Southwest Airlines Co.

Balanced Scorecard Analysis

BALANCED SCORECARD ANALYSIS

Southwest Airlines Co. focuses on short-haul, low-cost services to price and convenience-

sensitive travelers. Its vision is to continue being the only short-haul, low-fare, high-

frequency, point-to-point carrier in America. In the scope of company’s this major strategy,

all of the key indicators, the objectives are formed to relate with it (Refer to major objectives

table). The designed balanced scorecard has four key performance indicators which are

financial, customer satisfaction, internal processes and innovation and learning.

Key Financial Indicators

Southwest Airlines aim to be leader in pricing and leader in Southwest. In the scope of this

strategy, in short-run, expanding into global markets has not been chosen as a financial

objective. In long-run this objective can be added to the designed balanced scorecard.

Besides, company’s financial objectives are mainly related with finding new sources of

revenues, increasing customer profitability, increasing revenues, maximizing financial

returns, operating improvements by lowering costs and high utilizations of assets. (Refer to

financial objective explanations)

Key Customer Satisfaction Indicators

Since Southwest Airlines is a service company, customer satisfaction objectives such as new

products, are not chosen for this company. Acquiring more customers, leadership in pricing

with the lowest flight prices, every time on-time flights, on time freight deliveries and

superior quality of service with low costs are the objectives of key customer satisfaction

indicators.(Refer to customer satisfaction indicators). Flight times are the most crucial

indicators because in short-run customers are mostly attracted by on-time flight performance.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Key Internal Processes Indicators

The basic differences while designing the balanced scorecard were about internal process

indicators. For a production company, reduction in inventory may be one of the basic internal

process indicators. However, for Southwest Airlines inventory is stable and processes are

mostly related with services. In the scope of this idea, objectives are improving operational

efficiency, reducing turnaround time, reducing non-core activities and application of cost

reduction program.(Refer to internal process indicators)

Key Innovation and Learning Indicators

New active ingredients, R&D projects may be chosen for many production companies but

again Southwest is a service company and its strategy is mostly related with reducing costs so

the initial training programs should be related with cost management. Therefore, training in

cost management is chosen as one of the objectives and the other ones are increasing

employee efficiency, organization re-alignment with core competences, and behaving

employees as future customers-employee satisfaction.(Refer to innovation indicators)

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Southwest Airlines Co.

Balanced Scorecard Analysis

APPENDIX

PHASE I: THE STRATEGIC FOUNDATION

In order to define major strategies of Southwest Airlines Co., we should take into

consideration of vision and mission statements because strategies are determined in the scope

of company’s vision, missions and goals.

The Vision of Southwest Airlines

It is to continue building on their unique position -- the ONLY short haul low-fare high-

frequency point-to-point career in America.

The Mission of Southwest Airlines

The mission of Southwest Airlines is dedication to the highest quality of Customer Service

delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

Mission Related with Employees (Internal Processes)

The company is committed to provide their Employees a stable work environment with equal

opportunity for learning and personal growth. Creativity and innovation are encouraged for

improving the effectiveness of Southwest Airlines. Above all, Employees are provided the

same concern, respect, and caring attitude within the organization that they are expected to

share externally with every Southwest Customer.

Core Goal of the Company

Southwest Airlines Co.’s main goal is to sustain operating efficiency.

Market Segment

Company focuses on customers requiring readily available short-haul low-fare flights.

Slogan

The Best Airline in the South-West. 1

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Southwest Airlines Co.

Balanced Scorecard Analysis

Swot Analysis

Strengths: They are a small compact group and are therefore better able to collaborate.

Weaknesses: The collaboration needs to improve to the extent where all employees are

thinking strategically.

Opportunities: Company can improve the performance if they all work closely and STAY

FOCUSSED.

Threats: Larger airlines can "Product Dump" in the company’s area. 2

MAJOR STRATEGIES

When designing a balanced scorecard, we always start by asking: “What is your strategy?”

Once we understand the strategy, we can build a new framework for describing the strategy,

which we call a strategy map.

