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3 5556 025 410 200
Proceedings of the 36th Annual MeetingTransportation Research Forum
Volumes
1 and 2
November 3-5 , 1994
Daytona Beach , Florida
Published and Distributed by :
Transportation Research Forum1730 North Lynn Street , Suite 502
Arlington , VA 22209
603
Beyond the " Southwest Sensation :" A Resource -BasedStrategic Analysis of Southwest Airlines 'Competitive Advantage and it
s Implications
James A. Kling * and Ken A.
Smith **
ABSTRACT
The phenomenon of
Southwest Airlines and its positive performance in comparison to
other U.S. passenger airlines has generated considerable publicity and attention . This paper goesbeyond simply relating th
e
particulars of
the " Southwest Sensation " and attempts to determine
the
underlying reasons for
the
airline's success . The analysis uses the
strategic management
derived resource -based theory of
the firm asa framework to examine the performance of
Southwest Airlines . Specifically , the paper addresses the
sustainability of
Southwest'scompetitive advantage , th
e
potential for competitor duplication of
its strategies , and the
implications for carriers in the U.S. airline industry . The paper discusses the human , physical ,
and organizational resource bases which Southwest uniquely possesses and appear to be
responsible for
its
above average performance .. Significantly , the authors conclude thatSouthwest's resource base , and thus its successful strategies , will not be easily duplicated b
y
other airline firms . In conclusion , Southwest appears to have the
underlying strength to sustain
its competitive advantage and continue driving fundamental change upon the U.S. airline
industry .
INTRODUCTION
From a management perspective , any firm that conspicuously and positively sets itselfapart from it
s competition in profits , customer service , and strategic direction deserves study andanalysis . In the airline industry , th
e
phenomenon of
Southwest Airlines and its anomalous
performance in recent years has
generated both popular media attention and
interest frompractitioners and academicians . The " Southwest Sensation "may have hit its recent peak in the
spring of
1994 , when it announced record annual profits for
1993 -- its twenty -first consecutive
year of
profitability , achieved the
industry's best "Airline Quality Rating " by
the
NationalInstitute for Aviation Research , and it
s founder and leader appeared on
the cover of
Fortunemagazine under th
e
headline : " Is Herb Kelleher America's Best CEO ? " Beyond the
media
sensation , the
Southwest Airlines story generates some very interesting questions and potentiallyimportant management implications . Is Southwest's performance advantage significant ? Whatstrategies and tactics separate Southwest from other airlines ? These questions have beenaddressed thoroughly b
y
the popular press and will be reviewed briefly in this paper . Moreimportantly from a
n airline management perspective are questions regarding the sustainability
of
Southwest's competitive advantage and whether other airlines can
and should try to emulate
604
Southwest's operations . In order to properly address these latter questions it is necessary toanalyze Southwest's performance and management techniques in a more sophisticated and
theoretical context .
The purpose of this paper is to use the strategic management derived resource -basedtheory of the firm as a framework to examine the performance of Southwest Airlines ascompared to the rest of th
e
U.S. airline industry . The resource -based theory of the
firm focuses
on
the idiosyncratic characteristics of
competing firms and how
these characteristics contribute
to competitive advantage (Barney , 1991 ) . Two underlying assumptions are key to the resourcebased view : ( 1 ) firms in an industry are different with respect to th
e
strategic resources they
control ; and ( 2 ) these resources are not perfectly mobile across firms with the result thatdifferences between firms ca
n
be long lasting . Accordingly , the
focus is on the differencesbetween firms , particularly in terms o
fthe resources a
t
their disposal . By
analyzing Southwest's
resource base under this theoretical perspective , this paper attempts to identify the true source
of
Southwest's competitive advantage , the
sustainability of
that advantage , and theappropriateness o
f
competitor attempts at duplication .
THE " SOUTHWEST SENSATION "
Before probing into the firm's underlying resource base , a brief review of
the elements
of
the "Southwest Sensation " is in order . In management jargon , the firm appears to enjoy a
" competitive advantage " over its rivals . According to Michael Porter , " Competitive advantagegrows fundamentally out o
f
value a firm is able to create for
its buyers that exceeds the
cost of
creating it " (1985 ) . A firm with a competitive advantage provides greater value to its customersand should achieve superior performance (profits ) compared to other firms in its industry .
Competitive advantage may sometimes be
subtle and difficult to illustrate , but in the case of
Southwest Airlines it is remarkably clear . The advantage manifests itself in the form of higher
profits , low operating costs , and superior customer service quality .
