Decision Making by Individuals and Teams .Assig #6- Group

  

As a group, for the Southwest Airlines case (attached), respond to the following questions.1. Using the sidebar entitled ‘How Can You Increase Your Awareness’ in the ‘Decisions without Blinders article(attached), explain how Southwest Airlines could have improved their decision making.2. Using the recommendations in the “When Teams Can’t decide’ article (attached), explain how Southwest Airlines could have improved their decision-making.
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REV: JANUARY 9, 2013
JAMES L. HESKETT
W. EARL SASSER JR.
Southwest Airlines: In a Different World
On a bright day in October 2008, Gary Kelly, Executive Chairman, President, and CEO of
Southwest Airlines, listened intently to the arguments of those seated around the conference table in
his Dallas, Texas, office. They were arguing for and against Southwest’s possible acquisition of slots
and gates that the bankrupt ATA Airlines had vacated at LaGuardia terminal in New York City.
Executives from both Marketing and Scheduling argued for going into LaGuardia. Those from
Properties and Legal worried about getting the slots. Those in Operations were concerned about
delays. Kelly was not surprised by the vigor of the discussion. He recognized that such a move would
further test just how far Southwest could expand its network to meet the needs of its Customers. 1 It
represented just one of many decisions that the team would have to make in the context of its
continuing efforts to transform Southwest’s strategy in the face of rising costs, stiffer low-fare
competition, and changing Customer needs and behaviors.
Background
Once considered an upstart in the airline industry, Southwest had grown to become the airline
serving the most U.S. customers with the most flights and seats, but to only 64 U.S. cities to which
Southwest targeted its service. In the process, it had come to stand for, in the words of Kelly,
“outstanding, passionate, caring Customer Service combined with an efficient, simple, low-fare
Customer experience provided with high reliability and operating expertise.”
Founded in 1967, Southwest’s operations were delayed for nearly four years due to lawsuits that
competitors brought to block the new carrier’s entrance into the Texas intrastate market. Since its first
regular flight in June 1971, Southwest had compiled the most consistently profitable record in the
world’s airline industry. By 2001, shortly after September 11, the airline’s market value exceeded that
of all other U.S. air carriers together, suggesting the dominance of the strategy developed over time
by Southwest’s founders, Rollin King (an investment counselor and pilot), Herb Kelleher
(Southwest’s attorney), and Lamar Muse (former CEO of another small airline who became
Southwest’s first operating President and CEO). By then, Southwest had literally changed the rules
by which air carriers worldwide operated and competed. By 2008, many airlines had been created
based more or less on the Southwest model, including Air Asia, Air Deccan, Go Airlines, Spice-jet,
and Indigo in Asia; Ryanair and Easy-Jet in Europe; and JetBlue, Ted, and Song (since merged back
into Delta) in the U.S.
1 Throughout the case, the words Customer and Employee are capitalized. This is the practice at Southwest.
Professors James L. Heskett and W. Earl Sasser Jr. prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are
not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2010, 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may
not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
Southwest Airlines: In a Different World
Southwest’s beginnings were not auspicious. Because of their plan to charge fares that were at
least 60% lower than the average coach fare, its founders did not want to be regulated by the Civil
Aeronautics Board, which set airline routes and fares for interstate carriers. Having seen the success
of intrastate carriers Pacific Southwest Airlines (PSA) and Air Cal, Southwest’s founders mapped a
triangular intrastate route connecting Dallas, Houston, and San Antonio, cities located about an hour
(by air) from each other, and in 1967 applied for authority from the Texas Aeronautics Commission to
serve them. Two interstate competitors, Braniff and Texas International, sued to enjoin Southwest
from flying, a suit that was eventually resolved in Southwest’s favor by the U.S. Supreme Court in
1971.
King, Muse, and Kelleher consulted with Air Cal on a number of issues, including the decision
initially to purchase three aircraft. (They bought a fourth shortly thereafter.) The Boeing Company,
which had overproduced its Boeing 737 twin jet (a result of an overestimation of the market), was
willing to sell each plane for $4.1 million, $500,000 below the initial asking price, and provide
favorable financing terms. Thus began a relationship that would create Boeing’s best customer. It also
launched Southwest as a carrier that utilized only Boeing 737s, 537 of them by 2008.