– The Strategy Focused Organization by Robert S. Kaplan & David P. Norton

Strategy map is the visual presentation of key performance indicators and it summarizes every

strategy related to each measurement categories. The main four categories are; Financial,

Customer Satisfaction, Internal Processes and Innovation and Learning categories. In order to

draw the strategy map, first, the objectives related with the above stated vision, mission, goals

and the short-haul, low-cost service strategy of the Southwest Airlines are determined. They

are;

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Southwest Airlines Co.

Balanced Scorecard Analysis

Major Objectives of the Target Company

After determining the objectives, we should allocate each objective to each four measurement

categories. This is the strategy map phase which forms the basis of balanced scorecard.

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Find new sources of revenues,

Increase customer profitability,

Increase revenues,

Maximize financial returns,

Operating improvements by lowering costs,

High utilizations of assets,

Acquiring more customers,

Leader in pricing with the lowest flight prices,

Every time on-time flights,

On time freight deliveries,

Superior quality of service with low costs,

Improve operational efficiency,

Reduce turnaround time,

Reduce non-core activities,

Apply cost reduction program,

Training in cost management,

Increase employee efficiency,

Organization re-alignment with core competences,

Behave employees as future customers-employee satisfaction

Southwest Airlines Co.

Balanced Scorecard Analysis

PHASE II: BALANCED SCORECARD FRAMEWORK

Balanced Scorecards tell you the knowledge, skills and systems that your employees will need

(learning and growth) to innovate and build the right strategic capabilities and efficiencies

(internal processes) that deliver specific value to the market (customer) which will eventually

lead to higher shareholder value (financial).

– “Having Trouble with Your Strategy? Then Map It” by Robert S. Kaplan and David

P. Norton - Harvard Business Review

Not only does the Balanced Scorecard transform how the strategic plan is expressed, but it

also pulls everything together. This is the so-called “cause and effect” relationship or linking

of all elements together. For example, if you want strong financial results, you must have

great customer service. If you want great customer service, you must have excellent processes

in place (such as Customer Relations Management). If you want great processes, you must

have the right people, knowledge, and systems (intellectual capital).3

Balanced scorecard provides an integrated scope of company’s strategies and the performance

measures shows if the company is successful on implementing these strategies. In our

balanced scorecard we do not only use financial measurement categories but also use

nonfinancial information in the categories so that the company is analyzed as a whole.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Strategy Map Fitted to Measurement Categories for Southwest Airlines Co.4

After determining the strategy map, we justified the objectives with the performance

measures. Every performance measure should reflect the objective value. The four categories

of key indicators are used for evaluation of the company as a whole and since Southwest

Airlines Co. focuses on short-haul, low-cost service to price and convenience-sensitive

travelers, all of the key indicators, the objectives are formed to relate with this strategy.

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Southwest Airlines Co.

Balanced Scorecard Analysis

We assume that all of our measurement parameters are used annually to determine whether

company has a high performance or not. In the evaluation stage, these measurements should

be compared with past year’s values and target values.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Key Financial Indicators

Find new sources of revenues: Southwest Airlines’ goal is to have the minimum costs and

minimum fares for its customers but while implementing this strategy it needs several sources

of revenues. In order to minimize the fares, company should have new sources of revenues to

compensate the costs.

Increase customer profitability: Besides lowering the fares, company should have its

customer profitability increased so that the sales and revenues increase respectively. By the

help of that, financial performance increases too.

Increase revenues: The main goal of a company is to increase the revenues and this objective

is one of the financial key indicators.

Maximize financial returns: Revenue sources may be good enough to make many

investments. However, the amount of money used is not a key performance value by itself.

Southwest Airlines should also receive the financial return of its investments in order to

continue being a strong company in the air transportation market.

Operating improvements by lowering costs: Southwest Airlines provide promotions with

free tickets so in each flight there is quota for these free tickets. This causes a sunk cost for

each flight. These costs should be eliminated with a control system for free tickets and have

the full capacity purified from sunk costs.