Southwest ,now the
sixth largest U.S. airline based on
the
number of
passengers carried ,
is noted for its remarkable financial performance in an industry racked by bankruptcies and red
ink in recent years . As
can be
observed in Table 1 , Southwest's profitability clearlydistinguishes it from other major U.S. carriers . For the past three years , Southwest has been
the
industry's profit leader , most recently earning $ 161 million in 1993 while most airlines
continued to report losses , and it was the only airline that was profitable during the
1990 to 1993
time period .
One key to this profit performance is Southwest's low
cost structure , and everycompeting airline manager has taken note o
f
this well publicized aspect of
the "SouthwestSensation . " In 1992 , Southwest's cost per available seat mile equalled 7 cents while theindustry average was 9 cents (HBS , 1993 ) . A
s
can be observed in Table 2 , the airline has the
lowest per -mile seat costs in the
industry despite also having the shortest average flights . This
is remarkable because research has consistently demonstrated an inverse relationship between
flight length and per -mile operating costs (Bailey , Graham , and Kaplan , 1985 ) . Importantly ,
Southwest's cost advantage does not appear to be eroding ; its costs increased at approximately
the same rate as
the industry average between 1988 and 1992 , allowing them to maintain this
605
TABLE 1
U.S. Airlines ' System Net Profit (Loss ) in Millions of Dollars
Airline1990 1
199191 1992*
AmericanUnited
Delta
USAirNorthwest
SouthwestContinentalTWAAmerica WestAlaska Air
(78 )
96
(154 )
(411)( 10)
47
(1237 )
(238)
(75 )14
( 165 )
(335 )
(239 )
(260 )( 3)
27
(341)
35
(222 )11
Cumulative
1993 1990-1993
(274) (314 ) (831 )
(417 ) (50) (706 )
(569) (226 ) (1188 )
(590) (393) (1654 )(275 ) (115 ) (403 )59 165 298
(299 ) NM (1877 )(403 ) NM (606 )(132 ) 37 (392 )(77 ) (45 ) (97)
* Does not include FASB 106
special accounting charges
NM Net profit figures for
Continental and TWA in 1993 are notmeaningful due to credits
resulting from their emergence from bankruptcy . Note that both airlines had 1993 operatinglosses .
Sources : U.S. D.O.T. , Air Transport World World Airline Report , June 1994
aspect of
their competitive advantage (Kling , 1993 ) . Simplistic explanations of Southwest's low
cost structure do not seem to apply ; Southwest has a unionized work -force , the average pay of
its employees is closest to American Airlines , and at 7.3 years its fleet of planes is the youngest
of
all
themajor airlines (Bowen and Headley , 1994 ) . What is responsible for
Southwest's low
cost structure ? As
will be discussed shortly , it appears to result from a resource base thatdiffers from other airlines .
In consideration of
its very low cost structure and the poor customer service records of
former low
cost carriers such as People Express , a surprising element of the " Southwest
Sensation " is its stellar customer service reputation . Southwest captured in both 1992 and 1993
the industry's so - called customer service triple crown --best on -time performance ,
lowest rate of
lost bags , and fewest passenger complaints . A summary of airlines ' performance
in these three areas can be
seen in Table 3 . A more sophisticated analysis of nineteen customerservice and quality factors is conducted annually b
y
National Institute for
Aviation Research at
Wichita State University , and in 1993 Southwest displaced American as
the
U.S. airline with thebest overall airline quality rating score (Bowen and Headley , 1994 ) .