Price competition from interstate competitors was ferocious. According to Colleen Barrett,
President Emeritus, “we knew that we were going to have to have substantially lower fares on day
one of our operation than were currently being charged because that was our only chance of winning
a niche in the business.” The goal was to charge fares at all times that were below the cost of driving
an automobile from one Texas city to another. (Later, in most of the airports in which Southwest
initiated service, traffic on the routes it served increased three or four times. Over the years,
Southwest enjoyed a long waiting list of airport managers seeking out the airline to initiate service to
their airports.)
Management had to sell one of its four planes at a profit to survive the first year. This led to
another key element of Southwest’s eventual strategy, the 10-minute turnaround. In order to operate
with three planes rather than four, it became even more necessary to get maximum utilization out of
the fleet. As a result, Southwest made efforts to reduce the turnaround time (from arrival at the gate
to push-back from the gate) to 10 minutes, barely one-fifth that of competitors. While average
turnaround time increased over the years due to more seats (typically 130 per plane), higher load
factors (seats filled per available seats), and the carriage of freight, it remained less than 30 minutes,
about half the industry average in North America.2
Southwest’s business model, as it quickly evolved, became well known for its contrarian approach
to air transportation—what it didn’t provide that other carriers did. Because its flights were typically
90 minutes or less, it served no food (other than peanuts). There was no first class, no assigned seats,
no interlining (with other airlines) of bags or passengers, no code sharing (with other airlines’ flights
to extend routes), and no use of the popular hub-and-spoke route structure. Instead, Southwest
offered low fares, frequent flights, on-time arrivals, and point-to-point service, often from airports not
served by other airlines, some of which were less congested and more easily accessible to business
travelers.3 Its strategy was fueled by the low fares that it made possible. Southwest executives
regarded the private automobile, not other airlines, as its competitor. They set fare levels accordingly.
2 The savings provided by fast turnaround yielded significant competitive advantage for Southwest by increasing the
utilization of its 537 planes, each of which flew on average between five and six flight segments during a typical 11-hour day.
At the time of the case, Boeing was quoting to potential buyers a price of about $60 million for a single 737-300 plane.
3 In late 2008, Southwest’s fares on short flights were as low as $49 and on longer flights as low as $89 with advance purchase.
2
Southwest Airlines: In a Different World
The Focus on People and the Culture
Frequent on-time service to and from convenient airports for business travelers, provided at fares
rivaling the costs of driving an auto, were only some of the elements Southwest sought to deliver to
Customers. Just as important was the service provided. The founders wanted the service to be both
memorable and inexpensive to deliver. They had enlisted the help of a regional advertising agency,
The Bloom Agency, to come up with, among other things, a personality for the airline. As a result,
Southwest became “the airline that made it fun to fly. Young, friendly, refreshing, and exciting.”
Thus, the LUV (later, Southwest’s stock designation on the New York Stock Exchange) airline was
born, featuring things that today might be regarded as blatantly sexist: love potions (for drinks), the
love machine (for tickets), and ads with female cabin attendants in hot pants who invited travelers to
fly an airline that provided something only Southwest could offer, “me.”
From the outset, Southwest’s management focused on hiring agents and cabin staff with positive
personalities, senses of humor, and the willingness to make humorous intercom announcements and
otherwise innovate on behalf of Customers. These antics replaced meal service on flights that were
relatively short anyway. Employees had to be able to use good judgment in implementing
Southwest’s policy of “do whatever you feel reasonable doing for a Customer.” In return, the
company paid wages that were roughly standard for a start-up carrier and gave Employees an
opportunity to participate in the airline’s success through membership in its profit-sharing and stock
ownership programs.
