Blue Ocean Compass for Southwest Airlines: How Southwest Airlines Improved the Business Model of Red...

EXPONENTIAL PERFORMANCE IMPROVEMENT & BUSINESS GROWTH

How Southwest Airlines Improved the Business Model of Red Ocean Airlines … And Became the Largest Airline in America

Dr. Rod King

Consultant & Trainer on Business Model Analysis, Design, and Innovation

[email protected] & http://businessmodels.ning.com

mailto:[email protected]

http://businessmodels.ning.com/

Blue Ocean Compass: Visually Documenting, Analyzing, and Improving the Performance of Business Models in the Airline Industry

Southwest Airlines

4 ELEMENTS OF BUSINESS MODEL:

Competitive Advantage Strategies

• Increase quality (speed) to level 9

• Reduce cost (ticket price) to level 1.3

• Increase differentiation (novelty/simplicity) to level 7.6

• Increase on‐demand; 24x7/(adaptability; customization) services to level 3

Value Propositions (Innovative Processes)

• Higher quality (speed) at lower cost

• Higher differentiation (novelty/simplicity) at lower cost

Targeted Customer Segment(s)

• Frequent/Low‐cost traveler

• Early adopter/innovator; Non‐customers

Value Quotient (VQ)

• Benefit = Quality + Differentiation + Customization = (9 + 7.6 + 3)/3 = 19.6/3 = 6.53

• Cost = 1.3

• Value Quotient (VQ) = 6.53/1.3 = 5.03

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10Quality (Speed)

Cost (Price)

Differentiation (Novelty/Simplicity)

On‐demand; 24x7 (Customization)

Blue Ocean Compass for the Average Airline and Southwest Airlines

Ideal Business Model Southwest Airlines Average Airline

BOBM. Blue Ocean‐Business Models. Copyright 2009. Dr. Rod King. [email protected] & http://businessmodels.ning.com



Blue Ocean Map for THE VALUE QUOTIENT OF THE AVERAGE AIRLINE AND SOUTHWEST AIRLINES

Highly differentiated and premium-priced/free value chain

Commoditized and low-cost value chain

(+): DELIGHT

Benefit

Blue

Ocean

Plan

IDEAL BLUE OCEAN (FINAL RESULT)

(‐): PAIN

Red Ocean Plan

RED OCEAN * Average Short‐haul Airlines * Car Transportation/Taxis

BLUE OCEAN Southwest Airlines

Strategic Choice

(Uncontested Experience, Market Space, or New Category) Cost

∞

Fractal Market Segmentation of Short‐haul Airlines/Car Transportation

BOBM1.1. Blue Ocean‐Business Models. Copyright 2009. Dr. Rod King. [email protected] & http://businessmodels.ning.com



Company Overview of SOUTHWEST AIRLINES Date: April 28, 2009

Author(s): Dr. Rod King ([email protected]) Ref.: …………………………………..…………………….

COMPANY BACKGROUND

• Location: Dallas, Texas (USA)

• Founder(s): Herb Kelleher; Rollin King (1967 inc.; first flight in 1971)

• Revenue: $11 Billion (2008)

• No. of Direct Competitors:

INDUSTRY/BUSINESS

• Industry: Airline/Transportation

• Niche: Short‐haul, low‐cost air travel

• Model: Point‐to‐point air travel with ‘no frills’ to secondary city‐airports (cf. hub‐and‐spokes model with meal)

PRODUCTS/SERVICES

• Airline

• Aircrafts

• Air travel/transportation

CUSTOMER VALUE PROPOSITION

“The speed of a plane at the price of a car …”

Targeted Customer Segment: Frequent/low‐cost travelers

CUSTOMER BENEFITS/EXPERIENCE

• Faster travel at lower cost

• Simple fare structure

COMPANY OVERVIEW OF: SOUTHWEST AIRLINES

MAIN GOAL/OBJECTIVE/STRATEGY

• To quickly reach the destination at the lowest price

VISION (“Future Headline”)

“Do the right thing.”

MISSION

“Dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.”

