Why airfares stay so low while airlines struggle (2)

Another way of analyzing this article can be achieved using Hamel’s framework of Business Concept Innovation. Southwest airlines is known to be a creator for the new business concept of traveling economically. The company made it possible for customers to fly with affordable prices that are lower than prices offered by other airlines carriers. While applying the business model to Southwest, we can relate to a number of components from the model.

a. Core Strategy, is how the company wishes to compete.
1)Southwest’s business mission, as implied from the article, is to be the price leader in the airlines industry. They are able to achieve this mission through their pricing strategy that even forces other competing companies to follow.

2)Product/Market Scope: This describes which customers is the company trying to capture. The article explains that Southwest is targeting price-sensitive customers, and customers that travel to areas that are reached already through a number of other carriers.

3)Basis of differentiation: This factor definitely applies to Southwest. This company was able to differentiate itself from the other companies by creating a pricing structure that is hard to imitate by other airlines. It was able to be and remain the pricing leader in the industry.

b.Strategic Resources:
1)Core competencies: Southwest has the capability of achieving operational excellence that allows it to operate in an efficient and effective manner. This is its unique capability.

c.Customer Interface:
1)Pricing structure: This is the most relevant factor from the Customer Interface component of the framework. Southwest has eliminated some historical steps in the airlines industry that makes the travel experience more expensive. Southwest eliminated some of these costs to offer its product at a cheaper price relative to the competitors.

The last part of the article explains that Southwest has hedged its fuel until 2009, otherwise it would’ve been losing money. I don’t agree with this statement because I believe that although hedging the fuel may be one of the reasons of why the company is currently making money, I believe that Southwest has the capability of remaining in the lead through its unconventional ways of staying efficient. It would be interesting to review the media by then to see what will be written about Southwest and whether it will be able to keep its position as a role model!

Why airfares stay so low while airlines struggle (1)

I am a person who loves traveling, so that’s why the article titled “Why airfares stay so low while airlines struggle” caught my attention. The article explains about how Southwest Airlines is able to keep their prices so low in comparison to other carriers. One of the most important reasons that the article explores is the fact that Southwest had hedged 75% of its fuel. This enables it to pay approximately $1.20 a gallon, whereas most other carriers pay $2, and thus making profit. This is an excellent resource!

This situation must be very interesting in different ways, depending on whose side are you standing: Southwest’s side, or the other carriers’ side. When we apply Porter’s Five Forces Model, we realize that Southwest was able through successful hedging and historical operational excellence and efficiency to raise the barrier of entry for potential entrants. The company’s structure pressurizes other airline carriers to keep their prices low, thus forcing them to struggle in costs recovery. This unpleasant situation automatically discourages potential players from entering the industry along with high capital requirements; -which is another source for entry barrier-.

Also, due to what the author calls the “Southwest effect”, it is implied that the rivalry as it stands is very intense among existing competitors. Players in the airlines industry incur high fixed costs for their operations. Players in the industry also face high exit barriers, so once a company enters the industry, due to a number of factors including high investment costs.

Another way of looking at this article is to analyze it through Barney’s “Gaining and sustaining competitive advantage” framework. Southwest’s resource and capability of operational efficiency is definitely valuable because it enables it to exploit the environmental opportunities of serving price-sensitive customers. Their resource aids in increasing their revenue. This takes us to the question of rareness. Since Southwest hedged successfully the fuel, whereas other airline carriers aren’t covered, this capability is considered rare. We would need to use a time machine to enable the companies to have a similar resource. Therefore, since not many companies have this resource, then it is considered rare.

Rolling to the question of imitation, I can see that it would be hard for companies to imitate the resource of hedging the fuel that Southwest has, because it’s not possible to go back in time. However, companies may learn the trick and hedge for the future coming years. All in all, as the situation stands in the present, it is not possible for competitors to gain this resource.

It was hard to answer from the article solely the question of organization, however, historical information about the company can help answer the question. Southwest has been a role model for its innovative ways for operational efficiency and effectiveness. This implies that the organization is structured well to allow it exploit full potential of its resources and capabilities.

To be Continued...

Boycotting Danish Products

The topic that I am going to discuss doesn’t require an article to refer to. Being in the Middle East provides me with first hand experience that no article will be able to provide. I am talking about the consequences that resulted after publishing of the caricature depicting Prophet Mohamed (PBUH).

After the cartoons where re-published in the Norwegian magazine, a wave of rage and anger covered the societies in the Arab and Muslim counties. The immediate result of this anger was the coalition formed in these countries by consumers who were calling for boycotts on Danish products. The Denmark is portrayed as an ‘enemy’. And as human beings we won’t buy from the enemies if we were provided with alternatives. In this situation, Muslim customers of Danish products have alternatives. The Danish products, consisting mainly of dairy products and juices, are undifferentiated. This fact increases the bargaining power of buyers. Moreover, the customers face few if not no switching costs: thus, strengthening further buyer’s power.

Another way of analyzing the situation can be done through Hamel’s second business concept component, Strategic Resources. Firms can ask a number of questions to discover what are their core competencies. This would include questions on what is valuable to the customers and unique. When the Danish newspaper published the caricatures, customers linked this to any Danish product. Therefore, through the eyes of Muslim customers, all Danish Products are ripped off any uniqueness or value they represented to these. Consequently, losing their core competence from the customer’s points of view.

Moreover, when I look at the third component of the business concept, customer interface, I can see a strong link to this issue. Firstly, the way the firm reaches customers is labeled as Fulfillment and Support. When some Saudi and Emirati supermarket chains decided to stop selling Danish products, the producing firms lost their channel with the customers. So not only did Muslim customers stop buying due to their beliefs, but even the non-Muslims who aren’t boycotting the products, but who are customers of these supermarkets, do not have access to the products. The opportunity lost from selling products comes from one party intentionally, through personal beliefs, and by another party forcefully,through the decision of the channel provider, the supermarkets.

In the article Effect of Danish Boycott Patchy SADAFCO felt that as a consequence of the boycott to Danish products that its stock prices were slipping. SADAFCO was able to apply Customer Interface, information and insight. Pre-purchase conceptions were that SADAFCO was still partly Danish. This fact hindered many customers from buying their products and consequently resulted in a slip in stock prices. Company management had to publish a statement to fix this misconception. They were able to analyze the wrong information that reached customers during the pre-purchase stage, and do something about it.

On a personal note, if I talk about myself, I am boycotting Danish products. For me, it’s about my principals and values. I was brought up to respect the values of others, regardless of whether they are aligned with my beliefs or not. The fact that the Denmark is defending its position by saying that it’s part of their ‘freedom of speech’ is an explanation that I don’t buy-in. It’s common sense that your freedom ends when it intervenes with others’ freedom. I feel that I am an empowered buyer. (Yes!) In any case, it will be interesting to live and see what will happen next!