Docstoc

SWA_WC2_ppt - PowerPoint Presentation

Document Sample
SWA_WC2_ppt - PowerPoint Presentation Powered By Docstoc
					                           Southwest Airlines
1/2003

• How should SWA respond to Braniff’s 60-day
  half-price sale for Dallas-Houston/Hobby?
• Break-out groups, then report back
    – What prices should SWA set for February?
    – What other actions should SWA take?
• Background: Market & industry analysis
                                                 1
               Key Elements of Market Analysis
• Total market size growing, 1969-72 (Ex 8): Dallas-
  Houston up 58%, Dallas-San Antonio up 51%
• Incumbents provide safe service, but mediocre at many
  other demands: Reliability, cost, speed, convenience, …
• Segmentation: Bus./pleasure, peak/off-peak, short/long
   – Price sensitive: Pleasure, off-peak, short
   – Price insensitive: Business, peak, long
• SWA price leader entry strategy (fares & services)
   – $20 promotion, then $26 business & $13 off-peak
• SWA 1972 market share success (0 in 1970), short-haul
   – Dallas-Houston=40%; Dallas-San Antonio=25%
                                                       2
                              SWA Financials
•    Losing $$ (Ex 3), declining reserves (Ex 4)
•    Detailed analyses to devise response
    1. Break-even analysis: Variable & total cost
       calculations
    2. Break-even positions by market
    3. Pricing scenarios: Break-even points



                                                    3
                                                1. SWA Break-Even Analysis
                                                          Q3 1972     Q4 1972

 TC=Total costs (Operating & Interest) (ex 3)             $1,995,000 $2,046,000
                                                                                           VC/Flight
 Non-passenger incremental cost/Flight (ex 5)                  $244        $244
 Variable cost/Passenger (ex 5)                               $2.80       $2.80
                                                                                           VC/Passenger
 Total flights (ex 2)                                         2,518       2,509
 Total passengers (ex 2)                                     76,300      88,300

 ATC / Flight                                                  $792        $815
 non-passenger ATC=(ATC -AVC for passengers) per Flight        $707        $717              TC/Flight
 Break-even: Variable cost/Flight ($244)                                          Fare    VC     Contrib Passenger B/E
                                                                                  $26    $2.80   $23.20       11
                                                                                  $20    $2.80   $17.20       14
                              Cover VC                                            $13
                                                                                  $10
                                                                                         $2.80
                                                                                         $2.80
                                                                                                 $10.20
                                                                                                  $7.20
                                                                                                              24
                                                                                                              34

 Break-even: ATC non-passenger /Flight (Q4 = $717)                                Fare ATC n-p   Contrib Passenger B/E
                                                                                  $26   $717     $23.20       31

                               Cover TC                                           $20
                                                                                  $13
                                                                                        $717
                                                                                        $717
                                                                                                 $17.20
                                                                                                 $10.20
                                                                                                              42
                                                                                                              70
                                                                                  $10   $717      $7.20      100


 Three costs: FC (high), VC flight (mod.), VC passenger (low)
                                                       4
                     Break-even requirements                   Full $26      Disc. $13
                     VC/Flight $$                             $      244     $     244
                     Passengers needed                           11             24
                     Break-even $$                            $      800     $     800
                     Break-even passengers needed                31             70

          2. SWA     Dallas-Houston, Jan 1973
                     Actual passengers/Flight          Ex 2       37             67
       Break-even    Fare
                     Revenue/Flight
                                                              $
                                                              $
                                                                        26
                                                                       972
                                                                             $
                                                                             $
                                                                                       13
                                                                                      875
         Positions   Dallas-San Antonio, Jan 1973
                     Actual passengers/Flight          Ex 2       19             52
                     Fare                                     $         26   $         13
                     Revenue/Flight                           $        485   $        671

                     San Antonio - Houston, Jan 1973

 All cover VC       Actual passengers/Flight
                     Fare
                                                       Ex 2
                                                              $
                                                                  20
                                                                        26   $
                                                                                 31
                                                                                       13
                     Revenue/Flight                           $        520   $        406



   But only         Dallas-Houston, Dec 1972
                     Actual passengers/Flight          Ex 2       34             69