BOBM8A. Blue Ocean‐Business Models. Copyright 2009. Dr. Rod King. [email protected] & http://businessmodels.ning.com




• 60,000ft Level: Blue Ocean Map

• 30,000ft Level: Blue Ocean Compass

• Global Level: Company Overview

Blue Ocean Compass: Visually Documenting, Analyzing, and Improving the Performance of Business Models (in a Given Industry)

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10Quality

Cost (Price)



Blue Ocean Compass for Worst Business Model

("Why Businesses and Value Chains Fail")

Worst Business

4 ELEMENTS OF THE BUSINESS MODEL:

Competitive Disadvantage Strategies

• Reduce Quality: Level 1

• Increase Cost (Price): Level 10

• Reduce Differentiation (Novelty): Level 1

• Reduce On‐demand; 24x7/(Customization) services: Level 1

Worst Value Propositions (Innovative Processes)

• Lowest quality at highest cost (price)

• Lowest differentiation at the highest cost

• Lowest differentiation without adaptability, convenience, or customization

• Lowest quality without adaptability, convenience, or customization


• Dissatisfied customers

Worst Value Quotient (VQ)

• Worst Benefit = Quality + Differentiation + Customization = (1 + 1 + 1)/3 = 1

• Worst Cost = 10

• Worst Value Quotient (VQ) = Benefit/Cost = 1/10= 0.1

IMAGE




Template of Blue Ocean Compass: Visually Documenting, Analyzing, and Improving the Performance of Business Models (in a Given Industry)

Ideal Business

4 ELEMENTS OF THE BUSINESS MODEL:

Competitive Advantage Strategies

• Maximize Quality: Level 10

• Minimize Cost (Price): Level 1

• Maximize Differentiation (Novelty/ Simplicity): Level 10

• Maximize On‐demand; 24x7/ (Adaptability; Customization) services: Level 10

Ideal Value Propositions (Innovative Processes)

• Highest quality at lowest cost (premium)

• Highest differentiation at the lowest cost

• Highest differentiation on demand (adaptability; mass customization)

• Highest quality on demand (adaptability)


• Every niche: customers; non‐customers

Ideal Value Quotient (VQ)

• Ideal Benefit = Quality + Differentiation + Customization = (10 + 10 + 10)/3 = 10

• Ideal Cost = 1

• Ideal Value Quotient (VQ) = Benefit/Cost = 10/1 = 10 (‘Perfect 10’)

IMAGE

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10Quality

Cost (Price)



Blue Ocean Compass for Ideal Business Model

("Perfect, Free, Different, and 24x7 Value Chain")




Blue Ocean Map for Simply Mapping, Designing, Executing, and Monitoring a Value Proposition as well as Business Performance

Fractal Market Segmentation of ……………………………………………………………………….

∞

IDEAL BLUE OCEAN (FINAL RESULT)

BLUE OCEAN‐ Value Proposition

Benefit

Highly differentiated and premium-priced/free value chain

Commoditized and low-cost value chain

Blue

Ocean

Plan

(‐): PAIN

Strategic Choice

RED OCEAN‐ Value Proposition

Red Ocean Plan

(Uncontested Experience, Market Space, or New Category) Cost

(+): DELIGHT

BOBM1.1. Blue Ocean‐Business Models. Copyright 2009. Dr. Rod King. [email protected] & http://businessmodels.ning.com



Company Overview of ………………………………………………………………….. Date: …………………………………….………..………..

Author(s): …………………………………………………………………………………….. Ref.: …………………………………..…………………….

COMPANY BACKGROUND

• Location:

• Founder(s):

• Revenue:

• No. of Direct Competitors:

INDUSTRY/BUSINESS

• Industry:

• Niche:

• Model:

PRODUCTS/SERVICES

CUSTOMER VALUE PROPOSITION

• Value Proposition:

• Targeted Customer Segment:

CUSTOMER BENEFITS/EXPERIENCE

COMPANY OVERVIEW OF:

MAIN GOAL/OBJECTIVE/STRATEGY

VISION (“Future Headline”)

MISSION

BOBM8A. Blue Ocean‐Business Models. Copyright 2009. Dr. Rod King. [email protected] & http://businessmodels.ning.com



INNOVATIVE PROCESSES FOR VALUE CHAIN AND BUSINESS MODEL (for fulfilling challenging value propositions)