606
TABLE 2
Selected Operational Data for the U.S. Airline Industry -- 1992
Food ExpenseCost PerASM
FlightLength *
Average
$ WageAirline per 100 RPM *
American
United
Delta
US AirNorthwestSouthwest
Continental
TWAAmerican WestAlaska Air
8.93 c
9.60
9.44
10.83
9.09
7.03
8.39
9.04
7.10
10.50
799 mi.800
625
496
699
375
*774
710
618
624
$45,80154,380
63,078
60,970
58,105
44,035
34,205
57,876
31,687
45,808
55.6 C
45.356.8
70.2
40.7
2.6
56.5
39.130.1
98.0
Average 9.0 652 48,595 49.5
*Domestic , 2nd Quarter Data
ASM = Available Seat Miles , RPM =Revenue Passenger Miles
Sources : HBS (1993 ) and U.S. D.O.T. RSPA Form 41
TABLE 3
Selected Service Quality Data for
the U.S. Airline Industry -- 1993
On - Time Bags Lost per 1000 Complaints perPercentage Passengers 100,000 PassengersAirline
American
United
Delta
US AirNorthwestSouthwest
Continental
TWAAmerican WestAlaska Air
80.8 %
78.4
76.7
82.9
85.9
89.5
79.0
82.5
85.5
84.5
5.68
6.415.66
5.835.84
3.78
6.075.02
4.39
5.74
1.05
.84
.50.66
.62
.18
1.62
1.92
1.11
.33
Average 82.3 % 5.44 .88
Source : U.S. D.O.T. Air Travel Consumer Reports
607
Southwest's service reputation is not a new phenomenon ; since it began in 1971
the
airline has offered low , flexible fares while earning a reputation with passengers forfrequent , reliable service and friendly employees . Southwest's success and popularity is n
o
longer in question ; its annual growth rate has been around 20% in recent years , and a 1993
study by
the
U.S. Department of Transportation found that Southwest now has the highest totalmarket share in the top 100 U.S. city -pair markets (Donoghue , 1993 ) . While the airline hasroots and a strong presence in Texas and th
e
southwest U.S. , its current size (sales $2.3 billion )
and reach (over 45 cities including such northern destinations as Chicago , Cleveland , Detroit ,
and Baltimore ) make Southwest a legitimate major player in the U.S. airline industry . Theimplication --Southwest's edge in customer service quality is not due to some geographic fluke
or
its
small size ; it must be the result of
real differences between Southwest and other airlines .
In summary , Southwest has succeeded in providing high quality service ata low
cost .
In a 1988 speech , Kelleher quoted airline executive Michael Levine , now at Northwest :
" It's very easy to be expensive and good . And its very easy to be cheap
and bad . Southwest Airlines walks the biggest tightrope in the Americanairline industry because it's inexpensive and excellent at the same time . "
This favorable competitive position exists because Southwest’s management developed ,
implemented , and sustained a strategy designed to achieve a competitive advantage .
Interestingly , this strategy has remained remarkably consistent through both deregulation andindustry consolidation , and it was well publicized . As summarized in Table 4 , the airline'sstrategies and tactics have been laid out in speeches b
yits CEO , Herb Kelleher , described in its
annual reports , scrutinized in industry publications , and detailed in the general business press
(HBS 1993 ; Henderson , 1991 ; Kelleher , 1988 ; Kling , 1993 ; O'Brian , 1992 , SouthwestAirlines , 1993 ) . Henderson (1991 ) in Ai
r
Transport World describes the firm's strategy as
" low -fare , high frequency , short -haul , point - to -point , single class , non - interlining , and ... funloving . "
Fundamentally , Southwest's strategy entails building two separate but complementarybases o
f
competitive advantage : high service quality and very low cost as outlined on
the nextpage . In subsequent sections w
e
argue that the
success and sustainability of
Southwest'scompetitive advantage a
re functions of
the
company's resource base .
SOUTHWEST'S RESOURCE BASE
It is evident that Southwest's strategy has been effective . What is not so readily apparent
is why other airlines have not attempted to imitate Southwest's strategy given the fact that the
strategy has been widely publicized . That others have not attempted to replicate Southwest's
success suggests that something underlies Southwest's strategy that others are not able to
duplicate . We believe it is Southwest's resource base .
608
TABLE 4
Summary of Southwest's Operational Strategies and Tactics
Service excellence has been built on the following:
Very high frequency of service on short distance , frequently traveled routes
Convenience and accessibility provided by locating at smaller , close - in , and lesscongested airports ;
Superior customer relations achieved through high employee morale and a " fun "organizational climate ; and
Low , unrestricted fares, allowing passengers to make plans on short noticewithout paying the high , full fares charged by other airlines.
To provide high service quality at a low price , Southwest has developed a very
low
cost structure built upon the
following elements :
Only one type of
aircraft in its fleet --Boeing 737s ; (Compared to an average of
6.6 types for othermajor carriers ) ;
High utilization of
aircraft ( SW gate " Turn -around " equals 20minutes , compared
to the industry average of
55 minutes ) ;
High labor productivity ;
Avoidance of
traditional hubs and their associated operational costs ;;
Minimal food , reservation , baggage handling , and other overhead expenses ; and
Modest , controlled growth to avoid excessive debt , resulting in the only
Investment grade credit rating in the
U.S. airline industry .
