnics. To make up for this, Kelleher organized a 2:00 a.m. barbecue where Kelleher himself and several pilots served as chefs. Another example of Southwest thinking about their employees first, was in response to the attacks of September 11th, 2001. Due to the decreased passenger traffic after the attacks, many airlines laid-off workers; however, Southwest employees were willing to take major pay cuts to avoid lay-offs. Herb Kelleher’s genuine care for his employees leads to the development of a work atmosphere that is known for being fun, friendly, and full of creativity. This happy and stress free atmosphere has led to happy employees who work hard for the company, and these hard-working employees have led to immense customer satisfaction and financial profitability.

Southwest Employees Really Love Their Company:

Southwest is also now more than just a fun and friendly place to work, where there is an emphasis on shared goals, shared knowledge, and mutual respect.  An example of this culture of sharing goals is shown in how Southwest monitors performance. Many companies measure performance by functional area to establish functional accountability. However, Southwest believes that functional accountability leads to department in-fighting where departments blame each other for company failures. Southwest instead utilizes team metrics to monitor performance rather than functional metrics. An example of a team metric at Southwest would be the percentage of on-time departures. Departures involve the efforts of  multiple departments, therefore all departments must work together to to improve the percentage of on-time departures. This emphasis on teams leads to a more cohesive company where everyone succeeds together and struggles together, rather than a company plagued by infighting that will eventually lead to failure. Many companies have tried to implement programs that emphasize company culture; however, these are just programs, and it takes more than just a program to create a strong company culture. Southwest is a prime example of a company whose culture has grown with the company since its inception, and is constantly reinforced in its daily operations. A company’s culture starts at the top, and only if top management fully buys into developing a unique and successful culture, can it truly exist. Herb Kelleher and other leaders at Southwest Airlines have been working and continue to work to develop a unique and fun culture at Southwest that is then expressed to their customers.

Making Flying More Fun:

Current CEO, Gary Kelly is following in Kelleher’s steps by continuing to stress the significance of a company culture that puts the employees first. He has said, “Our people are our single greatest strength and most enduring competitive advantage.” Southwest’s great treatment of its employees has led to employees going above and beyond the call of duty to provide superior service to customers. Happy employees are more willing to go out of their way to help customers and provide services to customers, that are not exactly in their job description. Southwest provides such a great working culture for their employees, so that employees are able to devote all their attention to customers instead of trying to better their own working conditions. Happy workers make good workers, and good workers lead to success. Southwest is quite successful.

Southwest's strong leadership is key to their success. In studies of organizational behavior, strong leadership has been positively correlated with financial success. Kelly and Kelleher are both prime examples of what it takes to be a strong leader; they have and had strong visions and were able to motivate those around them to follow these visions towards success. This strong leadership has led to very high levels of job satisfaction throughout the organization which has also been positively correlated to financial success. This awesome inner culture of Southwest has many characteristics that have been proven to lead to financial success, and has been one of the many factors that have been contributing to the success of Southwest over the years.

Saturday, April 14, 2012

Often Imitated, Never Duplicated

According to the U.S. Department of Transportation (a pretty reliable source), Southwest is the United States' most successful low fare, high-frequency, point-to-point carrier. They operate over 3,300 flights a day, and are the largest U.S. carrier based on domestic passengers boarded as of March 31, 2011. But how did Southwest reach such a high level of success? Well, it all started with an innovative idea...

Southwest Airlines was created in 1966 when Herb Kelleher and Rollin King famously drew up a business plan on a cocktail napkin. In the early days of air travel the U.S. government regulated prices, keeping them high so to encourage airline companies to invest in the latest technology. The problem was that flights were so expensive only the wealthy could afford to fly. The planes were big and fancy, but they were also empty. In creating Southwest, Herb Kelleher and Rollin King hoped to create a company that would demonstrate what the airline industry could be if there were no restraint of federal price regulations. Southwest was able to do this because it didn't cross state borders. They only flew within Texas, and therefore didn't have to adhere to the federally mandated prices. Southwest was able to dramatically reduce fares and became an immediate hit.

Southwest has been able to continue its success in the same way it started, with great service at a lower price.  They strategically enter regions by purchasing terminal space in airports that offer it for less. They then steal the ticket bookings away from their competitors with much lower fares. Southwest flies "point to point", unlike the hub-and spoke model of most other airlines. They also fly only one plane, the Boeing 737, enabling their pilots to fly any plane at any time. They serves no meals, only snacks. They charge no fees to change tickets and have no assigned seats. 

