Background :

1
Southwest Airlines Case - 1
(Prepared by Professor Barry Macy Texas Tech
University)

• Background
• - Founded in 1967 - Love Field in Dallas, TX
• - 35,000 Employees (strated Flying in 1972)
• - Nations 4th largest airline (59 cities
  and 65M
• Customers)
• - Only two fares regular coach and off-peak
• Results and Outcomes
• - Excellent customer service (rated the best
  for on-time
• performance, fewest lost bags fewest
  customer
• complaints 13 years in a row)
• - Safest airline in the world (never had a
  fatal accident)
• - Profitable every year (33 years in a row)
  only airline
• in the world

2
Southwest Airlines and Some Other Airlines -
4 4th Quarter, 2001 Profit/Loss
63.5M 32.4M
Southwest Airlines
Why?
American Airlines
(748M)
U.S. Air
(1.0 B)
Delta
(1 B)
Without Federal Aid
Source B.A. Macy, Successful Strategic Chance,
San Francisco, CA Berrett-Koehler Publishers
(forthcoming).
3
Southwest Airlines Case - 2

• Results and Outcomes (continued)
• - Highest stock return of any U.S. Publicly
  traded stock
• (compounded rate of return of over 21,000)
• - 4.5 B in revenue (continuous uninterrupted
  growth)
• - Continues to increase market share (not at
  expense
• of profitability)
• Returned 214M (profit-sharing) to employees
  (2001-2002)
• 14 of stock held by SWA employees
• Largest Market cap of any U.S. airlines (higher
  Market cap
• than all of U.S. Airlines combined)
• Success Factors (per the Companys behavior)
• Employees come 1st
• Customers 2nd
• Shareholders 3rd

4
Results (Cont)

• After 9/11 SWA had no Layoffs and ALL employees
  took a pay cut!!!

5
Southwest Airlines Case - 3

• One of Best 100 Companies and in the top 10
  Most
• Admired companies to work for
• - Unique, off-beat strong/adaptive (HPO)
  culture!
• - FUN emphasized!
• - Family emphasized!
• - Caring for employees emphasized!
• - Customers emphasized!
• - Identify with fellow employees (as internal
  customers!)
• - Ten-year Labor agreement! (81 unionized)
• - Aggressive under-dog spirit!
• Employees Love to work there!!

6
Southwest Airlines - 4

• Competitors have
• - Same Equipment
• - Same Locations
• - Same Route Planning
• - Same Technologies
• - Have tried same no-frills, lowest cost
  model (all have
• failed - Why???)

(40 of competitors went bankrupt or ceased
operations)
7
Southwests Values, Philosophy, and Spirit

• These are three basic values (the culture) or
  philosophical
• pillars at Southwest Airlines
• Value 1 Work should be fun ...it can be play .
  . . Enjoy it.
• Value 2 Work is important ...dont spoil with
  seriousness.
• Value 3 People are important...each one makes a
  different.
• Beliefs
• Organizations are transparent
• Family and Hugs

8
People at Southwest
- Hard-working (94 employees per plane vs..
Americans 160 and United 160 - Industry
average of 130 serves 2,500 passengers per
employee Vs. United and American average
less than 1,000) - Motivated - Have FUN
- fun place to work - Treat employees as
internal customers - Employees are
comfortable - Fundamental business
philosophy is that employees come first!
- Not a lot of employees!
9
Integrated Low Cost/Differentiation Strategy
Southwest Airlines
10
The Right People or the Right Organization?
A Values-Based Organization View of Strategy
Fundamental Values or Beliefs

• What are our basic Principles, Philosophies
• and Core Values?
• What do we believe in?

• What policies and practices are consistent
• with these Values and Philosophies?

Design Management Practices That Reflect and
Embody These Values

• What can we do for the customer better
• than our competitors?

Use These to Build Core Capabilities

• Given our capabilities, how can we deliver
• value (EVA) to customers in a way our
• competitors cannot easily imitate?

