STRATEGIC MANAGEMENT

UNIT 2 – The External Environment

Case Study

In 1971, an upstart firm named Southwest Airlines opened for business by offering flights
between Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial
fleet of three airplanes and three destinations, Southwest has grown to operate hundreds of
airplanes in scores of cities. Despite competing in an industry that is infamous for
bankruptcies and massive financial losses, Southwest marked its thirty-eighth profitable year
in a row in 2010.

Why has Southwest succeeded while many other airlines have failed? Historically, the firm
has differed from its competitors in a variety of important ways. Most large airlines use a
“hub and spoke” system. This type of system routes travelers through a large hub airport on
their way from one city to another. Many Delta passengers, for example, end a flight in
Atlanta and then take a connecting flight to their actual destination. The inability to travel
directly between most pairs of cities adds hours to a traveler’s itinerary and increases the
chances of luggage being lost. In contrast, Southwest does not have a hub airport; preferring
instead to connect cities directly. This helps make flying on Southwest attractive to many
travelers.

Southwest has also been more efficient than its rivals. While most airlines use a variety of
different airplanes, Southwest operates only one type of jet: the Boeing 737. This means that
Southwest can service its fleet much more efficiently than can other airlines. Southwest
mechanics need only the know-how to fix one type of airplane, for example, while their
counterparts with other firms need a working knowledge of multiple planes. Southwest also
gains efficiency by not offering seat assignments in advance, unlike its competitors. This
makes the boarding process move more quickly, meaning that Southwest’s jets spend more
time in the air transporting customers (and making money) and less time at the gate relative
to its rivals’ planes.

Organizational culture is the dimension along which Southwest perhaps has differed most
from its rivals. The airline industry as a whole suffers from a reputation for mediocre (or
worse) service and indifferent (sometimes even surly) employees. In contrast, Southwest
enjoys strong loyalty and a sense of teamwork among its employees.

One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies
choose stock ticker symbols that evoke their names. Ford’s ticker symbol is F, for example,
and Walmart’s symbol is WMT. When Southwest became a publicly traded company in
1977, executives chose LUV as its ticker symbol. LUV pays a bit of homage to the firm’s
humble beginnings at Love Field. More important, however, LUV represents the love that
executives have created among employees, between employees and the company, and
between customers and the company. This “LUV affair” has long been and remains a huge
success. As recently as March 2011, for example, Southwest was ranked fourth on Fortune
magazine’s World’s Most Admired Company list.

In September 2010, Southwest surprised many observers when it announced that it was
acquiring AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low

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fares, but they differed in many ways. AirTran routed most of its passengers through a hub-
and-spoke system, and it relied on a different plane than Southwest, the Boeing 717. The
acquisition of AirTran thus raised important questions about Southwest’s future.

Could the airlines’ respective fleets of 737s and 717s be joined without losing efficiency?
Perhaps most important, could Southwest maintain its legendary organizational culture while
taking over a sizable rival and integrating AirTran’s thousands of employees? When the
acquisition was finalized on May 2, 2011, it remained unclear whether Southwest was flying
off course or whether Southwest’s “LUV story” would continue for many years.

Questions:

1. Use the segments of the general environment to evaluate the opportunities and threats
facing the US airline industry and Southwest Airlines in particular.

2. Use (Porters) Five Forces of Competition Model to determine the attractiveness of the
US airline industry. Are there any implications for Southwest Airlines (positive or
negative)?

3. Looking at the elements of the external environment, which do you think will affect
the competitive landscape of Southwest Airlines? Which is the most important as a
source of competitive advantage?

4. Reviewing Southwest Airlines’ strategy, is the strategy appropriate to offset the forces
in the industry? Do you recommend any changes?

5. From your knowledge of strategic management, does Southwest Airline have a

competitive advantage? Why/ why not?

Discussion Questions

1. Why is it important for a firm to study and understand the external environment?

2. What are the differences between the general environment and the industry
environment? Why are these differences important?

3. What is the external environmental analysis process (four steps)? What does the firm
want to learn when using this process?

4. What are the seven segments of the general environment? Explain the differences
among them.

5. How do the five forces of competition in an industry affect its profit potential?
Explain.

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 6. What is a strategic group? Of what value is knowledge of the firm’s strategic group in
formulating that firm’s strategy?

7. What is the importance of collecting and interpreting data and information about
competitors? What practices should a firm use to gather competitor intelligence and
why?

Multiple Choice Questions

1. The three parts of the external environment which affect a firm’s strategic actions are
a) economic, political, and legal
b) general, industry, and competitor
c) industry, business, and product
d) local, national, and global

2. The ____ environment is composed of dimensions in the broader society that can
influence an industry and the firms within it.
a) general
b) competitor
c) sociocultural
d) industry

3. In analyzing the demographic segment of the general environment, one typically

examines all of the following factors EXCEPT
a) age structure.
b) ethnic mix.
c) distribution of income.
d) cultural values.

4. The economic environment refers to

a) the nature and direction of the economy in which a firm competes or may compete.
b) the economic outlook of the world provided by the World Bank.
c) an analysis of how the environmental movement and world economy interact.
d) an analysis of how new environmental regulations will affect the U.S. economy.

5. The political/legal segment of an environment represents

a) the political preferences of different ethnic groups in the society.
b) the technological values of different political entities in society.
c) how organizations and governments mutually try to influence each other.
d) the system of regulations governments at all levels place on businesses.

6. The technological segment of environmental analysis includes

a) institutions and activities involved with creating new knowledge and translating that
knowledge into new outputs.
b) the determination of when machinery will need to be replaced in a given firm.
c) the need for new technology in order for a firm to gain a competitive advantage.
d) places where a firm’s technology will allow that firm to dominate a given market.

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7. New entrants to an industry are more likely when
a) it is difficult to gain access to distribution channels.
b) economies of scale in the industry are high.
c) product differentiation in the industry is low.
d) capital requirements in the industry are high.

8. Economies of scale refer to the fact that as the

a) quantity of product produced in a given time period increases, the cost of
manufacturing each unit increases.
b) quantity of product produced in a given time period increases, the cost of
manufacturing each unit remains constant.
c) quantity of product produced in a given time period increases, the cost of
manufacturing each unit decreases.
d) quantity of product produced in a given time period decreases, the cost of
manufacturing each unit decreases.

9. Competitor analysis focuses on

a) firms with which the company competes directly.
b) firms that produce products that are substitutes.
c) all firms in the industry.
d) companies that might enter the industry.

10. Which of the following pairs of companies would be least likely to be examined together
as part of competitive analysis?
a) Home Depot and Lowe’s
b) Boeing and Airbus
c) IBM and Microsoft
d) Coca Cola and PepsiCo