1. Assess whether Southwest's culture is a source of competitive advantage for the company. 2.. Assess whether Southwest's employees are a source of competitive advantage for the company.

5.. Are Walmart's distinctive competencies VRIN? Why? 6. Are Target's distinctive competencies VRIN? Why?

7. Is Southwest's culture a VRIN resource? Justify your answer.

8. Is Southwest's employees a VRIN resource? Justify your answer.

9. Is Southwest's operating model a VRIN resource? Justify your answer.

10. Is Southwest's financial performance a VRIN resource? Justify your answer.

Service at Southwest Case #6-DRAFT TUCK SCHOOL OF BUSINESS AT DARTMOUTH GLASSMETTH/MCNAMEE CENTER FOR DIGITAL STRATEGIES That cheap but fun image was deeply engrained into the Southwest culture and visible in VINCENT LACORTE CASE SERIES everything from executive offices that looked little better than a janitor's closet to the elaborate practical jokes employees played on each other. Founder and long-time CEO Herb Case #6-0031 Kelleher carefully built that culture, one company party at time. Known for his love of bourbon and cigarettes, employees also knew he loved the airline and them. Kelly, a buttoned-down accountant, had a hard act to follow when he succeeded Kelleher in 2004. Enhancing Service at Southwest Airlines But when he showed up at the company Halloween party dressed as a character from the musical Hairspray complete with a pink dress and big hair, Southwest employees knew he was one of them. Even serious issues like safety were seen as opportunities for fun and with no passenger fatalities in its history, Southwest could brag that low-cost and fun didn't mean Gary Kelly clicked the "DING" icon and smiled as the laptop screen filled with the familiar unsafe. By 2009, Southwest was the fifth largest airline (in terms of passengers) in the U.S. Southwest Airlines website. "More peanuts?" the flight attendant poked him with a smile. but the largest in terms of market capitalization (see Exhibit 1 for financial information). Kelly looked up and pointed to his screen. "The internet at 30,000 feet-that goes great with peanuts!" Scarcely five years at the helm of Southwest Air, Kelly was navigating the high- flying airline through the biggest crisis in its 38 years of service. By focusing on simplicity A Simple Operating Model and keeping cost low, Southwest had posted profits in every year for over three decades and Within every element of its business strategy, Southwest sought to differentiate itself through had grown to be the fifth largest U.S. carrier. It had even logged a 12% increase in revenue simplicity. In its early years, the differentiation was stark-no meals, no assigned seats, no in 2008 as the U.S. plunged into recession. But the winter and spring of 2009 had been first class service, and no coordination with other airlines. While flying coast to coast, the torturous, with passenger traffic dropping 10%. Fare wars had begun in earnest, with offers airline stayed close to its roots as a short-haul, high-frequency, low-cost competitor. Beyond as low as $99 for coast to coast travel. Across the industry, executives looked eagerly to its value, many customers enjoyed Southwest's playful culture. With jokes and songs, its summer, hoping for some relief. casually dressed flight attendants entertained as they welcomed customers aboard, reviewed safety instructions, and served snacks. While Southwest was no stranger to low prices, Kelly was also looking closely at the airline's services. He wanted to be ready when passengers returned and believed that Southwest needed to constantly refine its value proposition. His flight that day was on one of four Marketing planes testing satellite-based WiFi Internet access. Other refinements, such as more- Southwest's marketing positioned the airline as fun, with low prices that allowed frequent, extensive wine and coffee service and even new international alliances with foreign carriers convenient travel. From the beginning, its advertising was playful, often poking fun at the were all under consideration. In each case, the offering would be scrutinized to see if it fit competition and emphasizing its low-price and convenience (see Exhibit 2). within the Southwest strategy and its legendary operating model. Year after year, Southwest steadily expanded its network, entering new markets with a predictable impact on customers and competitors-referred to by analysts as the "Southwest History effect." The company would identify markets that appeared underserved and overpriced. To keep costs low and avoid the harshest competition, it