Business Finance
Five Porters Forces Analysis for Southwest Airlines Case Study

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Instructor Commentary: Each week, we will Spotlight a different Spotlight Item. Last week, we focused on the GAP Analysis as an entire class. This week, you will focus on your individual briefcase item assignment, but I will highlight the SWOT Analysis. If you are not conducting the SWOT this week, you will still need to know this information for future references. (Note: For those of you conducting the SWOT, I must see current events considered in your SWOT)

The primary purpose of the SWOT is to have a visual of where the company stands in a given period of time. The most common users of a SWOT analysis are team members and project managers who are responsible for decision-making and strategic planning. However, anyone who belongs to an organization can develop a SWOT. Please use the guide below to guide your efforts in providing a SWOT chart. In your chart, you will need to include at least 4 elements per quadrant. Once you have completed the chart, make recommendations on how the organization should proceed. Remember, you must always support your recommendations with academic research.

Internal factors include your resources and experiences. General areas to consider for strengths and weaknesses:

oHuman resources - staff, volunteers, board members, target population

oPhysical resources - your location, building, equipment

oFinancial - grants, funding agencies, other sources of income

oActivities and processes - programs you run, systems you employ

oPast experiences - building blocks for learning and success, your reputation in the community

External factors that you can not control in the external environment of a business (social/cultural, political, global, economic, technological, environmental)

Cast a wide net for the external part of the assessment. No organization, group, program, or neighborhood is immune to outside events and forces. Consider your connectedness, for better and worse, as you compile this part of your SWOT list.

Forces and facts that your group does not control include:

oFuture trends in your field or the culture

oThe economy - local, national, or international

oFunding sources - foundations, donors, legislatures

oDemographics - changes in the age, race, gender, culture of those you serve or in your area

oThe physical environment (Is your building in a growing part of town? Is the bus company cutting routes?)

oLegislation (Do new federal requirements make your job harder...or easier?)

