Analyze Two Macro-Environment Components Influencing the Firm

Analyze Two Macro-Environment Components Influencing the Firm

Introduction

Southwest Airlines Corporation is an airline company which operates the Southwest Airlines in the United States. The company began its airline transportation operations back on June 18th, 1971 and for the 45th consecutive year; the company has been successful in the airline industry. According to the 2017 annual report found on the company’s website, the company was able to earn a total net income of $3.5 billion in that fiscal year (“Annual Reports – Southwest Airlines”, 2017). Also, as at 31st Dec 2017, the company boasted of operating a total of 706 Boeings, 737 aircraft and serving 100 destinations in 40 states. In this paper, I am going to analyze the airline industry in which the company operates in and evaluate the most influential forces in the general business environment. Besides, I am also going to analyze the five forces of competition the company dealt with and chose 2 of the most influential forces among other evaluations of the company such as the threats and how the company deals with the risks.

An Analysis of the Two Macro-Environment Components Influencing the Firm

In the Airline industry, macro-environment factors such as the general economic conditions in the economy, technological changes and competition are the most influential on the success of companies in this industry (Doganis, 2005). These forces have the enormous impact on the revenues realized by airline companies in the airline industry. To be more specific, fuel costs and technological factors are the most influential macro-environment forces influencing the success of Southwest Airlines Corporation in the airline industry.

Fuel-costs

Airline companies are inherently depended on energy to operate (Doganis, 2005). According to the company’s 2017 annual report, fuel costs which include jet fuel and oil made up to 22% of the company’s total operating expenses. This demonstrates how the company is depended on fuel costs to generate revenue. The cost of fuel in the market is usually characterised by volatility in the prices of fuel and is very unpredictable. A small change in the rate of fuel costs can significantly affect the company profits in a single operating year.

Fuel prices are usually affected by other external factors which are beyond the control of the company. The external factors can be categorized into political and economic factors and generally include political or economic conflicts in oil producing areas, the global demand for fuel, changes in the US government policies on fuel such as taxes, constant change in the currency exchange rates and large dependency on foreign imports of crude oil year (“Annual Reports – Southwest Airlines”, 2017). In the wake of high fuel prices, the company’s ability to efficiently handle fuel price increase is usually limited by factors such as the risk that high fares will lead to a decrease in demand, the historical low-fare reputation of the company and the competitive nature of the airline industry.

Southwest Airline Corporation tries to manage the risk associated with volatility of fuel prices by making use of over-the-counter fuel derivative instruments to try and hedge a portion of its future jet fuel purchases. However, this measure is not safe proof, and sometimes the company could face hedging losses as a result of a significant increase in the fuel prices because the company may end up paying end up paying higher than the market price of jet fuel. On the other hand, the cost of fuel can rapidly change over a small period and therefore, it is my opinion that the company is not well protected against the risk of increases in the price of fuel year (“Annual Reports – Southwest Airlines”, 2017).

Notably, the company is also reliant upon the readily and timely available supply of jet fuel in the airports that it serves. However, any significant interruption or disruption in this supply would affect the company’s operations in particular destinations. This could be followed by the company cancelling its flight operations or the general inability of the company to provide airline services in those airports. Fuel costs are seen to significantly affect the overall fare pricing by the companies in the airline industry and are essential to determine the profitability of those companies (Doganis, 2005).

Technological Factors

The airline industry, in general, is increasingly dependent on technological inventions and the overall use of technology to manage its operations (Doganis, 2005). Southwest Airlines Corporation is in constant reliance on the use of sophisticated technology and systems to run its operations and support the strategic objectives of the company. Nonetheless, the implementation and integration of the use of technology in the business operations by the company are affected by the costs of installation of such technologies and systems, the availability of competent and skilled human resource to use the technology and the need to implement internal controls to prevent manipulation of the technology or systems.

Southwest Airlines Company is also dependent on third-party vendors to efficiently manage and maintain adequate information security measures in the company. Any interruption or breakdown in the technology systems implemented by the company will improve the operations of the company significantly and consequently the operating profits at the end of the fiscal year. The interruptions or breakdowns may be as a result of power loss, catastrophic events such as fires or floods, computer viruses, security breaches or acts of war or terrorism. Be it as it may be, the use of technology by an airline company is meant to increase the competitiveness of the firm over its competitors in the overall industry (Doganis, 2005).

