MODULE 1 INTRO TO STRATEGIC MANAGEMENT 1.

1 SOUTHWEST AIRLINES OPENING CASE

Between 1978 & 1993, when the US airline industry was deregulated, 29 new airlines entered, leading to overcapacity. Each airline chased passengers, luring them with reduced fares. Competition grew so fierce during 1982, the industry lost $ 700 million & between 1990 & 1992, it lost a staggering $ 7.1 billion.
Despite

the hostile environment, one company, SOUTHWEST AIRLINES, not only remained consistently profitable but actually improved its performance. Southwest is a regional airline with a major presence in Texas. its customers. Its low costs stem from # of sources.
1. 2. 3. 4. 5. 6. 7. 8. 9. SW offers no-frills approach to customer service. No meals are served on board. No first-class seats. Does not subscribe to reservation computer network. Flies only one type of aircraft, the fuel-efficient Boeing 737, keeping training & maintenance costs low. Its major asset productive workforce. Its staff works hard, because management recognizes their efforts. Its CEO, Herb Kelleher, is known to help flight attendants serve drinks & maintenance engineers service planes. It operates stock-option plans to its employees employees own 10% of the airlines stock, a further incentive to work hard.

Two factors have made Southwest profitable: its low costs & the loyalty of

SWs low-cost structure lets it offer its customers low fares. This

builds loyalty, further strengthened by the airlines reputation as the most reliable carrier. SW has the quickest turnaround time in the industry; its ground crew needs just 15 minutes to prepare a flight take-off, thus helping in punctuality. SW also has the reputation to listen to its customers. SWs focused route structure it just serves 15 states, mostly in the south has helped it build a substantial regional presence & avoid cutthroat competition elsewhere in the US.

MODULE 1 INTRO TO STRATEGIC MANAGEMENT 1.2 INTRODUCTION

A central objective of strategic management is to find out why

some organizations succeed while others fail. Three broad factors determine a companys success: the industry where it is based, the country where it is located & its own resources/capabilities/strategies. In global markets, some companies find it easier to succeed because they are located in countries that have a competitive advantage in certain industries.
A companys resources, capabilities & strategies are by far the

strongest determinant of success or failure. Thus, some companies manage to thrive even in very hostile industries, where the average level of profitability is low. SW Airlines exemplifies such a company. SWs success is due to the fact that its resources, capabilities & strategies have enabled it to achieve a low-cost position & build customer loyalty. Understanding the roots of success & failure brings a better appreciation of the strategies that can increase the probability of success & reduce the probability of failure.
Many of these strategies are generic that is, they apply to all

organizations, large or small, manufacturing or service, & profitseeking or not-for-profit. For even a small non-profit organization like a local theatre or church charity, has to make decisions about how best to generate revenues, given the environment in which it is based & the organizations own strengths & weaknesses.

 The local church-run charity has to compete with other charities for the limited resources that individuals are prepared to give for charitable cause. Identifying how best to do is a strategic problem.

MODULE 1 INTRO TO STRATEGIC MANAGEMENT 1.3 WHAT IS STRATEGY?

Traditionally, the strategy is defined as the science & art of military

command as applied to the overall planning & conduct of large-scale combat operations. The planning theme remains an important component of most management definitions of strategy. The organization is depicted as choosing its goals, identifying the courses of action (or strategies) that best enable it to fulfill its goals & allocating resources accordingly.
A New Approach: It is now believed that planning approach

incorrectly assumes that an organizations strategy is always the outcome of rational planning. According to Mintzberg, definitions of strategy that stress the role of planning ignore the fact that strategies can emerge from within an organization without any formal plan.
That is to say, that even in the absence of intent, strategies can

emerge from the grassroots of an organization. Indeed, strategies are often the emergent response to unforeseen circumstances.
With this in mind, Mintzberg has defined strategy as a pattern in a

stream of decisions or actions, the pattern being a product of whatever intended strategies (planned) are actually realized & of any emergent (unplanned) strategies.
Mintzbergs

argument is that emergent strategies are often successful & may be more appropriate than intended strategies. Richard Pascale has described how this was the case for the entry of Honda Motor Co. into the US m/c market. When # of Honda executives arrived in LA from Japan in 1959 to establish an American subsidiary, their original aim (intended strategy) was to focus on selling 250 & 350 cc machines to confirmed m/c enthusiasts, rather
3

than 50 cc Honda Cubs, which were being a hit in Japan. Their instinct told them that the Honda 50s were not suitable for the US market, while the rest is history. By 1964, nearly one out of every two motorcycles sold in US, was a Honda.

MODULE 1 INTRO TO STRATEGIC MANAGEMENT 1.4 STRATEGIC MANAGEMENT PROCESS A MODEL

Missions & Goals

Internal Analysis Strengths & Weaknesses

Strategic Choice SWOT

External Analysis Opportunities & Threats

Function-Level Strategy Business-Level Strategy Global Strategy CorporateLevel Strategy

Strategy Implementation

MODULE 1 INTRO TO STRATEGIC MANAGEMENT

1.5 STRATEGY IMPLEMENTATION

Designing Organizational Structure: Designing a structure entails

allocating task responsibility & decision-making authority within an organization. The issues covered include how best to divide an organization into subunits, how to distribute authority among the hierarchy & how to achieve integration between subunits.
Designing Control Systems: The firm must also decide how best to assess

the performance & control the actions of the subunits. The options range from market & output controls to bureaucratic & control through organizational culture. A firm also needs to decide what kind of reward & incentive systems to set up for employees.
Matching Strategy, Structure & Controls: If it wants to succeed, a firm

must achieve a fit among its strategy, structure & controls. For ex, a strategy of cost leadership demands that a firm be kept simple (so as to reduce costs) & that controls stress productive efficiency.
Managing Conflict, Politics & Change: Politics is endemic to a firm.

Different subgroups (departments or divisions) within a firm have their own agendas & typically, they conflict. Thus divisions may compete with each other for a bigger share of a firms finite resources. Such conflicts may be resolved as much by the relative distribution of power between subunits as by a rational evaluation of relative need.

 The Feedback Loop: The feedback loop indicates that strategic

management is an ongoing process. Once a strategy is implemented, its execution must be monitored to determine the extent to which strategic objectives are actually being achieved. This information passes back to the corporate level through feedback loops.