focused much of its early expansion on Southwest began operating in 1971 out of Dallas' Love Field airport after a four year legal medium-sized cities and secondary airports of major cities. Through heavy advertising and battle with its local competitors. Arguing before a Texas court that that there was not enough low introductory fares, it would immediately initiate a price war with incumbent carriers, demand to sustain three intrastate airlines, the now defunct Braniff and Texas International stimulating overall market demand. Often the introductory fares would be 50% less than Airlines slowed Southwest's entry but strengthened its resolve. Fighting them in court and existing fares in that market and would be competitive with bus fares and the cost of driving. later in price-bruising competition forced the upstart airline to build an operating model that The low fares would grow the overall demand at that airport, which Southwest would fill could survive. And survive it did. From rock bottom fares to playful advertising built around through further expansion. Typically Southwest would enter the new city with at least 10 "Luv" theme, Southwest developed a reputation for fun and value. flights operating from two gates and quickly move to double that to 20 flights. As Southwest matured, it successfully pushed this same strategy into many entrenched hubs of its competitors like Philadelphia (USAir) and Denver (United). For example, to initiate Southwest's June 2009 entry into New York's LaGuardia airport, the This case was written by Professors M. Eric Johnson and Joseph M. Hall of the Tuck School of Business at Dartmouth. It was written as a basis for class discussion and not to illustrate effective or ineffective management firm announced it would offer eight flights/day to both Chicago Midway and Baltimore- practices. Version: May 8, 2009. Washington airports. Operating from gates and runway slots it purchased from bankrupt D 2009 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Center for Digital Strategies at 603-646-0899. Tuck School of Business at Dartmouth-Glassmeyer/McNamee Center for Digital StrategiesService at Southwest Case #6-DRAFT Service at Southwest Case #6-DRAFT ATA, the opening followed the well-established formula. With a blitz of advertising and the highest price Anytime fare for last-minute purchasers. In addition, it offered internet fare introductory fares of less than half that of the incumbents (American, United, and USAir), the specials at very low promotional prices that often sold out quickly. Interestingly, its simple carly demand for $89 one-way flights to Chicago and $49 Baltimore-Washington was brisk. web pricing was largely transparent-allowing customers to see the different prices that were available for each flight, even when that fare was sold-out (see Exhibit 3). Many might be surprised it took Southwest so long to directly enter the massive New York market. While it had operated for years from Long Island's Islip airfield, the congestion and Besides the web-site, Southwest was quick to adopt other digital conveniences such as competition of New York's three main airports kept Southwest out. Taking nothing for cashless payment for on-board drinks, saving time handling cash. They also provided mobile granted, Southwest worked to squeeze everything it could out of its new investment. Bill device applications that allowed travelers to track flights on the cell phone. In some airports Owen, Lead Planner in the schedule planning department remarked: they installed laptop counters in gate areas to allow travelers to power-up and work on their computers while waiting for flights. "How were we able to schedule eight departures a day? Simple. Southwest received 14 daily slots for our operations at LGA (each takeoff and each landing requires a slot), which gives us authority for seven departures Service daily. As a bonus-we're able to add an eighth flight by scheduling our first For the first 30 years, service at Southwest was shockingly different than its competitors. LGA-MDW departure in before slot controls start (prior to 7:00 a.m.) and With no meals, no seat assignments, and a single class of service, many travelers thought putting the last MDW-LGA arrival after slot controls stop (after 9:59 Southwest was the "bus" of air travel. Often the point of many jokes, it only offered peanuts, p.m.). Oops, I misspoke: We were able to negotiate with the FAA for one simple snacks, and drinks while other airlines historically provided full meals and lavish additional slot for our first departure, and the last arrival reaches