609
The resources of a firm include such things as the assets , capabilities , organizationalprocesses , information and knowledge that enable th
e
firm to conceive of
and implement
strategies that improve its efficiency and effectiveness (Daft , 1983 ;Wernerfelt , 1984 ) . Barney
(1991 ) has classified firm resources into three general categories . First are a firm's physical
capital resources , composed of
the
physical technology used in the firm , its plant and equipment ,
its geographic location and its access to raw
materials (Williamson , 1975 ) . Second are
the
firm's human capital resources . These include the
training , experience , judgement , intelligence ,
relationships and
insight of
individual managers and
workers in a firm (Becker , 1964 ) . Thirdare the firm's organizational capital resources . These include th
e
firm's formal reporting
structure , its formal and informal planning , controlling , and coordinating systems , and
the
informal relationships among groups within a firm and between a firm and those in its
environment ( Tomer , 1987 ) . In the
following paragraphs , we enumerate the resources uponwhich Southwest has built its competitive strategy .
Observing Southwest's physical capital resources in comparison to those of
its
competitors , one is struck by
the
resources that Southwest does not have . Southwest , aloneamong major airlines , has chosen not to invest in a hub -and -spoke system and th
e
physical
terminal infrastructure that is required to support such a system . Southwest does not have an
investment in a computerized reservation system , nor does it provide meal service . The result
is lower costs , especially those associated with ground terminal operations . Airline consultantMorten Beyer has calculated that American Airlines ' pe
r
passenger station (terminal related )
costs equal $24.46 , while Southwest's station costs are only $ 7.13 per
passenger (Donoghue ,
1993 ) . In contrast to other airlines , Southwest has invested in resources which allow it to
efficiently conduct its primary business of point - to -point transportation . Southwest's 160 planes
are all Boeing 737's , and this fleet commonality is a significant factor in achieving high aircraft
utilization rates and good on -time service . Southwest's concern about its passengers '
convenience has also led
it to develop facilities at smaller , close - in airports such as Love Field
in Dallas , Houston Hobby , Chicago Midway ,
and Detroit's City Airport .
Among Southwest's most important human capital resources are Herb Kelleher (CEO )and h
is top management team . Kelleher has provided the company with vision and strategicleadership since it began service in 1971. Further , topmanagement hasmanaged th
e
company's
human resources strategically . The company has built psychological ownership of the company
on the part of employees through optional profit sharing programs which totalled 8.2 % of
employee wages in 1992 , and stock options ; 10 % of
the company is now owned by
employees
(HBS , 1993 ) . Although Southwest employees are mostly unionized , workers are trained for
multiple jobs and flexibility is a requirement ; pilots routinely help flight attendants and baggage
handlers to finish tasks so that planes can be
turned around quickly . As a result , Southwest nowbenefits from a skilled , loyal , motivated , and productive work - force . A recent quote b
y
Gary
Barton , a Southwest Vice President , sums up the commitment of Southwest's human resources :
"Our employees recognize their future is tied very closely to the
fortunes of
Southwest "
(Velocci , 1993 ) .
Southwest also has several organizational capital resources that are essential to its overall
strategy . First is its reputation for
delivering high quality service , a reputation that reflectsSouthwest's distinctive definition o
f
service quality . While many airlines define service quality
610
in terms of such ancillary services as in -flight food service and lounges for
frequent fliers ,
Southwest defines service quality in transportation -related terms such as frequency of flights and
on - time performance . Second , while Southwest is structured asa fairly traditional functional
hierarchy , emphasis is placed on open communications both vertically and horizontally across
the
company . This open communication contributes to employee morale and psychological
ownership . Third , Southwest has emphasized the
development ofa " fun " culture , with the
expectation that fun
translates into friendly service . Thus , a culture committee was formed to
make sure that Southwest's " small family and spirit " was maintained as
the company grew
(HBS , 1993 ) . Together , Southwest's organization and culture keep the organization focused on
providing convenient and affordable transportation to its customers .