The organization was imbued with a sense of ownership. Jeff Lamb, Senior Vice President
Administration and Chief People Officer, told a story that illustrated it. He had just joined the
organization, leaving his former job in real estate because he was intrigued by the chance to be part of
the Southwest experience, when a member of his staff came by the office to drop off a cowbell and
announce that “everybody is gathering in the lobby in 15 minutes to welcome Bob back from the
hospital.” Lamb said, “I didn’t get the memo.” The reply was, “We don’t send memos for this sort of
thing. See you there.” According to Lamb, hundreds of people assembled in the lobby, greeted Bob,
and were back at work as if nothing had happened, all in the space of 15 minutes, while a skeleton
staff maintained “coverage” to ensure that nothing stopped entirely.
A “Culture Committee,” drawn from all levels of the organization, reviewed Employee ideas for
recognition and celebration, and used the Southwest Way to guide its efforts. (See Exhibit 1 for
Southwest’s mission and values.) Many of the projects were self-funded, with Employees raising
money to buy T-shirts and other paraphernalia with bake sales and other events. Employees
extended their team efforts when away from the job as well, engaging in community-based activities
together. The organization as a whole officially supported the Ronald McDonald House Charities for
sick children and their families.
There was a constant effort to maintain what came to be known as a “Warrior Spirit” at
Southwest. A typical, strongly worded memo from Herb Kelleher encouraging everyone to reduce
costs to maintain the airline’s low-cost leadership position was intended, in the words of the memo,
to make sure we don’t “rest on our laurels and get a thorn in our ass.”
A “Servant’s Heart” and a “Fun-LUVing Attitude” characterized much of the airline’s culture, as
shown in Exhibit 1. Cofounder Kelleher, who had become Chairman in 1978 and CEO in 1981, and
Barrett, who for many years served as Executive Vice President Customers and, later, President, led
efforts to preserve the culture. Kelleher’s antics were legendary. They included dressing in outlandish
costumes; riding a motorcycle into the headquarters lobby; arm-wrestling another airline executive in
a highly publicized “Malice in Dallas” match over the rights to the use of an advertising slogan, “Just
3
Southwest Airlines: In a Different World
Plane Smart”; and serving as the lead celebrant at the many awards parties that Southwest
Employees held. Visitors to Southwest’s headquarters were impressed by the thousands of photos of
Employees taken at these events, as well as frequent hugging and use of the word “LUV.” As one
visitor put it, “the longer it went on, the longer I concluded that the behavior was real. No one could
keep up a pretense for that long.”
Southwest remained the most heavily unionized airline in the industry. Both national unions such
as the International Association of Machinists and “associations,” such as the one formed by the
Pilots, represented its Employees. In its negotiations with these organizations, management had
always sought to provide reasonable compensation and secure flexible work rules. The flexible work
rules enabled Employees to perform many different jobs as members of teams. For example, Pilots
could handle baggage if the situation demanded it. Teams were assigned to gate operations, with
responsibility for turning planes around rapidly. If a plane was delayed on the ground, it was the
team’s responsibility to make sure it didn’t happen again. As a result, Southwest heavily emphasized
the selection of Employees with abilities to relate to both Customers and other Employees. Regardless
of rank, they were then required to complete team-based training activities.
By 2007, Lamb’s People Department was responsible for hiring roughly 4,000 people per year in
an organization of more than 35,000. This was sufficient to support growth and replace departures in
an organization with a relatively low Employee turnover rate of less than 5%. That year, it received
329,000 applications for employment. A significant number of hires were from current Employees’
referrals. Recognized by Fortune magazine as one of the best places to work in the U.S. for several
years running, Barrett discontinued Southwest’s participation, declaring that it required too much of
an investment in time.
Leadership and Succession
Former CFO Kelly became CEO in 2004, with attendant responsibilities for maintaining the
organization’s momentum. He added President and Chairman to his title in 2008. Among other
things, he had been credited with instituting a very successful fuel hedging strategy (described
below) that had saved Southwest more than $4 billion between 2000 and 2008 and further
differentiated the airline’s financial performance from its competitors. Chairman Kelleher and
President Barrett retired in 2008. The Board, to reward their legendary service, named both to
Emeritus status, with rights to maintain their offices at headquarters for five years. They appeared
frequently at Employee gatherings. Kelly appeared to be sanguine about the prospect of having two
giants of the industry in close proximity, if not looking over his shoulder.
