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Southwest Airlines Possible Solution-HBR case

Southwest Airlines Possible Solution-HBR case

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Published by kowshik yakkala

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Published by: kowshik yakkala on Nov 18, 2009
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03/22/2015

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2009
CASE ANALYSIS
TEAM
AKRITI SINHAARAVIND KUMARLIPIKA BRAHMANIKHILESH BHATTITARUN AGRAWALKOWSHIK YAKKALA
 
EXECUTIVE SUMMARY 
Southwest Airlines entered the airlines market and within a few years was known amongst the market leaders by following a low costdifferentiation strategy. Not only did the airlines win numerous price wars by just religiously following its set of coherent activities but it alsogained many loyal customers who wanted to fly in South West and wrote to them for setting up new flight routes.Southwest now had two major issues at hand, one was how would they continue to be the low cost leaders in the industry by making theirstrategy sustainable. The other was they wanted to foray into new markets or establish new routes to expend their reach in the industry.There were many activities that lead the strategy to be successful including low operating costs, low turnaround time, committed and efficientemployees etc. Their strengths seemed to be how well they managed time. They saved a lot of time on flight and in the airport which led tocost savings later. They now were on cross roads and wanted to make their strategy sustainable.The second dilemma was about their expansion strategy. South west had always followed a controlled expansion strategy and always wasknown for its deliberate and cautious moves to expand. Now they had three options at hand
a)
Expand within system, add a new segment between Detroit and Phoenix- where the airport gate and landing fee would be higher thanthe average Southwest Standards
b)
Grow in Chicago by adding a route from Chicago to Dayton- the fee per passenger would be lower than their average in otherairports, the airport was fairly uncongested and had room for further expansionc)Establish base in east coast- kick off service from Baltimore- airport fees was in line with the systemIn assessing the best option we evaluated all the three options both qualitatively and quantitatively. We evaluated the risks as well as thereturns in each of the three options separately and determined the best option. We forecasted the demand based on past growth rate. NPVand an calculation of the payback period for each of the options gave us an understanding of the returns that each project would provide uswith. Risks are always based on the best case, worst case and expected case scenarios of the prices to be offered to the customers sinceSouthwest had to maintain a cost lower than almost 60% of the industry average to be competitive in the industry. They could maintain theirlow prices only through their low operating costs. In the sensitivity analysis the final option seemed to go very well with the statement “higher the risk higher the return” which does not go very well with Southwest’s controlled expansion theory. The second option seemed toturn very bad in the worst case scenario in which southwest could operate due to entry of new competitors. The first option of expandingwithin the system was moderate and fared well in both the worst and best case scenario.Looking at it qualitatively the first option seemed lucrative since there were a lot of passengers already asking for the particular route to beestablished and this would improve the brand image of Southwest since they would be responding to customer.
 
Contents
Contents .........................................................................................................................................................................................3THE MAJOR ISSUES FACED BY THE COMPANY .................................................................................................................................4PROBLEM STATEMENT: ...............................................................................................................................................................4THE AIRLINES INDUSTRY IN THE 1990s ...........................................................................................................................................4Changing Consumer Perception:..................................................................................................................................................4 ANALYSIS OF PROBLEM 1: SUSTAINING LOW COST DIFFERENTIATION STRATEGY ..........................................................................5 ANALYSIS OF ACTIVITIES THAT ARE CRITICAL FOR MAINTAINING THEIR STRATEGIC COHERENCE ..................................................5 ANALYSIS OF PROBLEM 2: EXPANSION AND GROWTH INTO NEW MARKETS ....................................................................................6SITUATION 1: DETROIT AND PHOENIX –EXPAND WITHIN THE SYSTEM .........................................................................................6SITUATION 2: GROW IN CHICAGO BY ADDING CHICAGO-DAYTON ................................................................................................6SITUATION 3: ESTABLISH BASE IN EAST COAST: KICK OFF FROM BALTIMORE ..............................................................................6NPV and Payback period ...........................................................................................................................................................7 ANALYSING THE RISKS: SENSITIVITY ANALYSIS ...............................................................................................................................7 ANALYSIS OF RETURNS ...................................................................................................................................................................8QUANTITATIVELY:.........................................................................................................................................................................8QUALITATIVELY ............................................................................................................................................................................8SENSITIVITY ANALYSIS .................................................................................................................................................................8RECOMMENDATION .......................................................................................................................................................................10 APPENDIX 1: ASSUMPTIONS: .........................................................................................................................................................10 APPENDIX 2: RETURN ANALYSIS ....................................................................................................................................................11 APPENDIX 3: SENSITIVITY ANALYSIS ..............................................................................................................................................13 APPENDIX 4: WACC CALCULATION ................................................................................................................................................13 APPENDIX 5: PORTER’S FIVE FORCES ANALYSIS ............................................................................................................................14 Appendix 6: HOW DOES SOUTHWEST ACHIEVE STRATEGIC COHERENCE .....................................................................................15

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