LGA after treatment in business and first class cabins. But by 2009, the service in coach for most U.S. slot controls stop at 9:59 p.m. (Slot control begins at 6:00 a.m.). So even airlines was little different than Southwest, with the exception of an assigned seat though we're new to this whole slot-controlled thing-we're already working to maximize our presence at LaGuardia. Who knows what the future may Rather than emphasize meals and differentiated service, the Southwest model focused on fun. bring!" Presenting the image of a happy family, its playful approach included on-board games (such as guess the flight attendant's weight) and jokes that made even serious aspects of flying (such as emergency evacuation instructions) fun. For example, when describing how to Digital Strategy inflate the life vests, a cheeky flight attendant might say, "blow into the tubes like you would Southwest was an internet-ready firm long before the internet. It started out selling direct- a breathalyzer"; when instructing parents on the use of oxygen masks, they might say "first keeping costs low by not paying sales commissions to travel agents. In 1995, when the web put a mask on yourself and then your children-starting with your favorite child"; when was still in its infancy, Southwest was the first airline to launch a site. A few months later, it talking about emergency exits, they might say "find the closest available exit and move began offering customers the ability to quickly purchase ticketless flights. Southwest quickly off the plane. We will follow with the beer and wine." continued innovating on the web-developing the consumer application DING that notified customers of special low fares and SWABIZ, Southwest's free online booking tool that Holidays like Easter or Halloween were occasions for unusual craziness. At such times, it allowed business travelers to plan, purchase, and track business travel. In 2008 a staggering was not usual to see a flight attendant dressed as a bunny or gate agents standing behind 78% of its tickets were purchased via southwest.com, which remained the exclusive on-line elaborately decorated counters and dressed as witches. When making routine ticket outlet. In 2009, southwest.com was ranked the 4" largest travel site and largest airline announcements, some flight attendants would sing. Others would rap. Short poems or site in terms of unique visitors. Besides planning and purchasing air travel, hotels, and rental rhymes were also common. To relieve passenger tension during landings, attendants would cars, customers also used the site to check-in (77% did so online or at a kiosk) and track the make jokes like "whew... we made it" upon touch-down or "whoa...... big status of their flights. fellow.....whoa" as the plane shook from hard braking. First time customers would often roar with laughter at such antics and applause upon take-off and landing was not uncommon. At first, the Southwest fare structure was nearly flat-without the complex pricing models Flights to vacation destinations like Las Vegas or Orlando were particularly rowdy. For used by many airlines that employed revenue optimization. It offered simple point-to-point example, on a flight to Orlando, a flight attendant shouted "to infinity and beyond" as the pricing that did not require a round trip or a Saturday night stay to obtain low priced fares. plane lifted off and passengers instantly joined the cheer. That model stuck and while the network of destinations grew tremendously, it maintained a simple fare structure. In 2009, it still offered low-price Anytime fares that were fully Maintaining playful service required ongoing attention to the corporate culture and careful refundable along with Business Select fares that allowed carly boarding (ensuring a good employee selection. Southwest could afford to be very selective in hiring. In 2008 it seat). It also practiced a simple version of revenue optimization for advanced-purchased fare received 199,200 resumes for 3,350 new positions. Kelly argued that people were the most classes sold at lower prices (see Exhibit 3 for fare rules). As a plane filled, the lowest-fare important element of Southwest's success and refused to consider downsizing while other classes (that had scheduling restrictions and were not fully refundable) would sell-out leaving carriers shed workers through 2009. Tuck School of Business at Dartmouth-Glassmeyer/Mc Namee Center for Digital Strategies Tuck School of Business at Dartmouth-Glassmeyer/Me Namee Center for Digital StrategiesService at Southwest Case #6-DRAFT Service at Southwest Case #6-DRAFT