Controlled Growth
Southwest saw its revenue grow from $5.9 million in 1972 to $5.7 billion in 2000, a compound
growth rate of more than 25%. By the late 1990s, however, the airline sought a controlled growth rate
of about 8% to 10% per year in order to make it possible to hire enough of the right people to preserve
Southwest’s service, personality, and culture. Southwest was the only airline ever to win the “triple
crown” of service, recording the highest levels of Customer Satisfaction, the best on-time arrival
record, and the lowest level of lost baggage. Further, it accomplished the feat in five consecutive
years between 1992 and 1996. (See Exhibits 2 and 3 for the airline’s financials and operating data for
selected years.) The Company rewarded Employees for this achievement with a specially painted
aircraft, called “Triple Crown One,” that included the names of all Employees at the time on the
overhead bins.
4
Southwest Airlines: In a Different World
The terrorist attacks of September 11, 2001, posed challenges for Southwest as well as other
airlines. But unlike its competitors, Southwest’s management did not furlough anyone. Nevertheless,
new security rules for boarding passengers threatened to slow a process particularly important to an
airline operating with a significant percentage of last-minute “walk up” passengers and short
turnaround times.
As a result of management’s decision to maintain its flight schedule and staff, Southwest’s
revenues declined less than 2% in 2001 compared to the previous year. It emerged from the
September 11 crisis in a competitively stronger position than before, with by far the highest-valued
stock of any U.S. airline.
Transforming the Core Strategy
Opportunities for future growth within the highly focused strategy centered around low fares and
point-to-point flights were less certain. Kelly summarized the challenges this way:
One challenge in particular is overarching: a more than 35% rise in operating costs since
2005 caused simply by increased energy costs. For years, we had stable costs, low fares, and
traffic stimulation. Now, higher costs mean higher fares, which mean traffic de-stimulation,
which means less capacity needed, etc. One way or the other, for legacy carriers to survive,
they had to get their costs (and their fares) down. Demand was soft and the legacies’ days of
living off fat, high fares were over. Those sensing the opportunity formed a new generation of
low-cost/low-fare carriers. Now, our legacy competitors (through bankruptcy) and new
entrant low-cost carriers have lower labor rates than ours. Better, sophisticated revenue
management and customer fare shopping via the Internet make it easier for legacy airlines to
compete. This represents a threat to our market niche. We know we have to adjust to this
looming competitive reality.
Also, it’s a new world with security.
We have to transform our business model and expand our revenue-generating capabilities.
To do that, we have to transform or even construct our capabilities to offer new products and
services.
Changing the Customer Experience
As a result, management set out to increase revenue without raising fares and damaging its cherished
low-fare brand. To do this, it sought to win more Customers by improving the Southwest Customer
Experience. This meant adding flights among cities the airline currently served, expanding routes to
meet Customer needs for service to important U.S. destinations, adding code-share destinations (outside
the U.S.), and adding more sophisticated route scheduling and revenue management of seat inventories
and fares. It also meant completely transforming the supporting technology and challenging decades-old
paradigms, like open versus assigned seating, as well as introducing an array of new fares, products,
onboard services, and a “bags fly free” policy.
Adding Flights
In 1984, Southwest added its first flight segment of more than three hours. Until then, it had assumed
that service with minimal onboard catering (snacks and beverages) was not suitable for longer flights. But
the new service between, for example, Los Angeles and Houston proved to be popular. Further,
5
Southwest Airlines: In a Different World
Customer Service scores on the flights dropped very little as Southwest’s low fares and Customeroriented, fun Employees (who were known for initiating games such as “who’s got the biggest hole in
your sock contest”) outweighed other service factors. By the fall of 2008, with the addition of new stations
further and further east, the proportion of Southwest’s flights greater than 1,200 miles in length had risen
to approximately 25%. Popular routes, for example, were those between Phoenix and St. Louis,
Chicago/Midway and Las Vegas, and Denver and Orlando.
Aside from more flights to more distant locations, there were many opportunities to add shorter
flights to schedules connecting existing stations in the network.
New Markets
Southwest fir …
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