Importantly , while each of the resources listed above may contribute individually to
Southwest's success , there is synergy derived from the "bundle " of resources . The " Turn
Team " is an excellent example of
how Southwest's resources complement each other and
contribute to the firm's overall competitive success . Short turn -around times at gates (averaging15-20 minutes for Southwest compared to the industry norm o
f
50-60 minutes ) is a critical piece
of
Southwest's superior service delivery and low
cost structure . The firm's physical resourcescontribute to this remarkable performance . The a
ll Boeing 737 fleet allows ground and flight
crews to routinize and standardize gateway , fueling , and baggage loading activities . The use of
smaller , less congested airports minimizes gate -holds and
the
time spent in queues on
the
airfield . The organization's unique definition of
service quality eliminates the need for timeconsuming activities such a
s assignment of
seats , loading of food , and insuring hub connections .
The flexibility and commitment of
Southwest employees , along with the " fun " culture ,makesminimizing the time between arrival and departure a spirited challenge for the " Turn Team .
By" bundling " these resources to achieve extraordinarily short aircraft turn -around times ,
Southwest is able to generate high levels of
customer satisfaction ata low cost .
1
THE SUSTAINABILITY OF SOUTHWEST'S COMPETITIVE ADVANTAGE
Beyond the identification of
strategic firm resources , resource -based theory is concernedwith the extent to which such resources can provide a firm with a competitive advantage . Afirm enjoys a competitive advantage when either o
f
two conditions exist : ( 1 ) when it isimplementing a unique value creating strategy , one not being implemented b
y
any ofits
current
or potential competitors (Barney , 1991 ) , or ( 2 ) when the
firm ismore effective at implementing
value creating strategies than competitors pursuing the same or
similar strategies (Porter , 1985 ) .
Thus , competitive advantage may result from the
utilization of
resources that are unique to the
firm , or
from the more effective use of
resources common among competitors (Wilkins , 1989 ) .
Further , resource -based theory asks the question : given a competitive advantage , can it
be
sustained ? According to Barney (1991 ) , " a competitive advantage is sustained only if it
continues to exist after efforts to duplicate that advantage have ceased . " Thus , the concept of
sustained competitive advantage depends on
the possibility of competitive duplication . A
sustained competitive advantage may result when other firms are unable to duplicate the benefits
of
the strategy , or when a firm is able to more completely exploit similar resources-- eventhough competing firms are not significantly different in terms o
f
the
resources they possess .
611
According to resource -based theory , a resource (or bundle of resources ) must have fourcharacteristics to be capable of providing a fi
rm with a sustained competitive advantage (Barney ,
1991 ) . First , the
resource must be
valuable , in that it exploits opportunities and / or neutralizesenvironmental threats . If the resource does neither , it is not strategic and cannot provide a
competitive advantage . Second , the resource must be rare among a firm's current and potentialcompetitors . If the resource is common among competitors , they will be able to replicate
quickly any innovation that results in higher profits so that no lasting competitive advantage can
be attained . But valuable and rare resources can only afford sustained competitive advantage
if firms that do not have them cannot obtain them . Thus , a third condition necessary fora
resource to provide a sustained competitive advantage is that the resource must be imperfectly
imitable -- that is , it cannot be easily imitated by
competitors . Finally , the
resource must have
no
close substitutes . In the following paragraphs , Southwest Airlines ’ resource base is evaluatedagainst these criteria .
The value ofa resource can be
assessed in terms ofits contribution to the firm's ability
to generate above average profits or" rents . " Resource -based theorists including Castanias &
Helfat (1991 ) and Peteraf (1993 ) identify a number ofways in which resources can contribute
to firm profitability , all
of
which are observable in the case of
Southwest .
One source of profitability is the exploitation of superior resources that are
in short supply .
Known in economics as Ricardian rents these profits derive from the effective use of scarceresources -- resources competitors d
o
not
have or
cannot use as efficiently . Herb Kelleher ,
Southwest's CEO , has an " unorthodox personality and engaging management style " and this is
credited for
much of
Southwest's success (Labich , 1994 ) . Kelleher himself regularly creditsthe entire Southwest work - force , who have been recruited over a number o
fyears fo
r
their sense
of
humor , energy and flexibility . Another source of above average profitability stems from risktaking and entrepreneurial insight in a
n uncertain or complex environment . These
entrepreneurial or Schumpeterian rents (Mahoney & Pandian , 1992 ) often derive to the firm that
is able to move most quickly to take advantage of
new environmental opportunities . Southwestdeveloped a high -volume city -pair route structure and single plane type fleet configuration whilecompetitors developed hub and spoke route structures and diversified fleet configurations ; th
eresultant lower cost structure now permits Southwest to achieve above average profits , anexample o
f entrepreneurial rent . A third type of profitability takes the form of quasi rents ,
defined as
the difference between the value ofan
asset in its first best use and its value in its
next best use (Castanias & Helfat , 1991 ) . The notion underlying quasi rent is that certainresources gain value a
s they become specialized to a particular use or
firm . Many of thebenefits Southwest obtains from it
s single plane type fleet contribute to quasi rents . Forexample , the high level of pilot productivity a
t Southwest results from the
simplification of
crew
scheduling ; every Southwest pilot can fly
every one of
the
firm's Boeing 737 type aircraft .