Dallas-Houston       Fare
                     Revenue/Flight
                                                              $
                                                              $
                                                                        26
                                                                       883
                                                                             $
                                                                             $
                                                                                       13
                                                                                      900

covers full costs    Dallas-San Antonio, Dec 1972
                     Actual passengers/Flight          Ex 2       21             57
                     Fare                                     $         26   $         13
                     Revenue/Flight                           $        533   $        735

                     San Antonio - Houston, Dec 1972
                     Actual passengers/Flight          Ex 2       18             31
                     Fare                                     $         26   $        5
                                                                                      13
                     Revenue/Flight                           $        473   $        406
                                               1b. Load following SA price experiment

  1a. San Antonio historical load
                                                             3. Pricing Scenarios
                                                                                           Needed
                                                                                        passengers for
                                                             Total               Ave.       same       Needed   Mkt size     Mkt
San Antonio, Dec 1972       Fare    Passengers     Contrib.   cont      Flghts   load    contribution   load    (av 1972)   share
Full fare                     $26      2,400     $    23.20 $ 55,680     117      21
Discount                      $13      3,900     $    10.20 $ 39,780      69      57
Total                                  6,300                $ 95,460     186      34

All discount                                     $   10.20 $ 95,460      186                9,359       50       19,865     47%
Late January 1973 level                                                                     149%        48
Needed for break-even                                                                                   70                  66%
                           2a. Dallas historical load
Dallas-Houston, Jan 1973
Full fare
Discount
                             $26
                             $13
                                      15,100
                                      6,800
                                                 $
                                                 $
                                                     23.20 $350,320
                                                     10.20 $ 69,360
                                                                         404
                                                                         101
                                                                                  37
                                                                                  67
                                                                                                2b. Needed load
Total                                 21,900               $419,680      505      43
                                                                                                                  Ex 1
Scenario: All discount                           $   10.20   $419,680    505               41,145       81       53,528     77%
Already at B/E                                                                              188%


    1. SA responded well to fare cut, but still need growth to break even
    2. Dallas-Houston discounts may be feasible

                               Very aggressive market share requirements                                           6
   Strategy: Response to Braniff D-H Price Cut?
• D-H is critical for SWA (E5: 72% 1972 traffic)
• Can Braniff make money at the lower price?
   – No – higher costs (Boeing 727s v. smaller 737s)
   – But route is <1% of Braniff traffic (E1, 7): Can x-
     subsidize (but losses useful only if SWA knocked out)
   Braniff will increase price if SWA survives
• SWA pricing options: Can’t let Braniff recover
   – Pricing scenarios show that SWA can be aggressive
   – Needs to retain routes to spread fixed costs
• Complementary actions
   – Promote feistiness in ad campaigns
   – Aggressively seek right to expand into new markets
   – Legal action against Braniff?
                                                       8
                     SWA 1973 Actions in
                               Practice
• Response
  – SWA met Braniff’s Dallas-Houston price &
    continued San Antonio discount
  – SWA advertising campaign attacked Braniff
  – Braniff reverted to higher Dallas-Houston peak time
    prices in April, SWA matched increase
• Outcome
  – Increase in overall traffic
  – Braniff image declined, SWA image increased
  – SWA added aircraft & cities during mid 1970s    9
            • 1977 airline deregulation
              allowed expansion
              – New key assets: Airport gates
              – New terms of competition: Routes,
                costs
            • Braniff: Bankrupt twice
              – 1982: Expansion/cost-cutting
     SWA        conflict
              – 1989: Couldn’t downsize
Follow-Up
            • Texas Internat.: Merged into
              Continental, 1982
            • SWA: Highly successful

                                               10
       • ―Southwest Airlines will fly any plane, as
         long it's a Boeing 737, & let passengers sit
         anywhere they like, as long as they get there
         first.‖
SWA,   • Flights to 60 cities in 30 states
       • Uses only Boeing 737s (~360) to curb
2003     maintenance & training costs
       • Participative corporate culture, only one
         strike in 30 years
       • 29 straight profitable years
       • Expanding service in the eastern US
       • 2003: Two transcontinental flights (BWI –
         San Jose & Los Angeles)
                                                11
      30%                           $6,000
      20%                           $5,000
                                                        Financials,




                                             Revenue
      10%
                                    $4,000
ROS
       0%
      -10%
                                    $3,000
                                    $2,000
                                                           1972 &
      -20%
      -30%                          $1,000              1976-2002
      -40%                          $0