oLocal, national or international events

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2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 2-1 Explain the importance of analyzing and understanding the firm’s external environment. 2-2 Define and describe the general environment and the industry environment. 2-3 Discuss the four parts of the external environmental analysis process. 2-4 Name and describe the general environment’s seven segments. 2-5 Identify the five competitive forces and explain how they determine an industry’s profitability potential. 2-6 Define strategic groups and describe their influence on firms. 2-7 Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them. © RomanOkopny/Getty Images Studying this chapter should provide you with the strategic management knowledge needed to: ARE THERE CRACKS IN THE GOLDEN ARCHES? Ruaridh Stewart/ZUMA Press/Newscom McDonald’s is the largest restaurant chain in the world. It has 14,350 restaurants in the United States, with the largest market share of any such chain (7.3 percent). In total, it has more than 36,000 restaurants worldwide. Over the years, McDonald’s was a leader, not only in market share, but also with the introduction of new menu items to the fast food market. For example, it first introduced breakfast items to this market, and its breakfast menu now accounts for about 25 percent of its sales. It successfully introduced Chicken McNuggets to this market, and currently, McDonald’s is the single largest restaurant customer of Tyson Foods, the largest distributor of chicken products. In more recent years, McDonald’s successfully introduced gourmet coffee products and began to compete against Starbucks. With all of this success, what is the problem? The problems revolve around competition and changing consumer tastes. Consumers have become more health-conscious, and competitors have been more attuned to customer desires. As a result, McDonald’s suffered a decline in its total sales revenue of 2.4 percent and a drop in net income of 15 percent in 2014. This was the first decline in both figures in 33 years. It seems that McDonald’s did a poor job of analyzing its environment and especially its customers and competitors. During this same time, some of McDonald’s competitors flourished. For example, Sonic enjoyed a 7 percent increase in its sales, and Chipotle recorded a large 20 percent increase. Other specialty burger restaurants, such as Smashburger, have stolen business from McDonald’s even though their burgers are priced a little higher than McDonald’s burgers. The quality of these competitors’ products is perceived to be higher and many are “made to order” and thus customized to the customer’s desires. And, partly because the volume and complexity of the McDonald’s menu items have grown, the time required for service has also increased. This change has been most evident in the drive-through lanes in which the wait time has grown by approximately 20 percent in recent years. Because of the lack of understanding the changing market and competitive landscape, McDonald’s was unable to be proactive and now is in a reactive mode. For example, in 2013, it decided to add chicken wings to its menu. Wings were sold successfully at McDonald’s in Hong Kong, and it imported its “cayenne-and-chili-pepper coating” used there. The market test for the wings in Atlanta was successful, so the firm implemented a major campaign to sell them at its restaurants throughout the United States. The eight-week campaign was a miserable failure (some referred to it as the “mighty wings debacle”). Perhaps they were too spicy for the broad market, but some believe that they were also too expensive at $1.00 per wing, with a box of five wings costing $1.00 more than a similar number at KFC. Because of these problems, McDonald’s hired a new CEO in 2015, hoping to overcome its woes. The new CEO must act quickly. McDonald’s has recently announced that it is changing to use only chickens raised without antibiotics to be sensitive to human health concerns. It has also market tested custom hamburgers in Australia with success. In fact, Australia is one of 40 McDonald’s bright spots around the world. Sales have increased in Australia when they have fallen in the United States, Europe, and Asia. Making major changes to the McDonald’s menu is challenging partly because of its scale and supply chain. It orders hundreds of millions of pounds of chicken each year, so it will take a few years to fully implement the change to antibiotic-free chicken. Changing vegetables in Happy Meals (e.g., adding baby carrots) and implementing new wraps which require additional (new) vegetables (such as cucumbers) will take time because they require obtaining large scale suppliers that can provide the necessary quantity and quality at the right price and in the right location(s). McDonald’s was once a leader, and now it is fighting from behind, trying to stem its downturn. It has to respond quickly and effectively to its external environment, especially its customers and competitors. Sources: A. Gasparro, 2015, For McDonald’s, a minor menu change takes planning, MSN, www.msn.com/en-us/money, March 5; A. Gasparro, 2015, McDonald’s new chief plots counter attack, Wall Street Journal, www.wsj.com, March 1; M. Hefferman, 2015, It’s still a happy meal in Australia for McDonald’s, Sidney Times Herald, www.smh.com.au, March 10; J. Kell, 2015, McDonald’s sales still down as a new CEO takes the helm, Fortune, www.Fortune.com, March 9; D. Shanker, 2015, Dear McDonald’s new CEO: Happy first day. Here’s some (unsolicited) advice, Fortune, www.Fortune.com, March 2; S. Strom, 2015, McDonald’s seeks its fast-food soul, New York Times, www.nytimes.com, March 7; S. Strom, 2015, McDonald’s tests custom burgers and other new concepts as sales drop, New York Times, www.nytimes.com, January 23; B. Kowitt, 2014, Fallen Arches, Fortune, December, 106–116. A s suggested in the Opening Case and by research, the external environment (which includes the industry in which a firm competes as well as those against whom it competes) affects the competitive actions and responses firms take to outperform competitors and earn above-average returns.1 For example, McDonald’s has been experiencing a reduction in returns in recent times because of changing consumer tastes and enhanced competition. McDonald’s is attempting to respond to the threats from its environment by changing its menu and types of supplies purchased. The sociocultural segment of the general environment (discussed in this chapter) is the source of some of the changing values in society placing a great emphasis on healthy food