An Analysis of the Two Forces from the Five Forces of Competition Most Significant to the Firm

In the airline industry, competition is highly unpredictable and intense. On this note, the five forces of competition in the industry are; rivalry among sellers, the threat of potential entrants, threat of substitute products, suppliers bargaining power and buyer bargaining power (Porter, 2008). The most significant of the five forces of competition are rivalry among sellers and supplier bargaining power.

Rivalry Among Competitors or Sellers

In the airline industry, companies typically compete on prices of air tickets, the frequency of flights on specific routes or destinations and the reliability of flights to particular destinations. The ability of an airline company to offer cheaper domestic and international flight tickets fused with discounts on tickets affects the overall profitability of the company in the industry. This factor shapes the demand and preference of customers to the company as opposed to its competitors in the same market or industry (Porter, 2008). Customers will compare the cost of the air tickets offered by airline companies on specific destinations and will preferably demand the cheapest.

The Southwest Airline Corporation has implemented a low effective operating cost program in its airline services which enables the company to charge significantly low fares on flight tickets as compared to its competitors. The pricing of air tickets is also affected by other factors such as the prices of jet fuel and oil in the market. The company has implement hedge accounting measures to try and cushion the company from the volatile fuel prices in the market. Similarly, the company also offers various discounts to its customers by excluding charging additional charges on items such as flight changes, seat selection, and telephone reservations and first and second checked bags for each customer (Kim & Mauborgne, 2014).

Suppliers Bargaining Power

In the airline industry, the suppliers in the market have high bargaining power when it comes to setting the prices of the products they sell or supply to airline companies (Kim & Mauborgne, 2014). The high bargaining power of the suppliers comes from the reduced numbers of the suppliers offering the same products in the same market. For instance, there are only two manufacturers or suppliers of commercial passenger aircraft; Airbus and Boeing. Also, there are few suppliers of jet fuel and oil in the airline industry with the majority of the suppliers coming from the Middle East countries. As earlier discussed in this document, the airline industry is a fuel-intensive industry, and this makes the airline companies more sensitive to the prices of jet fuel and oil. The Southwest airline company has invested continuously in the purchase of aero planes such as Boeing and other small passenger aircraft as well as implementing adequate measures to mitigate the company against the volatility of the prices of fuel (Kim & Mauborgne, 2014).

Prediction on What Southwest Airlines Will Do to Address the Two Forces of Competition Discussed Above shortly

The dynamics of business operations are very unpredictable and uncertain especially as earlier highlighted in the airline industry. However, soon, Southwest Airlines Corporation might come up with measures or strategies meant to address the two forces of competition identified. On the industrial rivalry competition, the company might continue implementing low fare rates on air tickets in many destinations the company may venture into. The company might also continue to offer discounts on items which it might introduce shortly to gain a competitive advantage over its competitors (Porter, 2008).

On the second force of suppliers bargaining power is high, the overall airline industry might change the way it is structured currently to include many manufacturers of aircraft. The company can, therefore, choose the cheapest supplier offering the same product in the market. Besides, the company may continue to invest in aircraft purchases continuously, and this might help the company avoid forced buys of aircraft at high prices in the future (Baye et al., 2006).

External Threats Affecting the Company

The most prominent threat to the company and in the airline industry, in general, is the vulnerability of the sector to economic cycle’s year (“Annual Reports – Southwest Airlines”, 2017). In the event of a depression in the economy, customers may not be able to afford the air ticket’s fares and opt for cheaper means of transport such as the trains and buses. Secondly, the airline industry has only two leading suppliers of aircraft; Boeing and Airbus. This is a significant threat to the operations of the company bearing in mind that the company has to buy the planes at whatever price the supplier charges (Thomas, 2006).

Thirdly, legacy carriers such as American Airlines, Delta Airlines, and United Airlines and Continental airlines are developing their low-cost commuter services to its customers. These airlines can gradually acquire more market share in the industry (Thompson, 2009). Another seasonal threat is terrorism which has driven customers away. Terrorist threats have led to increased safety and security costs. There are also low-cost entrants into the airline industry such as JetBlue and US3000 into the market and employing the same low fares strategy as Southwest airlines company year (Thomas, 2006). Therefore, the company should use forecasting tools of the overall performance of the economy to implement measures to mitigate the company against the volatility of fuel and oil prices.

Opportunities Available for Southwest Airlines Corporation in the Market

The firm has to match the available opportunities in the market with its resources for the company to gain a competitive edge over its competitors in the airline industry (Thomas, 2006). The company is characterized by flying into small airports with less traffic or aero planes me essential cities in the South West. This has enabled the company to dominate domestic and shorter air routes in the airline industry. Eventually, the company should consider partnering with a European airline and implement the same low-cost air flights to overseas destinations.