Operations such connections by not providing baggage transfers to other airlines. One executive Southwest's operations also significantly differed from other U.S. airlines. Most noticeable, commented, "Southwest does not coordinate its service with other airlines." they firm only flew Boeing 737 jets. Other major airlines flew a portfolio of planes from small regional jets to wide-body jumbo jets. For example, United used regional jets for low- Southwest also differentiated itself in its ability to "turn' a plane. A turn was defined as the time a plane spent at the gate, from moment it was secured until it was pushed back from the volume routes, like Manchester, N.H. to Washington, D.C. and much larger jets for New York to Los Angeles or Washington, D.C. to London. The 737 was among Boeing's smallest gate with a new set of passengers. During that time, passengers were unloaded, the plane jets, seating about 130 passengers depending on the configuration. As Southwest expanded, cleaned, restocked with snacks and beverages, and loaded with a new set of passengers. it simply added more flights to each link and bought more 737s. By 2009, it maintained a Outside, baggage was unloaded and loaded, fuel added, and the plane would be visually fleet of 539 planes (see Table below) flying over 3,300 flights a day with an average inspected. Likewise, unplanned maintenance was also performed. Much like a pit stop in a passenger load factor (in 2008) of 71.2 percent (United's was 81% during the same period). NASCAR race, Southwest studied and practiced turns-always looking for ways to improve. The short turn time was born out of necessity when the struggling airline was forced to sell one of its four airplanes in 1972 to avoid bankruptcy. Wanting to maintain the service it had Table: A breakdown of SWA's 539 Boeing 737 jets (as of April 16, 2009). developed between Dallas, Houston, and San Antonio, founder Herb Keller suggested that if they could turn the planes faster they could save time and squeeze more flights out of each Type Number Seats plane. That was the birth of the famous ten-minute turn. Twenty years later, Southwest had 737-300 184 137 grown from a tiny Texas carrier with three planes hopping short flights to 124 aircraft 737-500 25 122 servicing 32 cities, and still maintained turn times of 15-20 minutes (with average flights of 737-700 331 137 about 65 minutes). By 2009, Southwest's turn time had slipped to 25 minutes, still far below the industry average of about an hour. The firm's fleet was one of the youngest in the industry, with an average age of about ten Labor flexibility helped Southwest speed the turn process. Even though they were unionized years. The average trip was 635 miles, requiring an average of one hour and 35 minutes (77 percent of employees), flight attendants and even pilots often helped turn planes, including taxi time (c.g., about the time required to travel from Baltimore to Chicago). A including cleaning cabins, moving baggage, and loading passengers. Labor rules for other plane would fly an average of 6.2 flights per day, or almost 12 hours and 9 minutes per day. unionized airlines typically prohibited such practices-limiting plane cleaning to cleaners. If A 737-700 cost approximately $60 million. With its uniform fleet, Southwest worked to find a cleaning crew was not immediately available when a plane arrived the departure could be cost savings in every area from maintenance to reduced fuel consumption (through such delayed. Not so at Southwest, where everyone would help out when needed. innovations as single-engine taxi and reduced use of the thrust reversers on landing). Southwest was probably best known by passengers for its unique way of boarding planes. Using the small jets, Southwest focused on point-to-point travel rather than building a hub- Prior to September 11, 2001, Southwest used only plastic, reusable boarding cards to load its and-spoke system. Airlines such as American built large hub-and-spoke networks with planes. Customers arriving at the airport would receive a numbered card upon check-in with airports like Dallas-Fort Worth representing major hubs. For example, passengers traveling numbers starting at 1 for the first person to check-in and running to 130. At the gate, from Denver to Kansas City would pass through Dallas. Southwest would fly many such customers would line up according to the boarding number on their card. Those with low "low-volume" links directly. Over time, Southwest did develop mini hubs-for example numbers would be first and would have their choice of seats while those who arrived