choices. The Opening Case also describes some of the ways McDonald’s is responding to the specific concerns for health by purchasing only chicken that has not received antibiotics. As noted in Chapter 1, the characteristics of today’s external environment differ from historical conditions. For example, technological changes and the continuing growth of information gathering and processing capabilities increase the need for firms to develop effective competitive actions and responses on a timely basis.2 (We fully discuss competitive actions and responses in Chapter 5.) Additionally, the rapid sociological changes occurring in many countries affect labor practices and the nature of products that increasingly diverse consumers demand. Governmental policies and laws also affect where and how firms choose to compete.3 And, changes to a number of nations’ financial regulatory systems that have been enacted since 2010 are expected to increase the complexity of organizations’ financial transactions.4 Firms understand the external environment by acquiring information about competitors, customers, and other stakeholders to build their own base of knowledge and capabilities.5 On the basis of the new information, firms take actions, such as building new capabilities and core competencies, in hopes of buffering themselves from any negative environmental effects and to pursue opportunities as the basis for better serving their stakeholders’ needs.6 In summary, a firm’s competitive actions and responses are influenced by the conditions in the three parts (the general, industry, and competitor) of its external environment (see Figure 2.1) and its understanding of those conditions. Next, we fully describe each part of the firm’s external environment. Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 41 Figure 2.1 The External Environment Sustainable Physical Economic General Environment Industry Demographic Environment Threat of New Entrants Power of Suppliers Power of Buyers Product Substitutes Intensity of Rivalry Sociocultural Competitor Environment Political/Legal Global Technological 2-1 The General, Industry, and Competitor Environments The general environment is composed of dimensions in the broader society that influence an industry and the firms within it.7 We group these dimensions into seven environmental segments: demographic, economic, political/legal, sociocultural, technological, global, and sustainable physical. Examples of elements analyzed in each of these segments are shown in Table 2.1. Firms cannot directly control the general environment’s segments. Accordingly, what a company seeks to do is recognize trends in each segment of the general environment and then predict each trend’s effect on it. For example, it has been predicted that over the next 10 to 20 years, millions of people living in emerging market countries will join the middle class. In fact, by 2030, it is predicted that two-thirds of the global middle class, about 525 million people, will live in the Asia-Pacific region of the world. Of course no firm, including large multinationals, is able to control where growth in potential customers may take place in the next decade or two. Nonetheless, firms must study this anticipated trend as a foundation for predicting its effects on their ability to identify strategies to use that will allow them to remain successful as market conditions change.8 The industry environment is the set of factors that directly influences a firm and its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competing firms. 9 In total, the interactions among these five factors The general environment is composed of dimensions in the broader society that influence an industry and the firms within it. The industry environment is the set of factors that directly influences a firm and its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competing firms. 42 Part 1: Strategic Management Inputs Table 2.1 The General Environment: Segments and Elements Demographic segment • • • Population size Age structure Geographic distribution • • Ethnic mix Income distribution Economic segment • • • • Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses • • • Personal savings rate Business savings rates Gross domestic product Political/Legal segment • • • Antitrust laws Taxation laws Deregulation philosophies • • Labor training laws Educational philosophies and policies Sociocultural segment • • • Women in the workforce Workforce diversity Attitudes about the quality of work life • • Shifts in work and career preferences Shifts in preferences regarding product and service characteristics Technological segment • • Product innovations Applications of knowledge • • Focus of private and government-supported R&D expenditures New communication technologies Global segment • • Important political events Critical global markets • • Newly industrialized countries Different cultural and institutional attributes Sustainable physical environment segment • • • • Energy consumption Practices used to develop energy sources Renewable energy efforts Minimizing a firm’s environmental footprint • • • Availability of water as a resource Producing environmentally friendly products Reacting to natural or man-made disasters How companies gather and interpret information about their competitors is called competitor analysis. determine an industry’s profitability potential; in turn, the industry’s profitability potential influences the choices each firm makes about its competitive actions and responses. The challenge for a firm is to locate a position within an industry where it can favorably influence the five factors or where it can successfully defend itself against their influence. The greater a firm’s capacity to favorably influence its industry environment, the greater the likelihood it will earn above-average returns. How companies gather and interpret information about their competitors is called competitor analysis. Understanding the firm’s competitor environment complements the insights provided by studying the general and industry environments.10 This means, for example, that McDonald’s needs to do a better job of analyzing and understanding its general and industry environments. An analysis of the general environment focuses on environmental trends and their implications, an analysis of the industry environment focuses on the factors and conditions influencing an industry’s profitability potential, and an analysis of competitors is focused on predicting competitors’ actions, responses, and intentions. In combination, the results of these three analyses influence the firm’s vision, mission, choice of strategies, and the competitive actions and responses it will take to implement those strategies. Although we discuss each analysis separately, the firm can develop and implement a more effective strategy when it effectively integrates the insights provided by analyses of the general environment, the industry environment, and the competitor environment. 