The company can consider purchasing companies which went under because of competition in the airline industry to acquire bigger aero planes to fly into the new routes (Thompson, 2009). The company can also target new customers with families to board flights offered by the company by providing discounts. Therefore, Southwest airlines should diversify and venture into international markets by seeking a favorable partnership with a European airline company of its choice.

Opinion on the Most Significant Strength of Southwest Airlines Corporation

The most significant strength of Southwest Airlines Company is the ability of the company to offer cheap flights to the domestic market (Thomas, 2006). This strength has shaped the company into the most successful business in the history of the airline industry. As a strategy to maximize these strengths, the company should seek to venture into the international market by partnering with a European company. The company can still offer low flight tickets to these global markets as it does with the domestic fights. The company can also extend the entertainment it provides in the domestic flights to the new international flights to further increase customer satisfaction (Thompson, 2009).

Opinion on the Most Significant Weakness of Southwest Airlines Corporation

The most significant weakness of the airline company in question is the lack of customer service on the customers who choose to fly with the airline company. The lack of customer service by the company is attributed to the low-cost fare rates offered by the company which forces it to cut down on costs. Similarly, the company has no First class flight services for business people who prefer to fly in this category (Thompson, 2009). The company should include a business class flight category to accommodate business people. Finally, the corporation should also seek to employ customer services to ensure that their customers travel with ease and are satisfied with the overall service offered by the company (Thomas, 2006).

The Company’s Resources, Capabilities and Core Competencies

Southwest Airline Company is characterized by the following essential resources, capabilities and competencies in the airline industry;

Powerful Business Strategy

The company has transformed into a very successful business in the United States as a result of the powerful business strategies the company employs. Some of the strategies used by the company include; charging low fare rates in the market, treating the employees of the company well and having an active web presence. These strategies have enabled the company to make consistent profits the past decade (Miles & Mangold, 2005).

The ability of the company to Reduce its Operating Costs

The company has consistently implemented a low operating cost policy by cutting down on unnecessary operating costs previously incurred by the company. This strategy has enabled the airline company to realize profit revenues even when the overall business economy is not appealing (Miles & Mangold, 2005). The company fires any unnecessary employees and asks the available employees to work extra hours to compensate for the work hours they would have worked.

Low Ticket Price Rates

The company has consistently adopted a policy where it charges its customers the lowest price for air ticket fares in the market. This strategy has enabled the company even to win the customers of other airlines. Also, this policy has made the company be unique in the airline industry and produce vast volumes of profits in the process.

Providing a Stable Work Environment for its Employees

The company has created an open culture in the organization for its employees to innovate and be creative. There is an overall stable work environment in the company for employees to grow in their careers (Miles & Mangold, 2005). Also, the company has allowed its employees to join union organizations in the country. This is to make sure that employees are satisfied with their work.

Proficient Website Presence

The company was the first of its kind to have an online presence by creating an efficient website to manage some of its business operations (Miles & Mangold, 2005). As a result, the majority of the company’s ticket booking was done online on the company’s website portal. Similarly, the potential customers can acquaint themselves with the services offered by the company through the website. The customers can also check their flight schedules online on the webpage.

Investment in the Aircrafts

The company has consistently invested in large passenger aircrafts such as Boeing and also other planes such as Airbus (Miles & Mangold, 2005). These aircraft have been essential in offering low priced economy air tickets to its customers and keep the company in business. The aero planes can also be crucial should the company choose to venture into international airline market soon.

Conclusion

According to the company’s value chain, it is my opinion that Southwest Airlines Company can create value by using its core resources, competencies and capabilities to venture into international markets. This can be achieved by the company partnering with a European airline company as earlier suggested in this document.

References

Annual Reports – Southwest Airlines. (2017). Retrieved 2018, from http://investors.southwest.com/financials/company-reports/annual-reports

Baye, M. R., Prince, J., & Squalli, J. (2006). Managerial economics and business strategy (Vol. 5). New York, NY: McGraw-Hill.

Doganis, R. (2005). Airline business in the 21st century. Routledge. (Doganis, 2005)

Kim, W. C., & Mauborgne, R. A. (2014). Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard business review Press.

Miles, S. J., & Mangold, W. G. (2005). Positioning Southwest Airlines through employee branding. Business Horizons, 48(6), 535-545.

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.

Thomas, J. L. (2006). Southwest Airlines Corporation: A Domestic Industry Analysis & Recommendation for Expansion.

Thompson, T. (2009). The Airline Industry: A Strategic Overview of Southwest Airlines.

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