Invent a Strategy That is Consistent with the
Values and Uses the Talents Capabilities of
People/ Organization to Compete in New and
Unusual Ways

• Senior management manages the values
• and culture of the firm.

Senior Managements Role
11
Summary of Southwest Airlines Case - 6
1. Alignment between strategies, goals, culture,
core values, structures, systems,
processes, and people. 2. Consistency of
management and senior management
responsible for maintaining the Culture and
the Core Values 3. Assets are managed and low
variable costs 4. Focus on Human Capital - -
unleash their innovation and increase their
capabilities
12
Southwest Airlines Results - 5
KPI INDICATOR S.W.A.
INDUSTRY
EXEMPLAR ORGANIZATIONS
II. Business/ Financial 1. Continuous
Yes 10 No
10 Per Year Uninterrupted
per Year Growth 2. Continuous
Uninterrupted Yes
No
Yes Market Share Growth 3.
Continuous

Mainly Uninterrupted Yes 29 yrs.
No
Yes Profitability in a
row 4. Rate of Return 21,000
Not even close - Close
to (7th Highest
public) below average
Top 10 5. Average Hours 11 hrs.
8 hrs.
NA in Air per day
13
Southwest Airlines Results - 6
KPI INDICATOR S.W.A.
INDUSTRY
EXEMPLAR ORGANIZATIONS
II. Business/ Financial 6. Flights per
10.5 4.5
NA Gate 7.
Ground Time 15 min.
47 min. NA
(70)
(70) 8. Employees Per Plane
94 130
(some 160) NA 9. Employee
Service 2,500
1,000 NA per
Passenger 10. Typical Financial
Best Average to
Best to Measures
Below
Average Excellent 11. Cost Per
Mile 5.86 1984
15-40 Higher Average of 5
7.3 1998

Reduction/Yr.
14
Southwest Airlines Results - 7
KPI INDICATOR S.W.A.
INDUSTRY
EXEMPLAR ORGANIZATIONS

• III. Employees
• 1. They Come 1st Yes
  No
  Balanced
• 
  
  Scoreboard
• 2. Motivation Very High
  Average High to Very
  High
• 3. Job Satisfaction Very High (85)
  Below Average to High (65-70)
• 
  Average (50)
• Employment Never had a
  Very Frequent Rare
• Security Lay-off
  Lay-offs
• 5. Labor 10 years (No
  1-3 years None to 5
  years
• Agreement Work Rules)
• 6. Internal Yes
  No
  Yes

15
Southwest Airlines Results - 8
KPI INDICATOR S.W.A.
INDUSTRY
EXEMPLAR ORGANIZATIONS
III. Employees 7. Families
Caring Questionable
Caring 8. Trust and
Confidence Yes
No
Yes 9. Work
Fun Not Challenging/
Fun/
Boring
Challenging 10. Catastrophe
Yes
No ?
FUND 11. Jobs
Multi-skill Narrow
Multi-skill 12. Number of
Employees Few
Lots Few
to Average
16
2005 Southwest Airlines Case - 12

• Competitors have
• - Same Equipment
• - Same Locations
• - Same Route Planning
• - Same Technologies
• - Have tried same no-frills, lowest cost
  model (all have
• failed - Why???)

(40 of competitors went bankrupt or ceased
operations)
17
2005 Southwest Airlines Case - 14

• Strategies and Goals Fly to airports that are
• under-utilized and close to metropolitan areas
• - One type of aircraft (367 737s)
• - 80 of customers fly non-stop (no hub
  necessary -
• avoids delays and shorter turnaround times
  70
• of planes have 15 minute ground times)
• - Planes average 11 hours in air (Industry
  average 8.0)
• - Planes average 10.5 flights per gate
  (Industry
• average 4.5)

18
2005 Southwest Airlines Case - 15

• Strategies and Goals (continued)
• Simplify the operations (no meals, no seat
  assignments
• frequent flyer awards are simple - no mileage)
• Low cost structure - - a competitive advantage
• - Turnaround time
• - Pilot spend more time in air than other
  airlines
• (100,000 wage vs.. Deltas 200,000)
• - Flight attendants and pilots help clean
  planes, check
• passengers in at the gate and load bags if
  needed
• (people pull together to accomplish the
  mission
• and goal)