This is one important reason that Southwest’s pilots fly
75-80 hours amonth , compared to 45-60
hours at other airlines (Velocci , 1993 ) . Southwest’s pilots are paid near the industry average ,
but their productivity is high due to the number of
hours they fly. Should one of
Southwest'spilot's go to work fo
ra competitor , they would not be as productive because of the
less efficientscheduling associated with multiple aircraft types . Thus , their productivity is firm specific . A
fourth source of profitability takes the form ofmonopoly rents . In general , monopoly rents
result from a restriction of output rather than an inherent scarcity ofa resource (Peteraf , 1993 ) .
612
As an example , the
presence ofmobility barriers as described by
Caves & Porter (1977 ) explains
the profitability Southwest derives from its domination of
small , close - in airports such as Love
Field and Midway ; Southwest has effectively limited significant competition at
these small , gaterestricted airports . Thus , taken separately and a
sa whole , Southwest's resources are valuable .
But Southwest's resource configuration is not only valuable ; it is also rare . Herb
Kelleher is a rare human resource . He is unique among leaders in the airline industry , and hisvision and spontaneous character a
re central to the
strategy and organizational culture Southwest
has developed since 1971. According to Labich (1994 ) the
work climate is rare , " The oldfashioned bond o
f loyalty between employees and company may have vanished elsewhere in
corporate America , but it is stronger than ever at Southwest . " Toa large extent , Kelleher has
contributed to the rarity of
Southwest's other resources .
One valuable , rare , but intangible resource Southwest commands is its reputation for
high
service quality . Southwest's unique definition of service quality is based on Kelleher's perceived
role for his firm . He recently stated that , "We've created a solid niche -cour main competition
is the
automobile . We're taking people away from Toyota and Ford " (Woodbury , 1993 ) . Thus ,
Southwest's definition of
service quality revolves around convenient , reliable , and friendlytransportation rather than customer amenities such a
sfirst class upgrades and other " perks . " A
s
a result , what customers expect from Southwest is different from what they expect from otherairlines . For example , a frequent domestic and international flier o
n United Airlines maycompare United's service amenities and food to British Airways ' and Singapore Airlines ' .
However , a Southwest passenger flying between Los Angeles and Phoenix will be highlysatisfied with a convenient , on -time , low -cost , no - frills flightbecause the alternative is a six hourstint behind the wheel and a trip to the MacDonald's drive -thru . Since the other major U.S.airlines have promoted their own " full service " images , the different expectations passengershave o
f
Southwest is indeed a rare resource , as is Southwest's ability to consistently meet theseexpectations .
Southwest's fleet configuration is also a rare , if not unique , strategic resource . No othermajor airline follows the single plane type fleet format ;most airlines have between si
xand eight
aircraft types . Interestingly , competitors showed no signs of
reducing the
number of
aircrafttypes between 1988 and 1992 and several are adding aircraft types o
f differentmanufacturers ,especially the Airbus A320 and Fokker F100 models (Kling , 1993 ) .
Southwest's motivated work -force and positive management labor relations are also rare
in the airline industry . In the 1993 update of The 100 Best Companies to Work for in America ,
Southwest is ranked in the
top ten ; only one other passenger airline , Delta , made the
top 100
list (Levering & Moskowitz , 1993 ) . Employees enjoy working at the airline and they are
especially devoted to CEO Kelleher . In contrast , a recent trade journal article on airline labor
issues summarized the industry's overall management -labor relations as " ...marked by
deep
distrust and officials in both camps say they cannot imagine much improvement in theforeseeable future " (Velocci , 1993 ) .
From this discussion it is clear that Southwest's resources are rare as well as valuable .
The picture that emerges is that ofa company significantly different from its competitors in its
resource configuration and resultant strategies . But given Southwest's superior performance and
itswidely publicized strategy ,why have competitors not copied Southwest's formula for
success ?