High utilizations of assets: Because of time-value of money, all of the assets should be

utilized in order to prevent the losses caused by time. Our company has a growing market-

share and while growing, making benefit from its increasing assets is very important.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Measurements for key financial indicators are;

Number of New Sources: In order to determine the amount of new revenue resources

provided in each period, they should be measured annually. Thus, number of new

resources each year gives the potential growth of Southwest Airlines provided from

different revenue resources too.

Return on Sales: This ratio determines how much of the net income is derived from

the sales. This is a good measure to find the customer profitability of the target

company. If this ratio increases, this means that Southwest Airlines’ net income, the

customer profitability increased more compared to sales.

Annual Growth Rate: Southwest Airlines aims to be the best airline in the South-West

and annual growth rate gives the idea of increased revenues and the place of the

company in the desired market.

Return on Equity: Earnings per share determine the amount of financial returns made

on investments. This is the ultimate measure of performance from the shareholders’

perspective for Southwest Airlines.

Annual Sunk Cost: In order to improve the operations, the sunk costs must be

eliminated and then costs are decreased and operations profitability decreases. So the

annual sunk cost should be determined to present the performance.

Utilization Rates: This ratio determines the performance of Southwest Airlines’ in

utilization of their assets.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Key Customer Indicators

Acquiring more customers: Increasing number of customers provides a strong clue about

company’s future and potential growth in the market. This gives an idea about customer

satisfaction. Since Southwest Airlines aim to stay in the market as a unique business

providing short-haul low-cost service, increase in number of customers is a perfect indicator.

Leader in pricing with the lowest flight prices: Having low prices may seem to cause

decrease in income in short-run; however, it provides Southwest Airlines the advantage of

leadership in the low-price market in long-run. Customers are attracted with low prices and

the sales amount increases respectively. This indicator is chosen according to potential future

growth of the company in the market as being the leader in pricing.

Every time on-time flights: One of the basic indicators for customer satisfaction is on-time

flights. Southwest Airlines had the low-price company image but customers would not prefer

the company when flights are not on-time even if price is low. Therefore, this key indicator is

chosen to determine meeting customer expectations.

On time freight deliveries: Southwest Airlines also gives service as freight. The customers

similarly expect on-time deliveries for their packages. Again, low-fare itself is not enough,

service quality should be measured too.

Superior quality of service with low costs: In short-run, decreasing quality in service may

seem to be a good option to eliminate or decrease the major costs. However, in long-run,

company would be negatively affected because of having no drink-meal service during the

flights. In order to prevent this disadvantage, superior quality of service with low costs is

chosen as a key customer indicator.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Measurements for key customer indicators are;

Annual Number of New Customers: In order to measure the performance of acquiring

new customers, annual number of new customers is the criteria which will provide

sufficient information about the improvement in the customer satisfaction perspective.

Competitive Comparison: Comparison of the competitors in the market with the

Southwest Airlines gives sufficient information about being leader in pricing in the

air-transportation market. This measure provides whether company is achieving its

strategy.

Annual Proportion of On-Time Flights to Total Flights: The best way to measure the

on-time flight performance is to take the annual proportion of on-time flights to total

flights.

Annual Proportion of On-Time Freights to Total Freights: The best way to measure

the on-time freight performance is to take the annual proportion of on-time freight to

total freights

Customer Satisfaction Survey: Customer satisfaction can be measured with several

surveys by wanting them to rate their satisfaction levels. This survey provides

information if customers are satisfied with Southwest Airlines’ superior quality of

service with low costs or not.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Key Internal Processes Indicators

Improve operational efficiency: Since Southwest Airlines is a service company internal

processes do not include any production phases. However, there are services instead of

productions. The reason of choosing operational efficiency as an indicator is that operational

efficiency can be measured by service times and this is one of the important indexes for

service improvement.

Reduce turnaround time: Reducing turnaround time ensures frequent departures with fewer

aircraft. This provides a decrease in costs so it is an important objective for Southwest

Airlines.

Reduce non-core activities: Non-core activities reduce the productivity of the company and

also cause additional cost for the company. So by eliminating the defects, non-core activities

like maintenance should be reduced to minimum.