19
2005 Southwest Airlines Case - 16

• People at Southwest
• - Hard-working (94 employees per plane vs..
  Americans
• 160 and United 160 - Industry average of
  130 serves
• 2,500 passengers per employee Vs. United
  and American
• average less than 1,000)
• - Motivated
• - Have FUN - fun place to work
• - Treat employees as internal customers
• - Employees are comfortable
• - Fundamental business philosophy is that
  employees
• come first!
• - Not a lot of employees! (per customer
  Best in the Industry)

20
2005 Southwests Values, Philosophy, and Spirit -
17

• These are three basic values (the culture) or
  philosophical
• pillars at Southwest Airlines
• Value 1 Work should be fun ...it can be play .
  . . Enjoy it.
• Value 2 Work is important ...dont spoil with
  seriousness.
• Value 3 People are important...each one makes a
  different.
• Beliefs
• Organizations are transparent
• Family and Hugs

21
2005 Southwest Airlines Case - 18

• Organization
• Stable working environment (never had a layoff)
• People orientated culture (informal
  egalitarianism)
• Equal Opportunity for learning and personal
  growth
• Creativity and innovation encouraged and
  rewarded
• Same caring, concern, respect within the
  organization
• as outside (with customers)
• Catastrophe fund for employees
• Targeted selection utilized
• Celebrations (for achievements)
• Contests
• Walk a Mile in My Shoes
• Lots of companies say employees are important
  - -
• however, their behaviors speak louder than
  words!!
• Flat/Lean organization structure (only 4 total
  levels)

22
Typical Ten Step Targeted Recruitment and
Selection Process - 20
1 2 3 4
5 6
7
8 9
10
Job Fair
Orientation/Application/Testing
Screening Interviews
Assessment Center (COBRA Team Decision Exercise)
Final Interviews
Background/Reference Check
Pre-Employment Orientation
Job Preview/Offer
Med/Drug/Prework
Confirm Job Offer
23
2005 Southwest Airlines Case - 21

• Organization (continued)
• Trust and confidence in employees (No H.R. Dept.
  -
• a People Department)
• Over 200,000 job applications in 1998 (35,000
  interviewed
• and 4,000 hired)
• Recruited primary for attitudes and behaviors
• 29,000 people are trained each year
• Get people excited and enthused - avoid
  complacency
• Key senior leaders are the trainers
• No tuition reimbursement (no to little outside
• sponsorship of training)
• Two-way communication and feedback
• Mutuality in Labor Relations (no work rules in
  contract)
• Everyone receives a raise on his/her birthday
• Employee Attitude Surveys

24
2005 Southwest Airlines Case - 22

• Organization (continued)
• Pay Practices Collective Vs. Individual
• - Profit sharing (all employees over 1 year
  with company)
• - Stock ownership
• - Relatively low Executive pay (little to no
  pay for
• performance)
• - Consistent treatment (raises or freezes)
• - Low pay at the start and high pay with
  experience
• (below market wage for managerial,
  professional and
• wage at start)
• - Pilots and flight attendants paid by the
  trip
• - Average wage (1992) was 44,305 compared to
• Americans 45,801 and Uniteds 54,380
• Employees treated like owners - share all
  information
• (good and bad)

25
2005 Southwest Airlines Case - 23

• Organization (continued)
• Employees encouraged to take responsibility and
  make
• decisions
• Management seeks out employee opinions and
  listens
• carefully to employees acts accordingly!
• Monthly meetings for sharing of confidential
  data
• Competitor information shared
• High level of employee trust
• Effectiveness NOT efficiency
• Effective Senior Leadership
• Effective and Strong Senior Management Team

26
Summary of Southwest Airlines Case - 24

• Sees its mission as creating the maximum amount
  
• of wealth possible out of the imagination and
  skills
• of its employees (rather than maintaining
• leadership in a particular market with one
• business model.)
• Assumptions Good business models are not
• immortal (only in a slow-spinning world).
  Business
• models can be rendered absolutely useless in a
  
• blink of an eye - every organization must now
  be
• built to change/be redesigned!

