Introduction
The development of the international business is a long and complex process, which outlines numerous challenges for the companies and illustrates the ways in which the organizations in this rivalry environment build on their competitive advantage and differentiate themselves from other companies. There is unlikely an industry, which does not value those, who bring new and innovative ideas to the picture and determine the stage at which the industry shifts to a new stage of its development. These innovators and forward thinkers are called first movers and the activities of these companies throughout the history and across the industries have been in the center of academic and business debates for decades. The reality shows that the general trend is that the first mover companies manage to gain competitive advantage and, being already ahead of the competition, succeed in building sustainable business model around their first mover’s element. Analyzing the first mover concept one can realize that some of the most exciting examples can be found in asset-heavy industries, where Research and Development (R&D) are in the center of attention as the drivers of competitive advantage. One of these industries is commercial aviation. While the majority of the companies were busy building on their competitive edge through investments in R&D and cost-cutting initiatives in the operational aspect of the business, one company opened up an entire new perspective on the competitive advantage in this complex and fast-moving segment. The choice of this industry for this report is determined by some interesting examples of the first movers and perspective, which they had on building sustainable business model. More specifically, the document will focus on the overview of the industry and its history and will analyze a specific example of the first low-cost airline in the history of commercial aviation – Southwest Airlines.
Industry Overview
History
The history of commercial aviation dates back to one hundred years ago, when, in 1914, Tony Jannus made his first twenty-three minutes flight in Benoit “flying boat” in Russian St Petersburg. Further development of the aviation industry is marked with the flight of Charles Lindberg and other remarkable individuals, who, being fascinated with the idea of flying invested into the research and development in the area and laid foundation of one of the most profitable and large industries in the world. It is interesting to mention that the beginning of the industry made this segment be considered a male business and no women could be seen on the commercial flight or the ground services. Some of the major milestones in the sector involve the names, which are known until today. One of the oldest airlines in the world, KLM, started its operations in 1919 and it remains the oldest company in the industry operating under its original name, followed by Luft Hansa, which started its operations in Germany in 1926. The first airports to open its doors for the general public are the Sydney and Minneapolis International Airports in 1920. Already in 1923 the industry marked the first transcontinental non-stop flight. Stewarts appeared in 1920s, with the main objective to calm down the customers and bring organization on the flight. Ever since, the concept of commercial aviation was expanding, bring new and creative elements into complex technically and operationally environment (Heppenheimer, 2012). Since 1914, the industry went a long way from doubtful experiment of Tony Jannus to one of the most prominent industries.
Commercial Aviation Today
Modern era of commercial aviation is marked with the strong rivalry around the international market shares and the competition, based on cost-efficiency and creativity of customer relationships. Once, back in 1979 the first frequent flyer program was introduced, the industry had seen a dramatic transformation from luxury, or, at a minimum, primary, transportation method to mass service, available to middle and upper social classes. 90s brought aviation on the new stage of integration and accessibility, when, in 1995, first airline tickets started to be sold online.
One of the most important milestones, however, in the history of commercial aviation is the development of the strengthening of the price competition and appearance of the low—cost airlines. Given the rapid pace of the industry development at the point in time, when the low-cost airlines started to appear, it is possible to argue that commercial aviation was a fast market.
The reality of the industry did not leave a lot of space for the existing market players to switch from asset-heavy business model, which naturally involves high costs and, consequently, pricy service, to a low-cost airline. With that in mind, the market saw the development of the segment through new players, which entered the market with new strategy, less asset-heavy structure and limited route options. First ever low-cost carrier is the Southwest Airlines, which started its operations on the US market in 1973. Later on, such companies, as Ryan Air, Skybus, Virgin America and others started to develop the concept and built on the competitive environment in the commercial aviation. The growing competition and customer demands determined the direction in which low-cost competition developed. While the first movers back in the 80s and 90s, Southwest and Easyjet Airlines, competed purely on the price, later entrants, such as Ryan Air and Virgin America had to bring in new resource and capability to differentiate them in the segment, as low price itself was no longer offering sustainable advantage. This reality laid foundation for the modern low-cost segment, where organizations compete not only on price, but also on the quality of customer service, online services and on-flight offers. The structure of the profit for a modern low-cost airline today is built of several elements, including add-on services, ticket and total roundtrip cost.
Southwest Airlines
The history of the Southwest Airlines dated back to the 60s, when Rollin King, the owner of a small Texan Air commuter and a lawyer, Herb Kelleher, set down together and had an idea to open an airline service between Dallas and San Antonio for USD$ 20. As a result of this idea, the couple launched the Air Southwest in 1967, which later grew into the Southwest Airlines in 1971 with the famous hub and spoke model, which offers cheap flights on short –distance routes and fast turnaround times. The company is known as one of the largest low-cost carriers in the world, which history illustrates the evolution of the “low-cost thinking” in the industry (Thomas, 2013). Today, the airline is the largest in amount of passengers carried annually in the country and the second largest in the world.