Are Southwest's current competitive advantages truly sustainable ?
613
Valuable and rare resources can only afford sustained competitive advantage if firms thatdo not have them cannot obtain them . Thus , the third condition necessary fo
ra resource to
provide a sustained competitive advantage is that it cannot be easily imitated by competitors .
It may be difficult or impossible fora competitor to imitate a strategic resource for any one of
three reasons . First , the ability to obtain the resource in question may be dependent on unique
historical conditions . Southwest's unique fleet configuration provides a case in point . As a
relatively young carrier , Southwest was able to develop its fleet of Boeing 737s unhindered by
previous investment in other types of
aircraft . In contrast , older carriers cannot easily change
to a single plane type fleet because of
their investment in other aircraft and the resources to
support them . While a new carrier might be able to imitate Southwest's fleet configuration ,
existing competitors would find a conversion too costly . Southwest's domination of MidwayAirport provides another example . When Midway Airlines went out o
f
business , Southwestseized the opportunity to move into the Chicago market through Midway Airport . Given thelimited possibility o
f expansion at Midway , Southwest now dominates the airport and other
carriers are effectively locked out from achieving a substantial market presence there . Thus ,
while the
fleet configuration and domination of
small airports are understood by
the competition
to be sources of
Southwest's competitive advantage , they are
hard to replicate because of
mobility barriers created by
historic conditions .
A second reason a resource or strategy may be difficult to imitate is because it is socially
complex . Such resources might include the
interpersonal relations among managers in a firm
(Hambrick , 1987 ) , a firm's culture (Barney , 1986 ) , or a firm's reputation among its
customers
(Klein & Lefler , 1981 ) . Southwest's reputation for
high service quality is an example ofa
socially complex resource . As
discussed previously , travelers expect something different fromSouthwest than they d
o
from the competition . Other examples of socially complex resources are
Southwest's loyal , flexible , and motivated work - force and its people -oriented culture . Both are
the result ofa complex mix of
leadership , recruiting , training , and " incentivizing .
Accordingly , it is hard to dispute Kelleher's assertion that " Our people are so energetic they
couldn't be replicated " (Woodbury , 1993 ) .
Finally , a resource or strategy may be
difficult to imitate because links between theresources possessed b
ya firm and its competitive advantage are causally ambiguous ; that is , the
way the resources controlled by
the firm generate competitive advantage is not clearly
understood . Given Southwest's openness regarding its strategies and the analysis of
Southwest
in the
industry and popular press , we do
not believe that causal ambiguity has played a
significant role in the
lack of
imitation by existing competitors .
The final criterion for a resource to serve as
the basis for a sustained competitiveadvantage is that is has no close substitutes (Barney , 1991 ) . In the case of Southwest Airlines ,
its power in the
market comes from the synergy among its resources , or its resource
configuration asa whole . While we can conceive of substitutes for individual resources in
Southwest's bundle of
resources , it is difficult to see how these substitutes could be
used
individually to replicate Southwest's overall strategy and resultant success . For example ,
Continental Airlines has a very low cost work -force due to low compensation rates , and it hasrecently launched a Southwest clone operation named " Cal Lite " that seeks to duplicate th
e
quick
turn times of
Southwest . But Continental is unlikely to ever have the leadership and humanresource strengths o
f
Southwest ; indeed , the airline has chewed up
nine presidents in the last ten
614
years (ATW , 1993 ). One could also conceive of a new airline with a homogeneous fleet ofA320s, which are more efficient than Southwest's 737s. But could that new airline find asubstitute for Southwest's presence at strategically located , close - in airports such as Love Fieldand Midway ? Clearly , Southwest has captured some resources for which there are nosubstitutes , similar or dissimilar .
IMPLICATIONS FOR THE AIRLINE INDUSTRY
The " Southwest Sensation " that is characterized by the
airline's high profitability , lowcosts , and superior customer service is real , substantial , an
d
appears to have considerablecompetitive staying power . A strategic analysis of the airline using resource -based theoryindicates that it commands a se
t
of strategic physical , human , and organizational resources of
which many are valuable , rare , inimitable , and non -substitutable . While the set
of unique
resources is substantial , there are several which stand out and bear revisiting in the summary .