27
Summary Southwest Airlines Case - 25

• Dont commit to one single business model - -
  commit
• instead to providing brood after brood of new
  business
• models!
• Their Characteristics
• - Democratic
• - Open
• - Experimental (risk taking)
• - Highly networked
• - Non-hierarchical
• - Structures, systems and processes are
  malleable / adaptive to the
• business environment
• - Some use of teams
• - Speed
• - Ideas/Imagination
• - Pattern of rule - busting strategies
• - Master of innovation platforms/pathways

28
Summary of Southwest Airlines Case - 26

• Other Characteristics
• - Scale
• - Effectiveness Vs. Efficiency
• - Replication
• - Discipline
• - Culture
• - Core Values
• 73 of its Revenue from E-Commerce
• Importance of Internet
• Synthesis of old and new organization (uses
  their
• scale size infra-structures, systems, and
  processes
• and operational excellence to crush
  competitors!)

29
Summary of Southwest Airlines Case - 27

• Clear, well-defined (NOT blue-sky), and
  articulated set of
• Core Values (Widely shared acts as a
  foundation for
• managerial behaviors and practices.)
• Alignment and consistency in the organizations
  structures,
• systems and processes that stem from the Core
  Values.
• Visionary leaders and senior management
• responsibilities for maintaining the
  organizations culture
• and Core Values (maintained and made real to
  employees
• in terms of managerial behaviors - NOT just
  words)
• Strong and Adaptive Culture
• Hiring (Targeted Selection) for Behavioral Fit

30
Summary of Southwest Airlines Case - 28

• Investment in Human Capital (Employees) - -
  improving their
• capabilities
• Widespread information (confidential) sharing
  (vertically
• and horizontally)
• Some (NOT a lot) of work teams -
  accountabilities and
• responsibilities of the teams clearly defined
• Rewards and Recognition
• Consistency in Top Management

31
Summary of Southwest Airlines Case - 29
1. Alignment between strategies, goals, culture,
core values, structures, systems,
processes, and people. 2. Consistency of
management and senior management
responsible for maintaining the Culture and
the Core Values 3. Assets are managed and low
variable costs 4. Focus on Human Capital - -
unleash their innovation and increase their
capabilities
32
Six Attributes of Best Companies

• 1. Employee talent and common sense
• - Hire for attitude train them for skill (We
  are in the customer service
• business NOT transportation!)
• Financial Soundness
• - Manage in the good times to get ready for the
  bad times
• Employees gave back part of their Sept., 2001
  wages
• (1to32 hrs. max.) 1.3M salary giveback
• - Top officers Gave back 100 of their pay in
  Sept., 2001
• - 13.3 Market cap (higher than all U.S. Airlines
  put together)
• 3. Use of Corporate Aircraft and Assets
• - Have 367 Boeing 737s
• Innovativeness 15-25 Minute turnaround 30
  lower wage rates
• Financial Soundness (long term investment)
• - 13.3B Market cap (larger than combination of
  all US Airlines)

33
Why is Southwest Successful? (1)

• NOT because of
• Only flies 737s
• Only Small Airports
• Low Ticket Prices
• Quick Turnaround
• Low Cost
• Customer Loyalty
• Efficiency
• Profitable
• Rate of Productivity

All Results/ Outcomes/ Effects/ Symptoms
34
Why is Southwest Successful? (2)

• Because of its Internal Business Environment and/
  or Execution Systemsthe Causes
• Culture, Core Values, Philosophies and Principles
  (Vision Direction)
• Effective Management of its Workplace (Level 5
  leadership)
• Effective Exemplar Structures, Systems and
  Processes (fit between elements of the Execution
  System)