Southwest Airlines started the concept, which was soon replicated by numerous companies around the world. The idea of the first mover was not only to reduce the price and offer airline shuttle service for the clients, but to bring in the entire new experience, which is linked to superior customer service, unique on board service and “always cheapest prices” in the industry. With that, the company focused on quirky and headline-grabbing branding, brought into the picture the Southwest Airline “style” through model-like hostesses, free snacks and cocktails and announced fixed low fares for a limited number of destinations. The remarkable Southwest advertisement, which outlines, probably, the concept of the low-cost in general states: We would like to match their new fairs, but we´d have to raise ours”. The idea behind the company´s innovative concept was relatively simple. The airline focused on several major destinations and corridors within the United States and offered their clients transparent price strategy, which fixed very low fare level for the backhaul flights and aimed to fill in the planes on the head-haul to cover the costs and generate profit. The model worked with very low profit margins and heavily relied on the ability to reach maximum capacity. This business model placed a lot of pressure on the company´s ability to fill in the flights and minimize operational costs, but, at the same time was offering stability to the customers in terms of expected price of the flight and, thus, resulted in advanced purchase, giving liquidity and consistent income to the Southwest Airline owners. The secret of profitability of the company is the operational and technical advancement, which enabled significant cost-saving on fuel and other operational costs, as well as “waste” elimination in the commercial and technical processes. This slogan placed Southwest Airlines ahead of the competition and laid the foundation to a new era in commercial aviation.
In order to make the analysis of the Southwest Airlines strategy as the first mover complete, it is important to look at the challenges, which the company faced as a consequence of its first mover strategy. When Southwest Airlines entered the market with a new business concepts, large international and domestic carriers were forced to review their pricing strategies and entered in direct competition with Southwest Airlines on their core routes. With that, the company had to look at further ways to innovate and differentiate themselves, experiencing pressure on costs and further diminishing of the operating profits. This pressure of increased competition on the local market continues placing emphasis on innovation in the low-cost carrier strategy and determines the direction in which the strategies of these companies evolve over time. The fact is that the first mover strategy if conducted efficiently allows companies achieve sustainable competitive advantage. But this approach demands strong and consistent focus on innovation, which often means higher investment levels and even faster responsiveness to the market.
With the above in mind, one of the major characteristics of the first mover is the demand for responsiveness and flexibility of the business model as well as relatively asset-light strategy. Southwest Airlines is an exemplary company, which offers very focused, niche service with extremely transparent strategy. It openly competes and challenges its competition and places research and development and innovation strategy in the core of its business. In order to be able to succeed as a first mover, the company should be able to recognize the competency gaps and ensure that its internal resources and capabilities are aligned with an external environment.
Learning Outcomes
Contemporary business environment is very complex, and the customers’ demands and expectations are constantly moving, placing pressure on the organizations and necessitating continuous investment of time and financial resources in the innovation strategy. Being a first mover means that the company first captures emerging opportunities on the market and can differentiate itself, building on image and loyalty to the brand. On the other hand, such strategy leaves these companies in the situations, when they “test” the market and opportunity, leaving other competitors an opportunity to build on the same market offer at a lower cost and risk. First mover position does not eliminate the risks of the competition and is not able to protect the companies from copycats as the product or service, offered by them is new, but in the vast majority of cases, not unique.
It is important to realize that first mover is not a one-time win of a market player, which allows it building on sustainable business and can guarantee its success on the market. On the contrary, this approach to the business is places a lot of responsibility on the company and demands continuity. To be able to benefit from the first mover strategy, the companies, therefore, should be able to build on their internal resources and capabilities and create corporate culture and structure, which can adequately address the changing external environment and fast market. Commercial aviation is the mature market, which yet, experiences a lot of changes due to extreme competitiveness of the market and continuous pressure on the cost-side of the business. Intellectual and physical resources in the industry are relatively limited, and companies compete with similar assets (planes) and resources (control systems), which leaves little room for innovation on the upstream of the business. The first mover, today, should be able to see and plan its steps five years ahead in order to build loyalty and trust as the core principle of maintaining its competitive advantage.
It is difficult to argue that the history can provide various examples of first movers, which ended as success or, equally, as a failure. The fact is that the effect of the first mover can be long-term and transitory. A lot depends on the timing and even luck, as the company decided to make its move. Virgin America airline is one of the examples of the wrong timing in the aviation industry and overheated pricing strategy on competitive market, while “Southwest effect’ became a synonym to success (Lieberman and Montgomery, 2007).. An analysis of the strategy of both companies reveals a lot of similarities and the drastic difference in the outcome of the strategic moves can only be explained by incorporating the external factors, such as economic health of the location, timing, the characteristics of the industry and even luck.
References
Thomas N. (2013). Low Cost airlines Have Gone a Long Way. But Who Will Win the Battle? Retrieved 16 June 2014, http://www.telegraph.co.uk/finance/newsbysector/transport/10454522/Low-cost-airlines-have-come-a-long-way.-But-who-will-win-the-battle.html
Heppenheimer T.A. (2012). Turbulent Skies. The History of Commercial Aviation. Center for Air Transportation Systems Research. Retrieved 16 June 2014, http://catsr.ite.gmu.edu/SYST460/Safety%20Workbook.pdf
Lieberman M.B. and Montgomery D.B. (2007). First Mover Advantage. Strategic Manageemnt Journal, Vol. 9, Issue S1:41-58
