O’Reilly, C., & Pfeffer, C. (1995). Southwest Airlines: Using Human Resources for Competitive Advantage. Stanford, CA: Graduate School of Business, Stanford University.

This posting is about the Stanford University, Graduate School of Business Case study focusing on Southwest Airlines as an example of leveraging human resources into a distinct competitive advantage. Certainly, we’ve all hear lip service paid to the importance of people and probably, most of us, even view it as a cliché and just words without any substance. This is certainly the case more often than not but Southwest Airlines appears to be an example of a company that has done so and proved that a company’s personality and intellectual capital, its people, can indeed be leveraged into a distinct competitive advantage.

As anyone familiar with human resource departments can attest, human resource issues are very important to businesses and typically consume a large amount of a company’s time and energy. The question is: how to leverage a company’s intellectual assets (people)?

A little background from the case study

In 1994, a “Major Showdown in the airline industry” was shaping up involving Southwest, United and Continental Airlines. The other airlines (Southwest’s’ competitors) had been hurt by competition from Southwest and decided to try their hands at competing head-to-head with Southwest in the type of low fare, no frill, air service that Southwest had become known for. It didn’t work out as well for them as it had for Southwest. Continental Lite, could not match the efficiency of Southwest and their CEO was purportedly not particularly people-oriented. United’s “Shuttle” was plagued by unhappy employees and an abundance of intracompany rivalries and conflicts.

So where does Southwest’s completive advantage lie? Southwest believes their competitive advantage lies mainly with their people and how they are managed and not so much with their pricing structure. The leverage lies with the people! Among other things that were not so easy for the other airlines to imitate, Southwest encouraged their employees to deliver great customer service and have fun (which often go hand-on-hand).

Not to be underestimated is the fact that Southwest’s workforce is very productive. Their turnaround time (arrival at gate to next departure) is about 15 minutes, as compared to an industry average of about 35 minutes. Also Southwest accomplishes this with great efficiency; they use fewer people at gate and a smaller ground crew. Harold Sirkin, an airline specialist with BCG said, “Southwest works because people pull together to do what they need to get a plane turned around. That is part of the Southwest culture. And if it means the pilots need to load bags, they’ll do it.” Southwest averages nearly forty percent fewer employees dedicated to an aircraft than industry average (81 vs. 130), a testament to their productivity. This means they need a smaller load factor (about 55%) on their planes to break even.

A little evidence of Southwest’s success

When Southwest started, in 1971 with 198 people, Continental Airlines used every dirty trick in the book, including political, regulatory, litigious, etc. to make sure that Southwest did not get off the ground. An example is the Wright amendment (named after James Wright, then Speaker of the House). This amendment ostensibly was meant to encourage traffic through the new Dallas-Fort Worth hub (where Continental flew through) but effectively made the logistics of airline routes in and out of Love Field (where Southwest flew through) very difficult. This appeared to have backfired and made Southwest “mad” and even more motivated to compete and win; a culture which appears to continue into their competitive culture that persists today.

Before Southwest entered the Louisville-Chicago market, 8,000 people daily flew this route, after Southwest entered, 26,000 people flew this route daily. Most of the excess used to drive it. Southwest, with their strategy of low costs, low fares and frequent flights, was able to effectively create new customers that didn’t exist before.

For the period 1972-1992, Southwest stock earned the highest returns of any publicly-trade U.S. stock—a compounded return of over 21,000%.

Corporate Culture

Southwest’s “Work is important…don’t spoil it with seriousness” attitude may stem from CEO, Herb Kelleher’s, personality and relaxed management style. As well, he “…somehow managed to get union people to identify personally with his company.” He said “our essential difference is minds, hearts, spirits, and souls.” In a letter to employees he also quoted Winston Churchill: “Success is never final.” Kelleher said “Indeed success must be earned over and over again or it disappears. I am betting on your minds, your hearts, your souls, and your spirits to continue our success.”

Southwest’s human resources department is named the “people department” and stresses the two “C’s”” compassion and common sense. They tell people to “break the rules” if they need to.

The “Southwest Spirit” appears to be: creative, not too uptight (loose), strong on teamwork, positive, a bit non-conformist, a little outrageous and extroverted.

What lessons can be drawn?

• The leverage that corporate culture and the human resource can provide for strategic advantage and change cannot and should not be underestimated. However, it must also be “articulated, practiced and reinforced.” The employees who are the face of the company must also be bought in heart and mind, and actually do and say what the company values.
  
• It is good practice to put one’s energy in figuring out how to do better every day and how to achieve continuous improvement and not to waste too much energy worrying about the competition.
  
• An intracompany family spirit and atmosphere of trust as well as meaningful interpersonal connections go a long way to fostering motivation and a sense of job satisfaction. And have no doubt, this is directly related to the bottom line.
  
• Growing too fast can hurt the “family” feel of a company.