late for Baltimore (for the east coast), Oakland (for the west Coast), and Chicago to facilitate check-in would end up with high numbers and limited choice-likely a middle seat! frequent connections for longer east/west or north/south travel (see Exhibit 4). However its focus remained point-to-point travel. New security procedures in U.S. airports challenged this procedure, requiring a paper boarding document with the passenger's name. Southwest quickly adapted, allowing With its point-to-point model, Southwest also preferred smaller, less congested airports in passengers to check-in on-line via the website while still using the numbering. Twenty-four medium sized cities (like Manchester NH instead of Boston) or secondary airports (like hours before the flight, passengers could print their own boarding pass with the boarding Midway in Chicago rather than O'Hare). Smaller airports provided many benefits including number again assigned using a first-come-first-served approach. However, the new web- reduced runway costs and the ability to lease multiple gates to support a growing schedule of based process also allowed Southwest to reserve some low numbers for frequent travelers- flights. In highly congested airports like Atlanta and Chicago O'Hare, runway capacity was allowing them to check-in later without fear of a bad seat. Passengers who do not check-in limited and congestion often resulted in delays. Runway delays translated into higher fuel via the web still have the option of obtaining a boarding card at the airport. However, those costs, more employee time, and customer dissatisfaction. Smaller airports saved flight checking in at the airport were likely to receive a high number when arriving only an hour or time-possibly as much at 15-20%, depending on the airport. However, this also made it two before the flight. difficult for passengers to connect to other airlines. In fact, Southwest further discouraged Tuck School of Business at Dartmouth-Glassmeyer/Mc Namee Center for Digital Strategies Tuck School of Business at Dartmouth-Glassmeyer/Me Namee Center for Digital StrategiesService at Southwest Case #6-DRAFT Service at Southwest Case #6-DRAFT At the gate, Southwest also experimented with different corral configurations. Initially Exhibit 1a: Southwest Airlines Financial Information ridiculed for long lines that snaked out into the terminal, Southwest developed orderly corrals (In millions] 12/31/06 12/3 1/07 12/31/08 that kept lines compact, but maintained the virtual order (see Exhibit 5). Breaking the passengers into three major boarding groups (A, B, C) and then further subdivided into ASSETS: batches of 30, flyers typically lined up along a series posts, each with numbers (1-10, 11-20, Current assets: $1,390 $2.213 $1,368 21-30) on one side and (31-40, 41-50, 51-60) on the other. First, Al-30 would board, Cash and cash equivalents Short-term investments 369 566 435 followed by A31-60, then BI-30 and so on with group C boarding last. Accounts and other receivables 241 279 209 Inventories of parts and supplies, at cost 181 259 203 Fuel derivative contracts 1.069 365 Service Decisions Deferred income taxes Prepaid expenses and other current assets 51 67 313 Throughout its history, Southwest constantly evaluated its model to look for areas of improvement. Services, like assigned seats, had been evaluated many times in the past. Total current assets 2,601 4,443 2,19 While customers liked assigned seats, Southwest concluded over and over again that it would Property and equipment, at cost slow its service causing greater customer dissatisfaction than the good will an assigned seat Flight equipment 11,769 13,019 13,722 would generate. Ground property and equipment 1.515 1,769 Deposits on flight equipment purchase contracts 734 With such a rich history of cost consciousness and convenient service, Kelly thought about the proposed services as he crunched on his peanuts. Would high-quality wines or greater 13,869 15,160 5,17 beverage selection conflict with their operating model? Was free WiFi consistent with their Less allowance for depreciation and amortization 3.785 4.286 4,831 fun service? Could international partners help Southwest continue to grow without slowing 10,094 10,874 11,040 down its operations? Every one of these enhancements would have to be scrutinized. Other assets 785 1.455 375 Pulling into the gate, the flight attendant teased the passengers to stay in their seats. "Wait $13,460 $16,772 $14,308 for it......wait for it......wait for it." When the bell chimed, the attendant cried "get out!" LIABILITIES AND STOCKHOLDERS EQUITY: Current liabilities Accounts payable $643 $769 $868 Accrued liabilities 1,323 3,107 1,012 Air traffic liability 799 901 963 Current maturities of long-term debt 122 163 Total current liabilities 2.887 4,838 2,806 Long-term debt less current maturities 1,567 2,060 3,490 Deferred income taxes 2,10 2.535 1,904 Deferred gains from sale and leaseback of aircraft 120 106 105 Other deferred liabilities 343 302 1,042 Stockholders' equity: Common stock Capital in excess of par value 1,142 1,207 1,215 Retained earnings 1.307 4,768 4,919 Accumulated other comprehensive income 682 1,241 (984) Treasury stock, at cost: 24,302,215 shares in 2006 (390) (1,103 (1,005 Total stockholders' equity 6,449 6,941 4,963 $13,460 $16,772 $14,308Service at Southwest Case #6-DRAFT Service at Southwest Case #6-DRAFT Exhibit 1b: Southwest Airlines Financial Information Exhibit 2a: Early Southwest Ads. In millions, except per share amounts) 12/3 1/06 12/31/07 12/31/08 OPERATING REVENUES: How do we love you? Passenger $8,750 $9.457 $10,549 Freight 134 130 145 Let us count the ways. Other 202 274 129 Policy FL Werth to Hasram Hasits to Delcy FL Werth Total operating revenues 21086 9.861 11,023 OPERATING EXPENSES: Salaries, wages, and benefits 3.062 3,213 3,340 Fuel and oil 2 204 2690 3,713 Maintenance materials and repairs 616 721 Aircraft rentals 158 156 154 Landing fees and other rentals 495 580 862 043 Depreciation and and amortization 515 556 599 Other operating expenses 1,180 1 280 1,385 Total operating expenses 8,152 9,070 10,574 OPERATING INCOME FEE 791 449 OTHER EXPENSES (INCOME]: Interest expense 128 119 130 Capitalized interest (51) (50) (26) IRLINES Interest income (84) (44) (26) SOUTHWEST Other (gains) losses, net 151 (292) 92 Total other expenses (income) 144 (267) 171 INCOME (LOSS) BEFORE INCOME TAXES 790 1.058 278 PROVISION (BENEFIT) FOR INCOME TAXES 291 412 100 WE'RE SPREADING LOVE ALL OVER TEXAS. NET INCOME $499 $645 $178 NET INCOME PER SHARE, BASIC 50.83 50.85 50.24 NET INCOME PER SHARE, DILUTED 30.61 50.84 $0.24 To Corper Christ Lubbock, El Pma, and we're ipreading it areaand WEIGHTED AVERAGE SHARES Basic 796 757 735 Diluted 824 768 739 dService at Southwest Case #6-DRAFT Service at Southwest Case #6-DRAFT Exhibit 2b: Playful Southwest Ads. Exhibit 3: Southwest Airlines Fare Rules. Freedom and Flexibility Compare Southwest's New Fares After lengthy deliberation Wanna Get away at the highest executive levels, and extensive consultation with our legal department, Flapid Huwarch Condata we have arrived at Your pur that an official corporate response to Northwest Airlines claim to be number one in Customer Satisfaction. to your wigoal formet "Liar, liar. Pants on fire." SOUTHWEST AIRLINES SOUTHWEST.COM Special Offers Travel Tools Aspid Rewurth* Travel Guide AIR CAR HITE CRUISE VACATION PACKAGES CANADA MEXICO TRAVEL SUMMARY * SELECT FLIGHT LOW FARES. NO HIDDEN FEES. SAME HOW Compare Select Departing Flight SICK OF YOUR JOB? Ballmore, MO to Chicago (Midway). IL (Tuesday. May 09 2009) Modify Your Search 2:90 Butmore, MO - DW 280 Quir 280 Shortcut Missstop 2:10 1458 7:0pm 1:05pm Now Chicago Midway) IL to Baltimore, MID (Wednesday. May 06 20391 Tuck School of Business at Dartmouth-Glassmeyer/Mc Namee Center for Digital Strategies 11 Tuck School of Business at Dartmouth-Glassmeyer/Me Namee Center for Digital Strategies 12Service at Southwest Case #6-DRAFT Service at Southwest Case #6-DRAFT Exhibit 4: Southwest Airlines' Top Ten Airports: (as of April 16, 2009) Exhibit 5: Boarding Areas. Cities Daily Number Nonstop Established Departures of Gates Cities Served Gate B-29 Las Vegas 234 21 56 1982 1-30 61-90 Chicago Midway 214 29 48 1985 Phoenix 187 24 42 1987 Baltimore/Washington | 162 26 38 1993 Houston Hobby 135 17 29 1971 Dallas (Love Field) 134 15 15 1971 Los Angeles (LAX 120 11 18 1982 Oakland 118 13 19 1989 Denver 115 10 32 1996 Orlando 115 12 33 1982 Pacific Mountain Central Eastern Portland Minicapo St Pal Boston Logan's Mogera Fake Are A Derate the New York Hartford Spring Rene/Tance Salt Lake City Midway-Clevelande Pisburgh mountain of Lang Hiand Omata Philadelphia Daviand Sacramento Calumbuse Butimond Washington (BW) San Francisco a Joke Indianapoliss Kansas City . WWashington, D.C. (Dullmal Las Vepar . Louisville . Norfolk (Southern Virginia) Eubank Albuquerque Fornigh-Durham |RDUI Los Angeles LAX. .Ontario Santa Fe Areal : Oklahoma City Little Rock Orange County Amarilas San Diego Phoenix Lubbock. .Birmingham Love Field SanAntonio . Oranda Hobby Tampa Bay . West Palm Beach Corpus Christie . Southwest Cities South Padre bland FL MyersNaples FL Lauderdale (Miami Areal