                )
           19 72
           19 74
           19 76
           19 78
           19 80
           19 82
           19 84
           19 86
           19 88
           19 90
           19 92
           19 94
           19 96
       20 2 98
            (3 0
              Q
         02 0 0
           19




                Rev ($ mln)   ROS                          SWA
      SWA v.
      Airline
       Index,                                          Airline index
       1995-
        2003
                                                                   12
     12%
     10%                         Fall 2001
     8%
     6%                                                 Southwest Air v.
     4%                            Net Profit M argin
     2%                            Return on Assets            Industry
     0%
     -2%
                           es



                             s
                           ir




                          ne
                        in
        tA




     -4%              rli
                     irl
      es




                    ai
                  la
     hw




     -6%
                 or
               na


              aj
   ut


             io


            M
 So


           eg
           R




                                      6%

                                      4%

SWA dominates                        2%
                                                                 Jan 2003
majors                                0%
                                                                 Net Profit M argin




                                                           es



                                                             s
                                                                 Return on Assets
                                                           ir




                                                          ne
                                     -2%

                                                        in
                                        tA




                                                      rli
Regionals slowly                                    irl
                                      es




                                                    ai
                                                  la
                                     hw




                                     -4%


                                                 or
                                               na


                                              aj
                                   ut


                                             io


                                            M
                                 So



                                           eg




catching up                          -6%
                                           R




                                     -8%
                                                                        13
        Step back: Consider SWA’s
           competitive environment


• Competitive analysis: 5 Forces analysis
• Mobility barriers
• Market segmentation




                                            14
              Competitive Analysis

• How attractive is an industry?
• How profitable is the average firm?
• Probes the reasons for systematic
  differences in average firm performance
  across industries.



                                            15
                Porter’s Five Forces
• Expands notion of rivalry to include any
  other firm that can affect your profits, not
  just direct competitors
• Shifts attention from two-stage vertical
  chains (supplier-buyer) to three stage
  (suppliers-firm & its rivals-buyers)
• Purpose—to address:
     Where’s the opportunities?
                                                 16
 Features of Porter 5-forces model
• 5-forces model is qualitative, making it
  useful for assessing trends and changes
• Focus is industry-level, not on any
  individual firm 
    So ask what special advantages you bring
    to the party.




                                        17
             Porter’s Five Forces
               Threat of
                 entry



Bargaining                  Bargaining
 power of      Internal      power of
 suppliers      rivalry     customers


               Threat of
              substitutes
                                     18
                     Internal Rivalry
• Define the market: Who are your direct
  competitors?
• Pay attention to product and geographic
  market definitions
• Firms may compete along price and nonprice
  dimensions


                                         19
                          Internal Rivalry
• Intense non-price competition (i.e.,
  advertising or R&D) may erode profits by
  driving up fixed costs
• Price competition erodes profits by depressing
  prices, reducing price-cost margins
• Diminishes market shares
• Approximate measure:
  – Concentration ratio
                                           20
       Factors affecting internal
                           rivalry
• Number of sellers (concentraton & balance)
• Slow growth of demand
• Different costs across firms
• Intermittent overcapacity
• Homogeneous products, or buyers have low
  switching costs
• No history of tacit collusion
• Strong exit barriers (firms struggle to survive
  instead of exiting)
                                             21
                           Threat of entry

• Erodes profits:
  – Incumbents constrain prices to forestall entry
  – Post-entry, internal rivalry increases,
    diminishing market shares, and so on (per
    greater internal rivalry)




                                                     22
    Determinants of entry threat

• Barriers to entry: characteristics of
  industries that protect high profit levels by
  inhibiting entry
• Entry barriers can be:
  – Structural (e.g., EoS, exclusive access to key
    input, legal barriers such as patents, etc.)
  – Strategic (incumbents keep prices low to deter
    entry)
                                                     23
                       Barriers to entry

• Economies of scale/Minimum efficient scale
• Capital requirements
• Reputation effects; strong brand loyalty
• Restricted access to key inputs, including
  know-how, raw materials
• Access to distribution channels
• Gov’t policy
                                           24
           Barriers to entry (cont.)

