Value Chain - Strategic Management Tool
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Question 1) – Value Chain
The concept of the value chain is used to describe and analyse the core activities undertaken by an organisation to determine which elements add strategic value and competitive advantage to the operation. The framework was first introduced by Porter in 1985 and is used to highlight how a product or service attains and adds value and profit margin as it passes through the organisation and on to consumers. The framework is shown below in figure 1:-
Figure 1 source: Proven Models, Porter. E (1985)
Porter identified five core cost-driven activities which underpin the supporting activities that are necessary for an organisation and provide value in an alternative manner, (Mitchell et al, 2009). Given the robust infrastructure of Southwest Airlines it is interesting to consider where value is derived and how Southwest can further leverage their activities and position themselves in the marketplace.
Analysis of the approach of Southwest with regard to their primary activities demonstrates that the cost structure of Southwest is tightly controlled and maintained on constricted margins. Overheads are high, (fuel, maintenance and labour), yet Southwest control these by operating a single-unit fleet which is relatively young and thus requires less maintenance. Further core advantages include strategic fuel purchase as commodity trades, (they short the price, www.southwest.com, 2010), the introduction of enhanced aviation technology to save fuel and use of technology to increase passenger throughput efficiency and reduce processing time. Perhaps the most significant strategic advantage is their operation of point-to-point flights into secondary airports with lower taxes as opposed to hub and spoke to primary sites, enabling them to increase the average daily utilisation of the fleet and reduce the turnaround time on the ground. The speed of supporting operations is instrumental in their efficiency and consequentially in their profitability.
Southwest's operations are not the only unique approach to strategy. The company is also known for their irreverence and humorous approach to sales and marketing, perhaps best surmised as “simple, fun and profitable” (www.southwest.com). This has been demonstrated in a tradition of amusing and memorable advertisements and a corporate culture in which employees are proud to work for Southwest and will do their utmost to deliver exceptional customer service. Examples of this include the unique livery of the planes which are used as advertising for other partner companies such as Seaworld, (www.reuters.com, 2010). The use of reciprocal advertising in this manner is a unique and cost-effect approach to raising visibility and increasing revenue streams from less obvious sources than straightforward marketing. Similarly the leverage of social media marketing has enabled southwest to adopt a fresh approach to adding value to their organisation.
Considering their support operations such as human resources and procurement, Southwest have a robust policy of procurement, particularly with regard to fuel purchase and technological advances. They are able to leverage their size and the no-nonsense approach to procurement and align it with the strategic objectives of the business to ensure that Southwest remain as profitable as possible even when externalities contrive to make operating circumstances more challenging. At their inception Southwest set out clear aims and objectives which they have adhered to as the organisation has grown. This strategy has enabled them to focus on delivering differentiated service which has seen them become one of the most profitable airlines operating in the US, (www.wsj.com, 2010).
Question 2) – Strategic Management Tool
There can be little doubt that Southwest Airlines are one of the most successful airlines in the United States, (Stodder, 2007). Whether measuring their unbroken profits, their customer service record or their reputation for innovation, Southwest have been breaking barriers and records since their inception in 1971. At the heart of their success is their clear management vision and strategy,which shapes the approach of Southwest and their response to the competitve environment, (Coyne and Balakrishnan, 2006:158). Analysing the approch and attitude of Southwest Airlines offers an insight into their success, and one particular framework which is valuable in these circumstances is that of Porters Five Forces. Originally discussed by Porter in 1979, the most recent itteration of the theory was discussed in 2008 and can be seen in figure 1 below:-
Figure 1 – Porters' Five Forces, Source HBR Jan 2008
The framework analyses the economic potential for competitive rivalry and the opportunity for profitability; hence an attractive market is one where there is the potential to make considerable profit, and an unattractive market is the result of circumstances which result in near perfect competition. Of course, an attractive market does not guarantee profitability as that is entirely dependent on the strategic approach of the individual organisation.
Turning now to apply this framework of analysis to Southwest Airlines (SWA) with reference to the case study. As Southwest has chosen to adopt a very different approach than their rivals to grow their business and develop and synergistic relationship with their suppliers, the bargaining power of suppliers, (most notably Boeing) is quite weak. As Southwest only fly one type of aeroplane they do not suffer from the difficulties of multiple supplier management and shortages of spares and parts for maintenance. Moreover the size of Southwest with regard to their peripherals (for example on-board snacks), gives Southwest considerable power over their suppliers as these products are generic and can be substituted by Southwest with ease. The bargaining power of customers has been reduced by recent economic difficulties, (www.southwest.com, 2010). Customers have always been free to select the most competitive option for themselves, but as economic circumstances tighten increasing numbers of business travellers are opting to reduce expenses by utilising low-cost airlines such as Southwest, (www.reuters.com, 2010). In consequence Southwest has profited from these difficulties and the bargaining power of customers has been constricted.
The threat of new entrants has always been curtailed within the airline industry due to the extortionate barriers to entry, stringent regulation and capital intensive running costs. Indeed SWA were originally considered something of a joke when they launched in 1971 with one aeroplane, (www.southwest.com) and it was only their unique strategy which differentiated them and enabled them to grow. Current financial constraints thus reduces the threat of new entrants, (unless backed by a major investor), and it can be regarded as the least of their concerns, although they do recognise that some smaller firms have tried to emulate their business model. Finally, the threat of substitute products is perhaps the most significant concern. This is likely to arise not only in the form of other airlines, but also alternative modes of travel or even the decision not to travel at all, particularly with the advent of media technology and video conferencing for business users. Thus, Southwest must focus on ensuring that they continue to deliver exceptional service and exceed the expectations of their customers to remain both successful and profitable in a highly competitive environment.
Coyne, K.P. and Balakrishnan S (2006), Bringing discipline to strategy, The McKinsey Quarterly, No.4
Mitchell, J., Coles, C., and Keane, J. (2009) Upgrading along value chains: Strategies for poverty reduction in Latin America London, UK: COPLA Global
Porter, M.E. (1979) How Competitive Forces Shape Strategy, Harvard business Review, March/April 1979
Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance Prentice Hall
Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard business Review, January 2008
Seetharaman (October 21, 2009),"Southwest to Start Flying to Panama City, Florida". Reuters. http://www.reuters.com/article/companyNews/idUSN2150675320091021. Retrieved 14th Sep 2010
Stodder (2007). "Making people count: Southwest Airlines - Company Profile". Entrepreneur. http://findarticles.com/p/articles/mi_m0DTI/is_n9_v25/ai_19892335. Retrieved 14th Sep 2010
www.southwest.com, Retrieved 14th Sep 2010
www.wsj.com Retrieved 14th Sep 2010
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