Many traditional airline companies have tried to copy Southwest’s success by creating discount fleets, but have failed miserably as it is too out of line with the core of their business. Still, some companies, such as JetBlue, have entered the discount airline industry and achieved moderate success. However they may try, no airline has been able to achieve the success of Southwest Airlines. Why? Though Southwest is often imitated, its culture cannot be duplicated.

In Southwest’s early days they ran into some financial trouble. They were faced the choice of either selling one of its planes or laying off some of its employees. They made an unconventional, but powerful choice and sold the plane. In return, they asked their employees to cut gate turn-arounds down to 15 minutes. The employees met this goal, and established an executive-employee relationship that lives on today. This relates to the organizational behavior concept of giving employees more autonomy. If employees are given more autonomy, they will be happier even when facing an undesirable situation. Employees with autonomy have greater job satisfaction and less absenteeism. This is important because Kelleher attributes the airlines success to its employees. He says he “simply hires the best people, treats them with respect, and gives them the freedom to make decisions and to have fun just being themselves.” Southwest does have its pick of the best employees. In 2010, Southwest received 143,143 resumes and hired just 2,188 new employees. Southwest’s position is that the happiest worker creates the happiest customer, leading both to stick around with Southwest. Happier workers work harder and stay with the company. The employees will likely be more conscientious and have a vested interest in seeing the company succeed. This culture leads employees to not only give their best efforts, but work to improve. Later blog posts will explore this culture on an in depth level, but it all started with the great ideas of Herb Kelleher and Rollin King on a cocktail napkin. Watch the video below to hear from “Luv Herb” himself why Southwest has been able to be so successful.

Want to check out Southwest but scared to fly? 

Wednesday, April 11, 2012

It’s a song, a smile, a cheer, and the LUV.

Southwest Airlines has been able to stay profitable in the past few years while traditional airlines are majorly struggling. The financials are amazing. However, Southwest is so much more than just a profitable organization. We are setting out over the next few weeks to see what it is that makes Southwest so successful. Why is the airline positively deviant in such a crumbling, bankruptcy-ridden industry? Southwest is different. There is not a simpler way to put it. Watch below and get excited to want to fly again.

When people think of Southwest they think about fast, cheap, short flights. If they are frequent travelers, they are quick to point out that checking bags is free. People might even go on to sing a little jingle a flight attendant has sung on one of their flights. That’s right people-Southwest flight attendants often like to spice up the journey with a couple little jingles. No more stuffy, overheard voice explaining “there are two side doors in the back…,” we all know the rest. What if this woman was your flight attendant?
You remember what she said, don’t you? You are intrigued. Well, so are we. We believe that Southwest is successful because of its brand image, internal culture, innovative overall idea, and its maintained competitive advantage. The branding, or external appeal, makes people want to fly with Southwest and invest. The corporate culture allows employees to have fun and in return make the customers happy. They operate with an innovative idea of being the airline industry’s  low-cost leader. Finally, it makes sure no other airline will be successful in trying to mimic the airline.

A Quick Glimpse to the Past:
The Dallas based low-cost airline was established in 1971 by Rollin King and Herb Kelleher and is currently the largest airlines in the US in regards to domestic passengers carried. They operate more than 3,300 flights a day, to 97 destinations in 42 states. These trips are quick and the airline prides itself on the quick turnaround time at the gate.
        The President and CEO is Gary C. Kelly. The airline’s employees are unionized and, as evidenced, extremely entertaining.  Recently the airline has completed several acquisitions in order to increase revenue and raise the number of destinations available.
        The company thrives on its innovative and distinctive marketing campaigns. Throughout the years, Southwest has adopted the LUV mentality. Originally it came from the fact that the airline first used planes on the LUV field. However, it has stuck around. There are several different reasons for this, but all focus around the idea of a relaxed and easy way to travel. People will LUV Southwest.

Most recently, Southwest has focused on passengers’ “want to get away.” In a bad situation, not having fun, or you broke your roommate’s TV? Get away. Oh-and please take Southwest.

Since its founding, Southwest released statements have shared a very clear message.
Mission "The mission of Southwest Airline is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride and Company Spirit"- Gary Kelly, CEO Southwest Airlines
"Our people are our single greatest strength and most enduring longterm competitive advantage." -Gary Kelly, CEO Southwest Airlines.

We know what they are saying and look forward to find out if it is true.

We are excited to get to know Southwest Airlines in the coming weeks! Stay tuned!

Southwest is a fun place to work that provides a great service at a lower cost because of the branding, internal culture, innovative ideas, and their competitive advantages. These things stem off the internal culture of the company. We propose that Southwest Airlines has a strong f
ocus on internal culture and a want for customers to experience the same positive culture that their employees get to experience. We believe that this focus on internal cultural helps the employees offer great customer service. 

A happy employee makes happy customers.