Foremost among these is Southwest's managerial leadership and its highly motivated , productive ,
and flexible work -force . These human capital resources are critically important for a servicefirm , but positive labor -management relationships are rare in the airline industry and cannot be
created quickly or easily . Secondly , Southwest is unique in the physical resources that it has
not invested in for
the
long run ; all
other major airlines have committed to hub -and -spoke
systems and the
physical infrastructure , reservation systems , personnel , and diverse fleets whichsupport hub operations . Lastly , Southwest has created a unique set o
f
customer expectations
which makes it easier for Southwest to satisfy customers within its
low cost structure . This is
an important organizational capital resource , and will not be easily replicated by
existing firmsthat have spent years establishing themselves a
s full service airline brands . As discussed in
detail in this paper , the combination or
bundle of
resources that Southwest has constructed is
truly daunting . We believe that Southwest's resources provide it with a strong basis forsustainable competitive advantage into the foreseeable future . In this context , th
e" Southwest
Sensation " is not overstated ; this paper supports the position that Southwest may have thecompetitive power to force fundamental change upon th
e
U.S. airline industry .
Therefore , the first significant implication for
the airline industry is that Southwest
Airline's competitive threat to existing carriers is not likely to recede , and considering its growth
rate appears to be increasing . Furthermore , Kelleher seems to enjoy his airline's competitive
prowess ; he has recently signalled his intention to " retaliate " and " attack " if competitors targetSouthwest's existing markets (Labich , 1994 ) . U.S. carriers will have to respond in a mannerthat is determined b
y
their own resource bases . For large airlines with hubs and stronginternational networks , this may require abandoning most short -haul routes and focusing solely
on long -distance markets not vulnerable to Southwest's formula of
success . For smaller airlinesthe competitive response is less clear , but a risky strategy would appear to be ignoring altogether
the
competitive impact of
Southwest's success and tactics .
An important implication for established U.S. carriers , both large and small , is that it
will be very difficult for traditional full - service airlines to remake themselves in the image of
Southwest . As stated earlier , it is the combination and synergy of valuable resources thatSouthwest possesses that makes it very hard fo
r
other airlines to duplicate its competitive
615
advantage . The best opportunity to do so probably would occur in the
creation of highly
autonomous subsidiary firms which might be able to create a corporate culture similar to
Southwest's by
carefully selecting employees , having very flexible labor agreements , andcreating a set o
f
customer expectations separate from the larger parent airline . On the
positive
side , the parent airline would be
able to provide equipment , gates and slots at important airports ,
finances , and information systems to launch such a carrier in a relatively short time period . Themodels for such an endeavor a
re General Motor's Saturn Corporation and the non -union regional
less -than -truckload firms established by
national LTL motor carrier firms such as
ConsolidatedFreightways .
Additionally , airline management strategists may wish to develop a greater understanding
of
resource -based theory . They may find that their firm's resources suggest strategies to pursue ,
or
specific opportunities that fit the firm's resource base .Managers that understand resourcebased theory might be less likely to follow strategies that are n
ot
appropriate for their firms .
ample , as a part of its growth strategy , USAir bought Piedmont and PSA , apparently notrecognizing that th
e
key resources possessed by
these firms were their human resources andorganizational reputations --not their physical assets . Consequently , when USAir systematicallydismantled these important characteristics and imposed it
sown organization and culture o
n
theacquisitions , it destroyed their basis fo
r
competitive advantage . Had USAir understood the
resources upon which Piedmont and PSA had built their success , itmight have found them lessattractive acquisition targets o
r
maintained the separate identities of
PSA and Piedmont . In
general , one can use resource -based theory to identify the
key strategic resources that serve as
foundations for
competitive advantage , thereby adding significantly to one's understanding of
strategy
In conclusion , the hyper -competitive nature of
the U.S. passenger airline industry in
recent years has created new winners and losers in the industry and has demanded a re
evaluation of
traditional airline strategies and assumptions . The immediate contribution of this
paper is to establish that the " Southwest Sensation " ismuch more than a simple media creation ;
our analysis of
Southwest Airlines demonstrates that its underlying resource base strongly
supports a sustainable competitive advantage within the U.S. airline industry . Additionally , thestrategic management derived resource -based theory o
f
the firm seemed a particularly
appropriate tool for
explaining the
exceptional performance of
Southwest in recent years .Academic researchers and practitioners may wish to use this theoretical framework in futureanalyses o
f
the airline industry and firm performance .
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ENDNOTES
* College of
Business , Niagara University , Niagara University ,NY 14109 .
** School ofManagement , Syracuse University , Syracuse , NY 13244-2130 .