Apply cost reduction program: Southwest Airlines’ main strategy is to reduce all of the

costs and provide lowest-fare for their customers. To achieve this goal, there should be a cost

reduction program inside of the company. This is the reason for choosing applying cost-

reduction program inside of the company.

Measurements for key operating indicators are;

Flight Times: The measure of operational efficiency can be calculated by flight times.

If the flight times are decreasing then Southwest Airlines have an increasing

operational efficiency.

Turnaround Time: Turnaround time affects the amount of aircraft used because when

turnaround time decreases; it ensures frequent departures with fewer craft.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Percentage of Non-Core Activities: Non-core activities cause extra cost and

inefficiency in internal processes. In order to determine Southwest Airlines’

performance, percentage of non-core activities should be calculated.

Percentage Cost of Sales: In order to apply cost reduction programs, each cost

percentage in terms of sales should be determined. This ratio provides sufficient

information about the efficiency of cost reduction program.

Key Innovation and Learning Indicators

Training in cost management: Since Southwest Airlines’ strategy is to minimize the costs,

cost management should be applied in the learning and innovation perspective. Employers are

the key elements of the company to ensure improvement in cost reductions. This objective is

chosen to improve Southwest Airlines’ strategy beginning from the basis.

Increase employee efficiency: Southwest Airlines’ is in service business with its educated

employees and aircrafts. This objective is chosen in order to increase customer satisfaction

and the sales; first of all, employees should be efficient to assist their clients.

Organization re-alignment with core competences: Southwest Airlines is a growing

company and organizational structure can be improved according to competences. This

objective is chosen to provide advantage for the company in the market with its efficient

organizational structure.

Employee satisfaction - Behave employees as future customers: Inside the company,

employees are seen as future customers. This objective is chosen because creativity and

innovation are encouraged for improving the effectiveness of Southwest Airlines. This

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Southwest Airlines Co.

Balanced Scorecard Analysis

objective ensures employees share their satisfaction externally with every Southwest

Customer.

Measurements for key innovation and learning indicators are;

Annual Number of Training Programs: In order to measure the importance given to

cost management training’s, annual number of training programs provide sufficient

information.

5 Point Ranking: Employee efficiency can be measured with 5 point ranking which

provides every employee to be graded over 5 point scale and this measure encourages

them to be more effective in doing their jobs.

Structure of the Organization: Compared to competitors Southwest Airlines’ should

have more efficient organizational structure and this can be measured by comparing

structures of companies having same objectives in the same market.

Employee Satisfaction Survey: For Southwest Airlines, in the scope of employers

being future customers their satisfaction becomes nearly as important as customer

satisfaction and it can be measured with the surveys and their complaints can be

determined and company’s employee efficiency also can be improved by the help of

these surveys.

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Southwest Airlines Co.

Balanced Scorecard Analysis

Evaluation of the Balanced Scorecard

Next step of the balanced scorecard is to measure the objective values. However,

measurements themselves are not enough to evaluate the company. For every key indicator, at

least one previous period’s values, current period’s values and pre-determined future target

value should be compared with each other. After these steps, company can be evaluated.

Summary

While designing balanced scorecard objectives should be related with company’s major

strategy. Southwest Airlines’ major strategy is to continue being the only short-haul, low-fare,

high-frequency, point-to-point carrier in America. Therefore, in short-run, reducing fares may

seem to be an income decreasing strategy; however, in long-run it provides the company

being leader in the market in Southwest. Additionally, all of the measures are determined in

conjunction with their objective criterion.

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Southwest Airlines Co.

Balanced Scorecard Analysis

REFERENCES

1 http://www.southwest.com/about_swa/mission.html

2 Vision, Mission, Values Module of Strategy Map Balanced Score Card Software-

Personal Version- www.strategymap.com.au

3 http://www.exinfm.com/training/pdfiles/course11r.pdf

4 Strategy Map Module of Strategy Map Balanced Score Card Software-Personal

Version- www.strategymap.com.au

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