• Proprietary experience curve putting
  entrants at a cost disadvantage
• Network externalities, conferring advantage
  to large installed base
• Expected retaliation



                                         25
             Buyer/Supplier Power
• Two forms of buyer power:
  – Direct power -- buyer is so large that its
    business is essential to supplier’s survival
  – Indirect power– buyers are motivated (benefits
    of shopping around justify the time and
    expense) and able to shop around (is well-
    informed about alternative producers)
• With more power, buyers can lower price
  and try to raise quality (though limited)
  – Ex: GM’s steel procurement policies
• Supplier power analogous
                                              26
Factors affecting Buyer/Supplier Power

• Concentration of buyer/supplier industry relative
  to the other
• Purchase (sales) volume to/from firm
• Availability of substitutes
• Switching costs (which can change over time)
• Supplier/buyer information
   – Consider impact of web
• Threat of up/downstream integration



                                                27
                  Threat of Substitutes
• Substitute products satisfy same function in
  at least some applications (e.g., aluminum,
  plastics and ceramics for steel)
• Substitutes erode profits by imposing price
  cap, or similar to threat of entry (stealing
  business and intensifying internal rivalry)
• Key determinants of immediate threat:
  – relative price performance
  – Switching costs
                                             28
           Extension: Mobility Barriers
• Even within industries, there can exist different
  ―strategic groups‖ of firms, distinguished by:
  –   Market segment served
  –   Vertical and horizontal ties
  –   Org’l and technical capabilities
  –   Size-based cost leadership (scale, scope, learning)
  –   Average earnings
       • Ex: ethical versus generic drug mfrs.
• Mobility barriers impede movement across
  strategic groups within industries
                                                       29
      Suggests: Market Segmentation
• Identify key market segments
   – Price/service/product demand variation
• Don’t take tastes or mobility barriers as
  givens
  – Create new segments proactively
  – Change tastes & create growth with
    product/service innovation

                                          30
  Airline Industry: Tough Environment
                    Potential entry
            • Market by market/often high threat


Suppliers           Competitors                    Customers
  • Few               • Often Many        • Weak but price sensitive
                                            •Price discrimination

                        Substitutes
                 • Not flying often an option
                 •Exs: Cars, teleconferencing

      But some airlines make money                          31
   ROS, 1991-2000, Major US Airlines
                                    10-yr ROS


3.0%

2.5%

2.0%

1.5%

1.0%
                                                                         10-yr ROS
0.5%

0.0%
        Delta   American   United     Continental   Northwest   US Air
-0.5%

-1.0%

-1.5%


                                                                              32
                      SWA & Overcoming
                   Entry/mobility Barriers
Ultimately, many barriers are ―Maginot lines‖
• Competitor inertia creates entry opportunities
  – Behavioral inertia: Strategic blindness
  – Structural inertia: Fixed investments
• Post-entry: Competitors’ behavioral inertia
  declines, but their structural inertia remains
• Focus attack on competitors’ structural inertias
• For SWA, Braniff’s high-cost planes created
  discount opportunities and a sustainable niche 33
   How a firm can transcend the five
  forces: Long Term Success at SWA
• Bring inimitable, firm-specific advantages
  to the party
• Why is SWA difficult to imitate?
  – ―First survivor‖ preemptive advantage in
    regional markets v/v other regional airlines
  – Actively sustains its low-cost position v/v
    national airlines
  – Web of inter-related capabilities (SBL, p. 114)

                                                      34
  Pitfalls & Limits of Five Forces
                          Analysis
• Much of framework goes beyond what
  ec’ists have shown empirically to be true
  (note italics above).
• If applied mechanically 
  – Takes strength of each force as beyond the
    firm’s influence—often not true (e.g., SWA)
  – May misrepresent the ―opportunity‖ (e.g.,
    incumbents’ high RoR doesn’t mean that you
    can do as well)


                                                  35
      More Pitfalls & Limits of Five
                    Forces Analysis
• Must expand notion of rivalry even further to
  include possible sources of ―disruptive‖ change
  (i.e., substitute technologies and business models)
   – Ex: In its fiber optic business, should Corning have
     been looking at wireless?
• Entertain the possibility that ties with other firms
  can increase your profits
   – ―Co-opetition‖: Identify possible partners, even among
     ―rivals‖ (e.g., Astra-Merck)
   – Other firms products and services can complement your
     products and services (e.g., ―Wintel‖)

                                                            36
                                       Next

• Eat lunch!
• Return at 1:00 for afternoon session (Body
  Shop, BSkyB)




                                               37

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:66
posted:7/6/2010
language:English
pages:36