GENERAL PROCESSES

• Vertical/Horizontal Integration

• Extension/Compression/Removal

• Open Innovation/Collaboration

• Unbundling/De‐integration/Bundling

• Convergence/Standardization/Self‐X

EMPLOYEE PROCESSES

• Specialization/IP Creation‐Protection

• Outsourcing/Sub‐contracting/Agents

• ‘Star’ Performers/Top grading/Fun

• Wisdom of the Crowd/Co‐creation

• Cross‐functional Teams/Downsizing

MACHINERY/FACILITY PROCESSES

• Franchise/Leasing/Rental

• Localization/Substitution/Reversal

• Modularization/Standardization

• Asymmetry/’Poka Yoke’/Nesting

• Attributes Interdependency

ENVIRONMENT/SUPPLIER PROCESSES

• Partnering/Complementing/Feedback

• Merging/(De)Centralizing/Integration

• Networking/Volunteering/Recycling

• Convergence/(De)Regulation

• Distributorship/Affiliates/Network

DOMAIN‐PROCESSES/FUNCTIONALITY

• Digitalization/Idealization/Downsizing

• Virtualization/Customization/DIY

• Zero Defect/Lean/Six Sigma/JIT

• Automatic/Outsourcing/Low Cost

• Restructuring/Inventive Principles

INNOVATIVE PROCESSES FOR VALUE CHAIN AND BUSINESS MODEL

CUSTOMER PROCESSES

• Segmentation/Direct Selling/Branding

• Cross‐subsidy/Hybridized Markets

• Subscription/Leasing/After Sale

• Auction/Co‐creation/Collaboration

• Advertising/Freemium/Licensing

CHANNEL/WHOLESALERS PROCESSES

• Multiple Channels/Syndication/Chain

• Pyramid/Multi‐level Markets/Wheel

• Digitalization/Online/Word‐of‐mouth

• Distributorship/Affiliates/Network

• Advertising/Auction Platform

PRODUCT/SERVICE PROCESSES

• Product/Service‐Platform

• Solution‐focus/Total Package

• Service‐focus/Servicing/Upgrading

• Fixed product (shell) and recurring/ replaceable/upgradeable component




8 QUESTIONS FOR UNCOVERING OPPORTUNITIES FOR EXPONENTIAL PERFORMANCE IMPROVEMENT & BUSINESS GROWTH

1. TRADITIONAL CUSTOMERS

Who are traditional customers/ consumers/buyers of the products and services? What are other (task‐based) ways of describing traditional customers/ consumers/buyers?

2. JOBS TO BE COMPLETED

What jobs or tasks are traditional customers trying to get completed while using the products and services? Why, why, why? How, how, how?

3. CUSTOMER OBSTACLES

What are obstacles, inconveniences, or interruptions to traditional customers while trying to get jobs completed? Where do the obstacles, inconveniences, or interruptions occur? When?

4. ALTERNATIVE PROCESSES & TOOLS

In how many and different ways can traditional and non‐traditional customers get the jobs completed? What comple‐mentary jobs can traditional and non‐traditional customers get completed?

5. SUCCESS CRITERIA

How do customers and other stakeholders know that the jobs are successfully completed?

8 QUESTIONS FOR UNCOVERING

OPPORTUNITIES FOR EXPONENTIAL PERFORMANCE

IMPROVEMENT & BUSINESS GROWTH

6. IDEAL PROCESSES & TOOLS

How can existing/future processes and tools help traditional and non‐traditional customers to better get the jobs completed without obstacles, inconve‐nience, interruptions, or other pains?

7. BEST BUSINESS MODEL FOR JOB

What are business model and value chain resources for most efficiently and effectively getting complete the most critical or profitable jobs for customers?

8. VALUE CHAIN OF CUSTOMERS

What jobs are the value chains of traditional and non‐traditional customers deeply trying to complete? What jobs precede and succeed the jobs that customers are trying to complete?




REFERENCES

1. Chesbrough, H. (2006) Open Business Models. Boston: Harvard Business School (HBS) Press.

2. Christensen, C.; Raynor, M.E. (2003) The Innovator’s Solution. Boston: Harvard Business School (HBS) Press.

3. Kaplan, R.S.; Norton, D.P. (1996) The Balanced Scorecard. Boston: Harvard Business School (HBS) Press.

4. Kaplan, R.S.; Norton, D.P. (2008) The Execution Premium. Boston: Harvard Business School (HBS) Press.

5. Kim, W.C.; Mauborgne, R. (2005) Blue Ocean Strategy. Boston: Harvard Business School (HBS) Press.

Consultant & Trainer on Business Model Analysis, Design, and Innovation

6. King, R. (2009) The Infinitely Zoomable Page: The Ideal Tool for Business Model Thinking, Design, and Innovation. Fresno: Ideal‐Solution Management.

Dr. Rod King

[email protected] & http://businessmodels.ning.com



Blue Ocean Compass for Southwest Airlines: How Southwest Airlines Improved the Business Model of Red...

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