35
Why are Firms/Organizations Successful (Using
only RBV Theory)?

• What are the assumptions the organization makes
  about people and their
• motivations?
• 2. What are the managers beliefs that
  underpin how they organize and design
• the work environment?
• What are the organizations core values,
  principles, and philosophies (the
• culture)?
• 4. What are the organizations expectations
  about their employees?
• 5. What are the strategies, structures?
• 6. How are their people utilized? How are
  the organizations capabilities
• improved?
• 7. Is it their technologies and the physical
  assets (i.e. equipment, machinery,
• etc.)
• 8. Why havent their competitors been able to
  imitate them?
• 9. Is it their strategies?
• 10. Is it the right people/excellent human
  resources?
• 11. Or the right organization (strategies,
  structure, and leadership?)
• 12. Why is the firm/organization so
  successful/exhibits exemplar performance?

36
Why are Firms/Organizations Successful?

• What are the assumptions the organization makes
  about people and their motivations?
• High Trust and High Motivation/ Committed
  Employees
• 2. What are the managers beliefs that underpin
  how they organize and design the work
  environment?
• Their Core Values, Philosophies and Principles
  (Corporate Culture)

37
Why are Firms/Organizations Successful?

• What are the organizations core values,
  principles, and
• philosophies (the culture)?
• CORE VALUES
• Work should be Fun!...It can be playEnjoy it
• Work is Important dont spoil it with
  seriousness
• Our People (Employees) are is important They
  come 1st (above Customers
• and Investors)
• PRINCIPLES PHILOSOPHIES
• No layoffs
• Egualitarism (all equal)
• Equal opportunities for learning and personal
  growth
• Flat/ lean Org. Structure
• Employees has important input-listen to them
• High participative work environment
• Care, concern, respect within the org. for
  employees
• Catastrophe fund for Employees Families
• Hire and we will train/ Develop/ mentor
• Celebrate achievements

38
Why are Firms/Organizations Successful?

• What are the organizations expectations about
  their employees?
• Expectation about work performance,
  communication,
• coordination, and integration
• What are the strategies, structures?
• Employees are always first ahead of customers
  and investors
• flat/lean structure (NOW-4 layers 3 Management
  and 1 level of Associates
• How are their people utilized, and organizations
  capabilities improved?
• PEOPLE UTILIZED
• No specific job/ work description high
  expectations multi-skill
• COMPANY IMPROVED CAPABILITIES
• Commercially Astute Employees Org Capabilities
  flexibility and adaptability
• Is it their technologies and the physical assets
  (i.e. equipment,
• machinery, etc.)
• NO!

39
Why are Firms/Organizations Successful?

• Why havent their competitors been able to
  imitate them?
• Corporate Culture (Core values, Philosophies
  Principles)
• Level 5 leadership (Effective management and
  Workforce)
• Is it their strategies?
• YesSomewhat (people Strategy)
• Is it the right people/excellent human resources?
• YesSomewhat!
• Or the right organization (strategies, structure,
  and leadership?)
• YesSomewhat!
• Why is the firm/organization so
  successful/exhibits exemplar performance?
• Corporate Culture!!
• Level 5 Management (effective management of
  workforce)!!

40
Alignment of Action levers
Southwest J J SAS Dell
GE ABB Cisco Cypress
Airlines
Action Levers

• Values, Culture, and
• Strategy Alignment
• Hiring for Fit
• Work Jobs
• Investing in People
• Widespread
• Information
• Sharing
• Shared Leadership
• Decision making

???
???
??
???
??
???
?/ 0
??
???
??
???

• ??? Excellent
• ? Good
• Fair
• 0 Missing

???
41
Alignment of Action levers
Southwest J J SAS Dell
GE ABB Cisco Cypress
Airlines
Action Levers

• Organizational
• Strategies
• Enterprise
• GBU SBU
• Business Models
• Core Competencies/
• Operations
• Others
• Capabilities

???
0
???
??
0
???
0
0

• ??? Excellent
• ? Good
• Fair
• 0 Missing

???
???
42
Future Issues/ Problems for SWA

• Going International
• Merger (Acquisition of another airline)
• Growth
• Internal?
• External?
• Both?
• Will the Corporate culture change when Herb
  leaves?