43 Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 2-2 External Environmental Analysis Most firms face external environments that are turbulent, complex, and global—conditions that make interpreting those environments difficult.11 To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment, firms complete an external environmental analysis. This analysis has four parts: scanning, monitoring, forecasting, and assessing (see Table 2.2). Identifying opportunities and threats is an important objective of studying the general environment. An opportunity is a condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness. Most companies—and certainly large ones—continuously encounter multiple opportunities as well as threats. In terms of possible opportunities, a combination of cultural, political, and economic factors is resulting in rapid retail growth in parts of Africa, Asia, and Latin America. Accordingly, Walmart, the world’s largest retailer, and the next three largest global giants (France’s Carrefour, U.K.–based Tesco, and Germany’s Metro) are expanding in these regions. Walmart is expanding its number of retail units in Chile (404 units), India (20 units), and South Africa (360 units). Interestingly, Carrefour exited India after four years and in the same year (2014) that Tesco opened stores in India. While Metro closed its operations in Egypt, it has stores in China, Russia, Japan, Vietnam, and India in addition to many eastern European countries.12 A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.13 Finnish-based Nokia Corp. is dealing with threats including one regarding its intellectual property rights. In mid-2013, the company filed two complaints against competitor HTC Corp. alleging that the Taiwanese smartphone manufacturer had infringed on nine of Nokia’s patents. However, the patent dispute ended in 2014 when the two companies signed a collaboration agreement.14 This threat obviously deals with the political/legal segment. Firms use multiple sources to analyze the general environment through scanning, monitoring, forecasting, and assessing. Examples of these sources include a wide variety of printed materials (such as trade publications, newspapers, business publications, and the results of academic research and public polls), trade shows, and suppliers, customers, and employees of public-sector organizations. Of course, the information available from Internet sources is of increasing importance to a firm’s efforts to study the general environment. 2-2a Scanning Scanning entails the study of all segments in the general environment. Although challenging, scanning is critically important to the firms’ efforts to understand trends in the general environment and to predict their implications. This is particularly the case for companies competing in highly volatile environments.15 Table 2.2 Parts of the External Environment Analysis Scanning • Identifying early signals of environmental changes and trends Monitoring • Detecting meaning through ongoing observations of environmental changes and trends Forecasting • Developing projections of anticipated outcomes based on monitored changes and trends Assessing • Determining the timing and importance of environmental changes and trends for firms’ strategies and their management An opportunity is a condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness. A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness. 44 Part 1: Strategic Management Inputs Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way.16 Scanning activities must be aligned with the organizational context; a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment.17 Scanning often reveals ambiguous, incomplete, or unconnected data and information that require careful analysis. Many firms use special software to help them identify events that are taking place in the environment and that are announced in public sources. For example, news event detection uses information-based systems to categorize text and reduce the trade-off between an important missed event and false alarm rates. Increasingly, these systems are used to study social media outlets as sources of information.18 Broadly speaking, the Internet provides a wealth of opportunities for scanning. Amazon.com, for example, records information about individuals visiting its website, particularly if a purchase is made. Amazon then welcomes these customers by name when they visit the website again. The firm sends messages to customers about specials and new products similar to those they purchased in previous visits. A number of other companies, such as Netflix, also collect demographic data about their customers in an attempt to identify their unique preferences (demographics is one of the segments in the general environment). More than 2.4 billion people use the Internet in some way including about 78.6 percent of the population in North America and 63.2 percent in Europe. So the Internet represents a healthy opportunity to gather information on users.19 2-2b Monitoring When mon ...
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Running head: Southwest Airlines.

Southwest Airlines
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Southwest Airlines

Five porters’ forces analysis for Southwest Airlines
The company is based in Texas, United States. Southwest is one of the largest airlines offering
low charges for its services within the U.S. It favours most of the people, including the middle
class, young adults, business people and short distance travellers. This paper discusses porter's
five forces of Southwest Airlines explicitly.
Threats of new entrants
There are low threats of business that are new entering the airline market. Therefore, Southwest
has nothing to worry about but only competing with old airlines like Delta, American and
JetBlue airlines. Its investments give the company high economies of scale and this have been
rising since its inception. It also has many customers due to low charges and the guarantee for
customers' safety. This prevents new firms to enter the market because Southwest has highly
established itself. A company that is not well in terms of finances cannot pose a threat to
Southwest because there are high chances of losing. Therefore, p...

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